Hey all have a few questions on this topic. 1. In the Christa Inger required return calc (vol 2 page 145) investable assets are calculated as: sale proceeds+mutuals+money markets. However, shouldn’t it be: salary-living expenses + sales proceeds + mutuals + money markets?? 2. For a multiperiod retirement required calc (not like above single period return) are the steps as follows: a. Compute the future value of expenses at retirement date. If asked to maintain current lifestyle with inflation then take salary*(1+inflation)^years to retirement to get annual expenses on retirement date. If given a large cash flows is needed on the retirement date (i.e., child’s education) set that as your FV, set PMT = salary - expenses, Set N = years until retirement and set PV = investable assets and solve for I/Y. b. Compute the future value of investable assets. If given an expected return take current investable assets*(1+expected nominal return)^years until retirement. If not given return, use above in a and set current investable assets to PV. c. Depending on taxes could take after-tax return + inflation/(1+t) to get pretax nominal return. Can anyone please help with #1 and confirm if anything in #2 is correct at all. I have been spending hours on this and am struggling considerably.

robbyrazz Wrote: ------------------------------------------------------- > a. Compute the future value of expenses at > retirement date. If asked to maintain current > lifestyle with inflation then take > salary*(1+inflation)^years to retirement to get > annual expenses on retirement date. Are these the expenses which will be made after retirement?

The future value of expenses would be the portfolio outflow expected annually in retirement. So if your salary just covers expenses and you want to maintain your current lifestyle you will need at least the amount of your salary including inflation.

Right. but this will only get your estimated expense on the year your retire. not the future value of expenses as they will continue to increase with inflation. calculator steps also seem wrong and you are calculating something completely different. really confusing post you have there. all over the place.

This is how the examples in the book are computed. For the Christa Inger example, they don’t ask out to retirement. Thus, they want a single period return. So they take (current salary - current expenses)/current investable assets. However, I don’t agree with their calculation of investable assets as they do not include salary or expenses. Any comments on why they wouldn’t include this? For the Fairfax example they ask you to compute required return and they note that current salary just covers expenses and they provide you with her acceptable return of the portfolio. To calculate the required return they compute the annual $ needed in retirement as current salary*(1+inflation)^ years to retirement. Then for the fv of investable assets they take current investable assets*(1+acceptable portfolio return)^years to retirement. They then divide the two to get the required return. For the Maclin EOC question. They state that you compute you will have 26,000 in annual expenses in retirement. Then on the retirement date you will need 2 million to pay for kids education. So to compute required return they take N = years to retirement, FV = 2,000,000, PMT = 26,000, PV = -investable assets, I/Y = solve for. I have no idea when to use what method. If anyone could shed any light on any of my questions that would be great. Thanks

Sorry for the confusing post. Hopefully breaking it down by example helped.

what I have seen thus far… please feel free to dispute, add. 1. investable assets only takes out current liquidity requirements… something required before the end of the current period (year, e.g). 2. salary is never included as part of investable assets - since it is assumed to pay for your current expenses. 3. investable assets - would be portfolio, inheritance, etc. Maclin EOC question is very similar to one of the previous year’s questions ( I believe 2005). Here you have an annual inflation adjusted need (26000) and you need a computed Future value (say for donation/charity or children’s future education need or an inheritance to be left for the kids at the end of time horizon like the 2 Mill, above). Your investable assets (PV) needs to grow to be able to provide you a. 26000 over the life of the investment (Time horizon - the N years) b. and the FV at the end of time. So the TVM method specified is the only way that can be done. Fairfax question: I believe you also need to do a ^ 1/N to calculate the annual return required. In each case - it is a different approach. Get familiar with those now, so you know what to use if they provide that kind of information come exam day. There is just no One size fits all approach when it comes to Return requirement in IPS, esp. individual IPS.

cpk123 Wrote: ------------------------------------------------------- > what I have seen thus far… > please feel free to dispute, add. > > 1. investable assets only takes out current > liquidity requirements… something required > before the end of the current period (year, e.g). > 2. salary is never included as part of investable > assets - since it is assumed to pay for your > current expenses. > 3. investable assets - would be portfolio, > inheritance, etc. > > Maclin EOC question is very similar to one of the > previous year’s questions ( I believe 2005). Here > you have an annual inflation adjusted need (26000) > and you need a computed Future value (say for > donation/charity or children’s future education > need or an inheritance to be left for the kids at > the end of time horizon like the 2 Mill, above). > Your investable assets (PV) needs to grow to be > able to provide you > a. 26000 over the life of the investment (Time > horizon - the N years) > b. and the FV at the end of time. > > So the TVM method specified is the only way that > can be done. > > Fairfax question: I believe you also need to do a > ^ 1/N to calculate the annual return required. > > In each case - it is a different approach. Get > familiar with those now, so you know what to use > if they provide that kind of information come exam > day. > > There is just no One size fits all approach when > it comes to Return requirement in IPS, esp. > individual IPS. Wow ok you are right with investable assets. I read the Maclin example wrong and thought they were including salary and expenses…could have saved hours had I just read it one more time. So for a multiperiod return, if they do not provide you with a future value large expense (i.e., the Maclin example), is it safe to assume you need to compute the future value of investable assets and future annual retirement expenses to compute the return (i.e., should each term be the future value at retirement date)?

If you were giving me money to invest, i wouldn’t count the money you might make next year. It is not investable at this point. if you make that allocation to me in the future, i will put it in. For right now, it is just a consideration as to how much money you will need from your portfolio next year vs how much you will cover on your own. will look into the other stuff

Be very careful, the approach used for one year’s exam may not be applicable on the next year’s exam. The two column approach with current year’s cashflow and then the next year’s cashflow which was used by CFAI on 2008 exam did not really apply to FY2009 or FY2010 exams. This is not an exact science and you can’t boil it down to a formula. I am willing to bet that for FY2011 exam they will use neither Fy2009 or FY2010 approach. Edit: Actually, I have a feeling that for FY2011 they will incorporate “Estate Tax” reading into the required return calculation which will be nothing like we have seen before.

It seems to me that the Fairfax and Maclin scenarios are asking for 2 very different things. Maclin: you want to required return for the first stage. An important thing to note is that the 2M is the Present Value needed at retirement (or future value at t=18) for one time cash flows AND retirement. The calculation assumes you have exactly 2M at retirement and there is no need to calculate the required return over that period. Fairfax: This is a second stage calculation so you have to fast forward to that date. This is the primary difference. However, it is not necessarily the reason why you use different calculation methodologies (notice i said methodologies as opposed to formulas - i already noted why the formulas would be different). solving for i on your 12c vs formula etc is simply due to what you are given as cpk mentioned.

Ok that does make sense when you think about it in stages. Thanks for all the help!