Cashflow Analysis Components
There are many components needed in a cashflow analysis, and most of which require careful considerations.
While we may no longer have work income, we may still have other sources of income, which include dividends, capital gains from investments, CPF Life, annuity payouts, maturity of endowment policies, and possibly part-time income.
Do note that the certain sources of income are more secure than others. For example, capital gains may not materialise if the stocks or funds we have, underperform. On the other hand, the guaranteed portion of an annuity payout is certain. Hence, it is important also for us to understand the profile of the income. Those of you with kids out there may have a ‘fringe benefit’ in the form of an allowance, although this author is not sure if this is guaranteed!
The most often asked question is the amount of expenses we require when we retire. This is an easy question to pose but a difficult one to answer, as it can vary from $1,000 a month (for someone very frugal), to an astronomical figure (celebrities come to mind). While a recent survey finds that older Singaporean singles require $1,379 a month to live on, I believe most of the younger ones want significantly more on retirement, as they have been accustomed to a higher standard of living.
What is important here, is for us to have a handle on how much we spend per annum (I prefer annual figures rather than monthly, as the latter includes seasonality effect like year-end vacations etc), and assume we can attain roughly the same living standards in our post financial independence years. Other considerations include:
Singapore already has one of the highest life expectancies in the world, and we are forecasted to live even longer. Therefore, we should not assume, in our analysis, we will only live till 70. With long lives come the ill effect of higher medical bills, long-term care expenses, and inflation eating into our purchasing power more pronouncedly. Longevity risks can be mitigated through the use of lifetime annuities.
b. Parental support
For those of us supporting parents financially, we will have to consider their longevity too. As with us, their longevity will lead to higher medical expenses, and if they have inadequate health insurance, this is a potential landmine.
c. Asset restoration
While we get older, so do our assets, including the roof over our head. Have we factored that we will need to spend some money, every few years, so that our homes do not degrade from a palace to a squatter hut? If we are to be truly financially independent, the ideal should include being able to live at roughly the same standard at home, rather in an increasingly dilapidated environment. It is a moot point whether a car is an asset, but drivers may also need to budget for the purchase of a new car should they eschew public transportation, in their post financial independence years.
For those of us with the intention to leave some money behind, we may not be able to include these funds in our cashflow unless we own policies which help us fulfil that motive.
e. Large market dips
For simplicity, we tend to model investment gains on a straight-line basis, but the reality is that while long-term gains are the norm, the medium and short terms are punctuated by significant spikes and dips. Abnormally large increases are of course, welcomed with open arms. Sharp market downturns however, will negatively impact cashflow.
Do assess if your financial state and cashflow are healthy enough to withstand a large decline in the markets (try modelling a 50% drop in equity values) or a prolonged bear run. One way to buffer against unwelcomed market movements and add robustness to cashflow is through the use of annuities, as they provide guaranteed income.
It is possible to carry some liabilities and be financially independent at the same time. We just need to be cognisant that discharging our liabilities will impact cashflow; if the liability happens to be a significant property loan, there may also be adverse cashflow movement arising from interest rate increases.