The most common client concern is running out of money in their lifetime, according to research by Aegon and Next Wealth*. Giving clients peace of mind that this is not the case and retirement is affordable is one of the most important roles of a financial adviser. It is here that cash flow planning is essential.
What is cash flow planning?
Cash flow planning (also referred to as cash flow modelling) is a tool that combines your income, expenses, assets, and liabilities over time to show a visual representation of your financial position. It is usually in graph form and plots your financial affairs over a set period of time, portraying your entire lifetime, if needed. You can find out more about cash flow planning in general here.
The graph below shows what a cash flow plan looks like. Along the left hand side is the total asset portfolio value of the client and when we apply their spending habits, you can see how this decreases over time, although not as drastically as one might imagine, thanks to return on their investments. The colours indicate the different asset types that make up the portfolio.
One key question the cash flow helps us to answer is ‘when can I afford to retire?’
The tool identifies any income shortfalls, both now and in the future, and then allocates funds from your investments to meet this shortfall. If there is a shortfall throughout, it will tell you at what age you run out of liquid capital, meaning you might need to work a little longer. Or if there is a surplus, it shows you how much your family might one day inherit or highlight how much more you could treat yourself!
Cash flow planning also works throughout retirement
As a population, on average, we are all living longer. So, once you wind down from work or fully retire, you will hopefully have a long future ahead. With that comes lots of opportunity, and plenty of room for change, too. Cash flow planning can be used at regular intervals to ensure you are on track to meet your ambitions or to provide reassurance if the unexpected were to happen.
It takes the question mark away
The big-picture approach allows you to see the potential advantages or pitfalls of certain financial decisions at various stages of your life. It’s extremely useful for predicting future scenarios and testing ‘what-ifs’ with real data to provide reassurance when making choices.
Your adviser can help you to ‘rehearse’ your future by exploring how different scenarios might affect your financial position. These might include:
However, the cash flow plan is only as good as the information you put into it
We take time to ensure the plans are as accurate as possible, taking account of all regular and one-off spending items. We like to be conservative in the assumptions we use, so we index-link your annual spending, assume a sensible rate of return on property and investments, and we also assume you live to age 100!
Cash flow planning also isn't a one-off exercise. It can be used throughout retirement to support changes in circumstance or new goals you may have. That way, you can feel sure your aspirations are still achievable.
Cash flow enables a joyful retirement
Once you have the basic plan built and agreed, it’s then about having some fun, and using the cash flow to back up big decisions. If the position is positive, you can add in more one off spending items, like a new Ferrari, or a yacht… (lucky you!).
Cash flow planning should always result in a feeling of confidence by the time your adviser has taken you through the process. A detailed roadmap of your financial future allows you to make decisions today that ensure a comfortable and fulfilling retirement.
*Managing Lifetime Wealth report – January 2024 by Aegon & NextWealth.
This content is for information purposes and should not be treated as financial advice. We would always recommend speaking to a professional before making decisions regarding your wealth.
The value of investments can fall as well as rise and you may not get back the amount originally invested. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. Even a long-term investment approach cannot guarantee a profit.
