Clarifying Liquidity Needs In IPS

[sk8247365]

Q1 - past am exam:
James has $50k investment in education for kids in 12 months
James invest $12k in a tax deferred account annually
James Likes to contribute $6k to charity annually
Living expenses are $100k

What are liquidity needs?
According to CFAI, ONLY the $50k investment. Why not the others?
Q2 - past am exam, different year:
Mrs P is retiring today and has $1,000,000.
Mrs. P has tuition of $250k for kids due today
Mrs P has a shortfall of $20k in pension income to cover expenses
Liquidity needs:
According to CFAI, the $250k AND the $20k. Why does this answer include living expenses and the other doesn’t??

 

[Galli]

In both situations there’s a ‘need’ versus an ability to pay.
In question 1 - assuming this person is still working- the 100k + 12k + 6k is assumed covered (absent the details you probably could provide) under his current income. The 50k ‘investment’ is probably not which means James needs to keep this as liquid as possible and perhaps even removed from the SAA all together. This all depends on the various factors in this person life which will be described.
In question 2, this person is retired and only has 1m in assets to drawn from if needed. The 250k is due immediately and the 20k represents a shortfall from income- in question 1 this 20k shortfall was not apart of the individuals circumstance. Therefore this Mrs. P’s liquidity needs are high (270k) and should also be considered for removal from the SAA.

 

[ink]

in addition to what Galli said, I think a good answer would also take into acocunt the periodicity of liquidity requirements.
one-time events are different from periodic events when it comes to liquidity planning. Events that are periodic in nature (e.g., living expenses, contributing $10000 yearly to a trust for your grandchild for the next 15 years) are something that you factor in the return requirement component of the ips. One-time events are something that more often fall uner the liquidity planning. As Galli suggests, one time events are removed from the SAA and are not planned in calculating the return requirement.

 

[zulu007]

Spot on both Galli and Ink.
One-off events should not be included in the return requirement calculation.
Thanks