current year living expenses to be removed from asset base?

CFA Level III
#1

If nothing is mentioned regading the salary, we would subtract the current year living expenses from investable asset base, right?

Also, is income and expense both to be adjusted for inflation when calculating next yr’s outflow.

#2

Take the net of all current inflows and outflows and apply it to the investable base. So if there are expenses and no salary or other inflows then yes, subtract the expenses from the base.

I’d think the question would specify what is indexed to inflation and what is not. If it doesn’t say then I would assume it’s not, and even note that in the response.

#3

qn is whether we remove living exp from investment base? imo we should not as it will sit in cash acct which shld earn rf rate

#4

Don’t remove recurring living expenses from the investible base, living expenses, unless otherwise stated, are generally assumed to be paid out over the year or at the end of the year (in the case of the latter you may need to increase it for inflation as well). The numerator of the return calculation is designed to compensate for recurring annual spending.

If it said $100,000 is due in a couple of days or there is a one time large liquidity need (such as a house), then yes take it out of the investible base. Also state this in your liquidity constraint. Based on the above criteria, I believe that any future flow that should be deducted from your investible base will stick out in the problem.

#5

if your income is capable of paying for the expense then you deduct it (if its an on going expense)

however if you are retired and you have “x amount of $” as spending needs effective now then you assume that you have no income and deduct it from invest assets.

If its an amount not related to on going expenses, then take it off OR add it (if its a sale) to investable asset base

#6

but if the income iscapable of paying for the expense, the numerator would adjust it right, why would we subtract it from the base?

however, if nothing is mentioned about salary, should we assume it will be taken care of from the investable base and therefore subtract it?

#7

If you have $30,000 at the bank or worth of stocks and you need to pay $50,000 but your income can cover only $30,000, what would you do? i’d definitely use some of the money at the bank (or sell the stocks) to pay for the expenses.