What is the Lifestyle Index?

The LifeStyle Index is a unique measure of financial independence, developed by Certior in consultation with award winning financial planners, specifically to help holistic financial planners and their clients assess the probability of achieving their financial planning objectives, whatever they may be. It has a number of uses :

• Retirement planning : to give an immediate and objective answer to the question “When can I afford to retire?”
• Estate planning : to give guidance on the value of assets that may be gifted away without prejudicing long term financial security.
• Protection planning : to determine whether and how much additional protection is required.
• Long term planning : to determine whether you are ‘on track’ or doing better or worse than expected.

Unlike other financial planning tools, it is independent of time and currency. Therefore it does not need to be adjusted for inflation over time, nor need it be adjusted if we start to do our planning in Euros!

The LifeStyle Index is simply comparing income (LifeStyle Income) with expenditure (Income Required) each year to come up with a ratio (not a money figure) which is then plotted on the LifeStyle Index chart. Where income exceeds expenditure, the ratio (whatever the actual figures) will be greater than 100%. A value of 100% (or higher) indicates that financial independence has been achieved.

Income Required is the gross income required to accommodate projected spending in the given year.

LifeStyle Income is the PRE-tax income which could be achieved by taking the projected value of investments in each year and notionally converting this value into an income for life by assuming that the investments are used to buy an index linked annuity. From age 55, pension funds are also notionally converted into an income for life in the same manner. (This is because under current legislation you are allowed to draw a pension from your pension fund from age 55.) To this is added any pension income being received. We use this method as a proxy for providing lifetime certainty of inflation proofed income, although in reality other more flexible (but less certain) options for funding lifetime income will be implemented.

This ‘LifeStyle’ income is then compared to Income Required in each year to produce the LifeStyle Index. If ‘LifeStyle’ Income is exactly equal to Income Required, the value of the index is 100%, suggesting that the lifestyle implied by that level of spending could be maintained for the remainder of your life. It is also probably helpful to bear in mind that the lines between the points in the chart simply join “snapshots” for each year rather than reflecting “continuous daily improvements”.