PAM Guide to Wealth Management

Produce a lifetime cash flow forecast

The adviser should draw up a cash flow forecast. This will be based, among other things, on your current position in terms of assets and liabilities that were collected in the information gathering process, as well as anticipated income and expenditure in the future.

A cash flow forecast is subject to a number of assumptions, such as future investment returns, the rate of inflation and the projected increase in national wages. This will help to evaluate exactly how much income you will need in retirement, for example, by establishing future expenditure requirements and assets. It will also help you and your wealth manager design an appropriate asset allocation for your investment portfolio.

For example, you may only require investment returns of four percent a year to ensure you achieve your stated goals. In reality, however, you may have a portfolio that is taking more risk than you require, as it has been constructed to try to achieve a return of seven or eight percent a year.

Without a cash flow analysis, it is difficult to evaluate how much life cover and income protection is needed to protect you and your family adequately. Bespoke financial planning tells you what you require and not the country's average. A complete picture of your current and future finances will aid any necessary tax planning as well.

Cash flow analysis will also produce different scenarios to assess how your finances will be affected. For example, if you are ill for a few months and therefore not receiving an income, a cash flow analysis will evaluate whether you have sufficient savings and how this will impact on your lifetime objectives. These scenarios will suggest whether you need to save or invest larger amounts of money, or whether you should lower your expectations.

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