> You can buy CDs that return over 5% APY right now (giving you a $500/year budget without even touching your principal)

Not really, because your principal loses value because of inflation.

If you buy that $10k CD, you get $500 out per year; you pay a couple hundred bucks of that in taxes, leaving $300. If inflation sticks around 3.2%, you'll be losing $20/year before you spend anything.

You wouldn't withdraw $500 per year, you would leave it invested and spend $500 that you already have liquid from elsewhere.

But it's beside the point. The point is that opportunity costs must be accounted for.

It doesn't matter when you withdraw the money, the taxes will be the same. $10k earning 5% compounded monthly will be $16,470 in 10 years. After paying 1/3 of the gains in taxes, you'll be left with $14,313 which has a present value of $10,446 at 3.2% inflation.

So yeah opportunity costs must be accounted for, but in your scenario the opportunity cost is negligible. We're talking 0.4% per year. Investing in a CD is like pissing in the ocean

> You wouldn't withdraw $500 per year,

You still generally owe taxes as the interest is accrued. So, the situation doesn't change-- that CD loses money unless your tax rate is low.

Even with compounded interest not subject to taxation until withdrawal, it's not much better. Even in a ridiculous case with 30 years, 10000 * (1.05^30) = $43220 ; minus .4 * 33220 = $29932; 29932 / (1.032^30) = $11401-- or about .4% real return per year.

Opportunity costs beyond inflation make the picture even more ridiculous.

Interesting, I used different numbers (10 years and 33% tax) in my comment but got the same result of 0.4% real returns. Check my math

(10000 * (1.05^10) - 10000) * .67 = 4213. 14213/(1.032^10) = 10372; or about a .36% return.

Not surprising that a lower tax rate gets to the same number sooner through compounding.

BUt the bigger issue is that you have to pay tax on interest as it is accrued, not all at the end. So in your case there's a 3.35% return vs. 3.2% inflation or a .15% net return.

Thanks, makes sense

Yes but you can recoup the entirety of what you put in when you sell your house (normally with a healthy margin).

You could invest it in real estate as that has historically had a great return.

Yeah, for example, you could invest it in an extra room in your house.