After-Tax Cash Inflows
Incoming cash arrives from several different sources . . . compensation . . . dividends . . . interest income . . . realized gains . . . asset sales. Against each of these sources, a tax exposure typically exists that reduces the dollars available to spend. If an after-tax adjustment is not made, then a wealth-destroying gap arises since each dollar paid to fund the gap in the present loses its compounding value in the future.
Compounding Cash Outflows
Only in the rarest of circumstances will an item that uses cash decline in value over time. The ever-increasing march in compounded costs contrasts with the risk that cash inflows can decline in value. Should a decline occur when a bill comes due, a future dollar must be moved into the present to fund the gap and, again, that dollar’s compounding power is lost.
Cash Inflows Commingle in Time
When considering a variety of spending categories, common financial planning processes view each associated cash outflow as a separate event. In truth, for any given time horizon, cash out-flows coming due for a variety of events commingle in time; simply, they all must be paid.
Dedicated Sources Restrict Flexibility
Retirement portfolios fund retirement outflows. Education portfolios fund education outflows. Complicating the cash-flow matching process are the restrictions that exist with these dedicated portfolios. Should a dollar from a dedicated portfolio be required to fund a non-dedicated need, not only is a dollar lost to future compounding, but any penalties further reduce the amount available for growth.