- Whether Salary Income ( say 100) to be considered as inflow Income or not 2) Taxes (say 25) on Salary Income to be considered as outflow expenditure or not 3) Living expenses is 150 per year. 4) Investable base 1000
Outflow = 100-25-150 = 75
Investable base = 1000
Return Required = 75/1000
As I know Living Expenses is certain to be taken while calculating Return Req. but what about salary & taxes on salary. Why it is to be taken or why it is not to be taken. What are the grounds for taking into considerations for while calculating Return and what are the grounds for not taking into considerations.
Is there any one who can solve this problem, Return calculation looks like to be a complicated issue.
Portfolio has to provide expenses that are not covered by sources of income.
As far as taxes go , generally done last ( after inflation ) because Govt. taxes the after-inflation ( also written as nominal income ) .
ConsiderAllIncome->DeductAllExpenses->ConsiderAllAssets->DeductAnyExpenditures
Get the Real Rate As ( net expense ) /( net assets) . Adjust Real-Rate for inflation . Then adjust inflation-adjusted-real-rate for taxes.
One study-material has a case where all the proceeds of the portfolio are not taxed , only portions withdrawn for expense. That material claims that you have to flip-the-order-of-inflation-and-taxes for this case i.e. taxes-first and inflation-last
The most tricky pieces ( or error-prone , for me ) are which numbers should be inflation adjusted in expense. Also if you carry-forward a net income it gets added to assets , so that’s tricky too . Also frequently miss considering some assets or expenditures .