27 Jan Taking your foot off the break
“I spent a lot of money on booze, birds, and fast cars. The rest I just squandered.”
What does the future hold?
When will I be able to choose whether to stop paid work?
Will we need to downsize our home to survive?
What happens to my partner if I die (or to me if they die)?
How can we help out the children and grandchildren without compromising our own future?
How much money is enough?
How do I know I’m not going to run out of money before I run out of life?
How can I make sure I don’t fail to do the things I want to do before I’m too old or infirm to enjoy doing them, simply because I’m worried that I’ll run out of money?
When do we take our foot off the brake?
These, and variants of them, are questions we hear over and over again from people who enquire about our services. The questions about getting the balance between living the life they want to live now without compromising their financial future, and when to take their foot off the brake, also crop up in the first couple of years during review meetings with new clients; interestingly the frequency of those questions tends to reduce the longer clients work with us.
Of course, the answer will be different for everyone and whilst we have no crystal ball to be able to answer these questions with certainty, what we can do is offer an informed opinion.
Central to the work we do with our clients is their lifetime cashflow. Working collaboratively with them to create the cashflow, this incorporates all known, planned inflows and outflows throughout their lives. We use reasonable, cautious, forward-looking assumptions for rates of inflation, earnings growth, investment returns, and longevity. We assume a level of expenditure higher than our clients’ required level of inflows (for example if they need an absolute minimum inflow totalling £80,000 per annum, we assume an expenditure of, say, £100,000 per annum), as this allows for some wriggle room.
We end up with something which looks like this:
Data source: Bloomsbury Wealth
The cashflow can then be used to calculate the clients’ personal required rate of return, i.e. what their long-term assets need to achieve to meet the cost of their goals – a much more relevant benchmark than a stockmarket index.
The cashflow really comes into its own once our clients reach financial independence and cease paid work. It can be a stressful time, as you adapt to no longer having a pay cheque coming in every month and every day being like a Saturday! In the early years, people tend to underspend as they get used to moving from the accumulation to decumulation phase. As with everything in life, some adapt more easily than others, but it’s undoubtedly the case that it’s much easier to adapt and to know what your safe spending rate is when you have a lifetime cashflow to inform your decisions.
Of course, all of the assumptions we make in the cashflow will turn out to be wrong: inflation will be higher or lower than we assume; investment returns will not occur in a straight line and will be lower or higher each year than we assume; tax rates will change, although annual reviews and updates allow for small ‘course corrections’ to be made in light of what has actually happened.
But for all its imperfections, imagine trying to plan without a cashflow? It’s like trying to find your way to an unfamiliar destination with no map and no road signs.
Imagine how much easier it would be to answer any of the questions above if you have a lifetime cashflow.
A man who both spends and saves money is the happiest man, because he has both enjoyments.