Running out of money
One of the biggest financial fears expressed by clients is running out of money before running out of life. After all, we know our date of birth but can’t know our date of death! How does Financial Planning help to overcome this concern?
Imagine for a moment that you’re comfortably well off, in financial terms. You own a home with no mortgage. You’ve got cash in the bank, a healthy portfolio of investments and several streams of
income, including your pension.
In this scenario, what could there possibly be to worry about? We often think of money worries only afflicting those who have little or no money. Our experience tells us that people with decent levels of wealth also worry about money; the worries differ, but they are equally as important.
New research published by National Savings & Investments found that almost a third of Britons have experienced a negative effect on their overall health due to their personal finances.
The NS&I study found that over half of people who worry about money say they worry about it all or most of the time. Rather tellingly, almost three quarters of people who worry about money have never sought professional advice.
We state one of our aims as removing stress about money. There are several ways we help our clients achieve this goal; the process of providing a clear explanation of choices and options when faced with important financial decisions goes a long way towards removing stress.
But perhaps most valuable as a stress remover is working through the financial planning process with clients.
Financial planning follows an established six-step process which is used to consider all aspects of your financial situation when formulating financial planning strategies and making recommendations.
In simple terms, these six steps involve establishing and defining a professional working relationship, collecting lots of information about you and your goals, analysing and assessing your financial status, developing and presenting the financial planning recommendations, implementing the recommendations, and then finally reviewing your situation.
Within this six-step process comes something we call lifetime cash flow forecasting. This is a powerful tool designed to graphically illustrate what your future financial position might look like, based on a series of carefully made assumptions.
Because we don’t have a crystal ball and cannot accurately predict what the future might hold, these assumptions are always based on what is reasonable today. The final step in the financial planning process of reviewing your situation includes a review of the assumptions made, adjusting your plan accordingly as things change.
Someone once used the analogy of a financial plan being a bit like piloting an aeroplane. The pilot sets the destination at the start of her flight, but makes a regular series of minor adjustments to stay on the right course and safely arrive at the desired destination.
The absence of a crystal ball also means that we use your data to come up with a number of ‘what if?’ scenarios to consider. Some of these are ‘disaster’ scenarios; what would happen (financially) if I were to die or become disabled, for example.
Other scenarios we build into your lifetime cash flow forecast are far more positive; based on our conversations about what you really want to achieve in life, we define these goals as financial scenarios and illustrate the impact they would have on your finances in the future.
The greatest value from undertaking a lifetime cash flow forecasting exercise, in my opinion, comes from offering reassurance that you will not run out of money before running out of life.
We model our cash flow forecasts through until age 100 in most cases. With life expectancy at birth in the UK now standing at 83.5 for women, using age 100 gives us some room for error, aware of the fact that one in three babies born today are expected to celebrate their 100th birthday!
Safe in the knowledge that you can afford to live the life you want to lead without running out of money before you die, our modelling and ‘what if?’ scenarios can move onto more interesting things.
For example, once your own living standards are considered relatively secure, you might wish to look at the impact of gifting assets during your lifetime.
Before making gifts to children or grandchildren, it’s important to understand whether such gifting will leave you short of money in later life.
Many of our clients express concerns about the affordability of residential care in later life, so by modelling the long-term financial impact of gifting money, we can give peace of mind here too.
Lifetime cash flow forecasting isn’t a panacea; the assumptions are subject to change and ‘black swan’ events can sometimes derail even the most considered financial plans.
What creating and then periodically updating your financial plan and lifetime cash flow forecast does achieve is a high probability that everything is going to be OK in the future.
Our clients will often tell us how relieved they are to see their current and anticipated levels of spending are sustainable for life. This relief combined with the presence of a clearly defined and considered plan for the future is a great anxiety reducer.
This article first appeared in the March 2018 edition of Informed, our client magazine.