Stress Testing Your Retirement Plan

You're diligently saving, investing, and planning for retirement. Everything seems to be on track, but the curveballs just keep coming—market downturns, surprise expenses, maybe even a health scare. Such developments raise an important question: Is your financial plan sound enough to withstand significant stressors?

Here's how to anticipate—and account for—the unexpected.

"Every good plan starts with realistic assumptions about your asset mix, savings rate, spending needs, and life expectancy," says Rob Williams, managing director of financial planning, retirement income, and wealth management at the Schwab Center for Financial Research.

To measure the odds that your plan will succeed, financial advisors typically run what's called a Monte Carlo simulation. Instead of projecting one smooth path forward, this simulation runs 1,000 possible scenarios, using varying market returns and inflation levels to show a range of potential outcomes. The results are presented as a percentage of times your plan achieved its goals, known as its success probability. A result of 85%, for example, means your plan failed only 15% of the time.

The goal isn't to achieve a probability of 99%—statistically speaking, the highest possible result—but rather an acceptable degree of certainty, depending on your goals and risk tolerance. "Many clients often set a target of 90% or more, which can be too high," Rob says. Those who are inherently more conservative, for example, could aim for 85% to 90%, while those who are a bit more tolerant of risk may target 75% to 85%.

"Your probability of success gives you an idea of how durable your plan might be under a range of conditions, including market highs and lows," says Mark Celusniak, CWS^®, CFP^®, a senior wealth advisor with Schwab Wealth Advisory. "However, life is rarely so predictable, so it's important to consider additional variables that are more tailored to your own life circumstances."

Your plan's probability of success hinges on assumptions that may not work out as you anticipate—your income level, retirement age, or spending needs, for example. "Stress-testing layers real-world risks onto your plan to see if any cracks form," Mark says.

To see how your plan might perform under pressure, you could ask your advisor to run a new simulation that looks at what would happen if:

• You're forced to retire early: Nearly 6 in 10 retirees say they left the workforce sooner than planned, according to a study by the Transamerica Center for Retirement Studies.¹ "Losing even a year or two of earning and saving power can take a toll on your plan's probability of success," Mark says.
• There's a down market just before or early in your retirement: Retirees who experience significant investment losses in the first five years of retirement are much more likely to run out of money, according to a recent study by Morningstar.² "Pulling money out during a downturn means there's less money in your portfolio to recover if markets bounce back," Rob says.

Market downturns can hit harder when they occur early in retirement.

• There's a significant change to tax policy or Social Security: While the One Big Beautiful Bill Act preserved several tax provisions that were set to expire this year, a future Congress could revisit them. Meanwhile, the Social Security Administration projects that it may need to reduce benefits starting in 2033, absent any changes in retirement ages or other factors by Congress.³ "While we do not expect anything drastic to change with the Social Security program, it could be useful to run some planning scenarios with a modified benefit schedule," Rob adds.
• You or your spouse require long-term care: The median cost of long-term care in the U.S. is $127,750 a year for a private room in a skilled nursing facility,⁴ with the typical stay lasting about 2.3 years.⁵ "Long-term-care insurance can help alleviate such a potentially burdensome expense, but it too can be costly," Rob says. "Testing how your plan would fare in the face of higher-than-expected long-term-care costs can help you determine whether the premiums are justified."
• You live longer than originally estimated: Once you reach the age of 65, you can generally expect to live an additional 18 to 21 years, on average.⁶ "However, many individuals will live much longer, especially if they maintain good health," Rob says. "We suggest planning for a lifespan of 90 years, as well as stress-testing your plan to determine how much flexibility you'll have if you or your spouse live even longer."

"If after pressure-testing some extreme scenarios your probability of success isn't where you'd like it to be, it's not the end of the road," Mark says. "In many cases, you're still on solid ground, and making just a few adjustments can give you added confidence that your plan will hold up."

To see how this might play out, consider a married couple in their late 50s who both plan to retire at age 64. Their plan assumes they'll spend about the same amount in retirement as they do now, including an annual budget for traveling of about $30,000 while they are still healthy enough to do so.

