# Required return question

Trying to solve this question, any help would be greatly appreciated…

Sam Smith is 50 years old and will be retiring in 2 years. He currently earns 1M/year and his lifestyle expenses are \$400,000 per year. Once retired, his income will reduce to \$150k/year.

His current portfolio consists of assets worth \$4.5M. What is his required return if he expects to live until 80 years old?

Assume Sam Smith would like 250k (400k - 150k) in real terms (inflation adjusted) per year

Thank you for any help

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Are the numbers before or after taxes?

Is the required return before or after taxes?

Simplify the complicated side; don't complify the simplicated side.

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S2000magician wrote:

Are the numbers before or after taxes?

Is the required return before or after taxes?

Sorry forgot to include tax rate of 20%.

All numbers are after taxes

Required return is after taxes.

Thank you and sorry about that..

250k after tax in real terms is equal to 312.5k before tax in real terms

His portfolio must return a real rate of return of 312.5k / 4,500k = 0.694 = 6.94% per year

As long as Sam is expected to live until 80-yo, he should consider inflation protection so his portfolio must yield an 8.94% nominal annual rate of return (assuming a long-term inflation rate of 2.00%).

I’m open to corrections!

Las almas de todos los hombres son inmortales, pero las almas de los justos son inmortales y divinas.
Sócrates

Harrogath wrote:

250k after tax in real terms is equal to 312.5k before tax in real terms

His portfolio must return a real rate of return of 312.5k / 4,500k = 0.694 = 6.94% per year

As long as Sam is expected to live until 80-yo, he should consider inflation protection so his portfolio must yield an 8.94% nominal annual rate of return (assuming a long-term inflation rate of 2.00%).

I’m open to corrections!

Don’t we have to account for account drawdowns too? We can use the capital in the account and not just need it to be a direct return #, right? This can be done thruogh an annuity calculation from what I understand?

imaginethat wrote:
Harrogath wrote:
250k after tax in real terms is equal to 312.5k before tax in real terms

His portfolio must return a real rate of return of 312.5k / 4,500k = 0.694 = 6.94% per year

As long as Sam is expected to live until 80-yo, he should consider inflation protection so his portfolio must yield an 8.94% nominal annual rate of return (assuming a long-term inflation rate of 2.00%).

I’m open to corrections!

Don’t we have to account for account drawdowns too? We can use the capital in the account and not just need it to be a direct return #, right? This can be done thruogh an annuity calculation from what I understand?

It depends on what the vignette tells you.

Whether you’re to preserve capital or not will be clear in questions on the actual exam.  Often third-party questions are hopelessly unclear.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/