2007 mock required amount for expenses

[gonowpass]

This is from the 2007 mock exam:
- Ingrams agree that current annual pre-tax income need is $200,000. They expect their inflation adjusted expenses will remain constant during retirement. They plan to fund their living expenses by taking annual distributions from their portfolio with first distribution occuring immediately.
- Long-term inflation is 2.5% and planning horizon is 35 years.
- Total asset base is $4million.
- Required value of gifts is $3million.
We are asked to calculate the return objective.
So N=35, PV=-4m, FV=3m, PMT=205,000.
Answer says living expenses and taxes in one year (inflation adjusted) = $200,000 x 1.025 = $205,000.
Why are we using the living expenses amount in one year ($205,000) when we are calculating the return objective as of right now? Hence i thought we would use PMT=200,000?

 

[gonowpass]

Any answers on the above please?

 

[gad4]

My thoughts are the first years is taken out immediately.
if you use beginning mode it would be 200k but what we take out in 1 year would be 2.5% more (end of year)

 

[d2rockstar]

Further to this, should we add inflation of 2.5% for the I/Y result? The reason I am asking is, return objective is for long term and 205,000 of payment takes care of inflation for next one year only.

 

[cpk123]

key statement …
They plan to fund their living expenses by taking annual distributions from their portfolio with the first distribution to occur immediately

So the remaining portfolio is going to start funding the living expenses from NEXT YEAR onwards - so inflation WILL APPLY.

And to answer d2rockstar’s question - you need to add the inflation after as well - to keep up the portfolio on an inflation adjusted basis.