you must remeber to to account for inlfation in your first year expense outflow as well when calculating the RR
Yes: if they give you this year’s expenses, but ask for next year’s required return, you have to increase the expenses by one year’s inflation.
Read the vignette.
Can you explain the rationale as to why when the account is taxable, you include inflation. But when it’s just withdrawals that are taxable, you tack it on afterwards?
Because you don’t withdraw the inflation return; you leave it in the account to grow. You withdraw only what you need to cover your expenditures.
Bump for 2014… Good thread.
I did find one example that doesn’t appear to be in line with this logic. 2003 #9 (I know it is far back, but these IPS questions are still the same IMO).
Says that income and cap gains are taxed… according to this thread, that would imply you need to adjust for inflation first. However, the answer suggests grossing up for taxes, then adding inflation.
I suppose an exam question from 11 years ago shouldn’t be of too much concern, but I’m just curious as to why the calculations are different on subsequent exams.
Anybody worked this question?
dont worry about 2003 go with s2k and the present
Can you send me a link to the question & answer?
Schweser does mention to use the conservative approach that is assuming inflation is taxable ( add inflation then gross up) when nothing is mentioned in the vignette. But like S2000magician said, the vignette does tell you which method to use.
S2000magician you have made this confusing concept clearer now. THANK YOU!
I’m curious to hear your take on 2003 #9. It seems to be in direct contradiction to the rule.
I’d have to see the 2003 question; getting bits of it out of context may be misleading.
I don’t have a copy of it, alas.
I’m having trouble linking or screen shotting it into this forum, so let me tell you how to quickly and easily access it.
Google “Past CFA Exams My Level 3 Notes” and find 1999 through the present exams and answers. You can view them without having to download them.
I appreciate any insight.
Just in case you don’t want to search Magician:
The Trust Porfolio should earn a return sufficient to cover the living expenses of recipient, taing taxes to consideration and allowing both inflation (expected to be 2%) and modest growth (1%). Income and capital gains are taxed at 30%, and this tax treatment is not expected to change.
I think that trusts are taxable. In that case, the entire return (inflation plus growth plus living expenses) should be taxable: add inflation and growth, then gross up for taxes. If the answer said otherwise, they got it wrong.
Yeah it should be, but the answer was:
((78,000[living expense]/(1-.3)/3000000)+2%inflation+1%(minimum) for growth.
6.71%
Might be an old test or there is some errta.
I’d say that they blew it.
And I’d say don’t worry about it.
This thread is amazing!