Cashflow Modelling Flashcards

1
Q

Benefits of cashflow modelling

A
  • allows advisor to compare the current income with their expenditure pattern
  • adviser can stress test different scenarios
  • to understand the impact various future events would gave on their ability to cover their expenditure
  • allow adviser to identify potential shortfalls
  • and put in place plans to avoid them
  • it allows certain assumptions to be made
  • these can be adjusted as circumstances change
  • can use to help establish a suitable asset allocation
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2
Q

Factors and assumptions when formulating a cash flow model

A

-expected future expenditure pattern
-expected pattern of gifting
-expected longevity
-likely need for long term care
-ATR
-CFL
- Expected growth rates of investments
- assumption for charges
-inflation rate assumption
-use of tax efficient wrappers/allowances and exemptions
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3
Q

Risks of using cashflow modelling

A
  • assumptions maybe incorrect
  • requires regular reviews
  • objectives and circumstances can change
  • cashflow returns are linear
  • tax rules/ rate may change in the future
  • does not allow for market risk /political risk
  • doesn’t take account of liquidity risk
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4
Q

Scenarios that should be discussed with D and J when carrying out a stress test on their cash flow model

A
  • permanent loss of income
  • future returns are lower than forecast
  • income requirements are higher than forecast
  • large unplanned capital withdrawal
  • inflation higher than forecast
  • living longer than expected
  • adverse change in personal circumstances
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