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

Iginla2010

yea good idea..tomorrow im planning to do a quick scan for all the recent guideline answers from individual and institutional ips.
i took a nyssa class and the professor strongly recommended not looking past 2009 or 2008.

malbec

Just printed IPS guideline answers(part A only) from 2007 to 2011, one page per year…

Nishant1

Exactly. That is why I am ignoring that one. Thanks! Now we will rock this IPS!!!

stockjaguar

It’s also important to note that the Maclin case is all the way back from the 2004 exam–that’s a long time.

RMontgomery

Level3Once wrote:
Sorry to bring this up again, but I reviewed this discussion after some inflation confusion myself. You mention that in the Maclin case, they make no reference to inflation, but they actually do. On the second page of the guideline answer for that problem they say, “Note: No inflation adjustment is required in the return calculation because increases in living expenses will be offset by increases in Christopher’s salary.” Now, they do not mention any inflation in the case, so are we supposed to exclude it if they don’t give us an inflation number? I do not feel comfortable relying on that…
In the 2004 Maclin case: “After-tax salary increases will offset any future increases in living expenses”. - they have a 26000 difference between income and expenses… this difference will increase over time due to inflation as you guys have mentioned. I do not understand why they do not adjust for inflation on this one using the logic of the other cases… Only logic is this test is outdated and they changed it. I am ignoring this case and sticking to the future cases:
2011 is straight forward and they add inflation.
In 2010: In this case, they say, “Her future salary increases are expected to match any increases in living expenses on a pretax basis. They do not adjust for inflation in the return calc. I believe this is because the IRA contribution of 12000 is fixed and will not change with inflation. This doesn’t exactly make sense because the 12,000 difference will increase as a result of inflation. However, they state that this 12000 contribution will be fixed forever… fixed payment = no adjustment for inflation at the end.
2009: Tracy’s “Pension income from both Patricia’s company plan and the government pension plan is fully indexed for inflation”. There is a difference in the pension income and expenses, which will grow over time with inflation. This makes me think add inflation at the end. They also mention maintaining the real purchasing power several times in this case. The return calc includes inflation.
In 2008 part 1: The mortgage payment is fixed at 55k and will not increase with inflation. However, “Their salaries are expected to continue to cover their living expenses to retirement.”  There is no difference between their A/T salary and their expenses, so this will not grow and the 55k morgage will not grow. Yet they adjust for inflation in the return calc…. They say that they want to maintain the inflation-adjusted value of the portfolio several times in the case.  

wake2000

Sorry to bring this up again, but I reviewed this discussion after some inflation confusion myself. You mention that in the Maclin case, they make no reference to inflation, but they actually do. On the second page of the guideline answer for that problem they say, “Note: No inflation adjustment is required in the return calculation because increases in living expenses will be offset by increases in Christopher’s salary.” Now, they do not mention any inflation in the case, so are we supposed to exclude it if they don’t give us an inflation number? I do not feel comfortable relying on that…
In the 2004 Maclin case: “After-tax salary increases will offset any future increases in living expenses”. - they have a 26000 difference between income and expenses… this difference will increase over time due to inflation as you guys have mentioned. I do not understand why they do not adjust for inflation on this one using the logic of the other cases… Only logic is this test is outdated and they changed it. I am ignoring this case and sticking to the future cases:
2011 is straight forward and they add inflation.
In 2010: In this case, they say, “Her future salary increases are expected to match any increases in living expenses on a pretax basis. They do not adjust for inflation in the return calc. I believe this is because the IRA contribution of 12000 is fixed and will not change with inflation. This doesn’t exactly make sense because the 12,000 difference will increase as a result of inflation. However, they state that this 12000 contribution will be fixed forever… fixed payment = no adjustment for inflation at the end.
2009: Tracy’s “Pension income from both Patricia’s company plan and the government pension plan is fully indexed for inflation”. There is a difference in the pension income and expenses, which will grow over time with inflation. This makes me think add inflation at the end. They also mention maintaining the real purchasing power several times in this case. The return calc includes inflation.
In 2008 part 1: The mortgage payment is fixed at 55k and will not increase with inflation. However, “Their salaries are expected to continue to cover their living expenses to retirement.”  There is no difference between their A/T salary and their expenses, so this will not grow and the 55k morgage will not grow. Yet they adjust for inflation in the return calc…. They say that they want to maintain the inflation-adjusted value of the portfolio several times in the case.  

atate2007

haha yea….i think the 2008 question part 2 is exactly the same as the maclin case

dcfox83

i am learning more here than in the curriculum

maratikus

Alladin wrote:
TheShow, theoretically for the maclin case, what has to happen for inflation adjustments to be made?
[1]Suppose expense/income do not offset and that expenses increase at inflation while income does not…would we multiply the expenses by (1+infl) in the CF section AND NOT add inflation in return requirement ?
[2]Suppose expenses/income do not offset and that expenses increase at inflation while income does not AND we want to preserve purchasing power…would we multiply the expenses by (1+infl) AND add inflation in return requirement?
My understanding is that you could not do a TVM calculation if the two did not offset precisely.  Because, your PMT would be different each year and your calculator couldn’t handle that.  You would need to use the CF function.
The trick to the 2007 case is that expenses were increasing with inflation each year, but there was NO SALARY.  So the “gap” was not increasing at different amounts each year.  It was increasing by a constant, steady rate of inflation.  And this was accounting for by adding inflation at the end of the return.