Love The Hustle Blog

How a Retirement Stress Test Can Help You

Before we start to rely on something important – whether that’s an automobile or a bridge – we want to know how it will react under extreme conditions.

That same logic should apply to your retirement portfolio, and that’s where a retirement stress test can help.

So, what is a retirement stress test?

Similar to how automobile manufacturers test their cars’ performance under challenging road conditions, a retirement stress test will examine how your portfolio acts through various scenarios. It can rigorously test the way a portfolio is expected to perform over time in various market conditions, with different asset allocations and spending levels.

How can a retirement stress test help you?

Many investors will look at the possible returns of their long-term portfolio, but ignore the potential for losses if the market turns sour. It’s understandable – nobody likes to think about bad scenarios (even if they’re temporary).

The biggest threat to a diversified portfolio over the long-term usually isn’t market conditions – it’s our emotional reactions to them. Although you might have an end-goal in mind (like a million dollars for retirement), you might not have looked at the potential drops you have to weather to get there.

If you can’t stomach potential drops, and are tempted to sell your investments, it’s important to know beforehand, rather than in the moment. These tests can also help you look at your spending levels before and during retirement, and determine if they’re viable in various scenarios.

Your next steps

The best approach is always a proactive one. If you aren’t comfortable with the risk levels in your portfolio, it’s better to know that beforehand, rather than in the moment. For instance, you can work with a trusted financial advisor to make adjustments to asset allocations to find a plan that you can stick to. This is also an opportunity to adjust your needs and goals, in case they aren’t met in certain conditions.

If you haven’t taken a retirement stress test yet, consider meeting with a trusted financial advisor to do one. At LexION Capital, we use sophisticated wealth forecasting tools, and craft bespoke portfolios based on our client’s unique goals and needs. To learn more about how we can help you reach your financial goals, contact us today.