With above-target inflation putting a greater demand on incomes, the goals of cash flow modelling may seem further away, but remain possible to plan for.
Rosie Hooper, chartered financial planner at Quilter Private Client Advisers, likens cash flow modelling to a long journey with a sat nav.
“We sit [with the client] at the beginning of the journey and we say, this is your destination, and these are all the things that might affect you on the journey.
“Then when they come and see you after, say, six months, and you assumed that inflation’s going to be 5 per cent, but actually it’s dropped down to 3 per cent for example, you turn around and say, ‘Actually, it’s not that bad, the sat nav has corrected itself again’, that is, the cash flow.
“It’s not five hours to the destination, it’s actually four hours and 40 minutes. And that’s what the cash flow is designed to do – reset itself at every touchpoint.”
Staying the course
The Bank of England expects inflation to rise further to around 7 per cent in the spring, and for inflation to be close to its 2 per cent target in around two years’ time.
CPI inflation is projected to fall back after a peak in April, according to the BoE, as the contribution from energy prices fades, global bottlenecks ease and domestic cost pressures lessen somewhat as demand weakens and unemployment rises.
While the CPI 12-month rate has remained above 2 per cent since August, Nicholas Sinclair-Wilson, chartered financial planner at BRI Wealth Management, says he would be reluctant to assume an inflation rate of 6 per cent or 7 per cent, for example, across his cash flows.
“It would be foolish to take the last six or 12 months as a snapshot and then apply that moving forwards.
“Someone who’s fairly early into that accumulation phase of building up their assets, I don’t think it would be fair to suddenly assume a 6 or 7 per cent inflationary rate.
“Maybe you tweak it upwards slightly for prudence, so instead of 3 per cent, maybe 3.5 or 4 per cent, if there was a longer period of time.
“But someone who’s maybe at the other end of that scale and is in their 70s and has been decumulating quite comfortably, you might not jump to increasing the inflation rate or assumption significantly.
“It might be slightly alarming for the client [if] you said ‘we’re okay’ for the past 20 years and suddenly it’s all going wrong. And it might not be particularly fair in terms of an actual good basis of assumption moving forwards.”
William Stevens, head of financial planning at Killik & Co, says he would generally work on a practice of taking a historic long-term average, and base it on the fact that inflation and living costs are likely to move around within that period.