# CFAI EOC, Question 2, Page 207, Book 2

In this question, the individual earns 7.4% on her portfolio. With 3% inflation, that is a 4.4% real return. Her living expenses that she needs to earn from the portfolio are \$50k on a \$1.12 million portfolio, or 4.5%

The answer says that because the 4.4% real return is less than the 4.5% return, she is SOL, and won’t earn enough.

But, it seems to me that she is earning 7.4% on 1.12 million, which is approximately \$83k, which is more than enough to cover the \$50k.

Is this problem just saying that even though she she has enough to cover living expenses, living expenses will grow at a rates of 3%, but the portfolio will only grow at a rate of 2.9%, so eventually, the portfolio principal will decline to zero?

She has enough to cover today’s epenses , but the ( real ) value of her portfolio will not stay at the same rate . It will decline because of inflation . The only way it will stay at a (real ) constant value is if the return = expenses+inflation