Hi there
After doing questions on behavioural finance and individual wealth for 3 days I have realised I have a HUGE weakness in calculating required returns!
I just don’t understand when to use the formula of shortfall/investable asset base vs when to use a time value of money approach.
Also, how do we work with taxes?
I did the 2008 paper question 1, and I don’t understand WHY we don’t do the 100,000 withdrawal from the investment portfolio on a pre-tax basis, when the text specifically says the following:
"Currently, Briscoe estimates that the Tracys’ investment portfolio will grow to 1,100,000 Canadian dollars (CAD) by their retirement date next year. Briscoe expects a tax rate of 20% to apply to the Tracys’ withdrawals from the investment account. If they retire at age 60, they plan to pay off their mortgage and associated taxes by withdrawing CAD 100,000 from their portfolio upon retirement. "
Ok, so I need to subtract 100,000 from the investable asset base, to use in the calculation of the required return right? If the Tracy’s retire at 60 that is.
Withdrawals are taxed at 20%, so if they need to withdraw 100,000 when they retire doesn’t this become 125,000 on a pre tax basis?
Therefore, the remaining investable base is reduced to 975,000 not 1,000,000.
The CFA answer is the investable base is 1,000,000 but I don’t get it.
Thanks!!!