A personal financial planning cash flow forecast is an exercise in plotting your financial position from the day you do the forecast through the rest of your life. Some forecasting tools may cut off at age 90, but whichever way you do it, the exercise is so valuable it should really be made mandatory.
Cash flow software works by taking your details, your input information, and then plotting a long-term income and expenditure model.
To create the model the software asks for assumptions to be made on a wide range of relevant matters. This includes such things as when you expect to receive the state pension, how your income may fluctuate depending on increases per year, future inflation rates, assumed rates of return on any cash or investments you have and so on.
These variables require assumptions applied to them. And you can play around with these assumptions. This allows you to create ‘scenarios’ – a set of different possible outcomes depending on how you move the assumptions around.
This way you can see your future income and expenditure changing depending on the movement in the assumptive figures you input.
For example, change the rate of investment return on your invested monies and you can see how this affects your income/expenditure and wealth in the longer term.
Add in care fees at age 75 in another scenario and this will show how this reduces your capital and/or how short you will be income/expenditure wise at future dates.
A picture of your finances through the rest of your life
The reason this is crucial is that the software allows you to see a picture of your financial position changing and moving depending on the scenario you are viewing.
This, in turn, provides a level of intelligence which can inform your decision making like nothing else. As you view the various scenarios it will become much clearer where your risks are, what gaps need plugging, what your investment strategy should be and the optimum way to decumulate.
The software is commonly referred to as a cash flow forecast, but the reality is that it is more of a cash flow model.
The reason model describes it better is that in so many ways the software is not forecasting anything, but showing you how your finances stack up against variable possible outcomes. It is by comparing and contrasting variable different outcomes when the mist is lifted and things become crystal clear.
This is an exercise to help with decisions not an infallible prediction
The cash flow modelling is not in any way meant to show you exactly what will happen, as there are too many assumptions and so much can change. However, it acts a bit like a cash flow forecast does for a business, in this respect it is invaluable to help you make better decisions as you will see pathways ahead and what happens along those pathways.
You can see where shortfalls might occur, where the risks are, and it can focus the mind of key decisions about where to invest, when to retire and how to build in protection against adverse unforeseen events (such as needing to fund care fees).
It is a crucial part of a two part process to judge your retirement prospects.
Part one – get a cash flow model done.
Part two – get your retirement priced up using the annuity quote (click here for more about this).
When you do both these exercises, you will have the best possible position to judge your retirement prospects, your decision making will be so much better as a result.