Cashflow - Time to retire

Scott Hansell
Financial Planning

In the first three parts we have introduced the concept of personal cashflow planning, and seen how it has helped Joe and his wife Jessie face unforeseen events, pay for their son Johnnie’s education, and stay on track for a comfortable retirement. In this part we see how the online planning tool can help them achieve that goal.

Once the thorny question of school fees is settled, the next big issue to look at is retirement, and this, like so many other things, needs careful cashflow planning from years, if not decades, out. 

Being a civil servant, Jessie is enrolled on a final salary pension scheme (one of the reasons that her choices about returning to work after Johnnie was born was so important – like many women, if she had delayed this, or returned on a part-time basis, it would have had a significant effect on her retirement income). 

Both Joe and Jessie will, as it stands, receive their state pension at age 68.

Figure 3: Joe and Jessie’s retirement cashflow scenarios

The top cashflow forecast in Figure Three demonstrate that the couple still face a shortfall against their projected expenditure in retirement.  

The forecasts assume that although their mortgage will be paid off by the time they retire, their expenditure will increase when they first retire.  This kind of bounce is common, as newly-retired people spend on those projects that they have been dreaming about, whether that is travelling the world, taking up new hobbies or simply spending more on socialising and eating out.  

For most retirees, their expenditure settles down to a more stable pattern after about five years; it is important to build this kind of insight about spending habits into personal cashflow planning, and not just concentrate on the savings and investments side of things. 

To tackle that shortfall, thankfully Joe made some headway by starting to contribute to a defined contribution pension earlier in his working life.  The cashflow modelling tool is very useful for determining how much that income shortfall is likely to be during his and Jessie’s retirement, and what level of pensions contributions during his working life will mitigate that shortfall. 

The lower cashflow forecast in Figure Three assumes that Joe contributes £500 a month from 20 years before he retires (i.e. when he has stopped paying Johnnie’s school fees).  The forecast shows that this level of contribution will mitigate the shortfall and that based on Office for National Statistics (ONS) life expectancies, Joe and Jessie’s combined pensions should see the couple through to the end of their lives.

Would you like to see how using the personal cashflow tool could help you?

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