Our clients will know that we love preparing cash flow and asset models for them, updating and discussing these can often be the central topic of our review meetings. Used properly with reasonable assumptions, these models can provoke great discussions on the impact in the future of decisions made (or being considered) today. They often provide our clients with the confidence to make life changing decisions they may have not otherwise considered to be possible.
This is perhaps best explained with a case study, which is real but of course the names have been changed to protect the innocent. 65 year old Mike is retired with a 57 year old partner, Sally who continues to work full time. They both have superannuation and an investment property in Subiaco. Mike is bored in retirement and would love to buy a property in Dunsborough, but does not see how he can afford to do this.
We modelled the scenario of him selling the Subiaco property and buying a holiday house in Dunsborough. He would then lose the $25,000 in rent from the Subiaco property, so he did not think this was at all feasible. However, the equation is more complex than just subtracting $25,000 from his cash flow. Taking rent from his cash flow also impacts his tax and government entitlements both now and in the future. To supplement this income, he can easily increase the annual pension from his superannuation, probably only $15,000 is required. Taking more out of his superannuation reduces investment returns on this asset, this now means his superannuation is estimated to run out in his eighties. This is of no concern to Mike as he does not see himself driving back and forward between Dunsborough and Perth at 85, he is likely to sell one of these properties and top up his investment assets. By this age he would not be able to add the proceeds back to super, another assumption we can model the impact of. The result is he can now sell the property with more confidence, he now considers it to be one of the best decisions he has made.
Fast forward a few years and now Sally is missing out on the action down south and has not been enjoying her work as she has a new boss with different ideas to her. Can she afford to retire? Surely not she thinks. But when we model the projections of her starting a pension from her superannuation ahead of schedule, her early retirement looks entirely feasible. She also noted it is extremely likely she will receive an inheritance in the next ten years from her brother, so we added a conservative amount for this into their cash flow in ten years’ time. Now they can both see they should have no concerns and the conversation switches, now to estate-planning, what will happen to these funds when they die as they have no dependants? Well that is conversation to be had next time!
Examples such as the above is why we feel the ability forecast multiple assumptions, such as tax, inflation, age pension, investment returns, spending, tax structures and earnings assumptions can be very powerful in the hands of an experienced operator who has a good understanding of what you are trying to achieve. It can simplify complex decisions in a format you can understand.
We have found them to be very engaging and thought provoking for our clients, providing them with the confidence to commit to strategies and investments that are required to make life changes they may never have thought possible. Seeing this happen is the greatest part of this job. 1 Life, there is no dress rehearsal!