Flying solo
Detailed fact-finding will help clients to make sensible decisions when dealing with the death of their partner or the end of a relationship, says Scott Gallacher
In addition to the emotional effects of death or a relationship breakdown, non-working spouses in particular face an uncertain future without their partner’s support. This is compounded if the working spouse had taken care of all financial decisions.
For the non-working or part-time working spouse, a life-changing event typically throws up some or all of these: a considerable drop in income, receipt of a large lump sum (either from life assurance or divorce settlement), a significant change in expenditure and lifestyle, the possibility of returning to work and a need or desire to move home.
As well as being at a financial crossroads, these clients are vulnerable and uncertain so it is particularly important that a financial planner can take into account all the variables – including what may be impulsive or contradictory ideas from the client.
Using ‘lifestyle financial planning’ is vital to helping them fully understand their financial future and make the best possible decisions on their options. It may sound a little New Age or American but it doesn’t have to be. In simple terms, there are three key elements:
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Lifestyle. Most clients think of their lifestyle in relation to where they are now (or where they were until circumstances overtook them). Therefore, whether the underlying objective is for their lifestyle to be maintained, slimmed down or built on, the starting point is the same: to understand exactly what the lifestyle is now.
The financial planner assists the client to determine their desired lifestyle by detailed
fact-finding and helping them complete a thorough expenditure questionnaire. -
Cash flow financial planning. Use sophisticated software to compare clients’ anticipated lifetime inflows (salary, maintenance, benefits, pension income, etc) against their lifetime outflows (anticipated/desired expenditure) and analysing whether or not the desired lifestyle is affordable given the clients’ assets.
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Engagement. Deeper conversations with the client about their future, and using interactive software that enables them to see whether or not their lifestyle is affordable or if there is a danger of them running out of money during their lifetime.
Despite the importance of complex software and calculations, the picture presented to the client is surprisingly simple, showing the net worth, income and expenditure, and capital position throughout their lifetime.
Lifestyle financial planning is invaluable in giving clients the confidence to make the right decisions and, in particular, helping them avoid the common mistake of being too cautious by relying on deposits and ignoring the hidden threat of inflation (see box below).
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Sure deposit or an unseen risk?
Background: Widowed client, mid 50s, homeowner, no liabilities, working part time, in receipt of some widow’s pension and living relatively fairly modestly. She is ‘cautious’ so keeps approximately £250,000 on deposit.
Problem: While her income, including interest on the deposit monies, was broadly sufficient to cover her current expenditure, a family friend mentioned inflation risks. She also wanted to reduce her working hours to spend more time with the grandchildren.
Analysis: By relying on deposits and spending the interest to help maintain her current lifestyle, we calculated that she would run out of capital by her early 90s. While not a key issue, she would also be eroding the children’s and grandchildren’s inheritance along the way. If she reduced her hours, she would potentially run out of money by her mid-80s. Given good health, increasing life expectancies and no prospect, or desire, of reducing her lifestyle, this was far from the low-risk approach she anticipated.
Solution: Investing just two-thirds of the client’s capital, still leaving almost £100,000 on deposit, and achieving 5 per cent per annum net investment return would ensure that (based on conservative assumptions) the client, while still eroding her capital, could afford to reduce her hours without any realistic risk of running out of money during her lifetime.
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Scott Gallacher is a director at Rowley Turton
He writes the regular IFA comment in Private Client Adviser