Future Expenses

I couldn’t find the original post but someone posted yesterday or day before about how future lump-sum expenses should be factored into the required return and/or asset base. I can’t remember what my original answer to the question was but the way I’m approaching it for the exam, upon further thought this morning on my train ride into work is as follows: If these future expenses incur in the current year, reduce the asset base when calculating required return. If these future expenses incur over the next 3-4 years, reflect this in the LIQUIDITY section of the IPS and ensure that when setting up your asset allocation, you put that amount towards Cash. As far as whether to calculate PV or FV when doing this, I do not feel it’s required unless the question specifically states that currently the expenses would be $15k/year but the client wishes to factor inflation. If it’s beyond 4 years, I would just make it a point under the Liquidity Requirements to mention that because these lump-sum expenses are going to be occuring in the long-term, these expenses can be met via lump-sum liquidations of the portfolio at that time (as per Schweser). Thoughts?

Agree, except… I would use immunized Treasuries as opposed to cash. There might be an absolute must do liquidity requirement beyond 4 years, in which case I would put in immunized Treasuries.