1st November 2018
Cash flow forecasting – for those ‘what if’ scenarios
The world of financial planning is dominated by ‘what ifs’. What if I retire a couple of years earlier? What if I go on that round-the-world cruise? What if I change my risk appetite? What if I gift more to my children?
Retirement income check
Cash flow forecasting tools take into account your income, expenditure, assets, liabilities, and future planned expenditure, as well as future windfalls. It will also make assumptions about inflation and investment returns.
Unlike an actuarial report, which is a snapshot in time and sometimes difficult to understand, cash flow forecasting looks into the future to predict incomes and whether there’s sufficient assets and/or pension provision. In a retirement context, it’s most commonly used to estimate how long into old age our funds will last or at what stage it is prudent for a client to give up work.
Knowing there’s enough money in the pot inspires confidence to do things while we’re in good health, rather than delaying until later on because of worries about the financial consequences. It can also be a factor in helping to decide how much of our wealth to share with children and family members.
Financial target setting
However, cash flow forecasting has many other uses beyond just retirement. It’s also a good way
of modelling the impact of school and university fees, weddings and family occasions and for revisiting budgets in the wake of a change in financial circumstances such as divorce.
The tools add much-needed focus to financial target setting, e.g a client in their 40s who is passionate about retiring by 55 can see where they stand and what they and their financial adviser need to do to achieve the goal, perhaps through more tax efficient investments. Sometimes it’s just nice to use the tool to show that you have the option to retire early should you ever want to.
Appetite for risk
Having these accurate forecasts can make a big difference to our appetite for investment risk. Once the tool has done its work, it might reduce pressure to achieve high returns when only a lower return is needed and therefore lesser investment risk is more appropriate.
It’s also better to know where you stand a few years in advance of retirement, rather than discovering the truth when it’s too late. You can work together with your financial adviser to make necessary tweaks to your financial plans.
As we set goals and targets throughout our lives, it makes sense to apply the same benchmarking approach to our retirement and financial planning.
Ask your financial adviser to show you how cash flow planning can help you achieve your financial goals and avoid your financial nightmares.