That is just confusing to me.
Agreed.
Nominal = Including inflation Pre-tax => if expenses are expressed after tax (meaning they have to be paid by taking money out of the portfolio that will be taxed) then adjust the expenses for taxes. There is one exam, I think 2006, that gives you taxes in pretax form, so no adjustment is required (They grossed it up for you).
so a pre-tax return will always be higher or more expenses due to taxes?
Yes, think about it like this way, you need to pay off 140k in expenses, only you have a series of appreciated stocks and dividend and income paying stocks and bonds and your taxed at a given rate (30%). In order to get the cash to pay off your expenses (which are after tax) you need to either get interest, dividends or sell something (your taxed at 30%), so you need 140k / 0.7 = 200k before taxes. This is your goal of your portfolio. So if you have 4m in investable assets you need to make 5% before taxes, the gov’t will take their chunk and you will be left with 140k after all is said and done. If inflation is 3% per year AND you want to protect your purchasing power, you need to add another 3%/yr, so you need to make 8% on your assets and this is your RR.
Ok thanks james makes sense I think i got confused with the wording pre-tax I thought can mean before taking taxes into consideration or the return you need before taxes (this is the correct pre-tax definition). I know very stupid but my mind has been violated last couple weeks.
Pre-tax = Before Taxes So yes its the return on the portfolio that must be earned before taking taxes into consideration. As its been stated before, the Before Tax return will “Always” be Equal to or Greater than the AFter-Tax return.
What I meant by before taking taxes into consideration was before taking the calc into consideration (return/1-t) but yes if you look at it that way yes it makes sense.