The cash flow analysis is a bottom-up budgeting methodology that cuts through the clutter associated with the traditional budgeting process. It gets to the critical numbers you need to get started.
Nobody enjoys sitting down to put together an entire budget; they’re often inaccurate and time-consuming, providing little value to the client.
Still, you must be familiar with your client’s cash flow as you assemble their retirement plan. The cash flow analysis allows you to obtain vital information without an extensive budgeting exercise.
“This tool was built through years of going through budgeting exercises. I had a lot of pushback from clients. I mean that. They just hated it. They dragged their feet, canceled appointments, rescheduled… I remember the one woman saying, ‘That was the worst thing I’ve ever had to do.’ She literally said those words to me. Everyone hates a budget.”
How the Cash Flow Analysis Works
The process is simple. Start with what the client is living off now:
- How much are they spending?
- How much is in their bank account?
And the key here is net: net after tax, after all deductions, everything. As it evolves, you can add a section for new retirement sources to offset the client’s current income.
Then, either decrease expenses or document increased costs to discern a net number they’ll need to draw off liquid investible assets.
The cash flow analysis is invaluable. Maybe you’re helping clients through the accumulation years or determining what type of disposable savings they have. Or perhaps you’re preparing them for distribution to decide how much money they’ll need to draw from their liquid investible assets.
C2P Enterprise’s cash flow analysis has two levels:
- The Income Gap Assessment for pre-retirees and retirees
- The Budgeter for younger clients who may need more data analysis around their income and expenses
Cash Flow Analysis: The Income Gap Assessment
What if you had a quick and easy way of assessing whether your clients have an income gap or excess funds?
With the cash flow analysis, you can discuss the overall financial plan with your clients and determine ways to guarantee their income in retirement.
We created the Income Gap Assessment to help you cut down on your time spent with each client.
This single resource allows you to skip the long, drawn-out budgeting process in your meetings. You get right to the important stuff, saving you immeasurable time.
The Income Gap Assessment aims to determine the gap between the net income the client currently lives on and the fixed income sources they’ll have after they retire.
We based it on a consumption budgeting methodology. It provides an accurate amount that they’ll need to draw off their liquid investible assets once they retire.
This is especially valuable for clients less than a decade from retirement.
Complete four simple sections to determine their income gap.
1. Net Income After Taxes
The first section is where you log the client’s net income after taxes. This is the current amount deposited into checking from salary, wages and other sources of income pre-retirement.
You want to determine the difference between their annual bring-home salary and their yearly living expenses. It’s important to base this number on the net income deposited into the client’s checking account, not their gross pay.
Net pay already factors out tax withholding, retirement contributions and any employee benefits (like health insurance) that they’d pay through withholdings.
You’re looking for the net amount that the client has available to spend on an annual basis.
After you calculate the annual net income, ask the client to choose which of the following scenarios most closely applies to them:
- Breaking even, consuming all their net income
- Saving some money, consuming less than their net income
- Losing money, going into debt
If the answer is no. 1 or no. 2, the Income Gap Assessment can determine what they should expect in retirement.
Simply ask the client this:
“If you could replace the same net income you’re spending now when you retire, would that meet your retirement goals?”
Their answer serves as a basis for the total income they’ll need in retirement.
If they choose no. 3 and are losing money every month, you may need to pivot to a detailed budget. It’ll help determine whether they’re the right fit for your firm.
2. Fixed Income in Retirement
The second section focuses on the client’s income after retirement.
Between Social Security and pensions, what will their fixed income look like when they aren’t earning a paycheck?
For Social Security optimization, clients may delay one or both of their benefits. This will leave a larger income gap for a short period.
When this occurs, consider conducting multiple Income Gap Assessments for different periods. This gives you an accurate picture of their cash flow analysis throughout retirement.
Alternatively, do one Income Gap Assessment as if all fixed income sources are activated. Then, ascertain how much you should set aside to cover the delayed income.
3. Adjustments
List anything that might affect retirement income here. If the client expects to pay off their mortgage, that decreases their expenses.
