Tailoring return estimates for taxable investors

Traditional return assumptions are typically expressed before taxes, potentially overlooking an important driver of portfolio outcomes. For taxable investors, what matters is not just what a portfolio earns – but what remains after taxes.

That’s even more paramount in today’s environment of structurally higher government bond yields. Higher yields have raised the cost of ignoring taxes, particularly for assets that generate taxable income. Factoring taxes into return assumptions can change how investors assess opportunities across asset classes.

We show how tax-aware capital market assumptions can improve expected portfolio outcomes. In our analysis, they boosted expected after-tax returns by roughly half a percentage point without increasing risk.

The rise in global government bond yields has made the tax drag more meaningful, reducing the income taxable investors ultimately keep. See the chart.