In the liquidity portion of the IPS, does it include annual expenses? I was always under the impression that liquidity only includes ONE-TIME distributions such as child’s education or charity donations.
But in the 2013 AM exam, it includes annual expenses in the liquidity calculations. income - expenses = liquidity, due to the fact that expenses are higher. I thought income - expenses would be covered under the return requirement calculations?
Just because you have it in one section doesn’t mean you shouldn’t list it in another. For example in the return section when calculating the required return you show your work deducting those 1 time distributions. But you still list it under liquidity constraints.
Just think of it as anything that will constrain you from meeting your goal of retirement or whatever your end goal is. Having to use investment income to cover expenses would be a constraint. That’s why it also reduces risk tolerance too.
I just wanted to bring up this topic again. Annual expenses aren’t always included in the liquidity requirement section. In the 2014 AM exam, it says that the Crusoes are net savers (income of $135,000 and expenses of $100,000) so this does not create a liquidity need in the portfolio
Well if they are net savers, there is no liquidity requirement in terms of expenses…if there is a shortfall between income and expenses on an ongoing basis, then there is a liquidity requirement to cover that shortfall.