-Current payments which need to be subtracted from investable asset base if expenses > income or income > expenses but isn’t sufficient enough to cover the expenses.
-expenses growing at inflation rate
-ill make sure to circle every “immediate, now, current” term found in the text.
-House is not included in the investable asset base.
-adjusting for pre/after tax if income is pre tax and ask for pre tax req rate, divide expenses by 1-t, if income and expenses are post tax, subtract them and divide the answer by 1-t.
-Including expected return on investments in the cash flows not the asset base.
-In case i need to submit a 1 time payment, i try to pay from my income sources; however, if not sufficient then pay from investable asset base.
-If the person is retired - > no current income and only pension income if any.
I will add, do not overthink the issue of cash reserve. If text tells you they want to have cash resrve you can substract it from your asset base or doesn’t include in return calculations. One of previous exams provides to alternative answers. Such small details often confuses us.
-adjusting for pre/after tax if income is pre tax and ask for pre tax req rate, divide expenses by 1-t, if income and expenses are post tax, subtract them and divide the answer by 1-t.
What if we calculate everything after tax and only do the before tax calculation at the end like : After tax nominal return / 1-t ?
In 2013 AM exams, question 1A, which requires to calculate “Nominal after-tax required rate of return for the coming year”.
As I thought, it should have been:
Investible Assets = USD 10,750,000. This is ok and consistent with the answer.
But the strange part is:
I thought: Cash needs next year=300,000 (real value)
Answer: Cash need next year = 300,000x(1+inflation rate)=307,500 (nominal value)
Then the nominal after required return is:
I thought: 300,000/10,750,000= 0.0279 and then (1+0.0279)x(1+inflation rate)= final answer.
Answer : 307,500/10,750,000=0.025 and then (1+0.025)x(1+inflation rate)= final answer.
My question is: why the total living expense next year need to be adjust to inflation to find the real required return, which is adjusted one more time for inflation.
I thought we should use real amount to find real required return.
^^ they solved it both ways with or without and since its included in the liquidity part then its better if you take it off from inv base (check alternate answer) but in all cases, both are okay.