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Detailed view - taxes on portfolio growth seem wrong

Posted: Mon Jun 08, 2020 11:27 pm
by nukescott
Great program, but I think I may have found an editing bug in the "Taxes on portfolio growth" column of detailed view. I'm running version 4.03.02.

Assume a 100,000k taxable portfolio (0 for the other 2). 0% interest, 20% investment and income tax rates. In additional inputs set 10% rate of return from start of plan to end of plan with no standard deviation. Set annual retirement spending to 20000.

What I get the in taxes on portfolio growth the first year is $1728. That appears to be calculated based on the subsequent year (and done either incorrectly or in a manner I do not understand). Using the value of $86400 (calculated below). The taxes on that balance's growth would be 86400*0.1*.2 = $1728. SO I think I understand how it was calculated, but:

The taxable portfolio value in the first year (86400) is correct. it is calculated as $100,000 - 20,000 expenses = 80000. Then there is growth of 10% so $88000. Then taxes are calculated as 8000*0.20 = *1860. Final balance is $100000 - 20000 + 8000 - 1860 = $86400, which is right.
I sure expect that the taxes on portfolio growth in that year should thus be reported as $1860. But possibly it would show up in the following year (deferred?). Regardless, that $1860 value never shows up in the taxes on portfolio growth column, so I'm quite confused.

But it is an extra column, and doesn't seem to impact the real ones that matter...

Attachment has the very simple frp file I was playing with.

Thanks much.

Re: Detailed view - taxes on portfolio growth seem wrong

Posted: Tue Jun 09, 2020 7:31 am
by jimr
Logically, annual expenses are deducted from the portfolio on the first of the year and portfolio growth and taxes are computed at the end of the year. Does that help to make your numbers make sense?

Re: Detailed view - taxes on portfolio growth seem wrong

Posted: Tue Jun 09, 2020 9:46 pm
by nukescott
Hi Jim,

No, it does not.

I've already subtracted expenses at the beginning (100K -20K = 80k). Then figured the return on 80K => 88K, then the taxes on the 8K (which I believe is consistent with the end of the year). The number in the taxes on portfolio growth column still seems wrong (and inconsistent with the taxes on portfolio growth actually used in the calculation of the value reported in the "taxable portfolio value" column. I believe taxes should be $1600 in that first year.

Do note I made a typo on the taxes part originally. Everywhere I typed 1860 (all 4 times) should instead be 1600. So sorry about that.

Re: Detailed view - taxes on portfolio growth seem wrong

Posted: Wed Jun 10, 2020 9:33 am
by jimr
Thanks for the update and for the nice clear report of what you are seeing.

That column was sort of an afterthought and because I didn't want to increase the storage used by the sim code, I calculate it after the fact rather than saving the data needed to pull a median value out of the simulation.

Anyhow, as you indicated, I was sloppy with the calculation. I was using the ending portfolio value and just multiplying it by the growth rate times the tax rate. The trouble is the calculation should be based on the starting portfolio value (after expenses but before any portfolio contributions).

The easiest way I can think of to correct this is to solve for the start portfolio value based on the ending value, the growth rate, and the tax rate. To do this, I brushed off my algebra skills (thanks google) and came up with this formula:
taxes on growth = (ending portfolio value / (1 + (return * (1 - tax rate))) * return * tax rate

I updated the code to use this formula and it seems to produce the expected results.

I'm not exactly sure when I'll release the next version, so if you'd like a pre-release version, just email me at and I'll send a download link for an interim version.


Re: Detailed view - taxes on portfolio growth seem wrong

Posted: Thu Jun 11, 2020 7:38 pm
by nukescott
Thanks jim.

I sent you an e-mail the other day. Gonna try again from a different account.