Why a short goal is costed at a lower return

The same client, the same money, two goals - and two different assumed returns in the report. A car three years away is costed at 7% a year while a house twelve years away is costed at 12%. Advisers ask about this, and clients notice it. The answer is short: a goal that is close has no time to recover from a fall, so costing it at a long-run market return would be costing it on a hope.

The three bands

Three years or less is held at 7%. Between three and five years it is held at 10%. From five years the goal is costed at the full rate the report assumes. The cap only ever lowers: if an adviser has set a cautious 6% for every goal, a three-year goal stays at 6% rather than being raised to 7%.

Why it matters more than it looks

Costing a three-year car at 12% does not make the car cheaper. It makes the monthly amount smaller on paper and leaves the client short on the day, because a return like that cannot be counted on over three years. The lower rate asks for a bigger monthly amount now, which is the honest cost of a goal that close.

The step at five years

The bands change at a point, so there is a step. A goal 4.99 years away is costed at 10% and one exactly 5 years away at 12% - about Rs 1,100 a month apart on a Rs 10 lakh goal, from one hundredth of a year. That is not a rounding error; it is what a band does. Any rule with a cutoff behaves this way, and the alternative - a rate that slides continuously with the horizon - trades one honest step for a number nobody can explain or check. If a client is sitting on the boundary, the useful conversation is whether the goal is really at 4.9 years or 5.1, not which side of the line the report put them on.

Money already set aside

The same principle governs what the client already holds. Money allocated to a goal grows at the portfolio's blended rate, or at the goal's own rate if that is lower - so a three-year goal's share never compounds faster than the report assumes for new money over the same period. The report never assumes money already held does better than the rate it uses for the goal itself.

Saying it to a client

One sentence usually does it: "Your house is twelve years away, so it can ride out a bad year and the report costs it at the full rate. Your car is three years away, so it is costed at a lower return - if the market drops the year before you buy, there is no time to make it back." Clients accept that readily, because it is the same instinct they already have about money they need soon.