In a simple sense, a financial plan is a series of arrangements made and actions taken in order to do or achieve something. We all have goals and dreams and a financial plan is supposed to help us to achieve those things.
So how do you know what arrangements to make or actions to take? What are the most sensible things to be doing and what are the things to absolutely avoid?
Answering these questions is not a trivial exercise. There are always variables that change over time. Amongst the most complex of the variables are the material things we want, and the experiences we want to have during our lifetime. These two things change considerably through the course of our lives, along with the emotional attachment we have to them.
In our experience, a reliable financial plan is based around cash flow modelling. This is a calculation taking into account your current position, along with your future income and expenditure, extrapolated over a long period of time. It will show you impact of your present day decisions and allow you to navigate the continual trade-off between present consumption and future consumption.
At Gilkison, we create a simulation of your financial future, using very conservative assumptions, that then allows you to make confident, highly informed decisions. We call this ‘Lifetime Cashflow Modelling’ as we literally model for what we assume will be the full period of your lifetime. That is, we typically project to when you reach 100 years of age because most of us will be gone before we reach that age.
It can be confronting to see the output from the modelling and we have often uncovered significant mental and emotional resistance to implementing a financial plan. In most cases, the resistance is linked to an unwillingness to start saying no to spending money on things that aren’t affordable. Ironically, spending money like that leads to a horrible and usually continual experience of buyer’s remorse.
Therefore, one of the key benefits of working through the lifetime cashflow modelling is that it allows for those resistance points to be addressed, which increases the probability of a successful experience with the financial plan. We often jokingly call this ‘buyer’s remorse prevention’, but for those who have experienced that feeling, it’s no joke.
Once again, this draws us back to the questions we are ultimately seeking to answer:
- Am I going to be ok?
- Do I have enough?
- When can I retire?
Although we recognise there is no way of predicting the future, we can absolutely plan for it. In a world of constant change, using the lifetime cashflow modelling on an ongoing basis provides an incredibly valuable reference point to make your decisions about your life much easier.
Practical example 1
A regular example is a client in retirement asking whether they can afford to purchase a caravan. They clearly want to have the caravan and experience the caravanning lifestyle. Therefore, what they are really asking is a narrow number of questions, such as:
“If we do this, will we run out of money?”
“If we do this, will we be able to maintain the lifestyle we are used to?”
“If we do this and it means we are going to have to adjust, what will that adjustment be?”
When asked these questions, we will add a lump sum expense to their lifetime cashflow projections and see what impact that has on the projected financial future.
Practical example 2
When someone wishes to purchase a new, more expensive home. The affordability of a higher mortgage in case of interest rate movements, or changes to income and unforeseen events impacting expenditure are all factors we are able to test using lifetime cashflow modelling.
What we are really exploring is whether they will experience financial difficulty and in the worst case, lose their family home. Prior to a decision being made, we can perform calculations and assume all kinds of worst case scenarios to provide perspective on what might happen. We can then discuss what action could be taken if any of those events were to occur. Ultimately, the calculations, together with detailed discussions, helps to remove the anguish and guide the decision.
Practical example 3
When someone is on the verge of retirement and are considering if they have enough to last the remainder of their lives. A key fear is retiring and then after settling nicely into that phase of life, finding out that they are actually not able to maintain their desired lifestyle. Their choices are to live the way they really want and run out of money, or adjust to a more modest lifestyle and maintain their financial assets for longer. Another option, which we have observed comes with significant fear, is having to return to work.
Therefore, what we are ultimately seeking is confidence that if I take the leap, the probability of having to return to work is zero. That confidence must be based on thorough consideration and conservative assumptions such that even in the event of several disasters, financial security will be maintained.