How cash flow modelling can help you plan for retirement

Ask someone when they plan to retire and you will usually hear a cautious answer: “Probably 67”, “Maybe 70” or “As soon as I can afford it”.

Yet some people may be able to retire earlier than they expect. The difficulty is that, without seeing their financial future mapped out, they may not know what is possible or how their money could support them throughout retirement.

The key to a comfortable retirement is not simply building the largest possible pension pot.

It is understanding what money you are likely to have coming in, what you expect to spend and how long your resources may need to last.

Cash flow modelling can bring those different elements together and help you make informed decisions about your future.

What cash flow modelling does

Cash flow modelling uses information about your pensions, savings, investments, income, spending and tax, then projects your finances forward year by year. It can also allow for assumptions about inflation, investment returns and future changes in your circumstances.

The result is a visual illustration of how your finances could develop over time. It can show the income you might have at different ages, how your spending may change and whether your plans appear sustainable.

It is important to remember that this is a projection rather than a guarantee. Its value comes from exploring different scenarios, testing your plans and updating the model as your life, priorities and the wider economy change.

For example, it might help you consider whether you could retire earlier, reduce your working hours before stopping completely, or spend more confidently during the earlier years of retirement.

How a cash flow forecast works

Your expected retirement income

A cash flow forecast looks at both sides of your retirement plan. The first is your expected income. You may have several sources, including the State Pension, workplace or private pensions, savings, investments and perhaps rental income.

When these sources are considered together, your potential retirement income may look stronger than you expected. The forecast can also illustrate when different sources of income are likely to begin and how your investments might be used to bridge any gaps.

Your projected retirement spending

The other side is your projected spending. This needs to reflect the lifestyle you want, the possible effects of inflation and the fact that expenditure is unlikely to remain constant throughout retirement.

• Active years: travel, hobbies and home improvements may make spending higher
• Settled years: spending may reduce as life becomes more routine
• Later years: health, support or care costs may become more important

These stages will be different for everyone but considering them can give you a more realistic picture of what your money may need to provide.

What if the forecast identifies a shortfall

A forecast may suggest that retiring at a particular age or maintaining your preferred lifestyle could place too much pressure on your finances. That may be disappointing, but identifying a potential shortfall early gives you more time and more choices.

Depending on your circumstances, the answer might involve increasing pension contributions, reviewing how your savings and investments are arranged, adjusting planned spending, working for longer or moving gradually into retirement.

Your adviser can help you understand the advantages, risks and compromises involved rather than treating any one of these options as an automatic solution.

Turning your forecast into a plan

At Continuum, we combine cash flow modelling technology with professional financial advice. We begin by understanding what matters to you, then use the forecast to explore the choices available and build a plan around your goals.

The modelling should not be a one-off exercise. Reviewing it regularly can help keep your plans relevant as markets, tax rules, spending and family circumstances change.

Whether you are approaching retirement or still have many years to prepare, a clearer view of the future can help you decide what to do next and give you greater confidence in the choices you make.

Talk to us today to find out how cash flow modelling could support your retirement plans.

This article is intended for general guidance only and is based on the opinion of Continuum it does not constitute financial advice. Individual circumstances vary, and you should consider seeking advice from a regulated financial adviser before making any decisions about your Savings, Investments, or retirement planning.

The value of an investment can go down as well as up. When investing Capital is at risk.

A pension is a long-term investment; the fund value can go down as well as up and this can impact the level of pension benefits available. Pension Income could also be affected by interest rates at the time benefits are taken. Pension savings are at risk of being eroded by inflation.

The Financial Conduct Authority does not regulate taxation advice or cashflow modelling.