How cash flow modelling can help you plan for your future
- Shunil Roy-Chaudhuri
- 13 February 2023
- 10 mins reading time
‘How long will my money last?’ ‘How much do I need to save for my future?’ ‘When can I stop working?’ Unfortunately, there are no easy answers to these questions. On the one hand, they depend on your unique circumstances: your background, your personal goals, the way you live your life and the tax rates you pay. On the other, they depend on the performance of financial markets and the economy.
Trying to find your way through these factors might seem impossible. But you can find a helpful guide in cash flow modelling, which a financial planner can use to provide a roadmap of your potential financial future.
What is cash flow modelling?
Financial planners can use cash flow modelling as a tool to assess your current and forecasted future wealth. They do so by matching expected income during your lifetime with expected expenses. In simple terms, a cash flow model is a year-by-year forecast of your money coming in, your financial outgoings and the resulting balances.
Cash flow modelling can help reveal how your current financial situation measures up against your life goals. It can help establish financial plans to achieve these goals and could provide peace of mind.
When building a cash flow model, financial advisers consider factors such as your life expectancy and expected investment performance, interest rates and inflation. They also consider your current financial situation, how much you spend, save and invest, the tax rates you pay, your hopes for the future and your intended retirement date.
Cash flow modelling can help you manage any wealth you might have built up, work out how much you need to save and the returns you require to meet your goals. You can also use cash flow modelling to plan for care home fees and, crucially, to assess how long your money might last during retirement.
How could it help me plan for retirement?
Cash flow modelling can help you assess issues such as:
When you can afford to retire
The lifestyle you can achieve in retirement
How long your money will last
The impact long-term care costs could have on your finances.
Cash flow modelling can also help you assess the financial impact of any changes to your retirement plans. A financial planner can explain how your future financial position might be affected by a range of scenarios, such as:
Retiring earlier or later than expected
Obtaining your retirement income through drawdown instead of through an annuity
Increasing or reducing the amount you invest in equities (shares)
Changing the amount of holidays you take during retirement
The level of income you choose and whether that level changes during your retirement
The tax you pay on your income and on your investment growth.
Read more: How far could a £250,000 pension pot go?
While preparing for your retirement forms a key part of your financial plan, it is still only a part of your holistic financial planning needs. You may, for example, have to make arrangements to provide for dependents in the event of death or disablement. And you may also have to consider any inheritance tax issues that could impact your beneficiaries.
How does cash flow modelling fit in with the financial planning process?
Cash flow modelling could help you understand how you may be able to meet your financial goals by forecasting your future cash flows. It often plays a vital role in tax planning because it can:
Take into account the impact of tax allowances
Incorporate changes in tax allowances into cash flow forecasts
Assess the tax consequences of taking income from different sources
Consider the tax impacts of different financial planning approaches.
It could also take into account changing circumstances, as it can:
Show how apparently small changes in areas such as savings, investment approach and income could, over time, significantly change your financial future
Assess the impact of illness or inability to work
Incorporate changes in the expected return on your investments
Simulate the impact of market falls on your investments
Simulate when your state pension starts, and how to aim to bridge the gap between when you plan to retire and when the state pension starts.
Conclusion
Cash flow modelling can be a valuable tool to help work out if you’re on target to meet your personal financial goals. It could help you decide if you need to take on more investment risk or make changes to your lifestyle. But it isn’t a one-time activity: cash flow models should be reviewed regularly to adapt to changes to your life, your goals, the markets, the economy and the regulatory environment (such as tax rates).
In the end, cash flow modelling could give you greater insights into your financial circumstances and these insights can support you with your financial decision-making. A good financial adviser can explain how cash flow modelling may benefit you.
Important information
There are no hidden fees or charges at Schroders Personal Wealth, and you’ll only pay if you choose to go ahead with the recommendations in your personalised financial plan.
The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits which isn’t guaranteed and can go down as well as up. The benefits of your plan could fall below the amount(s) paid in.
The value of investments and pensions and the income from them can fall as well as rise and are not guaranteed. The investor might not get back their initial investment.
There is no guarantee by investing money it will keep level or beat inflation, particularly when inflation is high.
Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
Any views expressed are our in-house views as at the time of publishing.
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In preparing this article we have used third party sources that we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.
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