2002 exam on return calculation

This is also in Q.3A, p. 380, CFAI vol 5. The case is about Wisman. In the solution for part (A), why is the before-tax retirement spending $400,000? I thought this is after-tax spending. Did I get anything wrong? - sticky

I agree – they said they estimate their living expenses to be $400k annually after retirement. The other living expenses in the problem are given in after-tax dollars, and there is nothing to indicate the $400k is any different. God help us if this is the sort of answer key they use in grading the exam. I was also annoyed by the answer that risk tolerance has increased. No way. Before the changed circumstances, the limiting factor on risk tolerance was WILLINGNESS to take risk (below average) not ABILITY (averrage). Nothing in the changed circumstances indicates that her attitude toward risk has changed, even though her ability to take risk may have increased. In fact, the problem specifically says that, although her husband has taken significant investment risks in the past, he is leaving the investment decisions to her.

I wonder what would happen in grading if someone gave a well-thought out answer that contradicted what their answer key said. I would hope that the grader would read it and think “this kinda makes sense”. More likely, they would mark it wrong and move on. I generally agree with Max, but I don’t agree that even ability to take risk has increased: 1. Income in real dollars has decreased ($145K 5 years ago to $150K today), yet expenses have increased (mortgage, two people to feed, son going to stay home for the next 40 years). 2. Solution claims that portfolio increase allows greater risk – but the net portfolio (after deducting pv of expenses) is actually lower. 3. Husband works at Spencer, and she owns gobs of Spencer stock. Nice correlation between human capital and financial capital. And if you read the solutions to B part, you’d think they said that risk tolerance decreased! It’s like one person wrote the solution for A. and someone else wrote the solution for B. and they never checked with each other.