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
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
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