# CFAI 2005 IPS Question

Hey guys, Has anyone of you had a look at Question 7 (IPS for individual Investors)? If Yes, could you please explain why the income/taxes related to the Money Market Fund were considered only during the year prior to the retirement and then ignored for the 1st year of retirement? Thanks! M.

I think it’s because they were deriving what the asset base is expected to be at retirement… so, that includes the AT return on the money market portfolio (= \$1.2mm * (1.025)*(1-.28)) They ask for the required AT return in the 1st year of retirement. That required return implicitly includes the AT return on the money market, because it’s an investible asset. So, you don’t need to go forward a year and calculate what is the AT income on the money market. It’s a bit confusing… p.s. I got the wrong answer b/c I got the time period screwed up.

thanks for the reply! but I stil don’t get it what was accounted for within teh asset base is just the amount during the last year prior to the retirement. I still do not understand why income from this Money Mkt fund is ignored during the 1st year:((

It’s not ignored at all… rather, it’s part of the required return because the money market’s within their investment portfolio. Think of it like this: if they had income coming from outside the portfolio (e.g. wages) then you would net the after-tax amount against their required expenses - because that reduces what the investment portfolio needs to earn (required return). But, the expected return on their money market account (the 2.5%) is baked into what the portfolio must earn over the next year. As I said, it’s confusing.

I would think in this way. Today (year 0 end) (Elizabeth’s 55 aged old) Money market fund valued at \$1.2M Year 1 end (Elizabeth retire) \$30K interest income inflow from the money market fund (=\$1.2M*2.5%), increase the asset value by \$30K(1-t), plus other funds inflow result in net investable asset value of \$10.2956M Year 2 end (end of 1st year after Elizabeth retire) After tax portfolio return (which includes after tax return from money market fund) required to meet living expense, education and donation needs = 0.5165M/10.295M+3% =8.02%.