Tom Kenny DipPFS
Senior Financial Adviser, GHC Wealth Management
Have I got enough?
Second only to ‘I think you’re still on mute’ this has, in one guise or another, almost certainly been the most discussed question in our client meetings here at GHC Wealth Management over the last year.
In this article, I want to briefly discuss some of the ways in which we unpack and answer that question for you.
As financial planners, we have many tools at our disposal, none of these more important than the humble budget planner.
By building a clear understanding of how much you are likely to need to meet your different objectives, we are then able to work together to identify the best way of achieving this income, so as to make sure that your money lasts as long as it needs to and you achieve all the goals we set together.
A concept I like to introduce to clients early in our relationship is the ‘money pyramid’.
Source: GHC Wealth Management
Originally described by Abraham Maslow, this pyramid helps us identify what money you need to meet your necessary bills (shelter, heating, water, food and security) as well as your discretionary outgoings (dinners out, holidays and luxuries) and finally your dreams and legacy aspirations, such as retiring early, going on a world cruise or leaving money to the grandkids to help them on the property ladder.
Many clients find this quite enlightening, as they come to the realisation that they don’t need as much as they think to survive and that they probably spend a larger amount than they thought on ‘luxuries’.
This isn’t to say this is a bad thing, ultimately my role is to help you make smart decisions with your money, not to tell you how to spend it.
However, by having a clear picture of these figures we can discuss how they are likely to change over time, which helps us build an understanding of how much you will need going forward and ultimately figure out if and when you have enough. We are also able to plan on where the money should come from to be as effective as possible - Did you know that it may be possible to have an income of £32,870 (source: gov.uk) a year without paying any tax by utilising your different tax allowances, such as Personal allowance, Dividend allowance and Capital Gains allowance?
By utilising the different annual allowances gifted to you each year by HMRC, such as Personal Allowance, Married Couples Allowance, Capital gains allowance, Dividend and Personal savings allowance, its possible to structure how you draw on your funds to minimise tax and ultimately make your money last longer.
Another tool many clients find helpful, is the big brother of the budget planner, the Cashflow model.
Very simply put, a cashflow model takes all your income, outgoings, assets and liabilities, mixes in a few assumptions and then plots your future. It is important to emphasise that these plans aren’t to be taken as gospel, however they give a great visual indication of the impact of various decisions you might be considering.
Take the above example. The first model shows a client who is planning on retiring at 67 and wants to know how much they could sustainably draw from their pension.
The first model shows them having an income of £20,000 a year, combining their State pension, Defined contribution pension and ISA. This shows their funds running out at age 96, leaving them with just their state pension.
The second model shows them having an income of £25,000 a year. This clearly shows that they run their funds down by age 88 and that they likely don’t have enough to draw this level of income.
We can then work together to understand whether the higher level of income could be achievable by investing more into the Pension whilst the client is still working and benefitting from tax relief whilst they can, or if appropriate taking a higher level of risk to potentially achieve a better investment return.
Another benefit of featuring cashflow modelling in client reviews is it can help show the impact of so called ‘black swan’ events, such as the COVID19 pandemic. By being able to model a drop in fund value, as we saw across most markets in 2020, we can quickly see if you continue to draw the same amount as you were pre-pandemic if your funds run out too soon. With this knowledge in hand, we can then decide on what changes to make ensure that doesn’t happen.
With over 60 years combined financial planning experience, whether you are new to financial planning or have worked with another planner previously, the team at GHC Wealth Management would be happy to discuss any questions you may have or ways in which we might be able to make you money, save you money or make your financial lives easier.
Please feel free to get in touch.