How Cash Flow Modelling can help expats plan for retirement, protect their income and discover their true financial potential?
When it comes to making big-ticket financial decisions, one of the greatest concerns for individuals of all backgrounds is the risk of the unknown.
Three in five UK adults do not feel that they can determine what happens in their lives when it comes to money. Any short-term certainty about financial stability fades away when long-term decisions come into the picture.
Unexpected market changes, windfalls, and financial crises are just some of the contingencies that could rock our finances, but there are also multitudes of everyday concerns that affect our long-term plans. Inflation, investment growth, and continuous cash flow are just a few among them.
This uncertainty about the future leaves 61% of UK working-age adults planning their finances exclusively in the short term.
Focusing on the short-term alone makes it difficult to consider opportunities that stretch out into the future. When your financial security is not guaranteed, decisions such as taking a year of annual leave or investing in property become even more challenging.
The ebb and flow of everyday finances provide little clarity about long-term financial health. Without seeing the full picture, it is difficult to anticipate potential risks or determine whether investing in an opportunity is feasible. As a result, realistic goals and opportunities can easily pass by in a flurry of ‘what ifs’ and worries.
For expats, long-term financial planning is an even greater challenge. More than half of expats report being worried about future finances. Apart from the usual concerns most clients encounter, additional uncertainties such as contract work income, tax implications, and pension entitlements hold expats back from long-term financial planning.
These complex situations require tailored solutions. Having a proper financial plan in place can provide peace of mind about the future, empowering expats to protect their assets, make informed financial decisions, and seize the unique opportunities available to them. Here at Infinity Financial Solutions, we offer cash flow modelling as a solution for clients who are seeking clarity on how their current income and expenditure levels will play out over time.
Thanks to this technology, we look forward to your financial future and anticipate risks and challenges before they occur. We also test and validate the goals and opportunities you might assume are out of reach so that you can make the most of your assets. If you are unsure about how far your money can stretch or what actions you can take now to ensure security in later life, cash flow modelling provides the clarity and confidence you need to make informed decisions about your wealth. Instead of one-size-fits-all, you’ll get a solution that is as unique as your situation.
According to historical data, cash flow modellers do a better job than their back-office employees regarding scores of adviser satisfaction. Tech providers cover a broader range of factors in the support service chain. For example, Dynamic Planner is expanding into the cash flow segment and offers the opportunity to house risk profiling and research on investment suitability alongside cashflow.
Approximately 80% of financial planners are estimated to make use of cashflow modelling tools. Conversely, only 54% use a standard client portal, which is another area where the functionally of cashflow could be optimised.
What is Cash Flow Modelling?
Cash flow modelling is a software-assisted method of cash flow planning that leverages your current income, expenditure and assets to create a model of predicted finances throughout your life. With a quick data analysis, you will have a clear picture of your wealth as it grows over time. The analysis of the cashflow modelling software takes into account your current income, expenditure, debts, investments and assets. It also considers factors outside your control, such as inflation, market growth and interest rates. This results in a full-picture projection of your finances based on all available data.
Seeing your Lifetime Cashflow Model in this year-by-year format allows you to plan with greater confidence — both for upcoming goals and your retirement plan down the line. You will be able to notice patterns, test out ‘what if’ scenarios in a fail-safe environment and seize opportunities you once thought were out of reach.
Assumptions of Financial Planning Tools
All cashflow planning and analysis tools make use of some degree of assumptions, and so do financial planning tools.
Assumptions regarding the growth rates of investments and inflation are unpredictable and will likely change with time. A client’s planning and aspirations for future outcomes may also change, which will influence the planning assumptions significantly.
An inaccurate assumption could result in an unrealistic financial plan that cannot meet a client’s objectives and financial goals. Although there may not be explicit rules set regarding the assumptions you have to use, there are a few rules of thumb based on historical data that prove to be the wisest route.
Assumptions About Inflation Rate
Inflation should not be underestimated, and it influences expenses and income. Financial planners generally assume an inflation rate of 3% annually for a basic cash flow model. More advanced and complex cash flow planning models may incorporate a few different inflation rates that vary between the types of expenditures and income.
