# Required Return - The Bible or Idiot's Guide

Okay… I thought rather than go through all the different posts/threads on required return that we could get the top dogs in here to summarize their process for calculated required return in the various scenarios that come up. For example: - Future expenses that begin in 5 years and only last for a few years (would you have 2 separate required returns calculated since obviously the required return will drop once that time horizon is complete) or do you do what Schweser suggests and calculate required return strictly for the main long-term goal ie: retirement? - Lump-sum expenses in the current year (I’m assuming everyone just reduces the asset base?) - What other scenarios are there? If we could get everyone to post exactly what their process is for each scenario I think it would be quite helpful so we can put this issue to rest. PJStyles

If the Q states that they would like to make/ensure a minimum donation of X in 10 yrs to a charity or to thier kids/grandkids …take the Pv of the that amount and deduct from your asset base …hopefully I’m right …

So you assume that clients use a zero-coupon bond strategy for lump-sum expenses in the future that are unrelated to their primary retirement goal?

no I’m including the additional return that they would require to preserve that amount Pv= 2 Fv = 3 n=10 pmt=0 or annual spending i/Y = ? I think i saw this in one of the past CFAI exams …and did not take this into account as the question said the they "desire " not they want to "ensure "

Not sure i follow that example above. So for “Desired Returns/Goals”, how should we be treating them? Still iffy on this…

i think the question i was referring to is on the 2007 exam …

PJStyles Wrote: ------------------------------------------------------- > - Lump-sum expenses in the current year (I’m > assuming everyone just reduces the asset base?) > thats what we have been doing. but i saw a ques in ss7… the expense was due in one year… they took the PV of the expense (d/s at rf rate and assume the money is invested in t-bills) out of the asset base fot strategic allocation… anyone see this happen in any of the ips ques

good! …so just to make sure i.e. what are peoples views on this? (again) I just want to make sure I understand it thoroughly as well… You have to take the Shortfall (on ongoing expenses) out of the asset base when you are in the CURRENT year (i.e. when there is a shortfall between Salary and Expenses! in the CURRENT year) example, Current year/year one if you have a Salary of \$50,000 after tax and Expenses of \$60,000 in the CURRENT year. you have deduct that from your asset base immediately. why? because they must be addressed immediately. year two and on… in the following years, we will allow the portfolio to generate a return to meet those ongoing expenses, so we don’t have to remove it from the asset base in the following years. Does anybody else agree with this? Can someone tell me why this wouldn’t be right? a.