Perhaps the most powerful tool in effective financial advice is lifetime cash-flow modelling, and it often proves revelatory when I share with a new client for the first time.
The basic premise is that we gather your income, assets and estimated expenditure – and, making a range of assumptions, use this to see what the future could look like. We create a ‘baseplan’; a client’s position now, and from this we can then project alternate futures by changing one or more assumptions, some common ones are:
Retiring earlier…or later!
It’s not quite a crystal ball, but we endeavour to make realistic and conservative assumptions.
Perhaps the most important assumption of all is how long you (and your partner) will live. This is crucial because if you live longer you’ll need more income and capital to cover more years of spending.
Benjamin Franklin famously said ‘nothing is certain in life but death and taxes’ – but whilst we all know it’s coming, we need to pick an age in order for our projections to see whether you have enough.
So, what ‘number’ do we use? Well, in our baseplan we show you living to 100. The good news is that we are planning on you getting that birthday message from the Queen…or King…but then you’ll unfortunately die before making it to 101!
Some of the client’s we share this with initially have a reaction along the lines of one of the following:
I’ll never live that long!
My family die in their 60s
I don’t plan on living to 100
That’s much older than the average life expectancy
To tackle these head on – yes, it’s longer than the average life expectancy. But there’s a 50-50 chance of someone living for longer than the average life expectancy, and as a person grows older, life expectancy should increase. To give this some context let’s take a look at the average lifetime expectancy of a husband and wife, aged 52 and 50 respectively:
Whilst looking at the above you would think their chances of living to 100 may appear remote, there are some major considerations to bear in mind:
Life expectancy of a couple is longer than either person’s individual life expectancy. Sometimes by a long margin, because couples get two shots at beating the average – and your money is going to need to last for both of you.
The above estimates are based upon the average population. Most people taking financial advice have financial resources available to them, which will increase your chances of living longer – crudely this can be seen by looking at the life expectancy of different post codes / regions.
Your state of health can have a huge impact on longevity – the healthier you are the better your chances of living longer
The calculator splits health into 4 broad categories:
Excellent health – assumes that you are feeling pretty good, haven’t been to the doctors for as long as you can remember. Your height and weight are fine, and you don’t take any tablets for any health conditions.
Reasonable health – assumes that you are feeling okay health wise, but not brilliant. You take tablets for high cholesterol and blood pressure.
Challenging health – assumes that your health is struggling. Although you take tablets for high blood pressure and cholesterol, it is the more serious condition such as Parkinson’s that is impacting on your activities of daily living.
Critical health– assumes that you are suffering from a serious medical condition such as cancer, and undergoing treatment for it. You find it difficult to get about, and possibly need assistance with day to day activities.
So, let’s take the same clients, and you can see the stark impact that health has on life expectancy:
We believe that the chances of you living to 100 (if you are in good health) are substantial enough that we want to try our best to make sure that you don’t run out of money if you get there.
To put this another way – when we build a financial plan for you, we want to make sure the plan is robust, and doesn’t unravel easily if the unexpected occurs. Running our lifetime cash-flow modelling to 100 should give you peace of mind that you aren’t likely to be destitute if you live for a year or two longer than average!
The content of this article is for your general information and use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice.
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