There is no way to nail this down, so I’ve decided to just let this go and try to make a logical argument and get partial credit whenever they went a specific number. Besides, it’s only usually one out of several questions. As far as formulate, or “discuss” a return requirement, it seems to me that the words: “provide for meeting annual living expenses on an inflation adjusted basis and preserve purchasing power of the portfolio utilizing a total return approach” pretty much meets 90% of the situations…
ditto…although I do wrestle with it, I am convinced the following steps work: Convert the case into a simple TVM problem-- 1) First figure out n, PV, FV, PMT (ALL on after-tax basis) Details below. 2) Next compute i 3) Then Add inflation and management fees (multiplicative) 4) Optionally if pre-tax number is desired divide by (1 - tax%) (i) PV is always net of any immediate disposals of cash / liabilities (credit card debt, house repair, downpay). Typically don’t include residence in PV (ii) FV = PV usually due to clients’ bequest desire, then the required rate is simply PMT/PV. Things get complex if PV <> FV, e.g. (a) lump-sum needed to buy annuity (FV > PV), or (b) retiree with no charitable intention (FV
Even after looking at the “Jurgen” example 5 times in various places (CFA book, Stalla) I couldn’t even nail the question when I took the 2007 morning session. I’m just going to label all my inputs, clearly write all my calculations and snag partial credit.