Michael, aged 65, approached us in 2012. He’d had a number of financial advisers throughout his career and had purchased a number of financial products.
As a private dentist, he had just agreed to sell his practice and wanted to plan for his and his partner Sue’s (aged 51) long-term future.
Their goals were:
- To know how much money they were going to have over the long term
- To ensure that they could continue to fund trips to Africa, their favourite destination (as well as any other destinations)
- To maintain physical strength, health and fitness
- To have more time for reading and study
- To have more time for friends
- To improve quality of life
- To gain peace of mind by feeling financially comfortable
- To achieve financial independence
To help fund this, their assets comprised of:
- An NHS Pension of c£13,000 per annum (pa) gross for Michael
- Full state pension for Michael (payable in 2012)
- Pension annuity income, c£760 per month (pm) net of tax
- Projected after tax business sale proceeds, c£750,000
- Cash savings, £50,000
Their immediate concern was to ensure the £750,000 would be invested appropriately, taking into account their appetite for risk as well having the ability to draw an income from this, if required.
What We Did
The first step was to create a long-term financial plan, which would include measuring their income and assets against their projected outgoings of c£5,000 pm. This would be until Michael’s 100th birthday, with inflation of 3% pa and, initially, assuming the £750,000 remains on deposit at 2% pa.
The table below shows:
- Readily realisable capital is available capital (left column)
- Cash Inflows is income (second last column)
- Cash outflows is expenditure (last column)
For example, the yellow line indicates that there is a significant shortfall of income required. As capital needs to be drawn upon to supplement income, it’s projected that the capital will be exhausted at age 82 / 68.
This can be seen below, where the blue is the capital balance reducing – the value on the left axis is in today’s pounds, with age along the bottom axis. The red is a negative capital balance (which indicates Michael and Sue will run out of capital):
At this stage they were faced with a few options:
- Reduce spending now or in the near future
- Which in turn would affect the amount of activities they were planning, especially the foreign trips
We then looked at how the situation would be impacted if the £750,000 was invested and attained an annual return of 5% pa:
As you can see, the capital now runs until age 90:
Lastly, we factored in Michael and Sue:
- Downsizing their main residence, releasing £200,000 of equity (which they were always planning to do at some point)
- Receipt of an inheritance of £100,000
The positive impact of these is clear to see, with the capital now running until age 100.
What it meant for Michael and Sue
They were now able to plan with more confidence than they had in the past, with the focus being on updating their financial plan first and foremost every year before analysing the performance of the invested capital.
They also saw how much of a positive impact the financial planning approach was, as opposed to the financial product approach that they’d been using in the past.
What’s happened since
Four years since we met, the plan is very much still on track. Another positive is that the £750,000, which was invested in 2012, is still worth more than this, even taking into account the fact that £164,000 has been withdrawn to date (they are invested in a low risk, well diversified portfolio).
What lies ahead
We’ll continue to work alongside Michael and Sue, updating their plan annually, which will take into account their ongoing aims and aspirations, as well as external factors such as inflation and projected investment returns.
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