Explanation:
The correct answer is C (10.5%). Here's why:
Inflation Adjustment: The client needs $500,000 in today's dollars, but due to 2% annual inflation, this amount grows to $500,000 × (1.02)^15 ≈ $672,934 in 15 years.
Required Return Calculation: The current savings of $150,000 must grow to $672,934 in 15 years. The required annual return, r, satisfies:
150,000 × (1 + r)^15 = 672,934
Solving for r:
r = (672,934 / 150,000)^(1/15) - 1 ≈ 0.105 = 10.5%
Alternative Method: Calculate the nominal return without inflation (8.4%) and adjust for inflation: (1 + 0.084) × (1 + 0.02) - 1 ≈ 0.105 = 10.5%
Why Not A or B?
$500,000.Ultimate access to all questions.
An adviser gathers the following information about a client's retirement income needs:
$150,000.$500,000.A
6.2%.
B
8.4%.
C
10.5%.
No comments yet.