I came to this conclusion after calculating that a highly taxed retiree would need to have $180,000 in stocks to produce the same benefit as shopping carefully enough to save $1,000 on a large TV set.
Investment income--- yields on stocks and bonds--- has declined to such low levels that the payoff on our time and skill as shoppers has skyrocketed.
How does this work? Careful shopping is a way to build a "virtual portfolio"--- every dollar not spent reduces the size of the investment portfolio you need. For many people, that "virtual portfolio" can be far larger than their actual portfolio.
Let's start with an imaginary exercise. Suppose you want to buy one of those gigantic high-definition plasma TV sets? If you just go out and unimaginatively write a check at the nearest vender, you'll lose an opportunity to build your virtual portfolio. (The very least you could do is charge it and get the flight miles!)
Take a few minutes to shop and research and you may find a bargain. What you save, in turn, is worth a virtual fortune in today's market.
You could spend $12,000 if you want bigger-than-life TV. That means there is lots of room for savings. Let's say you can save $1,000 by shopping around. What's that worth?
It all depends on your income and its source. Let try a few examples.
Step one is the same for all taxpayers. You won't save just $1,000 because we all pay sales taxes. You'll be saving $1,080, assuming an 8 percent sales tax. Before you have that amount of money, most people have to pay income taxes on a larger amount.
Step two is figuring out the pre-tax income needed to pay $1,080. If you are an upper-middle income person--- someone with an adjusted gross income between $46,700 and $112,850--- you pay taxes at a marginal rate of 27 percent. This means you'll need to earn $1,479 to get to the store with $1,080.
Step three is calculating how much you'd need to invest to earn the $1,479. Invested in common stocks with a dividend yield of 1.25 percent, you'd have to invest $118,356 to produce the same benefit as $1,000 of discount shopping.
Things don't improve very much if you shift from stocks to fixed income investing. With the average one-year bank CD earning 1.49 percent (according to Banxquote.com) the required portfolio is still $99,262, a hefty sum. Indeed, even if you scoured the planet for a safe 5 percent yield and found it, it would still require a portfolio of $29,590 to produce the needed cash income.
The higher the yield you seek, the more likely you are to decide that the payoff on careful shopping is larger than the payoff on careful investing.
Needless to say, the higher your tax bracket, the larger the virtual portfolio benefits from careful shopping. If you've got taxable income of $307,050 or more and pay taxes at the 38.6 percent rate, the value of $1,000 of careful shopping is $140,717 in stocks, 19 percent more than it's worth to the 27 percent tax bracket shopper. Then, again, if you have over $300,000 of taxable income you can be pretty sloppy about shopping.
Who'll be the fanatics of shopping?
Retirees. A quirk in our tax law gives some of them the highest tax rates--- 40.5 and 50 percent--- even though they don't have the highest incomes. For those normally in the 27 percent bracket with half their Social Security benefits taxable, their marginal tax rate is 40.5 percent according to calculations by the National Center for Policy Analysis in Dallas. That means $1,000 of careful shopping is worth a virtual portfolio of $145,200.
If a retired couple has enough income to make 85 percent of their Social Security benefits taxable, their marginal tax rate is 50 percent--- and their virtual portfolio is a whopping $172,800. The table below shows the virtual portfolio value of $1,000 of careful shopping for different tax brackets.
|The Portfolio Value of Not Spending $1,000 By Careful Shopping|
|Shopper||Tax Bracket||Stocks @1.25%||CDs @1.49%||5% Yield|
|Middle Income ($12,000-46,700 taxable income)||15%||$101,647||$ 85,274||$25,412|
|Upper Middle Income ($46,700-112,850 taxable income)||27%||$118,320||$ 99,262||$29,580|
|Highest Income (Taxable income over $307,050||38.6%||$140,717||$118,051||$35,179|
|50% Social Security Benefits Retiree||40.5%||$145,200||$121,820||$36,307|
|85% Social Security Benefits Retiree||50%||$172,800||$144,966||$43,200|
|Sources: Pocket Tax Guide, National Center for Policy Analysis, author calculations|