In Saunderson House’s recent Financial Wellbeing report, clients told us that one of the most important factors in achieving financial wellbeing was ‘having a sense of clarity and confidence over their future finances’. Whilst many are receiving transactional advice, such as using the basic tax allowances, we find that clients often benefit from understanding the big picture and how this transactional advice fits in to their long-term financial planning. This is where we have found that cash flow forecasting can help.
Meeting with an adviser who is able to run a long-term cash flow forecast, factoring in all current income, expenditure, assets and liabilities, and how these might project going forwards, can help clients to visualise how the future might be funded, and increase clients’ sense of financial wellbeing. Below we set out a few of clients’ frequently asked questions and the results from a cash flow forecast, put together using prudent assumptions, that might help to answer these.
The above graph shows how a married couple (currently aged 48 and 45) may fund their retirement (from age 60 to 100) using a typical portfolio built up as a client of Saunderson House. The black line (at the top) illustrates income need (factoring in tax and inflation) and the coloured bars illustrate how this need is met each year. In the scenario above, the couple have property rental income (shown in pink), a defined benefit pension from age 60 onwards (shown in green) and state pensions from age 68 onwards (shown in dark blue). The rest of their income in retirement is drawn first from non-pension savings and investments (such as ISAs and Investment Accounts, shown in light blue) that would be subject to Inheritance Tax (on second death), leaving pensions (shown in silver and then orange once inherited by the surviving spouse) untouched until all other accounts are depleted, so that this can be passed on to their children free of Inheritance Tax.
The absence of any red bars indicate the couple projects to be able to meet their income requirement in full, based on the strategy put in place with their Saunderson House adviser. Indeed, at age 100, the cash flow projects that the pensions will be worth c£730,000 (in today’s terms), as shown below:
Using the previous portfolio as an example, our advisers are readily able to consider ‘what if’ scenarios. In times of financial and political uncertainty a common question we are asked is how a market crash might affect a client’s ability to retire when they want to.
The above graph factors in the effect of a market drop of 21.9% (the amount by which our Wealth Management Balanced tactical model fell from peak to trough during the 2007-2009 financial crisis) at the worst possible moment, just as the client wishes to retire. Subsequently, the portfolio grows in line with the previously assumed rate (in other words, the market drop is not offset by improved subsequent returns, which occured in the years after 2009). The impact of this is that non-pension savings and investments are exhausted eleven years earlier, and the pensions are exhausted in the final seven years. As such, there is an income shortfall in those seven final years (as shown by the red bars to the right hand side) and no inheritance for the children from the portfolio (though they may still inherit assets outside of the portfolio, such as property assets).
Clients might decide to save more pre-retirement, spend less during retirement, take more risk in their portfolio to provide the potential for greater investment returns, or release equity from their
property (such as by downsizing or using equity release) to address a potential shortfall. All of these ‘what if’ scenarios can also be forecast, to provide clients with clearer sight on their future financial position, and greater peace of mind that they are on track even in a potential ‘worst case’ scenario.
Clients can sometimes be guilty of not spending enough, not taking the leap to buy their dream holiday home, classic car or round the world adventure, or deferring their Inheritance Tax planning because of the comfort that comes from a larger portfolio. Here, ‘what if’ planning can also come in useful.
The above graph factors in the client making an immediate gift of £50,000 to each of their two children (£100,000 in total) towards deposits on their respective first properties. The impact of this (relative to the base case scenario) is that the non-pension savings and investments might be exhausted four years earlier, but the pension projects to be sufficient to last them through to age 100, with no income shortfall (as shown by the absence of any red bars on the graph). This might give the couple greater peace of mind that they can make these gifts sooner rather than later, help their
children get on the property ladder and reduce their potential Inheritance Tax liability, whilst likely not affecting their standard of living in retirement.
Cash flow forecasting can be a very useful tool in helping to answer many of those questions that play on our clients’ minds and is something that Saunderson House continues to integrate into our service, to help clients achieve that sense of financial wellbeing that is too often not addressed by other advisers.
If you do not have one already, take some time this New Year to talk to one of our advisers about how we can help you put in place a long-term financial strategy. Get in touch today.
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