How Stress Testing Retirement Plans Builds Client Confidence

Justin FitzpatrickAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Stress tests are everywhere – banks, portfolios, and even retirement plans can get a stress test. But retirement stress tests tell just one story: whether a good retirement will look bleak if portfolio balances take a big hit.

This story can be misleading and drive client anxiety, uncertainty, and inaction.

A better retirement stress test would focus on the standard of living in retirement and how spending would need to change in times of market turmoil or heightened inflation. I led the development of a retirement stress-testing tool that does exactly that. Focusing on income and adjustments, instead of on success and failure, builds confidence and encourages action. When back tested through the rigors of the global financial crisis, 1970s stagflation, or the Great Depression, a good retirement income plan can typically be saved by relatively minor, temporary adjustments.