BUDGETING FOR RETIREMENT – WHOSE JOB IS IT?
According to recent findings from research provider Platforum, advisers are not using long-term cashflow planning with enough of their clients, both ‘at retirement’ and ‘on a regular basis’ once clients have retired. Long-term cashflow planning should be at the heart of retirement and in-retirement advice. It also makes a lot of sense in the accumulation phase.
The research says only 45 per cent of advisers undertake long-term cashflow planning for at least half their clients, while 21 per cent do not carry out any cashflow planning on a regular basis for their clients in retirement.
The reasons for this may be varied: some clients do not care for this level of intrusion into their lives; some are reluctant to add another service which may cost them more (‘just tell me how much I’ll have, and I’ll arrange how I spend it’); many clients reaching this stage of their life may never have encountered cashflow planning and do not appreciate the value of the process. There will also be advisers who lack the resources to provide this fairly ‘hands-on’ service.
One of the main advantages of cashflow planning is to allow advisers to illustrate the impact of investment risk and get a much clearer idea of clients’ appetite for risk in a practical way. There is probably no simpler way to assess a client’s attitude to risk than by showing the ‘what ifs’ in cashflow form.
Life changes and so do spending patterns
Many people approaching retirement are focused simply on how much income they think they need, with no real knowledge of how retirement may affect their spending patterns. This is an area where advisers can add value. After all, they see people go through different phases in their lives all the time. Most clients are thinking about each phase in any depth for the first time.
Long-term cashflow planning focuses clients’ attention on their future spending patterns. It may not be necessary to examine all clients’ current and expected expenditure in detail but it is important to get the broad outlines sorted and to get them thinking about the future.
Their ambition to ‘travel more’ might need some specifics applying to it (how often, destinations, likely cost, increasing costs of insurance etc.). 'Doing up the house’ might require a schedule of likely works over the next ‘x’ years and anticipated costs. Unexpected costs of growing older such as significant increase in cost of private health care, and more expensive car insurance need adding to the equation.
This is also the time to consider possible care costs – not something that people particularly want to think about, but a major expense. Cashflow planning is also essential if they are to consider how much they can safely and comfortably give away to their family to save inheritance tax.
Spending patterns in retirement can vary. Many people find they are quite high spenders in their 60s and early 70s but start slowing down in their late 70s or 80s. Other people may feel they are likely to be living life to the full for rather longer. It is important for advisers to see the expected spending patterns to ensure that the necessary income is available at the right times.
Following on from the initial cashflow planning, it is important to review regularly how much and where a client is spending. Investments might produce more or less spendable cash flow than expected. A partner might have died or fallen seriously ill. The client might find they are spending more than their income, or a lot less. Any of these could lead to a change in the financial plan and the cashflow version of their expenditure is a clear way to illustrate changes that may be needed.
Maybe now is the time for advisers to re-visit the advantages of spending time and resources on cashflow planning.