Annual cash flow
Surplusₜ = net incomeₜ − spendingₜEmployment income changes using the selected income-growth assumption. Spending changes with inflation and the user’s retirement-spending percentage.
Financial Future Explorer · Methodology
How the exploration works
Illustrate how household income, spending, accessible assets and pensions could interact across a user-defined financial lifetime.
Return to the explorerIncluded
- Annual household cash flow
- Separate cash, investment and pension balances
- An optional primary residence and mortgage
- Repayment and interest-only mortgage structures
- A current mortgage rate followed by a user-selected future rate
- Property appreciation, ownership costs, sale and downsizing events
- Cautious, central and stronger deterministic scenarios
- User-selected retirement and pension-access ages
- Dated costs, receipts and permanent income or spending changes
- Income-gap, market-fall and higher-spending stress tests
- A comparison retirement age
- Today-money and future-pound views
- A transparent order for funding spending shortfalls
Outside this method
- A probability of success
- Automatic UK tax calculations
- Advice on retirement or asset allocation
- Multiple properties, rental income or buy-to-let tax
- Automatic remortgaging, product fees or early-repayment charges
- A guarantee that assets can be accessed or a mortgage refinanced on the modelled terms
Calculation
Core formulas
Asset growth
Balanceₜ = balanceₜ₋₁ × (1 + return) + allocationₜCash, investments and pensions each use the stated annual scenario return.
Today-money value
Real balanceₜ = nominal balanceₜ ÷ (1 + inflation)^tThis converts future pounds into an estimate of current purchasing power.
Shortfall order
Cash → investments → accessible pensionThe model uses accessible cash first, followed by investments and then pension assets after the selected access age.
Dated events
Nominal event valueₜ = today-money amount × (1 + inflation)^tOne-off costs and receipts are entered in today’s money, then applied at the selected age. Monthly changes continue from that age onward.
Repayment mortgage
Payment = P × r ÷ [1 − (1 + r)⁻ⁿ]The monthly payment is recalculated from the outstanding balance, monthly interest rate and remaining months. The user-selected follow-on rate applies after the current deal ends.
Home equity
Home equityₜ = property valueₜ − mortgage balanceₜHome equity contributes to net worth but is not included in spendable financial assets.
Timing convention
When cash flows occur
The opening age shows the entered balances. Growth, contributions and annual cash flow are then applied for each year completed. Employment cash flow continues until the selected retirement age is reached; later years use the entered retirement income. Mortgage interest and capital are calculated monthly inside each modelled year. Property value changes and ownership costs are applied annually. Positive cash flow fills the selected cash reserve before moving to investments. Events and one selected stress are applied at the modelled annual point.
Limitations
What the result cannot establish
- Constant annual returns and property appreciation conceal volatility and sequence risk.
- Stress tests are fixed illustrations, not likelihood estimates.
- Tax is not calculated; the pension withdrawal percentage is only a user-controlled adjustment.
- Mortgage rates after the current deal are user assumptions, not refinancing offers or forecasts.
- Interest-only capital is treated as due at the end of the entered term unless a prior sale or downsizing event repays it.
- Annual timing smooths income, spending, property costs and events that occur unevenly during the year.
- Future income and spending may differ materially from the entries.
- The property module supports one primary residence and does not model other debts.
Reference tests
Numerical checks
| Case | Inputs | Expected result |
|---|---|---|
| No growth or cash flow | £10,000 cash; £20,000 investments; £30,000 pension; zero returns, income, spending and contributions | £60,000 total financial assets in every year |
| Cash reserve allocation | £1,000 annual surplus; cash already above the selected reserve | The £1,000 surplus is added to investments |
| Shortfall order | £5,000 shortfall; £2,000 cash; £10,000 investments | Cash falls to zero and investments fall by £3,000 |
| Future cost | £10,000 cost in five years; 2% inflation | A nominal £11,041 cost is applied in year five |
| Repayment mortgage | £200,000 balance; 5% rate; 25-year remaining term | An initial modelled payment of approximately £1,169 a month |
| Home equity | £500,000 property; £300,000 mortgage | £200,000 home equity, shown outside financial assets |
Evidence