Individual IPS - Liquidity

CFA Level III
#1

Should ongoing living expenses be part of the liquidity requirements?

In the 2014 exam, question 1-B states that “The Crusoes’ ongoing expenses of USD 100,000 per year (USD 135,000 after-tax income less USD 35,000 annual savings) are not included as a component of the liquidity requirement. The Crusoes are net savers , and thus ongoing expenses do not create a liquidity need from the portfolio.”

Can someone clarify this?

Do liquidity needs only come from portfolio withdrawals and not income from one’s occupation?

Net savers means that their income more than compensates for their living expenses - I am assuming that the opposite of this i.e., when expenses > income, would need portfolio withdrawals and would be classified as a liquidity event. Can someone confirm this?

#2

The Crusoes` living expenses are covered by their salaries. They are net savers, so no withdrawals are required from the investment portfolio. We can therefore ignore this aspect, but need to take into account the mortgage payment and the payment for the fund.

#3

Anyone know if you lose points if the ongoing amount saved is included as a note in the liquidity constraint?

#4

Yes, you will.