I had multiple errors in the 2007 Individual IPS q: I did not look at the fact that the couple needed the first 200k immediately ,i.e. their portfolio was already lower by 200k ( sneaky CFA) Then I am confused by this: I know we had to add 2.5 to the real return to get the nominal return required. But why do they add inflation to the payments also? Doesn’t the 2.5% addition to real rate cover the payment part too ? Can anyone help me here?

the first 2.5% is for current payment to get to next period. so you have a 100K requirement now - your next year will be 102.5 based on inflation. next year amount required / Net Investable assets = Nominal return requirement Nominal return requirement + 2.5 (in the case of additive) or (1+nominal)(1+2.5%) - 1 (for multiplicative) is the return requirement

Thanks CP , that clarifies it for me