Just want to discuss the return calculation with Q3. This is regarding Terry Malloy. Several points I want to raise: 1. The guy would like to make 5% annual withdrawal to cover his living expenses ($150K). Solution then says that means b4 tax of $150/0.7 = $214.286K, and that will covert to an asset base of $214.286/5% = $4285.72K Q1a) I wonder if this is proper way of interpreting a “5% withdrawal”? Note that $150K is only 150/4285.72 = 3.5% of the asset base 2. There are $5K (300x0.7+40-65-180) savings during y1 through y3, and $7K (210x0.7+40-180) saving during y4 thru y8. Solution simply ignores them. Q2a) If these savings are considered, the IRR will become 7.77%, instead of the 8.1% suggested by solution 3. Also, the VC is actually sold at end of year 3, so there should be contribution to portfolio at the starting of year 4. My understanding is that the “current value” of $400K be used at that point, instead of just assuming the $400 not invested and sitting there until retirement starts. Q3a) If this cash flow of $400K is further mixed together with the savings mentioned in (2), IRR will give the required return to be just 5.1% — far cry from the 8.1 of the solution! Comments on questions (Q1a) and (Q2a) and (Q3a)? I hate to find myself unable to figure out the way Schweser is assuming stuff to make the calculations that simple. In fact I find those assumptions quite wrong 
Sorry, part (3) is amended as follows: ::::::::::::::::::::::::::::: Just want to discuss the return calculation with Q3. This is regarding Terry Malloy. Several points I want to raise: 1. The guy would like to make 5% annual withdrawal to cover his living expenses ($150K). Solution then says that means b4 tax of $150/0.7 = $214.286K, and that will covert to an asset base of $214.286/5% = $4285.72K Q1a) I wonder if this is proper way of interpreting a “5% withdrawal”? Note that $150K is only 150/4285.72 = 3.5% of the asset base 2. There are $5K (300x0.7+40-65-180) savings during y1 through y3, and $7K (210x0.7+40-180) saving during y4 thru y8. Solution simply ignores them. Q2a) If these savings are considered, the IRR will become 7.77%, instead of the 8.1% suggested by solution 3. Also, the VC is actually sold at end of year 3, so there should be contribution to portfolio at the starting of year 4. My understanding is that the “current value” of $400K be used at that point, instead of just assuming the $400 not invested and sitting there until retirement starts. Q3a) If this cash flow of $400K is further mixed together with the savings mentioned in (2), IRR will give the required return to be just 6.99% — far cry from the 8.1% of the solution! Comments on questions (Q1a) and (Q2a) and (Q3a)? I hate to find myself unable to figure out the way Schweser is assuming stuff to make the calculations that simple. In fact I find those assumptions quite wrong - sticky
Hey sticky infact I just finished Exam 1 Am VOl 2. I am infact thoroughly frustrated by the solutions. 1a. I think this is the only point among the three that makes sense to me. I think here malloy means than he will not want to withdraw MORE THAN 5%. So this is pretty clear to me. 2a. I agree with you on the savings part. In fact a proper way to do such a question would be to incrporate all the savings and calculate the IRR. I dont know if that would be expected of us though. In the question they have also said that Malloy retires in 4 years on page 110 first line (I dont know which one is a typo since the question also states he’s gonna retire in 8 yrs)… 3a. I totally agree. I have another question here… 1. A. How is rebablancing your portfolio after 1 year be staus quo bias? Infact keeping the allocations unchanged suggests staus quo biases according to me. 3 A. How does the ‘risk’ part get graded if I use the standard Willingness - Ability - Overall approach to this like schweser did in all of Vol 1? 3 B. For ‘Liquidity’ part is such a detaied answer required? I appreciate the detail in which it is answered. Is it safe to answer it in this detail every time? Or does the marking scheme decide the length? Someone please help …
Replies below: 1. A. How is rebablancing your portfolio after 1 year be staus quo bias? Infact keeping the allocations unchanged suggests staus quo biases according to me. Reply> I think status quo here has reference to the initial asset allocation. In fact if the portfolio had not been rebalanced, it would not have been status quo (i.e probably higher %proportion of assets in growth fund due to say, higher market valuation). 1. The guy would like to make 5% annual withdrawal to cover his living expenses ($150K). Solution then says that means b4 tax of $150/0.7 = $214.286K, and that will covert to an asset base of $214.286/5% = $4285.72K Q1a) I wonder if this is proper way of interpreting a “5% withdrawal”? Note that $150K is only 150/4285.72 = 3.5% of the asset base Reply> The 5% withdrawal means withdrawal from the “income stream” note the question said it want to protect the principal amount intact. The 150k is only 3.5% of the asset base bec the 150k available for spending must be net of 30% tax.
cfa dude Wrote: ------------------------------------------------------- > 1a. I think this is the only point among the three > that makes sense to me. I think here malloy means > than he will not want to withdraw MORE THAN 5%. So > this is pretty clear to me. actually I knew I have to calc back the asset based on 5%, but I was confused with which amount to discount back. If I use $150K/5% then tax is not included, but if I use (150K/0.7)/0.5 then you are not really taking out “5%” from your asset. I know it’s about how that “5%” should be interpreted so that’s why I am asking here, checking to see if this is only my comprehension problem … > 2a. I agree with you on the savings part. In fact > a proper way to do such a question would be to > incrporate all the savings and calculate the IRR. > I dont know if that would be expected of us > though. In the question they have also said that > Malloy retires in 4 years on page 110 first line > (I dont know which one is a typo since the > question also states he’s gonna retire in 8 > yrs)… the 4 years in Q3 has been corrected by errata — to 8 years. > 3a. I totally agree. shxt, actually considering IRR is correct but will take up sooo much time >.