3 Questions For Your Stress Tested Retirement Plan
A stress tested retirement plan should do more than project average returns. It ought to evaluate how your financial plan during retirement may perform. We don’t suggest relying on (or expecting) steady returns! A stress tested retirement plan has to test market volatility, rising (changing) expenses, and financial surprises that can disrupt your plans.
Can Your Stress Tested Retirement Plan Handle Lower Returns?
We’ve seen retirement projections that presume consistent returns on investments. Markets don’t operate that way. Stress-testing your financial plan might show flaws and potential problems. How do we prepare for bad markets, or inconsistent returns?
Does Your Stress Tested Retirement Plan Account for Real Expenses?
All good financial plans must take a deep dive into expenses. But a stress-tested financial plan will take all expenses – and maybe some unexpected expenses, and then blow them up (inflated) into a much larger amount. Can your plan STILL be sustainable?
A good financial plan that’s been stress-tested isn’t about predicting the future. It should be about preparing for a range of outcomes. By low-balling investment returns and over-inflating expenses (and the rate of inflation!) , we can begin to see a framework that can be revisited and refined as your retirement unfolds.
About the video
What is a stress tested retirement plan, and why does it matter?
Tom breaks down how a stress tested retirement plan differs from traditional projections that rely on steady or average returns.
Many retirement plans are built using optimistic assumptions. But a stress tested retirement plan focuses on real-life conditions, which include market volatility, sequence of returns risk, inflation, and unpredictable expenses.
For pre-retirees and newly retired households in New Jersey, building a stress tested retirement plan means using more conservative return assumptions. And including higher-than-average inflation estimates. It also means evaluating both expected spending and a second, more demanding scenario where expenses rise over time.
This approach is designed to help identify potential gaps and create a more flexible framework for retirement income planning.
A stress tested retirement plan is not about creating pessimism. It’s about preparation. And remaining flexible!
Takeaways:
- A stress tested retirement plan evaluates more than average market returns
- Sequence of returns risk plays a critical role in a stress tested retirement plan
- A stress tested retirement plan includes rising, real-world expenses
- Conservative assumptions are central to a stress tested retirement plan
- A stress tested retirement plan supports flexibility as circumstances change
3 Questions For Your Stress Tested Retirement Plan – Links
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3 Questions For Your Stress Tested Retirement Plan – Transcript
The financial plan that you’ve got in your hands right now, or one that you were recently shown…..
May have been built to impress you.
The intention behind OUR plans is to protect you.
And there’s a huge difference there.
One of the biggest concerns that we hear is, “I don’t want to run out of money in retirement.”
We could say that another way, as “I really don’t want to shrink my lifestyle after I retire.”
“But I worry — because there’s no more paycheck coming in.”
We specialize in working with pre-retirees, or the newly retired here in Central New Jersey.
Typically with people who have accumulated a million dollars or more, but have at least $250,000 in investible assets.
A lot of folks, in our line of work build projections, using expected returns or historical average returns.
We’ll see plans that are based on generating a 7% return, an 8% return.
We recently saw a plan that was built on a 9% average return.
See, the problem is that markets don’t deliver “average” returns every single year.
It’s not like you’re going to, …you may average 8%, but you’re not going to get exactly 8% every single year.
They deliver a sequence of unpredictable returns.
And in retirement, the order of those returns matters quite a lot.
We’ve had some people come to us recently, with a plan from another firm that assumed an 8% return every year, straight line, for 30 years.
That’s not a financial plan.
That’s a best case scenario, with a cover sheet.
When we sit down with clients, whether they’re here in Monmouth County or they’re coming in from Somerset, Middlesex County, even Mercer, we ask them to walk through with us what they spend on a monthly basis.
It’s those irregular expenses, those once a year things, or “that’s never gonna happen again……”
Let me give you some examples.
All of a sudden now you are helping your grandkids….. well, you’re helping your kids…… pay for your grandkids Catholic school tuition.
You’re paying for the vacation that the entire family is going to be taking down here at the shore.
You’re going to be putting a new roof on a house.
Or, the healthcare expenses that go up every single year.
These are the kinds of things that quietly derail our retirement plan.
What we do is we run two different kinds of scenarios.
The first scenario is where we’re basically using your numbers…… exactly what you told us.
The second scenario is a stress-tested version of those numbers with inflated numbers.
…..expenses that are maybe more in line, not with 2026, but with 2027 and 2028.
It’s that second scenario, the stress tested numbers, that almost always lead to the more valuable conversations that we’re having with folks.
We don’t want to alarm anyone when we use these inflated numbers.
We’re just trying to make sure that when retirement arrives, that real life doesn’t hand you a surprise that you can’t recover from.
Because at this stage, you’re not going to have 10 or 15 years of paychecks to fall back on.
Another feature that we build into our plans is we build every long-term projection with two deliberate headwinds….. baked into the cake.
The first (headwind) is when we’re talking about what returns to expect in the future.
We use lower-than-expected market returns.
Not the historical average that looks great in a brochure.
But a more conservative figure that accounts for volatility, accounts for sequence risk, and it accounts for the reality that you’re now in the distribution phase of life — and not the accumulation phase of life.
We’d rather expect a 3% return — and get an 8% return.
Than expect an 8% return — and wind up with just 3%.
That’s the first headwind.
The second headwind that we bake into the cake is we use a higher-than-historical inflation set of numbers.
Because, let’s face it, we live in New Jersey.
Things are always going to cost more.
Healthcare is going to cost more.
Property taxes are going to cost more.
Housing….
Everyday costs for retirees are not going lower….. they consistently outpace the headline inflation number that you see in the news.
Because look, if your plan can accomplish your goals — with these kind of headwinds — imagine, just imagine… what it could do, if we have tailwinds.
It’s our belief that a stress tested plan won’t produce or, or may not produce, a pessimistic retirement where you actually have to watch every penny.
It could actually produce a more confident retirement.
See, when your plan holds up — under conservative assumptions…… you now have some flexibility.
You may be able to spend a little more freely than you planned.
You may be able to give more generously – to the folks you love in your life.
And I think this is a big benefit:
hopefully it will stop folks from freaking out watching the stock market — and getting fed up to the gills with anxiety — (just) because the futures are down.
For our clients here in New Jersey….. these are people who have worked very hard.
They saved their money.
They’ve done all the right things.
Now they’re at the point, they’re at the most important financial transition of their lives.
I have to think helping “reduce the anxiety” of that financial transition……. it’s got to be worth something.
When we make projections for clients, we like to do them just a few years at a time.
Three years.
What do the next four years look like?
What do the next five years look like?
Why don’t we build a plan that looks out the next 25 or 30 years?
I’ll tell you why.
Because, in our experience, we’ve found that circumstances change.
And they change all the time.
And there’s a greater likelihood that your situation — or your circumstances — may change right away upon retirement. Or within a few years.
You may decide you want to travel more than you initially expected.
You may have a sick member of your family that you have to take care of.
You may need to buy two new cars.
You may need to replace that roof.
There are things that happen that are going to come up.
And we want to maintain flexibility.
One of my favorite sayings, I have to translate this all the time to people, is the phrase “semper gumby.”
Always be flexible.
I think it’s important.
And so when we put these projections together for folks, we tell them right away, we’re ready to update these …..on a moment’s notice.
So, talk to us and tell us what’s happening.
Hopefully you’re getting the same kind of connection with your planner as well.
If you’re not, we’re happy to talk to you.
