Posted in the Nashville Business Journal, Cam Goodwin, President & Managing Partner of HawsGoodwin Wealth shares sage advice.

When you hear the term “stress test,” you might think of a visit to your doctor or the construction of a bridge. However, have you thought about stress-testing your retirement plan? Once a person goes from saving money for retirement to spending their saved retirement dollars, there are many aspects that a good financial plan should take into consideration. The four main factors that need to be accounted for in a plan are spending rate, life expectancy, inflation and investment returns. Each of these factors should be stress-tested to see how sensitive your plan is to any given area.

1. Spending Rate

The average retirement planning guideline is to limit the amount of money you take out of your investments to 3% to 5% per year. However, as we learned in 2020, things happen. What if you were forced to pull out 7% for several years? How would that affect your long-term probability of success? A stress test can help you adapt your financial plan for unexpected spending situations.

2. Life Expectancy

This is a big one. The average financial plan we run assumes you will live to age 92. Remember that the biggest goal when building most financial plans is to have enough money to sustain you for your entire lifetime. No one wants to run out of money. As healthcare in America continues to improve, people are living longer, which is wonderful. However, it presents a challenge for many people’s finances. It’s becoming more common for people to live until age 95 or even 100 these days. Has your plan accounted for that increase in life expectancy? Stress-testing these longer life expectancies is a must to make sure you will not run out of money in retirement.

3. Inflation

Inflation eats away your purchasing power over time. It’s a given that items at the grocery store will cost more in the future than they do today. We’ve been fortunate of late that inflation has remained in check and not caused prices to increase dramatically. However, we’ve seen this dramatic increase happen in the past (for those who remember the early 1980s), which means we need to know what would happen to your financial plan if it occurred again. Luckily, performing a stress test can help us see how an increase in inflation might affect your long-term goals.

4. Investment Returns

We typically assume a certain target investment return to meet your retirement goals. However, we also know that you probably won’t actually make exactly that return in a given year. Investment returns come with up years, down years, flat years, etc. What needs to be accounted for in your financial plan is what would happen if we got into an extended period with subpar returns or, perhaps, an extended period of above-average returns. How would that affect your plan for better or worse? Performing a stress test on these types of scenarios ensures that you’ve taken the good, bad and ugly into consideration.

Having a solid financial plan could be the key to long-term financial stability. The stress test allows you to make sure life’s unexpected events don’t derail your retirement goals. Adding this simple element into the planning process allows for peace of mind and assures that you are not overlooking any potential opportunities or potholes in your plan.

The opinions expressed herein are those of HawsGoodwin Wealth, LLC (HawsGoodwin) and are subject to change without notice. Nothing in this material should be construed as an offer to purchase or sell any product or security. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. HawsGoodwin reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

HawsGoodwin Wealth, LLC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about HawsGoodwin, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request.

Cam Goodwin is President & Managing Partner at HawsGoodwin Wealth, delivering financial planning and wealth management services that enrich clients’ lives.