The decision in brief
For a hypothetical $10 million portfolio, a $2.5 million cash reserve funds five years of a $500,000 annual net liquidity need. Year six needs another funding source. A five-year runway is a planning result under these assumptions, not a guarantee of safety.
| Assumption | Illustrative amount | Treatment |
|---|---|---|
| Portfolio | $10,000,000 | Starting balance |
| Cash reserve | $2,500,000 | Available at the start |
| Annual spending | $400,000 | Flat nominal spending |
| Annual capital calls | $200,000 | Paid from reserve |
| Annual inflows | $100,000 | Received within each year |
| Net annual requirement | $500,000 | Spending + calls - inflows |
The decision being made
The office is choosing between a larger growth allocation and a larger liquid reserve. The family has recurring spending and private-market commitments. A discussion framed only as equities versus bonds would miss the need to meet those outflows. The starting question is therefore which obligations need a reliable funding route and which can adjust when markets disappoint.
All figures here are invented for a transparent planning exercise. There is no named client, actual mandate or investment recommendation. A real plan would separate taxes, business support, gifts, debt service and exceptional purchases, then identify which payments have fixed dates.
Reconcile the reserve
The annual net need is $400,000 of spending plus $200,000 of calls less $100,000 of inflows, or $500,000. Dividing the $2.5 million reserve by that amount gives five years. On a simple annual schedule, the reserve ends years one through five at $2 million, $1.5 million, $1 million, $500,000 and zero. With identical flows in year six, the unfunded amount is $500,000.
This calculation assumes no investment return, inflation, taxes or intra-year timing mismatch. It is deliberately simpler than a forecast. The result is useful because every part can be inspected and changed. If the first capital call arrives before the expected inflow, an annual total can conceal a short-term funding gap.
Choose a replenishment rule
A reserve without a replenishment policy is a countdown. The committee could agree to review a minimum reserve annually and to refill it from distributions or a rebalance when a predeclared condition is met. It should say which asset sales are permitted, who approves them and what happens when markets are down. This exercise does not choose the threshold for a real family.
The remaining $7.5 million should not automatically be treated as unconstrained growth capital. Some of it may back future commitments, taxes or a business contingency. A complete balance-sheet review comes before assigning a long horizon.
Challenge the assumptions
Increase spending by inflation, delay inflows and bring calls forward. These are different changes and should be recorded separately. Raising the stated reserve to six years may appear conservative while still ignoring an immediately due obligation. Conversely, treating every uncertain outflow as simultaneous can overstate the reserve requirement and obscure useful flexibility.
A second scenario can assume distributions stop for two years. A third can include an agreed emergency payment. The office should identify the action each scenario would trigger rather than merely generating a more alarming chart.
What belongs in the committee memo
Record the dated obligation schedule, the reserve's eligible assets, the source of planned inflows, the timing assumptions and the person responsible for updating them. Show both the base schedule and the selected adverse case. Distinguish a reliable cash balance from an asset that would have to be sold, borrowed against or approved for redemption.
The recommendation should explain the trade-off: more reserve may reduce forced-sale pressure, while its opportunity cost and inflation exposure remain relevant. A useful decision concludes with a funding and review rule, not a claim that one allocation is universally best.
Decision points
- Define net cash needs before debating allocation weights.
- A reserve runway depends on the timing and reliability of its inputs.
- Specify how the reserve will be reviewed and replenished.
Test a different assumption
The tools use explicit hypothetical inputs. Change the spending, liquidity or portfolio assumptions to examine the arithmetic behind your own illustration.
Sources and further reading
The linked sources provide conceptual background. The worked examples and planning assumptions on this page are this publication's own illustrations.