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Financial Planning Using Cash Flow Modelling

For the first half of the year, investors have experienced volatile markets. While it may be easy to look at the short term and see negative returns, it is important to bear in mind the recovery and long term growth which we would expect from the markets. This can be difficult to see and assess the impact of, however an insightful tool to allow investors to see the bigger picture is cash flow modelling, especially when investors are looking at their pensions and retirement aims.

My Parents Situation

Recently I have spoken to my parents about their retirement income. While they are aware of the size of their pensions, and the income they would get from any defined benefit policies, they found it difficult to fully understand how much they could afford to spend each year during retirement, how much longer they needed to work for to ensure comfortable retirement funds, and how much they could rely on their savings as income when we are experiencing such high levels of inflation.

How Does Cash Flow Modelling Work?

Cash flow modelling accounts for all aspects of a client’s funds. It includes bank accounts, income, ISAs and pensions, while also accounting for growth of any investments which they hold. This is particularly important in the years when a client is building up to retirement, to stress test their savings and allows clients to regulate and understand whether they will meet their retirement targets. We are able to create clients an in depth model of their finances, not only to show them any excess funds or shortfall they may encounter in retirement, but this cash flow would also allow them to see whether they can afford larger ad hoc purchases, how much market volatility they can withstand, and how soon they would need to start drawing down on pensions and investments.

Managing Risk

Within these cash flow models, we look at capacity for loss calculations. The current markets are still uncertain, and while we would suggest most investors look to the long term market growth, for some investors their capacity for loss will have substantial impacts on their risk tolerance, and cash flow modelling can help to illustrate whether keeping all funds invested has the potential to lead to a shortfall. This would tend to be prevalent when an investor is looking to drawdown on their funds in the shorter term, and therefore it is important to see how much longer their funds can withstand the market volatility before having an impact on their standard of living. Even in stable markets, cash flow analysis can be an insightful tool to understand how much growth an investor would be aiming for in order to sustain their financial targets. 

How Cash Flow Modelling Can Help You

At AWM we offer cash flow analysis as part of our ongoing financial advice to clients. It allows clients to visualise the bigger picture during the accumulation phases of their financial journey with us, and how it ties into their retirement aims and life goals. We are able to create the model specific to you, including any ad hoc purchases you intend to make, and we can change the model to show how your investments may differ with varying retirement ages. 

Written by: Alice Frost

11 August 2022

Ascot Wealth Management Limited is authorised and regulated by the Financial Conduct Authority reference 551744. Our registered office: Scotch Corner, London Road, Sunningdale, Ascot, Berkshire, SL5 0ER. Registered in England No. 7428363. www.ascotwm.com Unless otherwise stated, the information in this document was valid on 3rd February 2017. Not all the services and investments described are regulated by the Financial Conduct Authority (FCA). Tax, trust and company administration services are not authorised and regulated by the Financial Conduct Authority. The services described may not be suitable for all and you should seek appropriate advice. This document is not intended as an offer or solicitation for the purpose or sale of any financial instrument by Ascot Wealth Management Limited. The information and opinions expressed herein are considered valid at publication, but are subject to change without notice and their accuracy and completeness cannot be guaranteed. No part of this document may be reproduced in any manner without prior permission. © 2017 Ascot Wealth Management Ltd. Please note: This website uses cookies. To continue to use this website, you are giving consent to cookies being used.