Are You Going to Run Out of Money in Retirement?

A portfolio stress test can help give you some peace of mind about that … but if you’re not careful, it could give you a false sense of security. To get results you can trust, make sure the parameters you’re using are realistic.

Bundles of money are stacked up.
(Image credit: Getty Images)

You just left a meeting with your financial adviser, and your nest egg is looking bulletproof, with a projected worth of well over $1 million at age 95. But wait a second, are you sure about that?

If your financial projections look too good to be true, they might well be, for a variety of reasons.

When the pandemic hit home in March 2020, the stock market crumbled and many people saw their investment portfolios drop. Fortunately, the markets eventually recovered; but the sudden drop caused many people to review their investments and projections.

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While reviewing a new client’s portfolio at that time, we learned that his previous adviser projected his net worth as double our estimate by age 70. Naturally, the client was confused by the different scenarios. We discovered that the underlying growth assumptions the former adviser used were far too optimistic, giving the client an unrealistic view of his financial future.

With Stress Tests, You’re Planning for the Worst

It’s easy for any adviser to make a financial plan look unbreakable when using unrealistic assumptions. The true value of a financial plan comes from testing its resistance under difficult conditions.

To do this, financial advisers typically conduct a “stress test.” The test typically examines how a financial plan will fare during a future unexpected event, such as a recession or major geopolitical event, and allows you to adjust accordingly. For example, if you are near retirement and your portfolio is heavily weighted in stocks, an unexpected recession may send it plummeting by double digits. Although there may be no recession in sight, stress testing would allow you to adjust your portfolio in advance to safeguard it from potential future harm.

It’s a good idea to consider asking your financial adviser to conduct this test. 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 — 5% annual growth is a common rate. 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, if this person’s adviser assumes a higher return, the projections show a scenario that is likely unrealistic: For example, at a 9% annual growth rate, his investments at age 70 to be 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 $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 $3.60.

As we know, some expenses can have higher cost-of-living adjustments than others, such as health care or even education costs. Due to the ever-growing cost of living, accurately depicting inflation is necessary when developing your financial projections. Otherwise, your projections 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. For most general living expenses, we typically like to assume an inflation rate of 2.5%.

Are My Annual Spending Plans in Retirement Accurate?

While working on a plan with another client, she reported she was spending around $120,000 annually, or about $10,000 per month. When asked to map her annual expenses for one year, she realized she was spending closer to $140,000. We discovered that the additional $20,000 primarily came from home improvement costs, roughly $500 a month on takeout/Amazon orders, and other miscellaneous one-off expenses that tend to go overlooked.

This difference is significant. Compounded over time, 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.

While taking the time to monitor your annual expenses is important, even with a budget in place, unaccounted-for expenses are bound to appear. The stress test can account for additional expenses that are typically overlooked, such as home upgrades, car repairs or any other unanticipated one-off costs.

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

A Whole Array of Other Uncertainties

Whether it’s a forced early retirement or a bear market, stress testing your financial plan will help account for other uncertainties in the future. It will not only test the plan’s strength, but also your individual financial flexibility.

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: While it’s fine to look at the most likely financial scenario, consider 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.

There is no doubt that future events will have an impact on our financial future. It could be an unexpected job loss or even another pandemic. By using realistic assumptions and mapping out all relevant scenarios, you can help make certain your plan can still deliver on your goals once these difficult conditions occur.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Andrew Kobylski
Wealth Planner, McGill Advisors, a division of CI Brightworth

Andrew Kobylski is an Associate Wealth Adviser with CI Brightworth/McGill Advisors and has been with the firm since 2020. Working closely with attorneys, dental professionals and small-business owners, he creates financial plans that align with each client's values and goals. He graduated summa cum laude with a degree in finance from Virginia Tech. He obtained his CERTIFIED FINANCIAL PLANNER™ and Certified Investment Management Analyst® designations in 2021.