2014 AM Mock Q1 A)

First question…always a good sign.

Soi they calculate the real investment income that is needed to satisfy expenses as:

300,000(1.025) - 125,000(0.70) = 220,000


Then they say the rea after-tax rate of return is 220,000 / 11,000,000 = 2.00%.

My question is, doesn’t he need to pay tax on whatever income he makes to get to 220,000?

So the before tax investment income would be: 220,000 / 0.7 = 314,286

That means the real after tax return is 314,286 / 11,000,000 = 2.86%

Then adjust for inflation and the answer is:

(1.0286)(1.025) - 1 = 5.43%

i had the same question to this question, which in my opinion was never answered. my answer actually had a higher rate bc i took the after tax value of the lump sum (10m*tax rate).


See my responses in bold, above.

FYI - this is not the 2014 AM Mock… the is the REAL 2013 AM Exam.