# Q1 Part A ii) PM(individual) 2009 CFA AM Session

Key facts Pension income after tax = 80,000 Expenses = 125,000 Shortfall = 45,000 Investable assets = 1,100,000 Mortgage to be reduced by 100,000 on retirement Inflation 4% **Briscoe expects a tax rate of 20% to apply to the Tracys withdrawals from the investment account Q Calculate the pre-tax nominal rate of return that is required for the first year if the Tracys retire at 60. CFA Answer [(45,000/(1-0.2)(1,100,000-100,000)) = 56,250/1,000,000 = 5.625% [(1.05625)(1.04)]-1= 9.85% However, I am curious, if the mortgage is being funded by the investment account (maybe this is not right, but it seems to be from the facts), the 100,000 should be 125,000 i.e. 100,000(1-0.2). My Answer [(45,000/(1-0.2)(1,100,000-(100,000(1-0.2))) = 56,250/975,000 = 5.77% [(1.0577)(1.04)]-1= 10% exactly. Maybe a co-incidence Any help appreciated. Not a great start to the paper, second qn in and i have got it wrong!!!

Man why are you making it difficult for yourself? It says clearly: “pay off their mortgage AND associated TAXES by WITHDRAWING CAD 100,000 from their portfolio upon retirement.” It did not say “pay off their mortgage of CAD 100,000 from their portfolio upon retirement.” Even in that case, you still can’t deduct full tax on the amount since you don’t know how much of the withdrawal is liable for tax.

thanks elcfa, got it now

man, 2009 AM Q1 is tricky.