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Most people go through their life not really knowing what their financial future looks like. They can see what they have now, and how their decisions have affected their money in the past by looking in the rear view mirror, but they do not look further ahead than the next corner or signpost when it comes to their finances.
As a result, people get lost, and most don’t get to where they wanted to go. Where they end isn’t where they wanted to be at all, because of the odd wrong turn along the way. Whilst they might not be a millions miles away from where they wanted to be, to undo those wrong turns isn’t quick and easy. With your money this could mean that you run out during your lifetime, or you could be dying the richest man in the graveyard, leaving your children with a big Inheritance Tax bill, and not having done some of the things you always wanted to do.
So when it comes to your finances, what is your sat nav or your map? What can guide you along the motorways of your financial future? It is known as a Lifetime Cash Flow Forecast. A Lifetime Cash Flow Forecast clarifies what your financial future will look like. It projects your life forward, allowing you to build in the aspects that are important to you, so that you can see how they will impact your financial future. It allows you to make more informed decisions because you can see the impact those decisions will have on your future.
Lifetime Cash Flow Planning enables you to visualise your current wealth, and how life decisions may affect your wealth over time. It is vital in financial planning, as it helps you gain greater clarity around your financial future. I want you to imagine that your life, from here to the end, as a timeline. The first thing to do is to set an end point for the timeline: When you are going to die. It is not an easy place to start, but it’s necessary.
When we are building Lifetime Cash Flow Forecasts for our clients, we assume everyone is going to live to age 100. It’s unlikely they all will, but it is likely that some will. If we have assumed someone is to run their money down by the age of 93 and then they are the one who lives to 100, they will be in trouble, so it’s better to err on the side of caution.
The idea of a Lifetime Cash Flow Forecast is to project forward several factors of your finances to Your NEW Life Expectancy. The first and most important is to forecast your income versus expenditure, as shown in a Cash Flow Chart. This will show you whether you have enough income to meet your needs or if you are going to have insufficient income. Inflation and investment growth make this more difficult to predict, particularly if you have many different investments, pensions, incomes and expenditures. A Lifetime Cash Flow Forecast allows you to see all of these elements in a simplified chart.
Before we explore this any further, let’s take a look at a few examples:
Cash Flow Chart
In this example, we are looking at someone aged 29. We’ll call him Tom. The solid black line shows his expenses, the blue bars are his income, and any red sections highlight years where he has insufficient income to meet his expenses.
In this example, you can see Tom has excess income above his expenditure prior to retirement, but because he is spending it down the pub instead of saving that money, he is going to have insufficient income when he reaches retirement, as shown with the red blocks appearing after age 62.
A Cash Flow Forecast will also show you the value of your investments, pensions and other assets over time so you can see if you are running down your money or allowing it to continue to grow. If your Cash Flow Chart highlights a shortfall, on your Liquid Asset Chart you will start to see why.
This chart only includes how much you are worth outside of property and shows whether your wealth is growing or falling. Brown bars show your pensions, Orange your investments and Yellow cash. There are also charts that include property, but I’m just going to focus on the basics.
Liquid Asset Charts
Let’s have a look at Tom’s Liquid Asset Chart:
Here we can see that at retirement, Tom does have savings in Pensions (Brown) and some money in cash (yellow) but it is insufficient to meet his income, which he runs down fairly early on. This explains what we saw in the Cash Flow Chart.
As well as projecting forward how your life is going to pan out financially, a Lifetime Cash Flow Forecast will help you to project forward to new scenarios, allowing you to see the impact of changes you can make today. Let’s look at what happens to Tom if he were to save some of his excess income into a pension:
As you can see, now that he has started saving into his pension, he now has no shortfall in retirement. Let’s have a look at the Liquid Assets Chart to see why:
As you can see, he has successfully saved sufficient money not only to provide him with sufficient income in retirement, but to ensure that when he does draw an income, the capital continues to grow.
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