Completing a Post Career Lifestyle Stress Test

In the banking industry, a financial stress test is a simulation of how a financial institution would perform under adverse economic conditions. It is used to assess the institution’s strength to economic shocks and to identify areas where it may be vulnerable.

There are two major types of tests:

  • Top-down stress tests are conducted by regulators, who use their own models to simulate the impact of adverse economic conditions on financial institutions.
  • Bottom-up stress tests are conducted by financial institutions themselves, who use their own data and models to simulate the impact of adverse economic conditions on their own operations.

In the world of personal financial planning, you should complete your own personal post career lifestyle stress test before you retire. Following the process used by the financial sector, go at it from both the top-down and bottom-up. However, before you go top-down, you need to get your bottom-up done first.

Bottom-Up Lifestyle Stress Test

Why start here? You own your lifestyle plan. Getting as much detail in place better helps your wealth manager align the retirement financial strategy to what you want to do in a post career life. Therefore, you need to use your own lifestyle data to best simulate the impact on the future. Here are the tools for testing a lifestyle plan.

  1. Robust goal planning. Create an overarching life purpose statement. Follow that up with a bucket list of activities only limited by your imagination. Add in any long-term goals you would like to do the first 4 years in retirement.
  2. Factor in changes to location. Over 20% of retirees will move from one residence to another in retirement. Is that you? Reason in what that might mean.
  3. Understanding your health. Medical costs go up the longer you are in retirement. Ensure you have what you need to account for that.
  4. Evaluate any hobbies or continuing education opportunities. Personal endeavors can get quite expensive, take that into consideration.
  5. Brainstorm the unexpected. Consider unlikely events that will impact your strategy.  For example, the United States about 20% of adults aged 18 to 29 live with a parent who is retired.

These five tools are not the only factors. As you work through, add others that may change the lifestyle you have envisioned. From these findings create an outline of retirement budgets, adding in all the results from your bottom-up stress test.

  • Bare-bones budget: what you need to meet expenses and live simply.
  • Preferred budget: the one you feel comfortable living based on your bottom-up stress test.
  • Stretch budget: what you would do if you pushed the lifestyle envelope.

Once this is complete, then it’s time to go back to your wealth manager and do the top-down lifestyle stress test.

Top-down Lifestyle Stress Test

A good financial planner completes their version of a top-down stress test on your portfolio all the time. They will determine the resilience of your portfolio using different scenarios.

Taking your budget options, ask your advisors to apply your estimates into your financial model. Let them stress test the assumptions of each budget, using the systems and software at their disposal. Challenge them and let them challenge you.

The post career lifestyle stress test is not a one-time event. Make it a semi-annual or annual activity, much like businesses create annual business strategies. Testing your lifestyle plan now might be a little stressful. However, it will limit the potential for a lot of stress later because you will have tested yourself beforehand.

Start by assessing your current post career approach by taking the Retirement Time Analysis (RTA) and get a complimentary summary report.

Understand the time investment you will need to have a solid social network in retirement. Download the Social Network Audit Tool. Get it here.

Get an overview on the art of goal planning as well as a complimentary Life Purpose Statement (PLS) worksheet.

Get to know more about me and why I do what I do. Hi, I am Dave…

Dave Buck and His Wife Susan, on the beach.

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