Reading 10 : Calculation of first year spending (with inflation)

[Blackou]

Hi,
I do not see when the estimation of year 1 spending need to take into account inflation and when not.
For example, the Exibhit 2 of R10 states: “The Websters’ inflation-adjusted annual spending needs are calculated based on their current spending of €500,000 per year and are increased annually using a 3 percent real growth rate (that is, 3 percent annual spending growth after inflation).”
The spending in year 1in the exihbit 2 is 500K and 503K in year 2
In the end of chapter exercice 2, there is another example : “Although both Greg and Christine are now retired, they would prefer to maintain their present lifestyle which currently requires annual spending of $75,000 in real terms. Inflation is expected to be 6 percent”
but this time, the year 1 spending in the correction to question C is 79500 (75*1.06)
Is there an information i am missing to help decide wether or not to apply the inflation for year1?
Thanks in advance for any help

 

[pokhim]

I don’t have access to the books but:
In your first example it says; current yr spending is 500k, therefore next year will be = 500 * 1.03
In your second example does it say that ‘spending last year was 75k and inflation is 6%’ if so, then the spending will increase by 6% in yr 1.
My advice would be to draw out a small time line of last yr (if given), now and next yr. It will help you visualise the spending and expense requirement.

 

[onlysimon]

I was actually looking at the same question. my thoughts were this..
- firstly do not interpret what “you think they should be asking”. i.e. for this vignette your inclination is to calculate the probability of them both surviving - not at least one surviving.
- and for the inflation thing. yes again be careful with the timelines. they already had their birthdays, and the spending is current (year zero, not year one), so for year one you need to start including inflation.
so in summary read every word and punctuation mark in the question..
(and yeah.. i think spending will be different depending on who dies & who lives..but this is cfai..)