In our series, readers can email in with any question about their finances to be answered by our expert, Charlotte Ransom. Charlotte has 30 years’ experience working in financial services and wealth planning, including 10 years as a partner at Goldman Sachs. She co-founded Netwealth, which specialises in low-cost investing and financial planning advice. If you have a question for her, email us at money@inews.co.uk.
Question: My husband and I have built up around £470,000 in investments but have been so busy with our business that our finances are very messy. Now that we are close to retirement, we should probably seek financial advice but, as we are time poor, how can we be sure it’s worth the effort – and what tangible outcomes can we aim for?
Answer: This is a scenario we often see – many people set aside meaningful sums for the future, but neglect to think about how managing it more effectively could make their pot last longer and help them achieve their goals. This is the point at which professional financial advice can add real value.
It’s only natural to question the value of financial advice, especially if the impact is not necessarily immediate. The International Longevity Centre, for example, has analysed the benefit to those taking financial advice compared to those who didn’t take advice – with positive results running into the tens of thousands of pounds for those who did. Let’s focus, therefore, on what we can achieve, and what can start making a difference much sooner than you might expect.
Cash flow modelling is one of the most popular and effective ways we, as financial advisers can help you visualise how to achieve your goals, typically for your retirement. We build a model of your financial position over time, considering inflows and outflows – and factoring in variables such as inflation and investment returns – to assess how your objectives can be supported over time.
In your case, you have amassed a decent pot of £470,000 already, so now is the time to understand how to maximise it. The goal for many of us is to make our pot last as long as possible, while having enough to live well and the freedom to do the things we want to do later in life.
Cash flow modelling aims to give you clearer answers to some of your more pressing questions. Are you likely to retire comfortably? How much can you, and should you, put away to achieve that goal? Can you afford a once-in-a-lifetime family holiday? Or a dream retirement retreat?
In practice it works by taking multiple factors from your current financial situation to craft a picture of your potential future. These include your income, how much you are saving and investing, your spending habits, when you are thinking about retirement and what you would like to achieve when you retire. An adviser will also consider factors such as projected investment performance and inflation and typical life expectancy.
When all these parameters are assembled and put into a model, they can produce a detailed image of what you can achieve in retirement.
Powerful technology can make a big difference. By providing the ability to visualise different potential outcomes you can assess various scenarios and explore your options. For example, if you put aside this much a month rather than another amount, or if inflation rises or falls to a certain level, what effect could these figures have on your financial situation? Being able to see evolving potential outcomes with interactive charts – rather than being asked to review a set of numbers on a static page – has become a game-changer for many clients.
Cash flow modelling helps to illustrate outcomes which you may not be aware of. For example, assuming growth of 6 per cent a year, your £470,000 pot could last for 24 years assuming £30,000 annual income withdrawal and average fees of 2 per cent per annum being paid to your wealth manager.
However, the modelling will demonstrate that your retirement pot will last almost 30 years if you are able to pay all-in annual fees of 1 per cent while withdrawing £30,000 a year (and the state pension will bump up your income nicely, too).
Unlike other scenarios which are more speculative, for example assessing the impact of inflation at different levels over time, this scenario is entirely real. The impact of paying less in fees and charges can be significant and can be incorporated into your model to demonstrate the concrete difference it can make towards funding your retirement.
Reducing overall costs and charges are a powerful incentive to see whether you can retire five years earlier, or discovering your retirement pot could last many years longer than you thought. We recently had a case where an individual who worked abroad found out they could come back to the UK to live with their family much sooner than they thought – a result that produced a truly emotional impact.
The Financial Conduct Authority (FCA) is also very clear that financial planning firms should always be honest and as accurate as possible with clients. They state that foreseeable harm could be caused if firms “project forward using returns that are unjustified and don’t result in realistic outcomes”. This guidance should act as a stark reminder to all financial consumers: if something sounds too good to be true, it often is too good to be true.
Remember too that this is a “living model” since the cash flow modelling results are based on the data input. Every so often, that data should be updated and reviewed in light of how your investments are performing and if your circumstances meaningfully change.
Nevertheless, when applied correctly, cash flow modelling is a remarkably powerful tool. It can give you greater clarity and control, enhanced flexibility and demonstrates tangible outcomes. The process allows financial advisers and their clients to gain a clear view of whether they are on the right track financially – and crucially, the opportunity to change their plans and behaviour if they are not.