The Monte Carlo simulates returns based upon the expected return and standard deviation of the allocation model used in a plan. In order to simulate a more realistic experience, the simulated return is dragged by two components: 1) Portfolio expense ratio, and 2) Dividend tax liability.
The Portfolio expense ratio is the weighted average expense ratio that a client might pay on funds in the portfolio. Once the portfolio’s expense ratio is entered, we deduct that expense from the simulated return.
The Dividend tax liability looks at estimated dividend yields per asset class. Then, using the asset allocation model, we calculate the total estimated dividends for the portfolio. Once we have the estimated dividend yield, we calculate the estimated dividend amount by applying the yield to the taxable bucket of accounts. With the client’s tax rate on hand, we then calculate a simulated dividend tax liability based upon the taxable bucket of accounts.