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From my previous post about The Power Of A Lifetime Cash Flow Forecast, let’s continue using Tom’s finances as an example.
By using this tool effectively, you can work out much more accurately how much you should save before retirement, and how much you can spend in retirement. Let’s roll forward in time to have a look at what Tom’s Lifetime Cash Flow Forecast could look like at retirement.
Let’s first look at a case where he hasn’t saved enough to meet his desired expenditure for retirement: You can see here that he starts to see a shortfall at age 73.
His pension has run out, and his investments are not providing sufficient income to meet his needs.
Tom has decided he still wants to retire, but he is going to rein in his spending. Let’s look at how his Lifetime Cash Flow Forecast looks now:
The good news is his strategy seems to have worked. He now has enough income for the rest of his life, and if we look at the Liquid Assets Chart, we can see his funds growing throughout his retirement:
Now that he has revised his retirement income, he needs to think more carefully about how he actually draws his pension. The previous chart assumes he goes into drawdown, but being a prudent fellow, he also wants to know how buying an annuity would affect this. The Cash Flow Chart still shows he has enough income, but if we look at the Liquid Asset Chart, that tells a different story. You can see the pension disappear into an annuity at age 70, but when compared to the previous chart, at Tom’s death his estate is worth around £350,000 less than when he used drawdown.
Based on his Lifetime Cash Flow Forecast, Tom has decided that, because leaving some money to his children and having future flexibility of income are important to him, drawdown is the right choice. Now that he has made that decision, he wants to think more about what retirement will look like. Again, using the Cash Flow Forecast, he can start to be a bit more specific as to how he takes his income. After some thought he decides he wants to spend an extra £10,000 on an amazing trip every other year until he reaches age 80. Thereafter, he is willing to settle for a level income for the rest of his life, i.e., one that doesn’t increase with inflation. This means his income is decreasing slightly each year from age 80 onwards. This seems like a sensible strategy given you usually do less and less the older you get, and let’s face it, he might not make it to 100 anyway. Let’s take a look at what a Cash Flow Forecast tells Tom now:
Immediately, you can see the change in his Cash Flow Forecast. You can see the spikes between age 64 and 80 from his amazing trips. You can then see that whereas before, his income and expenditure rose until his death, they start to fall slightly thereafter. But you will notice that there are still no red blocks indicating he has run out of money. Looking at the liquid assets, we can see why.
His investments and savings have eroded during the early years, but never enough to deprive him of a sufficient income.
At the beginning of this section, I quoted Napoleon Hill: ‘A goal is just a dream with a deadline.‘ I believe a goal is a dream with a deadline and a plan. By building a successful plan, you can make the decisions today that will lead to the results you want in the future. Planning clarifies and empowers you to take the right action now, safe in knowledge that you have clear foresight of your future.
Whilst a Lifetime Cash Flow Forecast can ensure that you have enough money to stop work and that you plan your income wisely at retirement, its effectiveness does not end there. We use a Lifetime Cash Flow Forecast to help many people who are already well into their retirement. Not only does the tool allow retirees to plan their income effectively, it also allows them to manage their estate better. For example, let’s assume that, having followed sound financial advice, Tom reaches retirement with roughly equal amounts in NISAs and pensions. He could choose to take an income from his pensions and allow the NISAs to accumulate. His liquid assets over time might therefore look something like this:
The problem with this is that NISAs are inside his estate for Inheritance Tax purposes, whereas pensions are not. By following this strategy, he is unwittingly setting up a big tax bill for his children. If he restructured his income to spend the NISAs first, and only then tap into the pension, it might look something like this:
By changing his strategy, he withdraws the same income but does not leave a big tax bill behind. There are many ways to use a Lifetime Cash Flow Forecast to help manage your estate more effectively: For instance, allowing you to make gifts early enough to live seven years necessary to avoid Inheritance Tax, and investing in Trusts to remove assets from your taxable estate.
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