2010 AM Session - Ques 1 (Individual IPS)

Really there is no standard approach to crack these IPS individual Questions

Query 1)

In Liquidity requirement they are only taking Child education expenses (50k). Why not charity (6k) investment in TDA (12k) payable year end

  1. When Lima is already paying for Children’s education on year end how come its included in time horizon. I believe it should only be two stage - 26 years pre retirement & 20-25 year post retirement.

I have learnt that only the if thet are factors which alters or calls for review in IPS should be taken as a stages in time horizon.

  1. Vignette states that Under TDA box that Income tax are paid on withdrawals. Why annuity payment at age 60 not adjusted for tax.

I believe in TDAs grows tax free but liable for tax at the time of withdrawal. Remeber TEA vs TDA account where TEA has back end tax benefits & TDA has front end tax benefits.

  1. TDA investment of 12 k is very well taken care from annual salary then there is a need to show 12k from portfolio (used in PMT = 12k) while calculating return objective.

Ok it is used as a contribution to investment. Its never been done this way before. I used PMT as 0

Any one else has taken the exam & felt the same probs.?

any help on point 1) & 2)

I will check this out when I get home and respond as best I can


I appreciate your help as these IPS question guideline answers are more confusing then the concept.

1.) currently her salary meets her living expenses. remember liquidity needs and portfolio returns (typically the same, or at least lots of overlap) only pertain to costs the PORTFOLIO is required to meet, if salary meets them, it is not a portfolio requirement or constraint. Additionally the charity contributions are included already in annual living expenses as the question states.

2.) there is more grey area here, I too have seen the general rule of only material changes that alter constraints to impact time horizon, however i have also seen upcoming expenditures (typically tuition) be treated as a time horizon. Personally I always count large expenditures as a separate time horizon. In this case, you are calculating current liquididty needs / expenditures, and the payment of those expenses are not until year end, so it is a separate horizon. If they were immediate, then you would be correct.

3.) I missed this too, i think it is because they are asking for a pre-tax return, so all the future nominal values (including both the necessary TDA value, and the 1,000,000 payment at retirement) need to be gross of tax.

4.) i do not understand what you are asking. I think what you are saying is that the salary covers the TDA investment, and you are asking why include it as a pmt in the TVM calculations. If this is the case, it’s because yes, the salary covers it, but you are still making those payments every year, right? If you were not making those payments it would take a much higher return to get to $2,000,000 future value in 25 years, plus, what would you be doing with that 12k every year since living expenses are not using it?

Hope this helps, as always, others are welcome to correct my attempts at answering so please do.

Can someone clarify why the 1m she is getting is not taxed ? I understand the rest, but is the rule that if the question asks for pre-tax, don’t tax anything ? I am confused, if someone can provide more color will be super helpful.