Return Objective - Add taxes or inflation first?

Anyone know the preferred order. Depending on how you add them, it can produce different results. IE: Post-tax and Preinflation Return: 6% Inflation: 3% Taxes: 30% Inflation First: 6% + 3% = 9% 9% / (1-.3) = 12.86% Taxes First: 6% / (1-.3) = 8.75% 8.75% + 3% = 11.75% Pretty big difference…

I like to do inflation first then taxes. In theory taxes will be due on nominal pre tax return.

inflation first. but pretty sure you are doing it wrong. your after tax return is bigger than your pre-tax return. wouldnt that be nice. unless i am missing what it is you are doing.

Interesting… I always did taxes first then added inflation at the end of everything. Guess it makes sense to do inflation first though.

jmac01 - Good call. That’s my mistake, should read “Posttax” in the answer.

oh…i was reading wrong as usual.

If building backwards like this, I would do taxes first. The inflation portion of the return is taxed as well. So, you would adjust the 6% to take out taxes and then add the 3% inflation to get your nominal return. you could then multiply by 1-tax rate to get your true after tax return depending on what you are solving for. normally you have: pretax real return + inflation and then adjust for taxes. So, this can be tricky and depends on what you are given.