The Retirement Stress Test Most People Skip — and Regret
Many financial conversations around retirement focus on projections, simulations, probability of success scores, and average annual returns. And, since the long-term history of market investing continues to be positive, many folks see graphs trending up and to the right and think, “Okay, the math works. I’ve hit my number. It’s time to retire.”
But what seniors often overlook, especially if they’re planning solo, are all the things that don’t show up in a typical financial projection. A slip-and-fall that changes your health care spending. A hurricane that drives up inflation. A once-in-a-generation global pandemic.
No one can predict the future – not even my team at Keen Wealth. But I can tell you that the durability of a retirement plan isn’t just about your net worth or maintaining averages. It’s about sequencing how you use your assets and maintaining flexibility to deal with surprises.
And as you get closer to retirement, the question you and your advisor should be answering isn’t, "Will it work if everything goes right?"
It’s, "What happens if something goes wrong early?"
Here are five stress tests your financial plan should be able to pass in the early stages of retirement:
1. The Year-One Market Shock Test
The Scenario: You retire on January 1st. By December 31st, the market has dropped 20–25%.
The Risk: While you were working and earning a paycheck, you probably didn’t worry too much about yearly market swings. You learned to trust your plan and accept volatility as a kind of tax on your investments. But now your retirement accounts aren’t just numbers on a spreadsheet: it’s real money you need to live on.
Without proper planning, early downturns can create a “sequence of returns risk” that could throw off your withdrawal and spending rates for the rest of retirement.
The Failsafe: We recommend that seniors create a liquidity buffer – typically 3 to 5 years or more of living expenses in fixed income investments. If the markets drop, especially early in retirement, we rely on that buffer rather than sell equity investments.
These holdings are part of a larger diversification strategy. When your money is spread out across a variety of assets (cash, equities, fixed income), you have the flexibility to meet your needs without triggering unintended tax consequences or permanent financial losses.
2. The Healthcare Acceleration Test
The Scenario: A major health event happens at age 68, not 88.
The Risk: Most spending plans account for the typical “retirement smile”: spending might dip or hold steady early in retirement as you live your best life, decline as you start to slow down, and then rise again when your health care needs increase.
Unfortunately, life happens. Healthcare risk is often a timing risk. An unexpected diagnosis or a life-changing accident might force you to spend more early in retirement so that you or your spouse gets the care and comfort you need.
The Failsafe: As part of your asset diversification plan, we are able to create an “emergency healthcare” line item that’s separate from your normal monthly expenses, including Medicare premiums.
Seniors also should be prepared to pay for services they might need that Medicare doesn’t cover. For example, if you expect that you or your spouse might need long-term care at some point in retirement, you should work with your advisor on a cost-benefit analysis of buying long-term care insurance versus self-insuring.
Couples should also coordinate their Social Security benefits. While generally, we recommend folks wait as long as possible to claim Social Security and maximize their benefits, a health care emergency might create a scenario where benefits are useful sooner rather than later.
3. The Family Shock Test
The Scenario: An adult child gets divorced, loses a job, or faces a health crisis and needs significant financial help.
The Risk: Sacrificing your retirement security.
To parents and grandparents, that might sound a little cold, or even a little selfish. But good intentions can be just as harmful to your retirement as poor planning. And supporting an adult child often involves a little bit of both.
Whatever their struggles, your children and grandchildren have the rest of their lives to work and earn.
You’re retired. If supporting the next generation depletes your nest egg ahead of schedule, who is going to help you?
The Failsafe: Set boundaries and be clear on the terms.
Are you prepared to give your adult child money? How much? For how long? Where will that money come from? One of your emergency reserve accounts? Funds that you have earmarked for your estate plan?
If it’s a loan, what are the repayment terms?
If it’s a repeat ask, is money really the best way to help your child? Do you have personal or professional connections who can help an underemployed adult find a better job? Should you bring your child to meet with your financial advisor and help them shore up – or start – their own long-term financial planning?
4. The Longevity Stretch Test
The Scenario: One spouse outlives the other by 10-15 years.
The Risk: When one spouse dies, the surviving spouse could lose up to 30% of the deceased’s Social Security benefit. And even if the surviving spouse reduces annual withdrawals from taxable accounts, that widow or widower is now living in a one-person household. Come tax time, as a single-filer, the survivor might find themselves having less spendable money while also getting bumped into a higher tax bracket.
The Failsafe: Couples should plan for two phases of retirement: their time together, and the time when one of them is alone. As unpleasant as it might be to think about, prepping a comprehensive plan (spending, withdrawals, benefits, taxes, health care) that will support each spouse solo will make a very difficult life transition a little bit easier.
Longevity statistics tell us that wives tend to outlive their husbands, so it’s especially important that senior women understand how their financial plan works and how it’s prepared to support them.
5. The Lifestyle Inflation Test
The Scenario: Spending rises 10–20% in the first five years of retirement because you feel great and want to do everything.
The Risk: Younger, healthier retirees who run headfirst into their "Go-Go Years" could turn their retirement smile upside down. Unfortunately, over time, that “frown” won’t be the result of a carefully planned decrease in spending: it will come from spending too much too soon and running out of money later in retirement, just as health care needs tend to rise.
The Failsafe: Set guardrails around your discretionary spending, especially in early retirement.
You might sit down with your spouse and rank some of your lifestyle and bucket list goals, or divide them into categories (Have To, Want To, Would Be Nice To), or plot them at various points on your retirement timeline (1-5 Years, 5-10 Years, 10+ Years).
For example, joining your local country club so you can play more sports and increase your social circle might be a top priority for the first six months of retirement. You might start planning a year out for your big anniversary trip to Paris. Relocating or buying a vacation home might be goals you build towards 5-10 years out.
By identifying priorities and planning ahead, you and your advisor can work out a spending plan that could help you achieve what’s really important at every stage of retirement, without throwing off your long-term security.
A Plan You Can Count On
As important as it is for your retirement plan to have buffers, flexibility, and contingencies, I believe that the emotional confidence a plan provides is even more important to your Golden Years. When you know your plan can handle a market drop or a health care challenge and still support you for decades to come, you’ll be able to enjoy the retirement you've worked so hard to build.
But remember: the best time to stress test your retirement plan is before your paycheck stops and the next best time is now! Come meet with Keen Wealth and let’s talk about how our process could help your plan perform better under pressure.
About Bill
Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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