Expense fulfilment is a complex aspect of the software. In this chapter we will show you how the software works out the cash flow and how you might control it. The software does offer some high-level control over the order in which accounts are liquidated, based on investment category. Beyond this, withdrawals can be controlled, if necessary, by setting withdrawal limits and/or draw down strategies on individual accounts. We will show you how to do this in a moment. Otherwise, simply leave the software to work out the cash flow for you.
Expenses are always met first with any cash, or credits that are available during the given plan year. Once these funds are depleted, the software will then attempt to withdraw funds from cash accounts, followed by withdrawals from any available liquid assets, in order to meet expenses and prevent shortfalls.
Funds can also be withdrawn from accounts regularly, or as one off transfers, regardless of a client's actual income need, using the software's 'draw-down strategy' or 'transfers' panels.
Voyant fulfils expenses in four distinct stages:
1. Expenses are first fulfilled from income / credits.
2. If expenses remain, withdrawals are made from ready cash, accumulated in the default cash accounts (e.g. Paul's Cash and Cathryn's Cash) as well as other cash accounts entered on the Savings screen (i.e. current accounts, savings accounts). Note that if you want to exclude cash from being used as income, or have an emergency fund you wish to ring-fence then you can go to the Advanced Settings> Liquidation Limits and Planned Withdrawals, and set the 'Liquidation Limit' option to "do not allow" - this will prevent the cash held in this account from being used in the plan, towards meeting expenditure.
3. If income and ready cash are not sufficient to meet expenses, funds will be drawn from available liquid assets (e.g. savings, investments, DC pensions).
Plan Preferences – Setting Asset Liquidation Order
The order in which assets are liquidated - Step 3 in the overall expense liquidation order - can be set at a very general level, by investment category, in Preferences > Plan Preferences > Liquidation Order. The default liquidation order, which can be changed, is normally 'taxable' assets first, then 'tax-deferred' assets, and ending with 'tax free' assets.
Taxable accounts include:
- Portfolio Accounts
- Offshore Taxable*
Tax Free accounts include:
- Offshore Taxable (can be used as a tax-free option). Otherwise, there are no specifically tax-free accounts, at present.
Tax Deferred accounts include:
- ARF/AMRF Accounts (i.e. crystallised DC pension benefits)
- Unit-Linked/Investment Trust accounts (Bonds)
Expense Fulfilment Order is based, in part, on the 'Owner' of the Expense
The fulfilment of expenses is based first on the owner(s) of the expense. The software also uses complex logic when determining the order in which withdrawals are made based on the owner(s) of the expense and the owner(s) of the accounts from which the withdrawal is being made.
For example, if an expense is owned by both Bob and Alice, the following order of accounts would be used to fulfil the expense, provided that the plan is configured (in Preferences > Plan Preferences > Liquidation Order) to liquidate 'taxable' accounts first.
Bob and Alice's Joint Savings Account
Bob's Savings Account
Alice's Savings Account
Bob's Portfolio Account
Alice's Portfolio Account
Further to this, if an expense were co-owned by the primary client and the client’s son, the software will try to use credits owned jointly or by one of the two before using a credit owned by the spouse (to whom this expense does not apply). If there are no credits available for the primary, the son, or the spouse, the software would then check the default cash account first for the primary, then the son, then the spouse. If still not available, it will check cash accounts in the same order. The point being that we check each category, even for accounts/credits not owned by the expense owners, before moving down the priority list. The reason being, is that you wouldn't forgo the spouse’s cash, and withdraw from a child's savings account, in order to fulfil the son's expense if the spouse, in fact, had sufficient cash to pay the expense.
Preferred Payment Sources Override the Expense Fulfilment Order
Preferred payment sources can trump the normal expense fulfilment order. Expense Payment Source is an advanced option on the Expenses screens that you to specify a preferred account from which to fund a given expense. Payment sources are merely an option designed to give you greater control, when needed, to specify how an expense will be paid. Otherwise, the software's default expense Fulfilment logic, as outlined, will be used.
An expense payment sources can be either:
- A Preferred Source, meaning that the software will draw funds from the preferred account first before using the usual expense Fulfilment procedure outlined above;
- The Only Allowed Source, meaning that the software will fulfil the expense only using funds from the specified account. If sufficient funds are unavailable in this account, a shortfall will occur.
The Expense Payment Sources will be the first or possibly the only account the software will go to fulfil the expense.
If you want to circumvent this ownership-based expense fulfilment logic, fulfilling an expense from a particular account, go to the Expenses screen and set an Expense Payment Source for the expense. This account will become the first stop for funds to fulfil this expense before the software starts stepping through the normal expense fulfilment logic.
Tip: If setting a preferred payment source, use the “Only Allow Preferred Source to Pay Expense” option very sparingly if at all. When ticked, this setting can create artificial shortfalls if the preferred source is inadequately funded to pay the linked expense. These artificial shortfalls can prevent the software’s need analysers from returning results.
When might you tick the “Only Allow…”option? In most cases, we recommend only using this setting in a what-if scenario. For example, suppose your clients are saving for their children’s university fees and you want to run a test to determine if they are saving enough to a particular account. Even if the account is set as a preferred payment source, income and other assets sources will be used if the account does not have the funds to meet the linked expense. However, by ticking the “Only Allow Preferred Source to Pay Expense” option, you could in this scenario test the account for adequate funding. Again, we recommend using this setting sparingly and normally only in scenarios.
A preferred payment source can also be specified for debt payoffs, if needed. Debt payoffs can be scheduled on the Debt screen > expand Advanced Settings > click Payoff > select a payoff event. You then have the option to select a payoff source, if necessary. Otherwise, the payoff will be made from income and possibly liquidated assets, if needed.
Liquidation Limits Override the Expense Fulfilment Order
Liquidation Limits can also trump the normal expense fulfilment order. If you limit or disallow the software from taking ad hoc withdrawals from a savings account or investment, that account will be effectively removed from or limited in the expense fulfilment process.
For Further Reading
Cash Flow Basics - An introduction to the basics of cash flow in Voyant.
Retirement Income (Webinar 2)