shouldn’t 40000 return from portfolio be added to 1000000 which gives 1040000 of investable assets in year of retirement? if so we would have [(1+45000/1040000)*(1.04)-1]/(1-0.2)=10.62 required rate of return before tax
10.85 [(1.04*1.045)-1]/0.8
engineer2finance Wrote: ------------------------------------------------------- > only the pension income and expenses are indexed > to inflation, the shortfall is subject to > inflation, this inlation would be added to the > shortfall (eg the required return) to meet > expenses if income is indexed and so is the epense, shouldnt the surplus outcome be indexed too… plus somehow i felt over 10% was way too high for the return figure…but looking by the consensus here may be i am wrong…but am still not convinced abt the inflation adjustment
This was a trick question. Inflation should not be added since income is indexed to inflation so both income and expenses grow at the same rate so the same dollar amount is required each year from the portfolio. Think I saw one like this in one of the prior year essay exams.
10.85 using multiplicative —agree
I included inflation in the expenses. So I had about an 11.5% return pre-tax. I’m not sure how many points I’d get taken off for this.
joeisenb Wrote: ------------------------------------------------------- > This was a trick question. Inflation should not > be added since income is indexed to inflation so > both income and expenses grow at the same rate so > the same dollar amount is required each year from > the portfolio. Think I saw one like this in one > of the prior year essay exams. Only the pension/gov’t income was, the part the portfolio was subsidizing wouldn’t not be indexed unless you added inflation to it.
Sponge_Bob_CFA Wrote: ------------------------------------------------------- > joeisenb Wrote: > -------------------------------------------------- > ----- > > This was a trick question. Inflation should > not > > be added since income is indexed to inflation > so > > both income and expenses grow at the same rate > so > > the same dollar amount is required each year > from > > the portfolio. Think I saw one like this in > one > > of the prior year essay exams. > > Only the pension/gov’t income was, the part the > portfolio was subsidizing wouldn’t not be indexed > unless you added inflation to it. as it was the expected expense in the next year, i would assume it to be the in hand expense amount requirement(which should be indexed to inflation)…but in this forum me and Joe are a resounding minority and thsu there is a chance that we completely missed the normal calculation and applied our head just too much… however i would still think going by the size of the portfolio that 10% pretax is way over(for any portfolio for that matter)
pimp Wrote: ------------------------------------------------------- > I included inflation in the expenses. So I had > about an 11.5% return pre-tax. I’m not sure how > many points I’d get taken off for this. I put this as well. I think we should get a nice chunk of credit with this answer.
dongjohnson Wrote: ------------------------------------------------------- > anishcandy Wrote: > -------------------------------------------------- > ----- > > nikko0355 Wrote: > > > -------------------------------------------------- > > > ----- > > > my question said after tax. thus i didnt > > divide > > > by .80. maybe there were different > wuestions > > > > > > my question said after tax nominal return > > > > > > I had after-tax as well. Took it in > Metropolitan > > Ballroom. NYC > > > After-tax in Los Angeles. I didn’t know they did > multiple versions… I am glad to hear that I could swear mine was after tax return, but I have been second guessing myself after seeing so many pre-tax calculations. What if I read trhe question wrong
There pension income was indexed for inflation. So I didn’t add inflation because their costs were not increasing. However, was I supposed to add it for the principal (which would effectively be eroded by inflation? Shoot, think I understated. Also, the house cost 200K. However, they withdawls were subject to a 20% tax. Thus, you had to increase the 200K or 200K/.80 and deduct that from the portfolio value.
tibwa Wrote: ------------------------------------------------------- > 45000/100000 = 4.5% > > 4.5/0.8 = 5.62% ( becuase, they will pay 20% of > tax) > > 1.04*1.0562 = 9.84% i did this too. but i’m sure this is in the wrong order.
Anyone know for sure the correct order? real after-tax to nominal after-tax to nominal pre-tax or real after-tax to real pre-tax to nominal pre-tax
MattLikesAnalysis Wrote: ------------------------------------------------------- > tibwa Wrote: > -------------------------------------------------- > ----- > > 45000/100000 = 4.5% > > > > 4.5/0.8 = 5.62% ( becuase, they will pay 20% of > > tax) > > > > 1.04*1.0562 = 9.84% > > > i did this too. but i’m sure this is in the wrong > order. i used the same formation too~~~
the schweser instructor at the seminar said the only time you don’t add inflation is when 1) you are given target end-period amount AND 2) your spending is fixed (e.g… fixed mortgage payment). all other cases you add inflation . so this one should be return + inflation + taxes
disagree. I can’t see any justifiable reason why inflation should be added here. Whether the portfolio grows with inflation or not is irrelevant because they only need portfolio income to subsidize the income shortfall which is a constant dollar amount since income and expenses would increase at the same rate. Using this approach the portfolio wouldn’t fall in value in nominal terms, would fall in real terms but this doesn’t matter because they don’t need distributions to increase with inflation to cover an income shortfall which is a constant dollar amount.
dude, the shortfall gap widens in nominal dollars…it is not a constant dollar amount.
You add inflation because, lets use 18 years as an example… 125,000 -80,000 ----------- 45,000 Let’s grow those for 18 years at inflation: 125,000 (1.04)^18 = $253,227 -80,000 (1.04) ^18 = $162,065 The difference isn’t still $45,000, it’s now $91,161. You have to include inflation.
joeisenb Wrote: ------------------------------------------------------- > disagree. I can’t see any justifiable reason why > inflation should be added here. Whether the > portfolio grows with inflation or not is > irrelevant because they only need portfolio income > to subsidize the income shortfall which is a > constant dollar amount since income and expenses > would increase at the same rate. Using this > approach the portfolio wouldn’t fall in value in > nominal terms, would fall in real terms but this > doesn’t matter because they don’t need > distributions to increase with inflation to cover > an income shortfall which is a constant dollar > amount. Write out a timeline and you will see that the shortfall will need to be adj’d for inflation. They have to index both the inc and expense or the calculation would have been way to complicated as the spread would grow/ get smaller over time otherwise. With both of them canceling out the shortfall simply grows at the rate of inflation. Below applies a 4%… T=0 1 2 3 4 exp 60 62.4 64.896 67.49 70.19 inc 40 41.6 43.264 44.99 46.79 shtfl 20 20.8 21.63 22.49 23.39
mark@dirtbags Wrote: ------------------------------------------------------- > You add inflation because, lets use 18 years as an > example… > > 125,000 > -80,000 > ----------- > > 45,000 > > Let’s grow those for 18 years at inflation: > > 125,000 (1.04)^18 = $253,227 > -80,000 (1.04) ^18 = $162,065 > > The difference isn’t still $45,000, it’s now > $91,161. > > You have to include inflation. the only issue with your and our assumption is that we(joe and me) take the next year income and expoense as indexed and we then determine the shortfall(as already adjusted for inflation). if it was for 2011 then offcourse inflation would come in picture.i guess it depends on what assumptions were taken…