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Required return inclusive of inflation for next year

hi all,

the question about the required return calculation seems to come often in the past exams and i think that i am missing something. 
can you please help me with the below? 
Here is the question (I am extracting it from 2011 Essay but simplifying it): 

  • Asset base is USD 4.3M
  • living expenses of this year 250k
  • inflation is 3%

the aim is to calculate the required nominal return next year.

what i did is the following: 

  1. calculate the return from a real value perspective 250 / 4.3M = 5.8%
  2. add the inflation component to get the nominal return: 4.8 + 3 = 7.8%

the correction seems to add one step before my step one which is inflating the expenses (250 x 1.03) and then they follow the rest of the logic. 

i don’t understand why we use the inflation two times. isn’t it there a double counting?


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You can refer to the similar question in the 2017 AM paper. CFA gave a full explanation on your exact question.