Summary
Limitations of traditional cashflow projection tools:
Use fixed rates of return, ignoring real-world market volatility.
Fail to account for the sequence of returns risk.
Use fixed inflation rates, not reflecting periods of high inflation.
Benefits of Timeline Planning:
Uses historical data for realistic financial scenarios.
Allows stress-testing of retirement plans.
Models impact of taxes across multiple accounts.
Integrates with major Platform/Back Office software for efficiency.
Description
Financial planning is a complex process that requires precise tools to deliver accurate and reliable advice. Traditional cashflow projection tools, while useful, have inherent limitations that can lead to oversights and inaccuracies. Timeline Planning, a next-generation financial planning tool, addresses these limitations, providing a more comprehensive and accurate approach.
The Limitations of Traditional Cashflow Projection Tools
Traditional cashflow projection tools often rely on fixed rates of return and inflation, which can oversimplify the complexities of the financial markets. Here are some key limitations:
Fixed Rates of Return: Traditional tools often use a fixed rate of return, which doesn't account for the volatility and unpredictability of real-world markets. For example, a tool might assume a steady 5% return each year, which is rarely the case in actual market conditions. In the wake of events like the COVID-19 pandemic, markets experienced significant volatility, with some sectors seeing dramatic drops in returns. A fixed rate of return would not account for this volatility, potentially leading to inaccurate projections.
Ignoring Sequence of Returns Risk: These tools often fail to account for the sequence of returns risk, a critical factor in retirement planning. For instance, experiencing negative returns early in retirement can have a more damaging effect on a portfolio's sustainability than if those same returns occurred later.
Inadequate Tax and Fee Modelling: Traditional tools usually lack the ability to model the impact of taxes and fees on the portfolio. For example, they might not account for the effect of capital gains tax on withdrawals from an investment portfolio, which can significantly affect the sustainability of a retirement plan.
Inflation Modelling: Traditional tools often use a fixed inflation rate, which doesn't account for periods of high inflation. For example, they might assume a steady 2% inflation rate, which wouldn't accurately reflect periods of high inflation, such as the surge in inflation rates seen in many economies post-COVID-19.
The Timeline Planning Difference
Timeline Planning is designed to address these limitations and provide a more realistic and robust approach to financial planning. Here's how it stands out:
Historical Scenarios: Timeline Planning uses over a century's worth of historical economic data to create financial scenarios, providing a more realistic basis for financial planning. This approach can account for periods of high market volatility and inflation as it draws on real-world data and events.
Stress-Testing: With its robust modeling capabilities, Timeline Planning allows advisors to stress-test their clients' retirement plans, helping identify potential risks and vulnerabilities.
Tax Modelling: Timeline Planning automatically models the impact of Income and Capital Gains tax across multiple accounts and income sources, simplifying tax planning and optimizing clients' tax situations.
Integration and Efficiency: Timeline Planning integrates with major CRM/Back Office and platforms, streamlining workflows and enhancing efficiency in portfolio management.
In conclusion, Timeline Planning offers a more comprehensive and accurate approach to financial planning. Addressing the limitations of traditional cashflow projection tools, it empowers advisors to deliver the best possible financial planning service to their clients.