How to use Retirement Stress Test

Building a successful retirement proposal for a client is wonderful, but what happens if uncontrollable factors experience more dire realities than the projection currently includes?

RightCapital has built the Stress Test tool to answer this exact question.

For a brief overview of the Stress Test watch this short video.

To access Stress Tests, navigate to the client, and select Retirement > Stress Test.

Using Stress Tests

There are many uncontrollable factors in the future. RightCapital has identified several common factors which often contribute to a diminished retirement lifestyle and has modeled a stress test to determine a client's financial resilience to fluctuations in these categories.

The Baseline column reflects the Probability of Success from Retirement > Analysis. The other columns reflect a stress applied to each individual factor (assuming all other factors are held constant). Mouse over the columns to see the exact Probability of Success for each factor.

Strategic planning and stress tests

The Stress Test tool can be an effective element in building a case for shifting a client's investment allocation.

The Stress Test can be viewed as a simplified sensitivity analysis, and help to identify areas of potential weakness in a client's current financial plan.

For example, if a client (like the screenshot above) demonstrates strong resilience to a market crash, but low resilience to tax increases, consider a proposal which shifts more assets into tax-sheltered accounts and fewer assets in equity accounts. This may create an overall more resilient portfolio. This is, of course, just one tool among many when making complex financial decisions and is not advice.

As another example, if a client is resistant to purchasing LTC insurance, show the impact of increased health care costs in this stress test and then build a proposal which includes LTC insurance and show the client this graph again, with increased resilience to increased health care costs.

To apply a stress to a category, open Action Items. The default stress tests are displayed; use the slider to create your own stress test. Once a category's stress has been adjusted, click Refresh and RightCapital will apply the indicated stress to each factor and re-run the entire Monte Carlo simulation to recalculate the client's Probability of Success.

To choose which stress test items you wish to display on the screen, click the 'Edit' button to check or uncheck various stresses:

Stress Test Details

Equity markets crash by: Assumes an immediate drop in the equity portion of the client's investments by the percentage indicated. Subsequently, investments are assumed to grow as they would have in the Baseline plan.

Tax expense will be higher by: Assumes an increase in the total taxes paid by the percentage indicated. For example, if the client is paying $20,000/yr in taxes, a 20% higher tax stress will increase the tax expense to $24,000.

Social Security will be reduced by: Assumes a reduction in total Social Security benefits paid by the percentage indicated. For example, if the client is receiving $50,000/yr in Social Security, a 40% reduction in Social Security will reduce the benefits to $30,000/yr.

You (and your spouse) will live: Extends both the client and co-client's planning horizon by the number of years specified.

Inflation will be higher by: Increases all inflation rates by the percentage indicated. For example, if general inflation is 2.5% and you indicate that inflation will be 1% higher, we will use 3.5% as the general inflation rate.

Health care cost will be higher by: Assumes an increase in the total health care costs by the percentage indicated. This applies to costs specified in the Annual Retirement Health Cost and Annual Retirement LTC Cost cards.

Asset return will be lower by: Reduces variable investment returns by the percentage indicated across the board.

Combined: The combined stress test reflects the cumulative impact of all of the other stress tests displayed in the graph. This allows you to select specific stressors and indicate their combined impact on the probability of success.

For Example:

The graph above indicates a combined probability of success for the proposed plan of 71.6%. This includes an equity market crash, social security being reduced, and the client and co-client living longer. The stressors in the graph are controlled by the edit button within the action items.

Creating and testing multiple Plans

As you create multiple proposed plans for clients, the Stress Test can be an excellent way to compare the resiliency of those proposed plans in a variety of environments. You can determine which plan to stress by using the drop-down box in the upper right-hand corner of the Stress Test screen.