mik82

Inflation can be multiplicative or additive. From the texts it stated the additive approach was easier to understand on the private wealth side. If you look at the essay answers they have both multiplicative and additive as possibilities. I would use multiplicative then you don't need to remember two things between institutions and individuals.

As for taxes and inflation. If the entire proceeds of the account are taxed on a yearly basis, inflation must be multiplied net of tax.

If the entire amount is not taxed every year and you are only withdrawing, inflation is not net of tax.

There is an entire thread from last couple of years relating to this. I found it via Google when I first started studying.

i.e. Return requirement 5. Taxes 20%, Inflation 3%.

If taxed every year. [(1.05)(1.03) -1]/.8 = 10.1875
If taxed only on withdrawals. [1 + (.05/.8)](1.03) = 9.4375

I think a lot of the posts on this board relate to attempting to memorize instead of understanding the theory. The tax problems are very difficult to memorize however if you spend the time to figure out what is actually being done you can answer them quickly.



Edited 3 time(s). Last edit at Tuesday, May 17, 2011 at 10:23AM by Paraguay.