Preparing for the unexpected is key to making your money last
In a perfect world, we’d all have enough saved for retirement to comfortably enjoy our golden years. And those funds would be enough without depleting savings or needing extra income. Unfortunately, life rarely goes exactly as we planned it. Even with substantial retirement savings, unexpected events like a stock market downturn, rising inflation that increases the cost of living for retirees, or a significant health crisis can derail your plans. Additionally, a seemingly positive outcome such as living longer than anticipated could also jeopardize your financial stability. So when is the “best age” to retire? Is there a “best time”? And how can you make your retirement savings last? Even if you do have a healthy sum put away for retirement, a single misfortune like a stock market crash, a spike in inflation or a major health crisis could threaten to derail your carefully plotted strategy. What’s more, a scenario you’d probably welcome—living longer than you ever thought possible—could also put your financial security at risk.
A key way to making your money last through retirement is to expect the unexpected and be as prepared as possible for any eventuality. As part of retirement planning, “stress-testing” your retirement plan is an important step in that process. With a mix of financial industry experience and sophisticated software, a qualified financial planner or retirement advisor can help you simulate different possibilities (including the worst-case scenarios) to evaluate your financial resilience. This exercise can reassure you that your retirement plan is in good shape, or it can alert you to shortcomings that necessitate adjustments in your plan. It can also clarify what to do when you retire in practical terms, from setting withdrawal rules, organizing cash flow to reviewing your retirement income strategy.
As you’re nearing retirement, here are four common threats to examine as you and your financial advisor stress-test your plan.
1. Market downturns
Your investment portfolio might look solid today, but how would a surprise 20-30% drop in the stock market impact your ability to retire (or stay retired)? This timing is crucial when deciding the “best time” to retire. An important part of the equation is exactly when that market downturn occurs. If the market crashes soon after you’ve retired and started withdrawing funds, it may have a more dramatic negative effect compared to a downturn that happens decades into your retirement timeline (in the industry, we call this “sequence-of-returns” risk). Stress-testing can help you explore these types of scenarios using Monte Carlo simulations1—a statistical technique that models the probabilities of different outcomes—and other tools to determine the likelihood of your assets lasting through retirement. The results may lead you to reallocate and/or diversify your portfolio to limit your downside exposure, and helping you ride through volatility.
2. Major unplanned expenses
You’ve probably spent plenty of time thinking about the fun ways you’ll spend your retirement fund (travel, hobbies, club memberships, etc.). It’s less fun, but just as important, to consider other, not-so-pleasant possibilities: major home repairs, a serious illness, or needing to support a loved one in distress. In all likelihood, you’ll encounter these or other obstacles at some point in your retirement journey. With stress-testing techniques, your advisor can work with you to help ensure you’ll have enough money accessible in liquid assets, to avoid raiding your retirement fund in an emergency, and to reinforce your budgeting for retirement. They can also evaluate your needs for property, healthcare and/or long-term care insurance.
3. Longevity risk
As you make a plan to draw down funds from your retirement accounts, you’ll need to make some assumptions about how many years your retirement will last (in other words, how long you’ll live). That can be problematic, of course, since no one knows for sure, especially as healthcare advancements continue to enable longer lifespans. Stress-testing can explore how your funds might hold up over 20, 30, or even 40 years of retirement. Based on what you learn, you can consider options such as as lightly lower standard of living, a more flexible withdrawal strategy, lifelong annuities or longevity insurance.
4. Inflation surges
Through the years, rising prices can gradually erode your spending power and deplete the value of your nest egg, increasing the cost of living for retirees. A sound retirement plan will account for some inflation based on historical norms (3% per year is about average), but what if unexpected events cause inflation to spike for a prolonged period? One only needs to look at the past several years for a real-life example, when inflation rose to 4.7% in 2021 and 8% in 2022. As the inflation rate has returned to normal, prices for everyday household goods and services haven’t gone back down—they’ve only stopped increasing so rapidly. If you’re in or near retirement, these events may have already necessitated changes to your withdrawal plan. No matter your age, stress-testing (and making adjustments as necessary) can help you hold steady when the next wave of inflation threatens to knock you off course.
While you can’t predict every situation that might disrupt your retirement plans, you can learn from the experiences of others and prepare for the most common challenges. That’s what stress-testing is all about. With the power of today’s financial tools and expert guidance from your advisor, you can add strength and flexibility to your long-term plans, greatly improving the odds that your money will last as long as you need it to. In turn, you can move through your retirement with the confidence and peace of mind to fully enjoy the life you’ve envisioned.
Could you use help navigating retirement? Have you “stress-tested” your financial plan? Quotient Wealth Partners is here to help! We have experienced retirement advisors who specialize in helping you grow your retirement accounts and support your lifestyle in retirement. We’re happy to provide a complimentary financial plan and retirement planning review that evaluates your options and develops an approach to help you achieve your long-term retirement goals. To learn more, contact us today!
1. Monte Carlo simulations are hypothetical and for illustration only, modeling potential outcomes based on assumptions like returns, volatility, and inflation. Results are not guarantees, predictions, or actual outcomes and may vary significantly. Different assumptions or conditions can produce different results. Probabilities reflect the likelihood of meeting objectives under assumptions, not specific predictions, and exclude real-world factors like tax changes or extreme events.