Lifetime cashflow modelling is fundamental to your financial planning. It gives you an understanding of how your future could look in financial terms, which puts you in a much more informed position to make confident decisions. As we’re often privileged to witness, this can be life-changing for our clients.
Without a cashflow forecast for your lifetime, you’re in the dark about the impact of stopping work at a specific age, the type of lifestyle you can afford in retirement, and how much of your wealth you can afford to share with others.
Read on to see how cashflow forecasting brings clarity to your decision-making, and the impact this can have on your life.
What is a lifetime cashflow forecast?
Essentially a lifetime cashflow forecast uses informed best guesses based on your current circumstances and aspirations, to project what your personal cash flow could look like for your future. We call this financial plan Your Big PictureTM.
To ensure your plan has maximum viability we always use cautious assumptions about your likely spending, the growth of your investments, and the impact inflation will have on your wealth over several decades.
This is preferable to the alternative of using optimistic assumptions where you need to keep your fingers crossed in the hope that things work out that way.
Of course, a forecast that covers several decades is never going to be precisely accurate. But updating it every year as life and your thinking evolves means it’s a powerful aid to your decision-making.
So how can this information be life-changing?
It gives you clarity on when you will have enough to be financially independent
Our experience has shown us that approaching retirement is a financially worrying time for many people.
This is partly because they don’t understand what’s possible based on their financial position. They wonder whether they have enough wealth to retire and live the lifestyle they would like to, or what they need to do to put themselves in that position.
Unfortunately, this means people often continue to work for far longer than they would ideally like to, simply because they didn’t realise they had enough wealth to stop sooner.
If you enjoy your work and find it very rewarding, you may like to continue working for as long as you can. However, being armed with the knowledge that you could stop if you wanted to, means you can be very selective about the work you do, and make different choices with any additional earnings you have.
Time is our most scarce and precious commodity. Once spent, it can’t be replaced. So, it’s important to make informed decisions about how you invest your time, whether that’s spending more time with loved ones, or taking on a new charitable project you’re passionate about.
Armed with this information, you can decide how to transition into retirement in a way that works best for you.
You understand what’s possible with what you’ve got
Nearly two decades of working with people as they retire has given us valuable insight into how cautious they can feel about spending the savings they’ve spent their lifetime building. Many believe they must maintain the value of their capital and spend only a sustainable income. But to what end?
For some people, this approach could be in line with their hopes for the future. They may wish to maintain their capital to pass on to the next generation, and only spend a modest income during their lifetime.
But, for many, leaving their property for the benefit of their loved ones is sufficient, while others are focused on enjoying as much of their savings as they can, having worked hard to accumulate them.
When we delve into the true motivation behind the desire to avoid eating into capital, it usually stems from a fear of running out of money. Sadly, this common misapprehension can lead to a life that’s not been lived as fully as it could have been, plus a huge Inheritance Tax bill.
So how can you know what’s possible?
Cashflow forecasting may show you that you have considerably more than you need to achieve the lifestyle you want in your future. In this case, the question becomes: what do you do with the excess?
You could think about spending some more money on your home to make changes that will suit your new lifestyle better, or possibly spend a bit more on a new property that allows you to fulfil your ambitions to move to a new location.
Cashflow forecasting enables you to understand whether downsizing your home by age 80 will mean you can spend more in your early retirement. That could be through gifts to family members at a time when they probably need it most, or on having more fun – an extra £10,000 a year on dream holidays for example.
Understanding how much you can pass on to the next generation now
As mentioned above, you may wish to make regular gifts to family members during your retirement. Imagine the confidence an understanding of how much wealth you have that’s surplus to your needs can give you?
Armed with this information you could choose to make a significant gift to your family now, or to another cause that’s important to you.
If you’re concerned about giving your family large sums of money and the negative impact this could have on their attitude to money in the future, it’s possible to make gifts to a trust, so you can maintain some control of how and when the money is accessed by the beneficiaries of the trust.
In addition to the joy of seeing your loved ones benefit from your hard-earned wealth during your lifetime, there can be huge savings to your Inheritance Tax bill by making significant gifts during your lifetime.
We can give you the confidence to make big decisions
Many years of working with people who are approaching retirement has shown us the benefits of lifetime cashflow forecasting.
We’ve worked with clients who’ve had the confidence to make big career changes taking a significant drop in income and those who’ve retired five years earlier than they thought was possible. We’ve met others who’ve fulfilled their dreams by upscaling their home or increasing their spending beyond anything they thought was feasible.
From our point of view, it makes our work enormously rewarding. For our clients – well, there’s no point being the richest person in the graveyard!
If you’d like to learn more about cashflow forecasting and how it could help you, please contact us at firstname.lastname@example.org, or call 01202 025481.