Can someone please explain why we do not include the 2.5% ANNUAL return on the money market account in each year of inflows and outflows? Why is it only listed in the first year and then forgotten even though it says it is received ANNUALLY right in the question??
If I’m thinking of the the same question, I believe it’s because they assume that you’ll re-allocate the entire portfolio in order to achieve the necessary target return requirement.
cuz if you include it every year you’re double counting. By including hte increase in the money market fund in year 0 until retirement one year later, you account for the increase in her asset base. you then use this new asset base to form the required return going forward.
NEVER use expected yield from money markets when calculatig required amount (numerator) ONLY use expected yield from money market to get net cash flow THIS YEAR, in order to determine investable asset base (denominator)
You only include it in first year, after that you dont care whats the return on money market as it is a part of portfolio
Thanks you guys. Makes complete sense.
Yeah don’t forget the interest via the money mkt fund if they have one 
In that one I did the math right on the return objective, but I don’t see how she has “above average” ability to take risk when she needs to earn a pre-tax return of over 10% to fund immediate liquidity needs in the first year and needs to fund a 25 year retirement with only her portfolio. On further review, I guess she can eat into her portfolio to cover shortfalls and make it back over 25 years in time to be at least flat in real value at death. Stupid mistake, which makes me glad I did the test just now.
This doesn’t make complete sense. CSK- you’re saying to only include it in the first year and Big Willy- you’re saying don’t forget to add the interest. But the asset base for the 1st year of retirement uses 1.2MM, not 1.2+ E®. On the ability to rake risk, I thought if they were depending entirely on the portfolio to fund all of their living expenses, we should “take down the risk a notch”. Do you guys remember anything about that? Thanks.
We are both saying the same thing. He’s saying add it into the First Year Only b/c he retirement doesnt begin until 1 year so she has 1 year of interest on the money market account.
barbc Wrote: ------------------------------------------------------- > On the ability to rake risk, I thought if they > were depending entirely on the portfolio to fund > all of their living expenses, we should “take down > the risk a notch”. Do you guys remember anything > about that? You only do that if they are relying on that income right now. In this situation, even though I haven’t seen the case but based on what you guys have already discussed, it looks as though he’s growing the portfolio for the future to meet certain income requires down the road. A total return approach would be appropriate and since those income requirements are not immediate, it does not reduce the ability of the investor to take risk. Again, didn’t see the case so not sure, but as long as the income requirements do not begin in the next 1-3 years, then it will not decrease his ability to take risk. PJStyles