In recent articles I have written about fluctuations in financial markets and outlined the potential benefits of ‘pension freedoms’, in particular the flexibility with which one can now access retirement funds. This month I’m taking a look at cash flow during retirement and how it is funded.
One of the key issues with retirement and planning for it is that income isn’t necessarily stable, unless it is provided from a safeguarded source, so for many it will be necessary to fund their retirement plans by using a combination of pensions, savings and investments, usually whilst the funds remain invested. On the upside this allows the potential for those funds to continue to grow, but also keeps alive the prospect that the value may fall.
From the outset it is important to understand what level of income you will require after tax in today’s terms, or looking at it from another angle, what your outgoings will be and where the money comes from to meet them. This can be established by adding together fixed and discretionary outgoings, with the latter including holidays, clothing, gym and golf memberships, food, etc.
You also need to decide at what age you intend to retire and establish all sources of income and capital that you have available. This will include obtaining a state pension forecast, establishing what you’ll receive from other pensions and what savings and investments you have access to.
The more tricky part is then visualising how your various money sources will support you. This is where a cash flow model is invaluable. This isn’t a guarantee of course and the information used will be based on assumptions and past performance, but what it will do is allow you to more clearly visualise your future income stream.
It’s also important to establish your risk outlook and loss tolerance so that a long term investment strategy can be established. Once the costs of advice and fund management are factored in, along with assumptions for inflation, this then provides a far more tangible outlook for your future financial plans and allows you to estimate how much you’ll need, how long what you have will last and how to plan your spending going forward.
The cash flow tool is best used live as a demonstration and allows an advisor to demonstrate ‘stress tests’. For example, what is the impact on your retirement pot if there was a market crash (such as in 2008) in year one of your retirement? At what age do your funds run out now?
It is important to understand that cash flow modelling is not a one off and is not used only at retirement. It can be used to help establish what level of savings you should be making and how realistic your retirement plans and targets are. It may even be used to demonstrate that taking risk in retirement is not appropriate for your circumstances and that a secure income such as an annuity may be more suitable.
Whatever the outcome, a cash flow model can be an important part of your financial planning, so if you feel you would benefit from a review of your own arrangements please email or call me on 01768 222030.
