Just did Question 1 2009 exam and got calc wrong. My approach was to: Post Tax real: 45,000/1,000,000 = 4.5% Post Tax nominal: (1.045)(1.04) = 8.68% Pre Tax nominal: 8.68%/0.8 = 10.85% My understanding was that you always adjusted for inflation before tax. i.e. you it shouldn’t assume that you get a tax benefit from inflation, i.e. inflation isn’t tax deductible. Does anyone understand why CFAI grossed tax before adjusting for inflation and what their rationale is? Also under what circumstances do you gross up expenses which go in the liquidity calc? again i thought you stated cost post tax real, therefore you adjust for tax and inflation in the return calc. Any input would be appreciated.
There are extensive discussions of this issue, going back to right after the exam last year. There were letters and responses to the CFAI posted in previous threads. The key is picking up that it was a Tax deferred account, if memory serves. They say something to the effect of “25% tax on withdrawals from the savings account” and we’re supposed to infer that means tax deferred. As such, needs to be addressed in numerator to reflect that it is the tax pd on withdrawal, as opposed to a tax on all inc. Hope that helps.