There’s some confusion as to whether a future outflow that is NOT IMMEDIATE (college expense of $x in 10 years) is ever needed in the return requirement. Is this true? Refer to 2005 #9. The “In addition to normal living expenses, initial annual university costs are projected to be $38,000, rising 8 percent annually(which is in 6 years)” is not used anywhere except for a vague statement in the liquidity section. Can someone confirm?
Hmm…interesting scenario. I am also interested in figuring this out. What my take is that, since the time period is still 6 years away, we would only look at the current situation and plan accordingly. In 6 years, many things could change and we update the IPS regularly. Maybe in the 5th year, we take into account the 6th year and the future cash flows into consideration. We take the PV of future requirement, ONLY if the client specifically says he wants X amount in Y years. Kinda like saying I want to make sure I have 1M in 1 year to buy a house. Then, you would take the PV of the 1M and keep it aside in cash or something. Would like to hear what others say.
I agree w/sparty. Expenses that are that far out would only come into play if you have to set up an IRR calculation to get the return requirement. I vaguely remember a problem where the couple needed X dollars at retirement and, that same year, they would have to pay Y dollars for the kids’ education. So, the portfolio value at retirement would be grossed up by Y dollars, that is FV = (X+Y). PV = whatever the portfolio is worth today, PMT = net annual cash outflow excluding the kids’ education, n = # of years to retirement. Solve for i to get return requirement.