Hi guys! Quick clarification please: R14 pg131: “the investor must generate 500,000*(1.04)^7 in annual inflation-adjusted income…” shouldn’t this calculation represent the accumulated figure after 7 years rather than the annual expense ? why is the yearly inflation-adjusted expense not = 500,000*(1.04) ? Can someone please clarify this ? Thanx a mill.
Inflation protection is available till retirement. Retirement is after 7 years. Therefore we need to know future value of annual expenses after 7 years so that client is able to maintain her lifestyle after retirement. Assume she is retiring in the current year then we will just add inflation to required return. retiring after one year…expenses will increase by 500,000(1.04)…retiring after 7 years 500,000*(1.04)^7 then calculate return required in the first year of retirement & add inflation.