Taxable Portfolio Taxes

[c17]

I've seen on other posts that the simulator assumes all Taxable Portfolio gains are taxed in full each year, applying the Investment Tax Rate. However the numbers I saw weren't adding up. As a test I pared down to bare bones and entered the following:

- Taxable Portfolio Value $1M
- Inflation 2%
- Custom Return Avg of 5%
- Investment Tax Rate of 10%
- Zeroed out everything else (including Std Devs)

The first year results show a Taxable Portfolio Value of $1,024,510. But I would have expected $1,027,000 ($1M + ($1M * 3% * 90%)).

Any insight on the calculus?

[jimr]

All of the amounts displayed in the year-to-year details view table are shown in present value (2021) dollars, so we need to convert the nominal return into a real return and we also need to subtract taxes from the nominal return.

So first, calculate the after tax nominal return as => 5% - (5% * .1) = 4.5%

The formula for real return is (1 + r)/(1 + i) - 1
https://www.investopedia.com/terms/r/re ... return.asp

real return = (1 + after tax nominal return) / (1 + inflation) - 1
= (1.045/1.02) - 1
= 2.450980%

So the real after tax growth rate is approximately 2.451%

So the $1M portfolio grows by just over 2.45 percent (real) to $1,024,510

Does that make sense?

Jim

[c17]

It does! Thanks. One other, probably equally nitpicky question: I know the "new investment" $ are automatically increased for inflation. And I think I saw somewhere that it is assumed those new investments are made at the end of each year. If that is the case, would the real value of that new investment be indexed lower in year 1 (e.g. if 2% inflation occurred during that year, $100 becomes $98.04)? Or is the assumption that it's a "real investment" at whatever point in time it's made during year 1, and we index from there?

[jimr]

The savings amount added to the portfolio is the amount specified. So in your example, $100 (real) would be added.

You could test this out using the same setup as your example above but putting in 100,000 for the "Taxable Annual Savings" input.

At the end of the first year of the plan, instead of a portfolio value of $1,024,510, the portfolio value will be $1,124,510