IBBC CAPITAL ACADEMY / 2027
Investment planning must be evaluated after tax and spending
Independent IBBC Capital draft content for self-study. Not affiliated with or endorsed by CFA Institute. New lessons await subject-matter review. No CFA designation or official PSM credit is awarded.
Learning goals
- Diagnose the case using the stated constraints and quantitative evidence.
- Defend a conditional decision and identify what further evidence could reverse it.
Draft · approximately 95 minutes, excluding further revision.
Decision case · fictional facts
A retiree holds 2 m, needs 80,000 net annual spending and has a 300,000 concentrated stock position with cost basis 100,000. For this fictional example only, realized gains tax is 20% and there are no exemptions or offsets. Target equities are 50%; current equities are 65%.
Allocate from the complete investment policy
Risk capacity, willingness, spending, horizon, currency and constraints determine allocation. Retirement adds sequence risk and potentially limited ability to replace losses with earnings. A concentrated legacy holding can dominate risk despite a diversified remainder. Use tax-aware transitions and cash-flow rebalancing while retaining an explicit timeline for concentration reduction.
Manage tax without freezing the portfolio
Asset location, turnover, loss realization, holding periods and realization schedules can affect after-tax outcomes subject to actual law. Avoid universal wash-sale, trust or retirement-account claims across jurisdictions. Tax deferral has value but must be weighed against concentration and goal failure. Legal and tax specialists should confirm the actual account and retirement rules.
Report success against the client’s plan
Review time-weighted manager results, money-weighted client experience, after-tax costs, risk, liquidity and goal funding separately. A falling portfolio after withdrawals is not automatically manager failure or success; reconcile returns and flows. Report policy breaches, concentration, spending sustainability and revision triggers in accessible language.
Rebalance using the after-tax denominator
Return to the retiree’s original 2 m portfolio: equities are 1.3 m (65%), including the 300,000 concentrated position with 100,000 basis. Sell this position entirely at the stated 20% gains tax; hold net proceeds as cash. Assume all other values stay unchanged and the tax is paid from portfolio proceeds. Determine the post-sale equity weight, then the additional tax-free equity sale needed to reach exactly 50% of the remaining portfolio.
Explain why selling exactly 300,000 of equities does not attain a 50% target once the 40,000 tax leaves the portfolio. The second sale’s zero-tax assumption is stipulated only to isolate the denominator effect; real taxes depend on lots, accounts and jurisdiction.
Model reasoning, sensitivity and self-check
The tax is (300,000−100,000)×20%=40,000. Portfolio value falls to 1,960,000; remaining equity value is 1,000,000. Post-sale equity weight = 1,000,000/1,960,000 = 51.0204%. Target equity amount at 50% is 980,000, so an additional 20,000 tax-free equity sale reaches the stated target.
If the additional sale instead has basis ratio b and tax rate t on its gain, let x be gross sale value. With tax paid from the portfolio, solve (1,000,000−x)/(1,960,000−t(1−b)x)=0.5. Therefore x=20,000/[1−0.5t(1−b)]. This expresses why taxes may change both the numerator and denominator. It is a mathematical illustration, not a universal tax rule.
Self-check: reconcile net sale proceeds, total portfolio value and target allocation. Concentration reduction and the client’s willingness to realize tax should be documented together with execution, spending reserves and ongoing policy bands. Do not equate a one-time allocation target with sustainable retirement spending.
Formula and assumptions
Tax=(sale−basis)×stipulated rate;net proceeds=sale−tax
Compare with the model response after drafting
- Selling the concentrated position realizes 200,000 gain and 40,000 stipulated tax, leaving 260,000 net proceeds. Current equities 1.3 m exceed target 1 m by 300,000 before tax and market moves.
- Plan a risk-aware transition and verify taxes first; rebuild cash and target weights using net proceeds rather than assume a 300,000 gross sale provides 300,000 spending cash.
Errors to catch
- Treating tax deferral as always more important than risk.
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