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2012 AM Q1 A

Why do we subtract the trust contributions from the 900k assets? We have no information about his current living expenses and his salary. It is possible he earns enough to cover that amount just using his salary.

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Are you talking about his annual, after-tax savings of $25k?  Those aren’t subtracted from his asset base; instead, those are his annual contributions.  The only thing subtracted from the $900k asset base is the $250k he’ll need within the next few months to fund the trust for his kids. 

PV = -$650,000 (900k asset base - 250k contribution to the trust for his kids)

PMT = -$25,000 (his annual after-tax savings, which are contributed to his tax-exempt account)

FV = $1,600,000

n = 15 years (when he plans to retire)

Solve for i –> 3.6467 ~ 3.65%

NOTE: easy way to remember whether to use + or - is if you’re contributing the money it’s negative, and if you’re receiving money it’s positive.

#goodluck

No, sorry I meant the 250k. Without any info about his salary we don’t know for sure where he is getting the money from.

All we’re told us that he is able to save/net $25k after-tax dollars on an annual basis.  He could make $75k after-tax and only have $50k in annual expenses – or $225k a/t and have $200k in exp.  Doesn’t matter, all we know is $25k is his net residual.

By default, we should assume that such a large amount (i.e., 10x greater than his annual savings) would need to come from his 900k asset base. Where else is he going to get 250k in the next few months?

Although you’re searching for key words and facts in the vignette, don’t read into it any more than you need to.

#JustTheFacts