Listening to “spreadsheet Phil” presenting the budget last week got me thinking of how far we have come since the days when this was our only hope of formulating clients’ plans.
After many years of pretty basic number crunching, spreadsheets enabled me to more present a clearer picture to clients of their planning needs. However, it could not easily accommodate the what ifs?
Today though we are so much more advanced than that, or those of us that use modern Cash Flow Modelling tools are, which unfortunately still doesn’t appear to be the norm.
“If you fail to plan, you are planning to fail.”
Benjamin Franklin is supposedly to have once said, “If you fail to plan, you are planning to fail.” Well this cuts to the heart of Cash Flow Modelling. It’s all about the plan.
Using sophisticated Cash Flow Modelling software (interactive spreadsheets written by very clever people and using pictures to illustrate the future) I help my clients to understand what their financial position will be in the years to come if a. they just carry on as they are now and b. if they make adjustments to saving habits, investment methods, spending, debt repayment etc. We then go on to build ‘What if?’ scenarios; the “what if I would like to retire five years early?” scenarios, or indeed any host of other questions like:
- When can I actually retire, and could I consider a partial retirement?
- Can I afford to make gifts to my loved ones during my lifetime and what will the effect be on my long term financial position?
- What rate of investment return do I need, to achieve my objectives?
- What level of financial risk should I be taking?
- Will downsizing my home in the future release enough cash to supplement my retirement? Do I have to downsize if I don’t want to?
- How will an inheritance tax bill impact my Estate? Are there ways of reducing this liability? What are the implications?
- If I die or get seriously ill, what will be the financial outlook for my family?
How does it start? Well it starts with the ‘good data in – good data out’ part. I gather up-to-date and accurate data from my client about their current financial position, so income, outgoings, savings, pension values, likely future expenditure and the like, including their aspirations and goals in life – the bucket list if you will. This is typically done through an online portal which the client can complete at their own pace, in their own time.
Once completed I do the work of assessing this information and producing a cash flow model to show the ‘current situation’. The one that shows you what the future holds if you just carry on as you are. This can be enlightening, scary or maybe a bit of both. Then we discuss the ways to alter the current position, to improve it, and how to ‘stress test’ the results – the ‘what if we had another financial crisis – what would that do to my retirement plans?’ etc, all to ensure we create a robust plan. We then implement any recommended changes and set sail.
What does it look like?
But what does a cash flow model look like? Typically there are two useful, visual outputs. Firstly, the cash flow forecast. This shows the anticipated lifelong expenditure, and how it changes over time and how major expenditures like buying a new car come into play. Here’s an example:
The red line shows annual spending, with peaks where one-off items of expenditure are anticipated. The coloured bars represent the places where we are receiving income or drawing capital from, so pensions, state pensions, rental income, savings interest etc.
The second chart below shows savings over time and how in this example overall savings in place gradually diminish as they are used up to support future spending.
Of course most financial positions need some assistance to get us to where we want to be. In the scenario below you can see that based on current and anticipated spending this example client would run out of money at around the age of 80, so work needs to be done.
Review and evolve
Once a plan is in place, it is only going to be successful if it is reviewed and worked on in the years ahead, adapting it to changes in circumstances or the goals and ambitions we have, making alterations as we see pension and savings values change as rates of return alter, as debts are repaid, and as inflation alters the cost of living, all to keep the plan on course.
New cash flow models are produced with further recommendations made if required, so that we continue to build upon the foundations in place and continue to move forward.
If you feel you would benefit from this level of financial planning then get in touch and let’s talk about how to achieve your financial goals.
Mark Ireland ALIBF