2008 AM, Q1 A (ii)

net, investment, required, needed

Question
A. i. Prepare the return objectives portion of the Tracys’ investment policy statement
(IPS) that will apply if they retire at age 60.
ii. Calculate the pre-tax nominal rate of return that is required for the Tracys’ first
year of retirement if they retire at age 60. Show your calculations.

Guidliene answer says:
After-tax net income needed (45,000)
Pretax net income needed (using 20% tax rate) (56,250)

Question-why use pre-tax income ?

BelalM

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发表于 2013-4-22 10:49 | 只看该作者

Can I interrupt to ask where you found this paper? Thanks

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sabaruch

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发表于 2013-4-22 10:49 | 只看该作者

Google CFA Level 3 sample -that will take you to the CFA webiste where papers are provided.Cannot recall link
Re pre-tax nominal rate of return-I missed that-but I overlooked that because tax is an expense.
In the case of a company pre-tax income equal taxablle income less allowable deductions and so it makes sense to talk of pre and post tax income
In the individual case you only get deductions in a limited number of instances -and certainly not for living expenses.
So talking of pre-and after tax income in the individual case ignores that in the individual case tax is simply and expense-leaving it out of the calcutlaion understates required return

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giorgio10

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发表于 2013-4-22 10:50 | 只看该作者

Hi, while we are on that question, why don’t they adjust for tax when they withdrew the 100,000 from the asset base but on the liquidity question they adjust for tax when calculating the 200,000 withdrawal when 65 years old?

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luda002