Cash flow modelling can bring considerable value to both advisers and clients in the pensions and investment space.
Findings from a 2020 Intelliflo poll showed 67 per cent of advice companies felt that carrying out cash flow modelling with clients helped to reduce some of their worry during the pandemic, and 92 per cent of those surveyed agreed that cash flow modelling helped clients to understand the impact of significant market movement on their future plans.
There is no doubt that cash flow modelling is a powerful tool to help clients plan for the future by painting their journey to retirement and, most importantly, the sustainability of their assets once they reach that point in time.
But when it comes to easing clients' financial worries and helping them understand the implication serious life events could have on their future plans, these are two areas where financial protection can come into its own.
So, there is another, possibly overlooked, aspect of cash flow modelling that might be worth exploring. Advisers can use this type of exercise to discuss financial protection with wealthy clients and demonstrate how their plans might unravel if catastrophe strikes, as well as what can be done to ease their financial worries.
What does cash flow modelling mean to clients?
For many clients, it will be a way to visualise their assets, investments, debts, income and outgoings and generally how their wealth might be affected over time.
It can also allow for a discussion on ways to minimise tax liabilities and make provisions to leave a legacy when they are gone. Maybe most important of all, it allows them to avoid running out of money and ensures they can maintain their lifestyle both now and in retirement.
Let us assume you are the financial adviser for Janice, aged 36, and her husband Fred, aged 35, both of whom are going through a cash flow modelling exercise with you. Janice and Fred are planning to retire at age 65 – in 29 and 30 years’ time respectively. They have a combined annual income of around £85,000, both work for well-known FTSE 100 companies. They are both making the most of their company defined contribution pension schemes as well as saving into a stocks and shares Isa. They also have two young children; Bruce, aged 7 and Julie, aged 5.
There are many different cash flow modelling tools available, allowing you to create incredibly detailed and tailored reports for clients. For ease, Janice and Fred's results have been heavily oversimplified.
Based on a range of assumptions, the following chart shows us how their combined assets might be expected to grow over the coming years – their ‘building wealth’ years – and, crucially, all going to plan, how sustainable their assets will be at a projected rate of income withdrawal in retirement – their ‘enjoying wealth’ years.
There is an estimated life expectancy of age 100 for both Janice and Fred, and assuming no catastrophes occur, the findings suggest they are likely to be financially stable up to age 100.