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Andrew Kobylski Apr 12, 2022 10:36:56 AM 4 min read

Are You Going to Run Out of Money in Retirement?

A portfolio stress test can help give you some peace of mind 

Andrew Kobylski and Caroline Whittaker Huggins

Everyone wants to know if they will have enough money to last during their retirement. So, how can you make sure that you will?

The true value of a financial plan comes from testing its resistance under difficult conditions – much like today. To do this, financial advisers typically conduct a financial “stress test.” The test examines how a financial plan will fare during a future event, such as a recession or major geopolitical crisis, and allows you to adjust accordingly.

We conduct these tests regularly with our clients. Here are four areas to discuss to ensure your plan will hold up:

What’s the Growth Rate You’re Using in My Stress Test?

Most financial advisers build a conservative growth rate into their projections — a 5% annual growth is common. While changing the growth by even a couple of percentage points may seem irrelevant, it can monumentally alter the trajectory of your projection.

Take this scenario: A 45-year-old has $1 million in investments and saves $20,000 annually. If we omit taxes and assume a realistic 5% annual rate of return, his portfolio will grow to around $4.3 million by age 70.

However, at a higher rate of return, the projections aren’t realistic. At a 9% annual growth rate, his investments at age 70 are valued at $10.3 million. Our research shows that the average investor loses 4% of their annual returns from simple mistakes stemming from investment selection, fee management, and emotional trading. Not accounting for this principle in your plan’s growth rate assumptions may inflate your projected future assets.

Our advice: Lean toward conservative growth assumptions to ensure your financial plan can withstand the unpredictability of future market returns.


How Are You Accounting for Inflation?

It’s not surprising that $100,000 had greater spending power in 1950 than it does today. This can be seen in something as simple as the price of milk, which in 1950 was 83 cents. Today, the average price per gallon is around $3.88.

Some expenses have higher cost-of-living adjustments than others, such as health care or education, so accurately projecting inflation is necessary when developing your financial projections. Otherwise, your financial plan may misrepresent your future reality.

Our advice: Since the cost of living will rise in the future, make sure your account for this growth in your financial projections. While there has been a rapid increase in inflation during the past year, historically it has ebbed and flowed with underlying economic conditions. To adequately capture purchasing power risk in your projections, we typically assume an annual inflation rate of 2.0 to 4.0% for most general living expenses.    


Are My Annual Spending Plans in Retirement Accurate?

One of our clients reported she was spending around $120,000 annually or about $10,000 per month. When asked to map her annual expenses, it was closer to $140,000. The additional $20,000 primarily came from home improvement costs, roughly $500 a month on takeout/Amazon orders, and other miscellaneous expenses that were overlooked.

This spending rate will affect her income in retirement. Rather than lasting through age 95, her assets would be depleted at around age 80. Using this information, we were able to get her back on track toward meeting her financial goals. 

Even with a budget in place, unusual or one-time expenses will occur. The stress test can account for these additional expenses.

Our advice: It’s a good idea to partially overstate your annual spending level to account for future, unknown costs. While everyone’s spending situation is different, projecting an increase from 5% to 10% in annual expenses allows the plan to account for future unknown costs.


A Whole Array of Other Uncertainties

Stress testing your financial plan will help account for other uncertainties in the future.

We know the stock market has been volatile so far this year, causing concern for some investors. However, knowing a plan can withstand a 30% market dip provides peace of mind. A test can also simulate the financial impact of taking a dream vacation or providing gifts to your favorite charity, giving you more freedom to spend your money in retirement. Navigating from your expected financial plan to these “Plan B” scenarios can display the robustness of your financial plan against unforeseeable risks. 

Our advice: As part of the stress test, consider the impact of a worst-case scenario, too. People often make their best financial decisions when they understand the potential consequences of when a plan doesn’t work out.


Future events, often unforeseen, will have an impact on our finances. However, by using realistic growth assumptions and mapping out all relevant scenarios, you can help make certain your plan can still deliver on your goals even when these difficult conditions occur.


Andrew Kobylski

Andrew is an Associate Wealth Advisor with CI Brightworth and has been with the firm since 2020. Originally from the Northern Virginia area, he attended Virginia Tech and graduated Summa Cum Laude with a degree in Finance under the CFP® Certification Education Option. He obtained both his CERTIFIED FINANCIAL PLANNER™ and Certified Investment Management Analyst® designations in 2021.