I have a question about calculate return and distribution in IPS
One portfolio with 1 is expected real return 4% and inflation 2%. Tax exempt.
So the required annual nominal return is (1+4%)*(1+2%)-1=0.0608.
But what is the maximum distribution amount over the coming year?
Should it consider inflation? So with an ending portfolio 1.0608
- if consider remove inflation first,
The portfolio after removing inflation is 1.0608/1.02 = 1.04
Then the distribution is just 1 * 4% = 0.04
- distribute first
The distribute amount is 1.02 * 0.04 = 0.0408
Then after distribution 1.0608-0.0408=1.02
Then remove inflation 1.02/1.02 = 1
So both of these two scenarios retain the real value but has different distribution amount.
Also what is insight for multiplication of return
say there are 100 distribution requirement, each of them if 1%
1.01^100=2.704813829 and 1=0.01*100=2
They are quite different. Why multiplication?