The amount you need at the end of the time horizon for a goal is referred to as terminal wealth. In this article, we discuss how to determine the terminal wealth for a goal. We also look at how to adjust for taxes on goal-based investments, as taxes can impact a goal’s terminal wealth.

Tax drag

Suppose you want to provide for your child’s college education ten years hence. As the first step, you must find out the current cost of college education for a branch of study you believe your child will pursue. For other goals such as buying a house, you must consider the current cost of buying your desired house. Next, you must consider the inflation related to the goal. A search on the Internet suggests that education inflation is 10%. Suppose the education you want your child to have costs ₹25 lakh today. You must determine how much it would cost 10 years hence at 10% inflation. That would be the terminal wealth required for the life goal.

The above calculation is simple but ignores the effect of taxes on the terminal wealth.

The terminal wealth should be enough to fund the goal after paying taxes. But accounting for taxes is easier said than done. This is because of two reasons. One, it is typical for individuals to invest in bank deposits for their bond allocation. The interest income on deposits is taxed annually on an accrual basis.

And two, you must rebalance your portfolio starting five years from the end of the time horizon for the goal. This means you could incur long term capital gains tax on your equity investments in the years you rebalance. The impact of taxes on your portfolio returns is referred to as the tax drag.

Conclusion

You can adjust for the tax drag by projecting the proportion of equity and bonds in the portfolio through the time horizon for a goal considering your rebalancing process. Then, you must adjust the portfolio value each year for taxes. But all this defeats the objective of keeping your investment process simple. An easier approach is to add, say, 10-15% to the pre-tax terminal wealth as buffer for taxes. Alternatively, you could decide that any shortfall in terminal wealth because of tax drag can be made good with surplus cash or from additional borrowings taken at the end of the time horizon for a life goal.

(The author offers training programmes for individuals to manage their personal investments)

Published on April 27, 2026