Reading 9: EOC 11 - The Muellers

[sachin_patel]

Just a quick summary
pension income 100000 (will not increase with inflation)
annual expenses 180000 (will increase with inflation)
inflation 2 %
portfolio 1000000
Mueller’s don’t mind invading their principal.
Time Horizon - 10 years.
How to calculate required rate of return in such a scenario?
Although the question does not ask about required rate (it just asks which portfolio is best for such needs)
I am curious how would we calculate required rate in scenarios like this?
Thanks,

 

[broadex]

I think the required return is (180,000 – 100,000)/1000,000 = 8% + 2% inflation…ideally geometic. (1.08)(1.02) -1 = 10.16%. You seem to say Part 2 requires picking the best portfolio to invest. I dont think we have all the information here but my guess is that if this is the only information provided, the portfolio to choose will be less than average risk tolerance, low return – more cash, bonds etc….as the income is less than annual expenses and the investor relies on the portfolio to meet personal expenses.