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18th June 2024

One of the hardest parts of planning for a successful retirement is understanding how much you’ll need to live on and is there enough in your savings pot to get you there? Cash flow modelling software provides a powerful tool through which you can answer those questions.

cash flow model sm

Everybody wants a comfortable retirement, sooner than later in most cases, but how many people know what one looks like? If you don’t, you’re in the majority. More than two-thirds of people approaching retirement in the UK, aged 50 to 64, don’t know how much they’ll need for retirement, according to research by the Social Market Foundation think tank. The Pensions and Lifetime Savings Association have provided some guidance in this regard and for a comfortable retirement a single person would cost £43,100 per year.

Most worryingly, the typical person’s pension savings in this age group are 58% short of what they need for a comfortable retirement, something most people discover too late in the day. Knowledge is power but the lack of engagement in financial matters is striking. A study by Standard Life found 75% of people don't even know how much is in their own pension savings.

Fortunately, there is a little known tool, utilised by financial advisers around the world, which helps map what your financial future looks like and what is required for you to meet your retirement goals. In this article we spotlight cash flow modelling.

What is cash flow modelling software?

Cash flow modelling is a tool which provides a detailed picture of your financial situation not just today but forecasted to various points in the future, helping you to answer important questions such as when can I retire, how much do I need to retire and even will my family be financially secure if I pass away or go into care? It’s a powerful way to help plan your future successfully.

The starting point is identifying what kind of retirement you want. What is important to you? Cash flow modelling is a key part of this exercise, building a visual plan in the form of a bar chart which takes account of personal goals, assets, expenditure and all sources of income. The tool can factor in inflation and assumed growth rates, taxes, lump sum expenses and gifts to family.

“If you are thinking about retiring but don’t know if you have enough to do so, cash flow modelling gives you a big picture of either yes you can or no but here’s what you need to do to get there,” says Mathew Lamping, Independent Financial Adviser at Ascot Lloyd. “It doesn't just show you if you've got enough to live on for the rest of your life if you retire now, but you can drill down into what your income will be made of when you’re older, as well as what tax you will be likely to pay based on current rates and allowances.

matthew lampingMatthew Lamping

“You put all the things in that you know to be true today and the tool projects forward and allows you to explore several what-ifs. I'm 54, my base plan is to retire at 58 but the modelling shows I can't do that – what if I work another year? What if I spend £5,000 a year less in retirement? What if I take a higher level of risk? Visualising like this is really helpful for retirement planning and understanding your options, and how actions like saving more, working for longer and/or spending less can work together like recipe ingredients you tweak to get the outcome you want, or as close to it as possible within the assumptions used.

“Cash flow modelling also helps with estate planning. If you can see through the cash flow modelling software that you have not only got enough but bordering on too much, such that you might have an IHT problem that could get out of hand, it opens up that important avenue to discussing legacy planning. So, it really is quite a powerful tool to a lot of clients that I deal with.”

How does the cash flow modelling process work?

To calculate how much income you’ll need in retirement, your financial adviser will typically work with you to understand how much your fixed essential expenditure is likely to be and add on how much you’d like to have for lifestyle and discretionary outlays like holidays, clothes and gifts. "Our goal is to tailor a plan that aligns to your hopes and needs, we don’t take advice off the shelf, we cultivate it with you," says, Harry Beddoe, Independent Financial Adviser at Ascot Lloyd. "We have access to advanced tools to ensure that every aspect of your financial future is meticulously planned. And whilst most people will not have a mysterious uncle that leaves them a fortune, one thing that is inevitable is market cycles will include a crash. These tools help us understand what impact that could have on your plans, allowing us to prepare for them."

harry beddoeHarry BeddoeEver been stress tested by a bank for a mortgage or loan? Cash flow modelling software allows you to stress test yourself against your own retirement goals, visualising how sustainable your income is in the future should inflation rise, or markets fall by more than expected, for instance. Typically, advisers will incorporate at least one or two market corrections in the modelling to ensure the plan they create for you is robust and resilient against potential volatility in the future and/or use historic data to examine the probability that the plan will work over the long term.

With all of these insights, your financial adviser will help you design a financial plan which meets your long-term goals for retirement, looking at not just a sustainable income throughout the rest of your life but also vital considerations like inheritance tax, income protection and tax planning. "We aim to provide a holistic approach to financial planning, ensuring that every aspect of your future is taken into consideration," says Harry. "Our comprehensive planning process is designed to give you peace of mind and confidence in your financial future."

That’s not to say the modelling will be totally foolproof, there are far too many variables for that, but these models can be useful in helping you approach the uncertainty of the future with more confidence. Your financial adviser will revisit the cash flow modelling software every now and then to update the numbers based on actual expenditure and investment performance and the assumed rates for growth and inflation etc. going forward. If your circumstances change, and they probably will at some point, it’s especially important to run the figures again to ensure the modelling that is guiding your financial decision-making now and in the future is as accurate as possible.

“I've had clients who have made their own Excel spreadsheets trying to model their financial future based on various assumptions. That's all fine and good but what if you've made just one mistake in one formula and you base your whole financial future on it? It’s a risk,” says Mathew.

“With our cash flow modelling tools there are a lot of things hard coded in which stop you from making these kinds of mistakes. We've also got tax table assumptions for now and in the future. We've got realistic growth assumptions of different levels of risk, and we've got inflation assumptions, all informed by experts and updated regularly. If you did the modelling yourself, would you really have the same confidence that the rates you use are as accurate as possible? It's really difficult to challenge your own assumptions yourself, so working with an adviser, especially when it comes to a major life change like retirement, even if you have never done so before, can be very valuable. You only really get one shot at retirement, so you want all the advantages you can get to hit the spot.”

If you have any questions about cash flow modelling and how it can help with your retirement plans, speak to your dedicated financial adviser, or our client service team who will be happy to help.


Our Financial Advisers are available on the phone so please contact us if you have any questions.

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