By Chris Jones, Proposition Director, Dynamic Planner
We are increasingly accustomed today to carefully managing our own retirement date. However, wider events, as we have witnessed in 2020, can quickly overtake the best laid plans, thus reminding us of the importance of cash flow planning.
It has been widely reported this year that the Covid-19 crisis has impacted younger workers hardest. But it is also hurting people reaching the end of working life, whether through necessary or opportunistic cost saving by employers, or through a perceived lack of new digital skills demanded today. While that more mature cohort may no longer have youth on their side, hopefully, they do have pensions, investments and professional financial advice.
What if a client is suddenly in retirement?
If a client is ‘forced’ early into retirement, the solution isn’t as perhaps simple as finding a sustainable income for the rest of their natural life. It could be simpler and transitional. For example, an income until new employment is secured, or while new expenditure habits are formed. Whatever the answer, you need to plan quickly and plan dynamically.
Accurate cash flow planning, in this context, of course is essential. If the client already has one, then it will need radically readjusting. Equally, it may be the first time there has been a pressing need for one. Whichever is the case, the final plan produced needs to be quick, easy to understand and above all accurate.
This is no longer a theoretical plan for the future, it is the client’s new reality. There is less room or time for error.
When a client plans to retire at a set point, years in advance, you can of course plan ahead. However, when circumstances suddenly change, as they have for many of us in 2020, there has been precious little opportunity to readjust expenditure – and how long will it be before new employment and regular income through that is secured? Such a backdrop demands an always-on cash flow modelling tool – one you can view and quickly update in minutes, not hours.
Things to consider
Decisions like paying for something annually or monthly, taking a lump sum from pensions or investments, or withdrawing a monthly income can all have a significant impact and should be included. Those decisions also importantly determine whether and how you need change the investment to accommodate the switch from accumulation to decumulation.
Which product is the most efficient to withdraw from? What are the tax implications? What happens if the client re-enters employment? Did the client receive a redundancy package from their last position?
All these considerations and potential complications demand a skilled adviser, who can quickly analyse and recommend the best solution for their client. Needless to say, choosing the correct fund and tax wrapper can make a notable difference to how long the portfolio will last and go some way to alleviating the impact of having to access it earlier than first anticipated.
The value of professional financial advice in this situation is irrefutable. Also, the added emotional value of having a person you trust, to shoulder the burden cannot be underestimated either.
Whenever short-term circumstances collide with long-term financial planning, there is always a danger that the former will win. It is of course the client’s money and this could be the rainy day you have both long referred to.
However, all clients deserve to know the pros and cons of choices they can still make. The best way to explore them is with a disciplined, accurate cash flow plan, which uses reasonable assumptions founded on objective data.
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