On paper a cash-flow forecast seems quite simple really, it’s a summary of your expenditure, both now and forecast into the future, along with an idea of the income and capital that can be used to meet that expenditure. The net result of the exercise is a good idea of how long your money will last. This is something that clients ask us about all the time.
The data that drives this plan, however, is very complex and requires a significant investment of time and effort on our part to get right. We will need to establish suitable assumptions for inflation, asset class performance and earnings growth as well as considering the impact of unexpected market events on the plan.
The foundation for any good cash-flow model is the “base plan”. This is what your financial future could look like based on todays position and known future income and outgoings.
Following the completion of this base plan, we can then consider various “what if” scenarios. These allow us to model the impact that different courses of action will have on a clients’ overall financial plan.
For example, if the initial (base plan) cash-flow model had identified that a clients assets would only last until the age of 76, we could consider the impact that downsizing their home would have on the picture. This might generate sufficient funds to last until the age of 80. Following this, we could then calculate the investment return that a client would require to ensure that their funds would last until the age of 90, and then make an appropriate investment recommendation to make this a reality.
A client had a real light-bulb moment when we were completing his cash-flow model a few months back. The gentlemen in question was desperate to retire in 6 years time at the age of 68, but was unsure as to whether this was realistic based on his current level of investments and pension provision.
We put together a detailed cash-flow projection for him which not only showed that he had sufficient funds to support his desired retirement lifestyle right now, but also that he would be able to sustain that level of expenditure until the age of 107!
Based on the outcome of our cash-flow modelling the client felt secure enough to take an early retirement, a whole 6 years before he had planned. He is very much looking forward to spending this time with his grandchildren. He has also now gained the confidence to start to pass down some of his wealth to help fund their education.
The output of cash-flow modelling may just look like a fancy graph, but it is fantastic lifestyle outcomes like this that make it so much more than that! Cash-flow modelling is, in fact, a powerful, enlightening, life changing tool.