Return Calculation- Private wealth Mgt (CFAI Vol 2 pg 183)

CFAI Vol 2 pg 183 states this under the Return requirement section of the IPS- “Her 3% real, after tax return preference implies a gross total return requirement of at least 10.8%, assuming 4% inflation and a 35% tax rate.” How was 10.8% arrived? I can’t see it given anywhere so how did they arrive at this figure?

it is just (4+3)/0.65 = 10.8% . 3 is real return , 4 is inflation , 35% tax rate give denominator of (1-0.35)

So 10.8% is nominal after tax return! I missed that. Thanks :slight_smile:


BEFORE! thanks cpk. My bad.

This is clearly a case of lack of sleep. I’m tripping out. :-/

As mentioned above, this is calculated as (3% + 4%) ÷ (1 - 0.35) = 10.7692%.

Note that this assumes that the account in which the assets are held is taxable, so the entire return (10.7692%) is taxable.

If the assets are held in a nontaxable account, then the correct calculation is (3% ÷ (1 - 0.35)) + 4% = 8.6154%; i.e., you pay taxes only on the 4.6154% you withdraw and use for expenses and taxes, you don’t pay taxes on the 4% you leave in the account to grow with inflation.

Look at for an example that makes that more clear.

Thanks magician. That helps :slight_smile:

My pleasure.