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Cashflow modelling is used by financial planners to forecast your future finances. It shows you how much money you could have in the future and whether you are on track to achieve your goals, helping to answer questions such as ‘do I have enough money?’ and ‘when can I afford to retire?’.
How does it work?
The first step is to collect information about your monthly income and outgoings, savings and other assets. Your financial planner will analyse this information along with your future goals and requirements, taking into account life events such as your retirement, exiting your business, one-off expenses like gifts to children, and even your death.
An example cashflow illustration:
Your financial planner will then create a long-term projection of your finances. This will show your future requirements alongside any increase or decrease in your assets, helping to identify any potential surplus or shortfall.
What is cashflow modelling used for?
Cashflow modelling helps people with all kinds of different goals to find out what their finances could look like and whether they will have enough money in the future. It can help to answer questions such as:
- Will I have enough money to retire when I want to?
- Am I going to run out of money in later life or can I spend more now?
- Will my family be financially secure if I go into care or die unexpectedly?
- Am I going to leave behind an inheritance tax bill?
- How can my other savings, such as ISAs, contribute to my overall retirement income?
- How can I take an income in the most tax-efficient way possible?
- How can I use the proceeds from selling my business?
You can run through many different scenarios to see how they might affect your finances. For example, you can bring your retirement forward, change the expected return on your investments or simulate a fall in the market. You can also see how taking income from different sources could affect your tax bill – and your overall finances – over time
An example - will I have enough money in retirement?*
Phil is 62 years old and runs his own business. He lives with his wife Angela in Hertfordshire. He wants to stop working in the next few years and decided to meet with a financial planner to check that he would have enough money for the retirement he wanted.
Before the meeting
Before attending the meeting, Phil filled out a spreadsheet with all of the couple’s assets, savings and liabilities including their pensions and investments, mortgages and Phil’s business account. He also listed their current and future outgoings such as pension contributions, the regular expenses they expected for retirement and other planned expenses like a new car and annual holiday. Phil’s financial planner had analysed these details using cashflow modelling.
On the day
The results showed that they had saved more than enough money for the retirement that they wanted. They could live to 100 and still leave an inheritance to their children.
Phil was keen to run through different scenarios. For example, could he stop working this year or take more holidays during retirement. For peace of mind, he also wanted to make sure he could afford care home fees in the future and ensure Angela would be financially comfortable if he died unexpectedly.
The financial planner's recommendations
The financial planner reassured Phil that he was in a good financial position and could afford to spend more during retirement if he wanted to. As Phil was forecast to leave behind an inheritance tax bill when he died, the pair decided to meet again in a months’ time to discuss Phil giving each of his two children a cash gift to help them onto the property ladder.
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*This is a real Evelyn Partners client case study. Names have been changed for anonymity and the client has given consent for the case study to be used.
Forecasts are not guaranteed, and may change based on changes in your investment performance or tax treatment.