Monitoring and trading (V6 R40 P107) Claire Wisman IPS

Brave ones, please help me on this one…

  1. If retirement living expenses will be 257,000

  2. If your PTFL will grow at an after-tax rate that of 4.9% (20 yrs), ending with 3,928,000

  3. why do they say that with the ‘usual’ 7% before-tax rate, the PTFL value at retirement (3,928,000) should be adequate to meet ongoing spending needs then ($257,000/$3,928,000 = 6.5% spending rate)

To what are they comparing this 6.5% spending rate? They will need an after-tax rate of 6.5%?

Don’t know what am I missing once again…

— (text CFAI) —

If the portfolio earns total return of 7 percent annually, the value at retirement ($3.93 million) should be adequate to meet ongoing spending needs then ($257,000/$3,928,000 = 6.5 percent spending rate)

(Level III 2012 Volume 6 Portfolio: Execution, Evaluation and Attribution, and Global Investment Performance Standards, 5th Edition. Pearson Learning Solutions p. 107).

guys, I really need your help on this one… it’s driving me nuts

  1. if the portfolio will earn 4.9% after-tax (totalling 3,928,000), why do they say that with a spending rate of 6.5% (257,000/3,928,000), the value should be adequate to meet the needs?

Page 107. Vol 6. (monitor and rebalancing)

Pre-Retirment return after tax is 4.9% .

PMT = 0 I/Y=4.9 N=20 , CPT FV=3,928,000

At retirement she needs she needs 257,000 per year. on a base of 3928000

That is 6.5% per year entirely from the portfolio.

Portfolio earns 7% , so it will be adequate . They’re comparing 7% return from portfolio to 6.5% required rate.

( I don’t understand 1 thing though , after tax the portfolio will earn only 4.9% after capital gains and income taxes , so I don’t know how they assume the return will be 7% ,can someone please clarify ?)

I think they said that after deducting PV of children’s edu & home building cost PV portfolio = 1509,000. _ **Assumption** _ if it _ **continues** _ to grow at 7% (as in the last 2 years) or post tax 4.9% portfolio value will be 3,928,000

Than back calculation & calculating spending rate (confusing term i think - nothing but required return to keep the present living expenses). I may be wrong though

janakisri, 1st of all many thanks for your time…I want clair wisman dead or alive!!! :slight_smile:

I know they are comparing the 7% before-tax return with the 6.5% spending rate, BUT I DON’T GET IT…

Actually the after tax value of the ptfl would be progressively depleted as you are spending every year 6.5% of it when the ptfl only grows at 4.9%…

how can this be adequate? (IS THIS A WORDING ENGLISH ISSUE FOR ME?)

More reasonable to me is the answer on page 114 for return requirement after clair fell in love…

The ptfl would earn a 6.3% after-tax and they would spend from it 6.47% every year…a bit more but it makes much more sense for me. However I gave up trying to understand why do they put it “SPENDING RATE BEFORE TAX OF 6.47%” when they are dealing with an after-tax ptfl value…

Guys, I had nightmares with this shit tonight…

anyone willing to save a candidate’s life…?