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Cash flow in retirement

Wherever you are on the retirement ladder, you will be better off – from a planning point of view – if you can “see” your future cash flow.

Too few people do this, they neglect to look at their projected cash flow in any detail, preferring instead to do one of two things:

  1. View their cash flow but only in the short-term or based on today’s know position
  2. Approximate their cash flow to an extent where it is a flimsy

Both have problems and both, we would suggest, lead to inferior decision making.

Most of the risks in retirement come from either future unknowns or from sudden events changing the pathway.

Future unknowns include not knowing how long you have to live, what your health will be like, how inflation may impact the cost of living, what interest rate and tax levels will be, what investment returns you may receive from your invested funds, how property prices will move, and so on.

Sudden events could include serious ill-health, being forced to retire early, having to go into care, a divorce in the family and so on.

To construct a plan based on the short-term position, which will always be more knowable than the longer-term position, risks coming unstuck as a result.

If one looks back in time it is easy to see how quickly things can change in a typical retirement period.


Someone retiring at age 60 has at least two decades of likely retirement.

If married or in a partnership then two people of around that age, are likely to have a minimum of three decades between them.

A typical retirement is inherently long-term in nature.

Twenty years ago interest rates were much higher, government finances were in a completely different position, and UK and US stock markets had boomed for the previous twenty years to that point.

If retirees construct their long-term retirement plan based on today’s knowns and extrapolate from there that these will be the pattern for the retirement then they will under-estimate the chance that things could be radically different in  five, ten or twenty years. When they will probably still be alive and needing income.

That’s why all retirees should try and construct “pictures” of their finances for many years to come (well into their nineties) and test different future scenarios.

This is especially the case for retirees who do not have much in the way of longevity insurance in the form of significant guaranteed lifetime income.

The approximation of cash flow projections that often takes place, is basically a description of a planning exercise which goes something like this: “I expect to need £30,000 per year in retirement, do I have enough in pensions and savings to fund this? Yes, I do. Therefore I’m good.”

That might work, but it isn’t stress tested. For example, what happens if you need care? What happens if there is a family matter that requires your financial support? What happens if the stock market crashes and your investments get decimated?

How these various potential changes might impact your finances, your lifestyle and your pathway are not clear from the approximate method.

A long-term cash flow model, using software, can bring all these possibilities into the picture, allowing you to see what happens based on different assumptions.

This provides a level of detail which helps with better planning and improved decision making.

Fluctuating income and expenditure needs

It is only very recently that evidence has started to appear about how a modern retirement tends to work.

The current retired generation, especially those deep into retirement, are the first people to experience a “modern retirement”.

Never before has such a mass of people been retired for so long.


Why is this important and revealing?

Mainly because it shows a typical retirement income/expenditure pattern is NOT uniform.

Retirees tend to spend more early in retirement and then spending tails off later in retirement, possibly spiking again if expensive health care is needed.

The spending graph rarely shows a smooth line of incremental spending. It is far more snake-like.

That evidence supports the benefit of running cash flow models, as those models can identify the most efficient way to fund expenditure in retirement.

You are likely going to make different plans and allocate your investments differently if you want £25,000 per year, forever, starting at age 65 and this increments by a little each year (for inflation), than if you want £35,000 per year for the next ten years, then £22,000 for the next ten after that, but it rises to £50,000 per year from thereon because of care needs.

The retirement ladder

The ladder is an expression of where you are in your retirement. You could be pre-retirement, at the point of retirement (which we can say is within a year or so of your planed date) or already retired.

Whatever point you are, the cash flow exercise is invaluable.

Pre-retirement it allows you to judge the move from working through early retirement to late retirement, and to make decisions and plans based on the long-term picture.

At the point of retirement it can inform you how to draw income down to meet your expenditure. Where do you take your income from? How do you structure your pensions and investments? And so on.

In retirement it gives you a check on your current plans, indicating if these work most efficiently based on the assumptions you plug into the software.

How we help you with cash flow modelling

We can help you to run a lifetime income and expenditure forecast. That means we work with you to gather all your current and projected financial information and then, from this, we can map out how this looks stretched over the rest of your life, or in the case of a couple, lives.

We can try out different scenarios and see how these vary or change the picture.

You will quite literally get to see how your income and expenditure pans out over many decades, based on variable assumptions and scenarios.

There is nothing you can do which provides a better framework for making informed decisions today, to identify where the risks are, to help you in your planning, than performing this cash flow exercise.

Running cash flow assessments regularly will help anyone regardless of where they currently are on the ladder.

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