ÖмäÒµÎñ·¢Õ¹Òâ¼û Portfolio Management- Return Objective, Vol 2, Page 183, Asset Allocation Concepts(1): Ms. Fairfax¡¯s base salary is 500,000, with inflation-protected, and sufficient to support her lifestyle. The curriculum says that to maintain her current lifestyle, 500,000*(1.04)^7 = 658,000 by retirement is needed with investable assets of13.211,500. I am confused about why not factor in the effect of inflation on living expense AFTER retirement, in other words, why just use the present value in year 7 as the requirement return during her retirement stage without taking the inflation rate into account? I think the living expense in year 8 it should be 658,000*1.04,and in year turns to be 658,000*1.04^2, and so on¡Any comments? Thanks in advance.
Did anybody see this thread? Your attention will be appreciated.
I can’t quote chapter and verse on this, but here’s my fuzzy recollection. If terminal date is unknown, then you must assume a perpetuity (i.e. no drawdown of principal). Say I start retirement today and need 50k this year, with savings of 1m. If inflation is 4%, then my 1m better grow to 1.09m to meet income+inflation need. So the portfolio must return 9%. Does that make sense?
If you look at the example, it starts from year 7.