2008 AM Que 1 vs EOC Reading 14 # 13 expected, increase, living, future

domani

2008 ques: After tax Salary is given & salaries & expenses are expected to increase at inflation rate
Ans: Inflation rate is considered while calculating nominal return
EOC # 13: After tax sal increase will offeset any future increase in living expenses
Ans: Doest not incorporate infaltion. Note says: need not consider inflation

cchang

I would have to look at the two other than this vague summary.  But, in general, even if both salary and expenses grow at inflation, therefore creating a constant real inflow/outflow each year, you still need to protect the portfolios value from inflation so it should be added (or multiplied) to the return requirement.
E.G. expenses is one area in which inflation needs to be considered, the portfolio is the other (and larger) part.

brk1yn

Actually I was not looking at it with that much granularity janak, but that is a very interesting point.
TBH when i see the words “preserve real value”, “inflation adjusted”, or “grows with inflation”…. or basically anything that even looks similar to these phrases, i always add in inflation.  That is why i missed the 2008 morning where it says “salary and expenses are a wash”.  I am not 100% sure when they want to add it and when they don’t, but I think between Janakisri’s comment and my halfwit attempt at an answer, we may be getting closer.
I think Janak may be right on with regards to “both grow at inflation” versus “salary and expense growth offset eachother” – the former requiring including inflation in the return, the latter not.
I’ll defer to smarter individuals than myself to put the nail in this coffin.

soverby

rahuls wrote:
I was so baffled after reviewing mine answers for 2008, srry for being vague. 2008 was a tough & a lengthy one.
I agree, for me the 2008 is the hardest exam i’ve taken yet.  It was just brutal.

Valores

So there are three statement or rather four i could collect so far. While formulating return objective whether to include inflation or not will depend on words. If it says
1) After tax salary increases will offset any future increase in living expeneses - dont consider inflation
2) Salaries & expenses are expected to increase at inflation rate -  consider inflation
3) Future Salary increases are expected to match any increases in living expenses on a pre tax basis  - Dont consider infaltion
4)  Terminal value at the end of horizon is given  - inflation is built in (as CPK mentioned in other posts) so dont consider.
Right?

sharksfan

Good summary , thanks. Sounds right on all of them

towardsutopia21

thanks Rahuls….#4 is bothering me lol I wonder if there is an example where we should included inflation…

MiniMe7

#3 infered from 2010 AM ques 1. There is no inflation number given in vignette. They say it is expected to match. Though we have not used this since #4 applied while calculating return. TVM was given to purchase the annuity.

SkipE99

To me “match” is the same as “offset” , so 1 and 3 are same

LokiDog2

Still not convinced on that Janak…. offset is more clear cut, expenses and salary are neutralized in prepetuity.  “match” could mean matchin percentage increase, which would make it the same as #2 as I mentioned.  Matching dollar increase would be offsetting.
And the inference on the 2010 AM Q is tricky because that involves a TVM calc as rahuls said, so we cannot be sure that #3 infers not adding inflation.
This is still a grey area for me though I feel I am closer. The uncertainty around inflation adjustment and also when to include charitable gifts/bequests into return calculations are the two parts of individual IPS that really confuse me.  Text says gifts/bequests are “desired” and not “required” so should not be part of required return.  However I saw a past morning test that did just the opposite.  I may have to reach out to CFAI on these.  Anyone know the general email address for this type of question and about how long it usually takes to get a reply?