CFAI AM 2014 Question 1B

The question is asking for liquidity requirement from the client’s portfolio for the coming year.

Relevant info, the clients (the Crusoes) will pay their mortgage of $25,000 and s tart a trust with $60,000 for their daughter’s upcoming education needs IN THE NEXT FEW WEEKS. Also, they are able to save $35,000 per year which are transferred directly into their investment portfolio and immediately invested in the existing asset allocation.

Obviously, $25,000 and $60,000 must be listed. I also listed $35,000 in savings, but apparently it should be excluded. Can anyone tell me why?

I guess liquidity requirement means withdrawals from the portfolio only.

First, you shouldn’t guess; you should know.

Second, you should know that liquidity is cash flows out of _and into _ the portfolio.

I believe that the key here – which the guideline answer most definitely does not make clear – is that the savings are transferred automatically into their portfolio. From that standpoint, it’s essentially as if the portfolio had earned that amount as a return: they don’t have the option of not depositing it (as they would have if, for example, they received an inheritance).