Monday, September 14, 2009

Stress Testing our Retirement Savings

When I retired in my forties in October, 2007, I didn't think I would need to seriously consider returning to work. However, after the current financial crisis reduced our savings accounts by 44% through mid 2009, I began to think that a Plan B of going back to work would be a prudent option.

This week, I will be meeting with our financial advisor to evaluate stress test scenarios and their impact on a successful retirement. Specifically, we will look at:
  1. No social security payments. This assumes the worst that social security will not be available when we are qualified to make withdrawals.
  2. Stock options are worthless. In October, 2007, the value of stock options were about 1/3 of our liquid assets. Currently, the stock options represent about 5% of our savings.
  3. Low portfolio growth rates. Historically, we've assumed a 7% annual growth rate. We'll look at 5% and 3% also.

In the past, with assumed portfolio growth rates of 7% (including stock options) and social security being available, the Monte Carlo estimation showed a high probability of our savings covering retirement at a 4% to 5% withdrawal rate.

The stress test scenarios will help us determine if our retirement savings have any margins of safety and whether we should seriously consider returning to work.

For more on Strategies and Plans Ideas, check back every Monday for a new segment.

This is not financial or retirement advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC


pfstock said...

Personally, I highly doubt that social security will be completely eliminated. More realistically, payments will likely be less than expected. Also, you can almost certainly expect higher taxes.

Am I to understand that you had one-third of your liquid assets in stock options? I hate to rub your nose in it now, but unless you are referring to unvested options that you can't sell, you should have started to liquidate them and get more diversified before you decided to retire.

Low growth is acceptable so long as inflation is kept in check. The biggest variable that you haven't mentioned here is inflation. I doubt that anybody can accurately predict where inflation will go, but that is something to think about.

Do you feel stressed now?

Super Saver said...


Agree, Social Security will be around. But if I can survive financially without it, I will feel better. Who knows, the government may use a means test in the future to decide who qualifies:-)

On the stock options, I realize the diversification risk, but still feel it is a good plan to hold and cash them near expiration. If the market keeps advancing significantly, I may cash some early as a hedge. However, just in case the market crashes again, I wanted to test the scenario that they are worthless.

Good point on inflation. I'll add that to the list of scenarios to test.

I'll let you know how stressed I am after the review :-)

Mel and Stacy Marten said...

Our company matches investors to financial advisors at, so we speak with investors all the time. Many people are feeling that the traditional approach of 60% or more of equities is uncomfortable. A different approach is to guarantee your retirement with bonds, both corporate and TIPS, and supplement the rest with your equity portfolio.