In order to calculate the growth rates of all your investments as time passes, you need to use an estimated return rate. Investment returns vary widely between the types of assets and the tax structure underlying the investment. Equities are higher than bonds, which are higher than cash. Growth rates fluctuate with time, and a rate that may have seemed suitable a decade ago will appear high today.
People often estimate their life expectancy based on their family history, which is frequently much too low. With medical advancements developing at the rate they do, life expectancy is continuously increasing, and a client needs to keep that in mind when planning for their future.
Tax Rates & Allowances
History has shown us that you cannot rely on consistency when it comes to tax allowances and rates. The majority of assumptions include annual increases in line with inflation, despite tax bands and personal allowances being frozen for a few years. For the purpose of financial planning, tax rates are held at their current rates. However, if the government moves to change rates, planning assumptions will need to be altered likewise.
A major flaw in lifetime cash flow modelling is that many factors are assumed to move in. a straight line. Generally, assumptions are averages that stay constant as time passes. They have no accounting for times of substantial negative investment returns or irregularly high inflation rates.
The assumptions that are used for income, expenditures, pension legislation, growth rates, and taxes are used as the fundamental base of any cash flow modelling system are ultimately not definitively accurate. To ensure all client data stays on the right track, regular reviews need to be performed.
This inconsistency becomes especially problematic when projections are made far into the future. Just like many things need to account for unexpected changes, a cash flow model also needs to be adjusted annually to account for financial instabilities in client situations.
A cash flow planning model only represents the conditions at a certain point in time, but, in truth, there are many variables that come into play. Cash flow planning models can only operate as well as the information available at that time and cannot necessarily account for possible future outcomes.
How does the Cash Flow Modelling Process work?
Our Lifetime Cashflow Model process begins with a detailed consultation with our financial advisers, where we gather relevant insights about your assets, current income and expenditure, and your goals for the future. This step is crucial because it allows us to fully understand your priorities and aspirations, as well as your attitude to risk.
During the consultation, we work with you to build a comprehensive profile. This profile is based on a number of factors, including:
- Current annual income and expenditure
- Assets and investments
- Liabilities, including loans and mortgages
- Income protection and life cover
- Desired retirement age, lifestyle and income
- Expected future windfall and expenditure
This step enables us to make informed assumptions about your financial standing. We also make assumptions about external factors, such as projected market growth and inflation rates. Once this profile is complete, we input the data into market-leading cash flow modelling software to create a visual chart of your lifetime cashflow. As your circumstances change, this cash flow model will be reviewed regularly so that you always have the most up-to-date version.
How Can You Benefit from Cash Flow Modelling?
Seeing your financial future laid out in front of you provides great peace of mind.
Firstly, it eliminates the initial stuck feeling that comes with uncertainty. Knowing whether or not your current income and expenses are sustainable will allow you to make life-changing financial decisions with confidence. It will also shine a light on any current shortcomings so that you can prepare for the unexpected.
Secondly, the secure testing environment allows us to model different scenarios and analyse their impact on your assets.
For instance, if you wanted to buy a holiday home, take a year of annual leave or retire early, we could test these scenarios against your Lifetime Cashflow Model to determine whether they are viable options. If they are currently unachievable, we will help you come up with a savings and investment plan that brings you closer to your goal.
In summary, cash flow modelling enables you to:
- Save and invest more effectively
- Make informed financial decisions
- Protect your assets
- Plan for your retirement
- Prepare for unexpected scenarios
- Explore and enjoy opportunities
- Minimise risk and liabilities
- Realise your full financial potential
- Make the most of your wealth
If you are an expat concerned about having enough money for your retirement plans, thinking about a career break or making a life-changing investment, our Lifetime Cashflow Model will answer any of your questions and concerns. We will create a model that is tailor-made to your needs and aspirations so that you know exactly where you stand today — and how to get to where you want to be.
To review your financial plan and explore the full extent of your possibilities, book a free consultation call with us.
A leading provider of expat financial services and wealth management services across Asia.