What is Cash Flow Modelling?
It is the process of assessing your current and forecasted wealth, along with inflows (income) and outflows (expenditure), to enable a picture to be created of your finances both now and in the future. Cash flow modelling allows you to reflect on your current financial position relative to your preferred position, enabling you to make provision or take action now to ensure you achieve your personal aspirations in the future. The cash flow model will give a detailed picture of your assets, investments, debts, income and expenditure, projected forward, year by year, using assumed rates of growth, income, inflation, and interest rates.
Growth rates are cross-referenced with your attitude to risk to ensure your expectations are realistic and compatible with the asset allocation needed to achieve the necessary growth rate. It will help to highlight or expose any shortfalls in your existing financial plan which can then be subsequently addressed at an early stage in the financial planning process.
Most clients have bits and pieces of wealth scattered around in various places and don’t actually know what it all adds up to. This also means they are oblivious as to how far their existing arrangements will go towards their financial objectives or what way they should draw down on this accumulated wealth in the future. Cashflow modelling puts a spotlight on this and helps to provide some indication of what one may expect to achieve in the future.
Cashflow modelling is possibly the most important exercise in financial planning and allows clients to understand where they are now and where they wish to be in the future. Removing the guesswork provides a context within which we can devise the strategy necessary to help a client achieve their financial goals.
Who is Cash Flow Modelling for?
There is a misconception that cash flow modelling is only for the extremely wealthy which is simply untrue.
Cash flow modelling is for anybody who wants to plan for retirement. It can help answer questions like ‘how much is enough?’. Many clients have no idea of this figure so they keep on saving… often at the expense of living a better lifestyle today.
This exercise can highlight the fact that clients have more than enough and it is in fact ‘time to spend!’.
Cash Flow modelling can also be very effective when clients have a big decision to make and want to know the financial outcomes of whatever decision they make.
What sort of scenarios can we map out?
- Do I have enough protection in place if suddenly I could no longer work?
- Can I take early retirement?
- What if you have an ARF and want to know if it can sustain your required levels of income over the longer term?
- Should I sell our investment property or keep the rental income coming in?
- What effect will downsizing the family home have in later life?
- Will we be able to afford a holiday home in later life?
- What if you want to spend €20k per annum on holidays from the age of 60 to the age of 70, what effect will this have on your assets?
- How much will I need if I want to make provisions for Long Term Care?
- What is the potential inheritance tax bill for your estate should you die at a certain age?
It is important to stress that cash flow modelling is not a process to be carried out once and then forgotten about. Cash flow modelling is a living document and should be reviewed on a regular basis and updated according to your current circumstances. Even small changes can make a big difference in the long run.
Want to find out more?
Contact us if you would like to find out more about cash flow modelling or to discuss your overall retirement planning and we can help implement a structure which suits your unique circumstances.