Schweser makes a big deal out of when you calculate nominal pre tax return from after tax real real return. Do you consider inflation taxable or not. Surely cfa must be very clear on which is required method. Schweser gives some preference of considering inflation taxable.
Also when going from pretax real to after tax nominal do you consider inflation taxable i.e tax the real return and then add inflation or tax the nominal (add real plus inflation and then tax the suM).
Does someone has some clarity on what is the CFA required method for the exam?
This has been discussed several times here; you should be able to browse through the threads and find some discussions.
The key is whether the funds supplying the retirement income reside in a taxable account or a nontaxable account.
It the funds are in a taxable account, then the return that covers inflation will be taxable, so you compute the after-tax required return, add inflation, then gross up for taxes.
If the funds are in a nontaxable account - so the investor is taxed only on the amout withdrawn from the account - then the return that covers inflation will not be taxed; you compute the after-tax required rate of return, gross up for taxes, then add inflation.
thanks for your response, i will try to apply this method to the questions. When you say “funds supplying the retirement income reside in a taxable account” whether your portfolio assets are in a taxable account or not. However if no clear indication is given in this regard will you prefer on method over the other or will this indication always be given. thanks