It says that he has a growth portfolio that is currently valued at $40 million and that a portfolio manager expects nominal annual return for growth equity to be 8.5%. I don’t understand why you would include the return from this as a current asset. When he retires in one year he will have the return, but how can he consider it an investable asset? I thought you had to work with your current assets and growth them to meet your retirement needs in 1 year. If you sure you would inherit money at the end of the year would you include it? What if you had payment you were sure to receive in 5 years?

It says that he has a growth portfolio that is currently valued at $40 million and that a portfolio manager expects nominal annual return for growth equity to be 8.5%. I don’t understand why you would include the return from this as a current asset. exactly my point. In 2009 case, they have not included their investment return (4% of 1m)

I thought on the 2009 case they did say they expected the portfolio to grow to 1.1M? What do you mean they didnt include their investment return?

I was a bit confused too but they include this because the return requirement they are asking for is for when he retires in two years so the $40m in now $40 * (1.085) since it grew during the year. Meaning assets in year 1 with requirements for end of year 1 or beginning of year 2. When you look at past exams, look very carefully for patterns on how to set up your asset base and cash flow. It seems that the math is always very simple but the trickiness comes from before and after tax as well as timing. Just my .02.

What would really help would be to see a timeline of the cash flows. I don’t understand why the wording is so vague that a simple concept becomes extremely confusing. The question states he is currently 34 and “Serra will retire from professional soccer 1 year from now at the age of 35.” How can you tell the return requirement is for him retiring in 2 years? It clearly states “1 year from now”. Aren’t you supposed to be meet the retirement needs with only your currently investable assets, not the ones you will receive in the future?

You can tell because the question specifically asks you to calculate the return for when he retires which is a year from now. Therefore, you need his asset base a year from now. Another little trick they like to throw in is when they give you an ending value target. “The Ingrams have $3000000 and decided that they wanted to leave $200000 to charity and $2000000 to their son”. In that case, you need to use TVM on the calculator with $3m as the PV, $4m as the FV and the CF is whatever the cashflow requirement is (grown at inflation or not, depending on timing). Again, they are not going to get too complicated on math but will try to trick you on taxes and timing.

It’s not 2 years from now. He’s 34 now and will retire 1 year from now and then the question asks for required return in 1st year of retirement…so it is 1 year from current and therefore you should add return of the current growth portfolio. You are increasing everything for 1 year out (inflation, for example) so why wouldn’t you include the investment return? How did you incorporate the $40m portfolio…just leave it unchanged, so 0% return, for 1 year? That doesn’t make much sense…