How should you take the various factors into account

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Question: The assumptions in many of the exercises of this chapter of a constant interest rate, rate of return on an investment, or tax rates (as in Exercises 47 - 50) holding over a long period of time are simplifications that simply won't be true. Interest rates fluctuate (though you can lock in a long-term constant rate by buying a long term bond or certificate of deposit), and the tax rate may change (with your income, your state of residence, and changes in tax laws). If your marginal tax rate (the rate you pay on one additional dollar of income) is lower in one year than the tax rate you expect to pay in retirement, what kind of retirement investment is better for you that year? If you have a windfall one year and your marginal tax rate is higher that year than the tax rate that you expect to pay in retirement, what kind of retirement investment is better for you that year? How should you take the various factors into account as you make investment and savings decisions early in life versus later in life near retirement?

Reference no: EM131939917

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