Ask the client about potential increases from things like income taxes, health insurance premiums, travel expenses, medical needs and more.
The client may have to allow for additional income taxes in retirement. You can identify this by creating a tax pro forma of their withdrawal strategy.
With these three figures, you can derive the income gap that you need to take from liquid investable assets in retirement.
Once you complete the Income Gap Assessment, you can determine the client’s retirement income gap or surplus using the following formula:
Net Income Received in Retirement – Fixed Income + or – Adjustments = Total Income Gap
4. Income Gap or Surplus
Once you have this final number, you’ll know whether the client has an annual surplus or deficit for their retirement.
If there is an income surplus, they can expect excess cash when they retire.
Knowing this will allow you to help them get even more strategic with their plans, perhaps with additional life insurance, asset-based long-term care or tax-efficient managed accounts.
The Income Gap Assessment is a viable tool to determine what kind of situation your client may find themselves in when they retire.
This serves as a basis for their total income needed in retirement. It also creates an educational opportunity for you to show them the various ways you can guarantee their income once they retire.
If you expect the client to have an income gap, ask them the following question:
“How much of this income gap do you want guaranteed in your financial plan?”
The Cash Flow Analysis Budgeter
We designed The Budgeter for younger clients who are more than a decade away from retiring and still in the accumulation phase of the money cycle. It also works for retirees who need more detailed budgeting information in their cash flow analysis.
The result gives the client an idea of their monthly cash flow analysis.
Should they expect a surplus or deficit during their working years? This helps you determine approximately how much they have available to invest.
For a retiree, it shows the same monthly surplus or deficit they’ll have based on their income needs and fixed income sources.
The Budgeter also has four sections.
1. Income
This portion of the cash flow analysis lists everything that the client is bringing home net after tax. This includes salaries, bonuses, commissions, Social Security and pensions.
You then add in the pay frequency to annualize the income number.
2. Tax Adjustments
List any necessary tax adjustments here. You can base these on the client’s tax returns from previous years or current projections.
List refunds as a positive value on the sheet, and enter taxes owed as negative.
3. Expenses
The Budgeter looks at the client’s monthly expenses. While not a full budgeting exercise, this portion of the cash flow analysis tracks some expenses, like mortgage or rent, property tax, childcare or auto payments.
This allows you to get a more accurate portrayal of how they’re spending their money and helps them change their financial behaviors if needed.
4. Totaling
Once you total all these categories, you better understand the client’s monthly and yearly cash flow analysis.
Surplus
If the client has a surplus, you have an opportunity to create a systematic savings plan for retirement. It could lead to more sales opportunities.
Deficit
If the client has a deficit and spends more than they make, you may need to put a budget in place. That budget gets them on track to meet their goals.
Cash Flow Analysis: Key Takeaways
You accomplish several things by sitting down with clients and going through these exercises:
- They have peace of mind knowing they don’t have to change their lifestyle in retirement.
- You can quickly get to the number the client will need to draw from their liquid investable assets to meet their retirement needs.
- You uncover opportunities for additional client education and sales.
You’ll always have cases where you need to do a complete budget breakdown of the cash flow analysis.
However, using these tools is a simple way to arrive at a net consumable, spendable income, followed by an accurate net amount that they’ll need to draw from their assets in retirement.
Knowing these numbers assists you in designing a suitable plan for your client. And they’ll sleep better at night knowing you’re working proactively to help them achieve their retirement goals.
Contact C2P for More Guidance
Schedule a complimentary call with our Concierge Support Team, or contact us today. We’re happy to speak with you! You’ll learn more about simplifying your clients’ budgeting and holistic financial planning processes.
Financial Professional Use Only
- The information provided in this presentation is not intended as investment advice or legal advice.
- The information provided is for informational and training purposes only.
- The information in this presentation was accurate as of the time of the material was created.
- Tax laws and rulings can frequently change.
- Please discuss the client’s current situation with an accountant or tax advisor.