Being financially ready for retirement is important.
As a financial planner I often get asked about how much money is enough in retirement. This is often coupled with the question how much can I give to my children or loved ones.
Clients want to give money to their children for all different reasons. These include helping them get on the property ladder, paying for a wedding or paying for private education for their grandchildren. It is natural to want to help our children thrive. However, there is a fine balance between ensuring you have the money you need to support yourself and your lifestyle, as well as helping others with their needs and wants. Getting this balance right can be the difference between being financially stable once you retire or finding yourself in a tricky financial position in your later years.
No one can predict the future.
Health issues, housing concerns, the need for long term care or simply living longer than you might expect are not things we necessarily want to be planning for. Yet we must. Without having the assets and income requirements to provide for these scenarios could mean that you inadvertently become a financial burden on your loved ones. Simply put, if you give money away to people you care about without ensuring you have financial stability to do so, could mean those loved ones end up paying it back by having to provide for you in later life.
The big question then is “how much do I need?” What are my assets, my income and my expenditure and how might that change over time?
If we answer those questions, then we have much more certainty when it comes to making provisions for loved ones. To do this we use something called Cash Flow Modelling.
Cash Flow Modelling
Cash Flow Modelling in its very basic form is a graph that shows you your assets, savings, investments, pensions and income from whatever source and how that grows and changes over time. It looks at how assets may be eroded if you take a certain level of fixed income, and it takes into account inflation. This is important as when looking at long term needs, we want the money to maintain its purchase power in the future.
Cash Flow Modelling allows us to model all different scenarios. It helps to identify how much money you need in order to live the lifestyle you want while taking into account thing like potential long-term care costs, holidays and home alterations, etc. Once we’ve reviewed how these scenarios will impact your finances, we can look at the impact of giving away money.
First, we take care of you, then we see how you can take care of them.
Gift Giving Considerations
When providing financial assistance to family, it is important to consider if you want the assistance you give each person to be equal. For example, if you’re looking at school fees and have multiple grandchildren, you will need to be aware whether what you choose to do is sustainable in the long-term. This is especially important if there is a big age gap between your grandchildren. You can easily end up paying school fees for over 20 years if you make the commitment to pay for the private education of all your grandchildren.
This might also come up if what you want to provide is financial assistance with a home deposit. If your children are close in age and likely to be looking to get on the property ladder within the space of a few years of each other, how does providing multiple gifts in the 10s of 1000s impact your finances?
If they are far apart in age, it could be that what a deposit of £30,000 gets you today might not be the same in 10 years. Are you going to give the same financial figure to each child, or are you going to give a sum reflective of inflation? These are likely to be decisions you want to make in an informed way. You can gain that information by working with a financial advisor who will review your pensions, investments, income and expenditure before running a cash flow model covering all the options you are considering.
Inheritance Tax
Tied up in working out how much money is enough is this whole notion of inheritance tax. Quite often I get asked “do I need to worry about inheritance tax?” The truth of the matter is, if your estate is worth over a certain amount then you will have to pay inheritance tax. That amount varies based on the individual allowances you have but for a married couple the magic number is currently £1million, assuming you can us all the available reliefs and have your own property to leave to direct descendants.
Now if your estate is just over this, there is no real need to worry since what you are likely to spend on yourself will mean that your estate will end up under £1million by the time your beneficiaries need to pay inheritance tax. Getting hung up on inheritance tax should be a secondary concern to ensuring you have enough income and assets to provide for yourself. In fact, most of the children that I meet are much more concerned about ensuring their parents are financially okay rather than how much money they are going to be left.
I have a lovely 90-year-old client who would not spend money to make her bathroom fit for purpose. Every day she was climbing in and out of a bath, not fully appreciating that should she fall her quality of life would be significantly reduced. She was more concerned about maximising the amount of money left for her children than she was about looking after herself. When I sat down with her and her children, they made it clear to their mum that her safety and wellbeing was more important than the potential £3000 extra they could be left when she passes. This message from children to their parents is one I hear all the time.
Difficult Conversations
Even with the reassurance that children do typically care more about their parent’s being financially stable than they do about inheritance, broaching the subject of financial gifts and inheritance can be a difficult one.
Being a parent myself, I have two young kids who always ask for everything. Whether it’s in a toy shop, extra weekend spending money, or ice cream on a day out they have to learn to understand the word no a little more. However, as much as we think they grow up, and they probably do to be fair, there is no guarantee they will not come to us as adults looking for a little extra financial boost. Whether it’s asking for help buying a car, with a house deposit, private school fees for their kids, we want to be there for our children. But whatever the beg, whatever the ask, you need to be certain that you have the tools available to have that difficult conversation of no.
The truth is, if you can afford to do so you would love to solve all those problems for them. Yet in reality, if your cash flow forecast tells you that you only have money for yourself of worse, that you don’t have enough money for yourself, you should not be looking to increase anyone else’s finances. The cash flow modelling with give you the evidence to support those difficult conversations.
Taking Care of You is Taking Care of Them
Remember the beginning of this article where we pointed out that if you don’t have enough money to look after yourself after you give money to family that they will end up paying for your care? Your children need to understand this and you can explain it using cash flow modelling.
Cash Flow Modelling can help you show the information in a graphical, numerical format. It will lay out all the facts and figures in an easy to understand and clear to see way. Not only do the numbers not lie, they show that you have given all due consideration to providing them with financial assistance. Sometimes you do just have to say no.
Assuming you can provide some degree of financial help, then it’s making them understand that this is their inheritance now. There are certain benefits to doing this early as gifts will fall our of your estate for inheritance tax provided you live for seven years after giving it.
Experience and Expertise Can Help
At Bigmore Associates we have difficult conversation of this nature with or on behalf of our clients on a regular basis. We can help you explain your financial plan, the theory behind it and reasons why we have designed you plan the way we have. Not because we want to be difficult and not give them a house deposit but because the first port of call should be looking after yourself. Our job is to make sure you are taken care of and if you also want to take care of your family, we can work together to see if this is possible.
Article by Clare Ridlington
Chartered Financial Planner, Head of Advisory
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