Life Needs Analysis & Client Situation question: Using the exact real rate

LifeNeeds Analysis & Client Situation

Noreen, 52, wants capital that will pay her husband $40,000 a year forever, with the payment rising each year with inflation. The capital is expected to earn 5% and inflation is assumed at 2%. Using the exact real rate (1.05 ÷ 1.02 − 1) and preserving the capital in real terms, how much is needed?

A $571,429
B $800,000
C $1,333,333
D $1,360,000

Show the answer and explanation

Answer: D. $1,360,000

The real rate is 1.05 ÷ 1.02 − 1 = 2.9412%. Capital = $40,000 ÷ 0.029412 = $1,360,000. Dividing by the nominal 5% ($800,000) leaves nothing to grow the payment with inflation. $1,333,333 uses the rough 5% − 2% = 3% shortcut, which the stem rules out, and $571,429 wrongly adds inflation to the return. Source: CISRO LLQP Curriculum (May 2015; current as at 12 Oct 2026), Life component 1.3 (impacts of inflation and investment returns); arithmetic on stated assumptions (as at 12 Oct 2026).

Common mistake

Capitalizing an indexed income at the nominal rate, which understates the need.

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