CGT on Shares Fund

Brendan Burgess said:

I think you are thinking too much about this.

You can't predict the rate of return.
You can't predict the rate of inflation.
You can't predict the tax rates in 20 years.



It's not a yearly gain.
You should not have a fund by the way, but a portfolio of individual shares.
You might have some without gains and might choose to sell them first and not pay any CGT.

When you die, the CGT liability, disappears - under current rules. (These are stupid rules and I hope it's changed)

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Hummm....well I am only a novice when it comes to personal finance, but let me explain my understanding...

I can't predict the future rate of return, but we do have data on historic returns. For example, we know the S&P500 and Nasdaq100 ROR average return y-o-y. I can buy a portfolio (fund was used as a synonym) that aligns with the weightings of such an index. I can then model using lower and upper bounds (bear periods and bull periods). I can do the same if I go with 60/40 equity/bonds portfolios etc. I fully accept that "past performance is no guarantee of future performance" but to not model/plan as a result seems a bit like throwing the baby out with bath water. Is it not sane to say if I invest €500k in an index that has previously yielded 7% over any 15 year period then I can assume that I will yield say 3.5% over the next 15 years. This will give me a portfolio value that is useful to know rather than not knowing....

Ditto for rate of inflation - we have all the historic data.

As for tax rate, it is an assumption that it will be the same. Out of my control of course, but again - just because I am uncertain doesn't mean I don't make a plan/model surely? A plan with 33% CGT included is better than no plan...

What is the point in saving/investing etc. if one doesn't have some idea on what the outcome of the numbers will be...? And how would you know if a small tweak to the numbers could be in your favour eg maybe that new car isn't a good idea if it could shift retirement out by 5 years...a simple model will tell you the sensitivity of such big decisions.

Finally, what do financial planners actually do if not make a year-on-year financial model/plan?

Thanks for the info on CGT with married couples - good to know!

Brendan Burgess said:

You are doing great. Paying 15% instead of 20% is close enough to maxing out.

Invest in a diverse portfolio of shares will give you the most flexibility.

One other thing to be aware of - I have known some people who were determined to retire at 50 and lived very frugally in the meantime to achieve it. You are well off. I am not suggesting you go on a spending spree but enjoy your wealth and if it means not retiring until 51, so be it.

And another thing. No matter how much you have at 50, you will still not be sure that it's enough and probably won't retire.

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Just wondering on what basis the OP is doing great. I hope they are but I cannot see any real life €igures referenced just their hypothetical plan albeit a good one.

Obairchrua said:

Just wondering on what basis the OP is doing great.

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jpmackey said:

I have paid off my mortgage and increased my pension contributions to app. 15% vs. a limit of 20%.

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And he is planning to retire at 50.

Obairchrua said:

Just wondering on what basis the OP is doing great. I hope they are but I cannot see any real life €igures referenced just their hypothetical plan albeit a good one.

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Hi, the €40k per year invested is my real life plan, not hypothetical. That is my minimum target, am hoping to achieve closer to €45k per year. I am fairly lucky!

Well done and great plan there alright. Best of luck.

Obairchrua said:

Well done and great plan there alright. Best of luck.

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Thanks a mill, appreciated.

Update:
For those interested, I have settled on using the formula for "real rate of return".

"Example of the After-Tax Real Rate of Return
Let’s be more specific about how the after-tax real rate of return is determined. First, the return is calculated by determining the after-tax return before inflation, which is calculated as nominal return × (1 - tax rate). For example, consider an investor whose nominal return on his equity investment is 17% and his applicable tax rate is 15%. Therefore, his after-tax return is:0.17×(1−0.15)=0.1445=14.45%0.17×(1−0.15)=0.1445=14.45%

Let’s assume that the inflation rate during this period is 2.5%. To calculate the real rate of return after tax, divide 1 plus the after-tax return by 1 plus the inflation rate, then subtract 1. Dividing by inflation reflects the fact that a dollar in hand today is worth more than a dollar in hand tomorrow. In other words, future dollars have less purchasing power than today’s dollars.

Following our example, the after-tax real rate of return is:

(1+0.1445)(1+0.025)−1=1.1166−1=0.1166=11.66%(1+0.025)(1+0.1445)−1=1.1166−1=0.1166=11.66%

That figure is quite a bit lower than the 17% gross return received on the investment. As long as the real rate of return after taxes is positive, however, an investor will be ahead of inflation. If it’s negative, the return will not be sufficient to sustain an investor’s standard of living in the future."

So, I have an input cell in my model for the actual rate of return and applying the 33% CGT and 3% inflation against this, then using that real rate of return year on year to project out the fund value long-term. Best I got.