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RP: There’s a great deal of ignorance and confusion about what a financial planner does.
A good example of this is what’s called cashflow modelling, which most people know little or nothing about.
So what exactly is it?
AO: The idea of cashflow modelling is very simple, it’s about trying to match your expected income throughout your lifetime with your expected expenses.
Generally speaking, less than a third of advisers use any kind of cashflow modelling, and I have criticism of the traditional straight-line projections that many advisers use in retirement - they’re just not fit for purpose because they are making assumptions that have very little semblance with reality.
RP: Good cashflow modelling includes worst-case scenarios.
It can give you real peace of mind to know that your financial plan can withstand all eventualities.
AO: The level of confidence that comes out of that to say, actually, in the worst-case scenarios, I can still support my expenditures, I can still support the kind of lifestyle that I desire.
The decisions that an individual can make and the level of confidence that comes with that is incredible, the peace of mind that comes with that. People on the basis of that make decisions about whether they need to continue to work, for instance, they might realise that actually there is, maybe they’re taking too much risk than they need to take for instance, and then of course, they might be in a position to make decisions about legacy, maybe wanting to give money out during their lifetime rather than waiting until the end of life.
So, there is incredible value in that exercise.
RP: But cashflow modelling isn’t something you can do once and forget about.
After all, our expected income, expenditure and investment returns change over time — as does inflation.
OA: The technology is now available to automate all of that so that you are constantly feeding in the client assets, the values are updated automatically, you can see what’s going on with the expenditure as well, and you can continually repeat that process of re-assessment of the plan.
So the plan becomes a living, breathing thing, as opposed to a sit and forget, peace of paper, you know, the saying that, plans are worthless, but that process of ongoing planning is incredibly valuable.
RP: So when choosing a financial adviser, be sure to ask them about cashflow modelling.
It’s a vital component of modern financial planning.
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