2005 CFAI AM Exam: YEO

Anyone who has done the 2005 CFAI Morning session…The YEO IPS problem… Do you recall why we didn’t also factor in her 250K living expenses into the return requirement? Everything else makes sense except for that. She is retiring in a year and would require this as well, and it wasn’t included in the answer key in the return requirement calculation…

It is, its grossed up by 1 year of inflation.

If you look closely, they incorporate 257,500 (250,000*1.03 to account for inflation) into the calculation because you are calculating the return requirement for 1 year from now.

ok. thank you!!

Hmm, but all of Yeo’s expenses are stated as of end of 1st year of retirement, so should not it be 1.03^2 x 250,000? Also (maybe it was discussed before) why do they add Lok’s education into her expenses instead of calculating PV of his education and subtracting it from Yeo’s asset base?

it says the living expenses grow at the inflation rate “throughout her retirement period” I guess this implies the inflation rate doesn’t kick in until that 2nd year in the example (the first year of retirement) i guess for the education expenses if it’s a one time expense you’d reduce from teh aset base but as it’s an ongoing expense for several years they consider it to be an expense instead…

Hey guys, I had a quick question on this problem as well. Why do we not factor in another year of interest and resulting taxes on interest from the money market fund in 2 years (first year of retirement) when calculating the cash flows for that year? Thanks!

jb I noticed that too and wondered if it was overlooked or if we’re to assume we redesign her portfolio

i think we’re to assume that we reallocated her portfolio by that time

gotcha…thx. darkhorse and tanyusha…this would fall under the “grey area” of this exam I suppose.

i hate this question

That question totally kicked the living sh!t out of me. I was so far off on the return it was comical.

The solution is not perfect given the complicated situation. At least it said the education cost is expected to increase at 6% annually but the solution only adjusted 3%.

this question still confuses me. do we need to calculate the 1st year of retirement to establish asset base etc, and then the second yr based just on future expenses? i started doing this from the current perspective to the first yr of retirement and then the first full yr of retirement and of course, i was wrong. just dont want to get tripped up on something like this. would appreciate any thoughts on how to think through this. tks

and why didn’t the 1.2 million money market fund (only the interest on it) is included in the cash inflow?

What else do you want? You already have the 1.2M…