Question. If the spending requirement was $100k of a $5million portfolio which was for a medical need running at a 5% inflation but general inflation was at 2% (which was another $50k of spending), which one do you use? I think it was a question from Schweser, but they used 2% for the whole thing. Doesn’t make sense to me. I weighted them… Anyone else see this or have input on it? Thanks.
CFAI would use the 5%
It depends what drives the required return. If the main goal is to provide funding for whatever is growing @ 5%, then 5% is the relevant inflation rate. If the item growing at 5% is only a one-time or short term need and the goal is to grow portfolio value to cover living expenses, then 2% is your relevant inflation rate.
that makes sense. thanks!