Return requirement

How do you model return requirement when their salary or pension payment is constant and doesn’t increase each year but expenses do increase by inflation?

  • Inflation is 3%
  • Portfolio is $1 million
  • Expenses this year is $50,000 and grows with inflation.
  • Pension payment is $20,000 fixed

Next year the return requirement is 31,500 / 1,000,000 = 3.15% + 3% = 6.15%.

But the return requirement will continue growing???

It doesnt matter becaues the question asks for next year’s return, not the required return for every year moving forward. So just adjust the correct inflation measures for NEXT year.