However, when their financial advisor stress-tests their plan against some of their fears—a lower-than-expected rate of return, a market downturn at age 65, and three years of long-term care in their high-cost state—the probability of their plan meeting their needs and wants drops 15 percentage points, from 80% to 65%.

"A probability of success below 70% warrants a closer look, so we would dig into the numbers to see whether their plan is meeting their most important needs, like food, housing, and medical care, even if it's not succeeding at, say, funding a grandchild's education or leaving a large legacy," says Justin Longfellow, an investment advisor at Schwab Wealth Advisory.

If, after your advisor runs a stress test, the probability of meeting all of your goals is too low for your liking, there are moves you can make to raise it. Justin, for one, likes to start by revisiting the following factors:

• Investing strategy: If you are younger than 60 and have been investing conservatively—say, with only 20% allocated to stocks—you may opt to add more risk in exchange for potentially greater returns. Depending on your needs, your advisor can help you select the right risk profile, including moderately conservative (29%–37% stocks), moderate (42%–50%), moderate growth (58%–66%), growth (72%–81%), and aggressive growth (88%–94%). However, if you're closer to or in retirement, it might make more sense to target moderate growth for those ages 60 through 69 or moderately conservative for ages 70 through 79. "Increasing your stock allocation is an easy lever to pull," Mark says, "provided you're comfortable with the added risk and uncertainty of a higher exposure to stocks."
• Savings rate: Adjusting your savings rate and directing those funds into the most advantageous accounts can also help shore up your plan. For example, you could boost your 401(k) contribution—and continue to capture your company match—or put more money into a taxable brokerage account, whose gains are typically taxed at a lower rate than withdrawals from your tax-deferred retirement accounts.
• Retirement age: If you're able to, delaying retirement even by a year can help your portfolio last longer, since not only are you adding savings but also giving your existing investments more time to likely grow. "That extra year reduces the strain on your nest egg and increases the odds it will support you throughout retirement," Justin says.
• Social Security start date: Because you typically receive an 8% increase for every year you wait to collect your benefit after full retirement age (66 to 67, depending on your birth year)—up until age 70—conventional wisdom holds that later is better. Delaying not only boosts your monthly benefit but also reduces the pressure on your portfolio by providing a larger, guaranteed income stream for life. But strategy matters: When there's an earnings gap between partners, it can make sense for the lower earner to claim earlier, providing income to cover expenses and preserve the portfolio, while the higher earner waits until 70 to lock in the maximum benefit.
• Spending rate: "This is another relatively easy adjustment to make," Justin says, "particularly as it pertains to your priorities." Our hypothetical couple, for instance, could opt to cut their vacation budget to $20,000 a year; alternatively, they could reduce their contribution to a child's or grandchild's 529 plan, since there are loans for education but not for retirement. "Staying flexible with your spending once you reach retirement—such as cutting back on nice-to-haves, if necessary—can help increase the likelihood that your savings will last," Rob says.
• Tax-saving strategies: You must start taking required minimum distributions (RMDs) from your tax-deferred accounts at age 73 or 75, depending on your birth year. But waiting too long to take RMDs can push your income into a higher tax bracket when you do start drawing down those accounts. In addition to paying more in taxes, your higher income can raise your Medicare premiums. Your advisor can help see if earlier withdrawals and Roth conversions might help you lower your future tax bracket and even maximize your estate for your heirs.

An unfavorable stress test isn't the only reason to reassess your plan. Life events such as a new job, marriage, divorce, the birth of a child, a death in the family, or a big purchase or sale should also prompt a review.

"Big life changes, even positive ones, are their own type of stressor when it comes to the longevity of your savings," says Mark. "Getting married, for example, means your portfolios should complement one another rather than potentially presenting concentration or other risks."

Even when life is humming along and nothing has changed, it's a good idea to revisit your plan at least every other year. "Life and markets are always shifting," Rob says. "Checking in regularly helps ensure your portfolio is well positioned to ride out whatever the future brings."