Date: August 15, 2022

Make Like a Banker—Stress Test Your Retirement Strategy

You’ve probably heard of stress tests for banks. These are designed to anticipate (and thereby lessen the impact of) worst-case scenarios: What if a stock market crash happens? What if rates go up? But what about your retirement money? 

Similarly, you should also be thinking about how you would react to adverse scenarios, such as an unexpected medical emergency or the death of your spouse. A retirement stress test can help evaluate how well prepared you are for unexpected events over the long term. It can also help guide you toward making smart decisions with your money today—so that you feel less stressed out when a rough day eventually arrives.

This article addresses these questions and more:

  • What, exactly, is a retirement stress test?
  • Why perform a stress test now, ahead of your retirement?
  • Should you try to do it all by yourself?
  • Could a financial advisor make it easier?
  • Could changes now mean a retirement worth looking forward to?


What Is a Retirement Stress Test?

As the name implies, a retirement stress test is a way of testing your retirement plan. Stress tests are used in the financial industry to test a bank’s or other institution’s resilience to financial shocks. In this case, it’s you and your family that are being tested for resilience in the face of potential blows to your wealth.

Stress testing is about preparing for the unexpected. This can include health issues, poverty in old age, disability insurance costs, and so forth. The overall goal is to identify what could go wrong with your financial plan so that you can make any needed adjustments before it’s too late.

What Does It Cover?

Unfortunately, things like a job loss or medical emergency happen out of the blue every day. So, the goal of a retirement stress test is to help you figure out if your savings strategy will work in the event of an unexpected loss of income. 

During the test, you’ll cut back your spending to see if you have enough money saved up to cover expenses for at least six months. You might also want to consider a retirement stress test if, for example, you’re close to retiring but haven’t yet set aside money for emergencies and other life events (like college tuition).

The same goes if you’re recently retired or plan on leaving the workforce soon. Investment is a long-term game. That’s why the URL for Heritage Capital, LLC includes “invest for tomorrow” (as “”). Especially if you aren’t sure how much money you’ll need, once you stop working full-time each month, a financial stress test can prove extremely helpful. 

Verifying the strength of your retirement strategy is a simple process. To begin, you need to know what risks you’re likeliest to face in order to account for them in your plan. In most cases, these are related to the way in which you’ve invested your money (and how much risk you’re willing to take on at any given time). 

Once the risks have been identified, it’s important to make sure that they can be mitigated. For instance, if an investment has lost value because of market fluctuations or unforeseen circumstances, how will this affect your future ability to retire? 

What if a large portion of your portfolio is tied up in volatile stocks like Apple or Amazon and has seen wild swings lately: Are you well-grounded for weathering the volatility? The best way to conduct this process is with help from an experienced fiduciary wealth manager.


A Financial Advisor’s Advantages

You’ve probably read about how financial advisors can help you with your retirement strategy. The reputable ones are experts at understanding your risk tolerance, investment strategy, and financial goals, as well. We can help you understand the different types of investments in order to help you determine your best options. 

For example, mutual funds are managed by a professional money manager who decides which stocks or bonds to buy to meet their investment objective. As a result, these assets can help investors build diversified portfolios through a single purchase rather than having to research each stock individually.

Mutual funds require a minimum amount before they will enter into an agreement with investors (usually $1,000 – $5,000, depending on the type of fund being purchased). Exchange-traded funds (ETFs) are similar to mutual funds but trade more like stocks on an exchange, such as Nasdaq or the New York Stock Exchange (NYSE). 

Meanwhile, Unit Investment Trusts (UIT) are investment vehicles created by banks and brokerages that typically hold stocks or bonds These have fixed maturity dates ranging from one year up to 30.


Thinking of Switching Financial Advisors?

It Doesn’t Have To Be an Ordeal at All.


Separate Accounts & Hedge Funds

Sometimes referred to as “separately managed accounts,” these are portfolios managed by an investment firm (often an RIA): They can offer greater flexibility than other types of retirement savings account because they allow more control over investments within your own portfolios, including asset allocation decisions (e.g., whether or not more should be invested in stocks versus bonds). 

On the other hand, hedge funds are typically large pools of money limited to the very wealthy. The funds can essentially invest in anything for any reason over any amount of time. These managers often borrow enormous amounts of money to add leverage to the fund. . 


“What if…?” Now Can Spare You Headaches Later

Businesswoman hand stopping the domino wooden effect concept for businessStress testing your financial plan is an effective way to test the integrity of your retirement strategy before everything has gone sideways. By identifying potential problems and risks beforehand, you can work proactively to prevent them.  

We understand the entrepreneurial spirit: you can perform stress tests on your own if you choose. However, doing so involves estimating what would happen if earnings were lower than expected or if market returns were lower than expected. Things get even more complex when you start factoring in macroeconomic changes outside our control, such as interest rate changes or currency fluctuations. 

This can sometimes make the financial advice of an investment advisor invaluable. We are happy to handle this research and compilation for you at Heritage Capital, LLC because we do it every day. If retirement stress testing sounds beneficial to you, contact us today.  

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Paul Schatz, President, Heritage Capital