Alpa Singh, 56, was recently widowed. She was married to Robert Singh, MD, for 29 years and has two daughters, 26 and 23 years old. Upon the death of her husband, Mrs. Singh received $2 million from his life insurance policy. The Sighs had also set aside $1,350,000 towards their retirement. Mrs. Singh has no income of her own and was dependent on her husband.

They lived comfortably, and Mrs. Singh estimates that she would need about $100,000 per year to continue to enjoy the same lifestyle. Even though her daughters are not dependent on her, she feels that she would like to gift them each $15,000 per year. She also would like to be able to pay $200,000 for the younger daughter's wedding in one year and will set aside the appropriate amount in T-bills. Her house is completely paid for, and she would like to leave it to her daughters upon her death as part of their inheritance. She would also like to leave a sizable inheritance for her grandchildren.

Mrs. Singh would like to keep her investments in the United States. She considers herself to be moderately risk averse but recognizes that she has a long-term time horizon after taking gifts to her grandchildren into account. Her numerical risk aversion is 5. Her tax bracket is 30%. The cost of managing her portfolio is estimated to be 0.50%, and inflation is estimated to be 1.50% per year.

1. Assuming that Mrs. Singh wants to maintain the value of her total portfolio, what is her before tax spending rate (ignoring inflation)? Hint: before tax annual cost divided by total available amount excluding all one-time payments.

2. Assuming Mrs. Singh wants to protect the real value of her portfolio, what is the required nominal, before-tax rate of return her portfolio must generate to meet her combined expenses next year?