private wealth - CFAI vol2 page 130 example!! especially, anything, private, example, present

waldziuchna

the example only mentioned base salary of $500,000, and this will be much the same as the expense to support “present lifestyle”.
for me, it should be applied by tax rate = 500000 * (1-0.35) = 325000, which is the real expense, especially for post retirement calculation, as you dont need to pay the tax any more
but in the answer, it calculated post retirement expense as 500000 applied with 7 years inflation.
am I missing anything here please??????

DoubleDip

I am reviving this thread to see if anyone has questioned this example this year. it’s the exact same example in 2010 and 2011 textbook.
p130 “her base salary of 500k, inflation protected, is sufficient to support her present lifestyle but can no longer generate any excess for savings”. I would assuming 500K is pretax income. and hence her current expense level is 500k*(1-0.35)…but it seems CFAI is computing her living expenses based on 500k……any thought?

ayaz_mahmud369

ndzhai,
I agree with you ! It is common sense that “salary” shall be mentioned on before-tax basis
in practice and in real world, unless otherwise it is mentioned specifically on after-tax basis.
On the other hand, the assumption that the current market value of 10M Reston stock will remain unchanged in 7 years is very un-realistic.
Frankly speaking, I don’t have any confidence on CFAI’s calculation of return objective due to their random assumptions, vague statements and no definite rules as well.

WarrenB1

sebrock, thanks.
but look at page p130 “her base salary of 500k, inflation protected, is sufficient to support her present lifestyle but can no longer generate any excess for savings” from a pure english perspective, you would understand it as break-even
I think CFAI should have mentioned clearly the 500k is post tax real income. then it explains everything. it is not safe to assume you are still on the hook in this case.
p.s. I have sent CFAI an urgent note, hope they can get back on this.

dandman

So to recap, the way they worded it is there to throw you off. Basically if your expenses are the same as your salary, then you are pretty screwed (depending on your situation I suppose) because you are still on the hook for the taxes. So if I need $500k to live and make $500k, I’m still short $175k every year.

wizofoz

Right but then they take $500,000 and get the FV needed grown at inflation. Which if memory serves correct was close to $658k. That means she needs to make $658k after taxes. So the 6.8% required return is after taxes. Meaning that if the tax rate was say, 35%, then she would need to make 10.4% before taxes. So if her living expenses are $500k, then she needs $1012k in salary before taxes. $1012/$9711 = 10.4%.
And it doesnt say she needs $325k, it says she needs $500k which is the same as her salary (which is just there to throw you off). If this was when she was still working then it would be a different calculation where she receives $325k after taxes and needs $500k, so her need is $175k a year grown at inflation but this is not the case in the sample.

bodhisattva

but 500000 is the current spend and current “salary base”.
I am only challenging the usage of 500000 to calculate future EXPENSE.

Rasec

The future return is an after tax return so you wouldn’t take taxes out.