IPS: Fixed Income, Inflation-Based Expenses? practice, problems, question, required, scenario

cjs238

This may be a really dumb question and perhaps I’ve just driven myself crazy overthinking it.
If income (let’s say pension income in retirement) is fixed, but expenses are moving up with inflation, is there a way we have been taught to calculate required return?
I saw this scenario in several of the CFAI practice problems in the book. They don’t do calculations on those problems, just discussions, but it’s making me nervous.
If anyone has thoughts please let me know. Thanks!

jim8z3

Just to get the discussion started, I think they would have to give you enough into to calculate the present value of the liabilities for that stage, or be able to say that the difference between income and liabilities is small enough to assume relatively constant cashflows. Any other thoughts?

PalacioHill

You ask for a higher return from your portfolio, by adding inflation to your required return.

Analyze_This

That’s what I would think/hope, avinand.
And the Schweser “For The Exam” box did say something like “this question is vague, and also tricky because of fixed income and rising expenses”.
I just wanted to make sure there wasn’t some obvious way to do it. I thought about discounting the present value of the fixed expenses, but I don’t know if that’s correct …
I have a feeling there is going to be an IPS question involving some sort of present value/discounting analysis, which always has a tendency to trip me up, so want to have my bases covered!