“Ellie and I estimate our personal living expenses will be 100kin the coming year, and I agree with you that they will grow at the general rate of inflation of 2% per year there after.my accountant indicates I will have a 33% average tax rate.”
next para goes…Total health care cost for their special child would be $100k with no associated tax benefits “I expect her care to increase at the rate approximately 2% annually.”
return calculation:
cash inflow:
income - 150k
cash out flow:
living expenses - 100k
allison care - 102k
Ernie’s stipend - 50k
tax - 49.5k
return 151.5k
investibleassets 5m$
rtn read = 3.03%
adding inflation: 3.03 + 2 = 5.03%
and also 2) we are adding infl in the expenses and adding it again to the return requirements. Doesn’t it constitute double counting? Isit considered convervatism?
yeah you have to watch which year they are giving you. the expenses are for the COMING year so no need to adjust for inflation. the healthcare is for THIS year so you have to adjust for inflation. 2) i agree this is confusing, think about the situation like a balance sheet though. Expenses etc are your liabilities, pension returns are your assets. Inflation affects BOTH sides of your balance sheet so you need to adjust both. for example: you have $100 of living expenses, 2% inflation, so next year you will have $102 of expenses. This year, your return requirement is $100. next year it’s going to be $102. ie a 2% increase. So both sides of your “balance sheet” are going to increase by 2% because of inflation, so two adjustments are required. hope that makes sense
