Required return question

[archived_user]

Trying to solve this question, any help would be greatly appreciated…
Sam Smith is 50 years old and will be retiring in 2 years. He currently earns 1M/year and his lifestyle expenses are $400,000 per year. Once retired, his income will reduce to $150k/year.
His current portfolio consists of assets worth $4.5M. What is his required return if he expects to live until 80 years old?
Assume Sam Smith would like 250k (400k - 150k) in real terms (inflation adjusted) per year
Thank you for any help

 

[archived_user]

Are the numbers before or after taxes?
Is the required return before or after taxes?

 

[archived_user]

S2000magician wrote:
Are the numbers before or after taxes?
Is the required return before or after taxes?

Sorry forgot to include tax rate of 20%.
All numbers are after taxes
Required return is after taxes.
Thank you and sorry about that..

 

[archived_user]

250k after tax in real terms is equal to 312.5k before tax in real terms
His portfolio must return a real rate of return of 312.5k / 4,500k = 0.694 = 6.94% per year
As long as Sam is expected to live until 80-yo, he should consider inflation protection so his portfolio must yield an 8.94% nominal annual rate of return (assuming a long-term inflation rate of 2.00%).
I’m open to corrections!

 

[archived_user]

Harrogath wrote:
250k after tax in real terms is equal to 312.5k before tax in real terms
His portfolio must return a real rate of return of 312.5k / 4,500k = 0.694 = 6.94% per year
As long as Sam is expected to live until 80-yo, he should consider inflation protection so his portfolio must yield an 8.94% nominal annual rate of return (assuming a long-term inflation rate of 2.00%).
I’m open to corrections!

Don’t we have to account for account drawdowns too? We can use the capital in the account and not just need it to be a direct return #, right? This can be done thruogh an annuity calculation from what I understand?

 

[archived_user]

imaginethat wrote:

Harrogath wrote: 250k after tax in real terms is equal to 312.5k before tax in real terms
His portfolio must return a real rate of return of 312.5k / 4,500k = 0.694 = 6.94% per year
As long as Sam is expected to live until 80-yo, he should consider inflation protection so his portfolio must yield an 8.94% nominal annual rate of return (assuming a long-term inflation rate of 2.00%).
I’m open to corrections!

Don’t we have to account for account drawdowns too? We can use the capital in the account and not just need it to be a direct return #, right? This can be done thruogh an annuity calculation from what I understand?

It depends on what the vignette tells you.
Whether you’re to preserve capital or not will be clear in questions on the actual exam. Often third-party questions are hopelessly unclear.