Stress Testing your Retirement plan....have you??

Sea_Shell

It has been brought to my attention that we should "stress test" our retirement plans to account for a worst case scenario playing out.

How many of you have done this?, and could your plans cope with the double whammy of inflation running at say 5%, coupled with a sustained run of negative investment growth, say -5%.

We have a total pot (cash/pensions/ISAs) of approx. £500k, and were loosely basing our plans on the 3-4% "rule" but if the above "doomsday" actually occurred and was sustained, we'd be stuffed....but could ANY of our retirement plans cope with this, without having to work FOREVER!!!!!

Or is your philosophy just to get on with enjoying retirement and what will be, will be.:j

[purplesignup][/purplesignup]

Triumph13

Depends what you mean by 'sustained'. If it continued for ever then no, but in that kind of scenario the whole world will be stuffed.
My plan is tested to cope with an immediate 40% drop in stocks and returns just matching inflation thereafter. If anything worse than that happens then I should have invested in tinned food, guns and ammunition.

marlot

Sea_Shell wrote: »

It has been brought to my attention that we should "stress test" our retirement plans to account for a worst case scenario playing out...

What's the worst case scenario?


Abolishing of the state pension?
Making the state pension means tested [to some extent it already is, given that it is taxable]?
A stock market crash early in retirement [Sequence of returns risk]?
A crash in the pound?
Onset of dementia requiring a very long stay in a home?
An incoming government wanting to do extensive wealth redistribution?
Our personal inflation rising much faster than our income?



etc.

PasturesNew

I'll be on the single person's state pension, living in my own tiny house and responsible for maintenance costs etc. All alone and I'm small with no DIY skills or mates or family to "help".

I'm sure I'll live.

Do you think you're just over-thinking it all and worrying yourself too much?

Suffolk_lass

My plan B if we can't manage is a combination of options:

• Travel less
• Grow more myself and eat more cheaply
• Use up stores and wine lake (no, really)
• Do a bit of work (DH is a teacher, could do some supply, I have done all sorts)
• Sell house and live somewhere smaller
• Rent out house and move somewhere cheaper
• Sell collectibles
• Sell some surplus possessions
• Sponge off Son

Stubod

I do all my planning on a spreadsheet. Once I had set one up with our current / known finances, expenses and incomes I created 3 copies and then modeled "worse case, average and best case" scenarios using various rates of inflation and interest.

I am happy we can manage on the worst case model which assume 4.5% pa ongoing inflation, 1% interest on all savings and investments, pensions only going up by 80% of inflation, and reducing our "starting fund / current money available" by 25%.

Although I am hoping my "average" scenario is more likely....but you never know!

Linton

marlot wrote: »

What's the worst case scenario?

Abolishing of the state pension?

Extremely unlikely that any elected gvernment would do this, or if it happens it would probably be with decades of notice.

Making the state pension means tested [to some extent it already is, given that it is taxable]?

Again unlikely.

A stock market crash early in retirement [Sequence of returns risk]?

Quite likely so yes you do need to factor this in. However you can plan that it would be followed by a recovery. If one doesnt happen we would be talking about global economic collapse when all bets are off anyway.

A crash in the pound?

Quite likely but if you are broadly and globally invested in equities you would be protected.

Onset of dementia requiring a very long stay in a home?

Quite possible but should be covered for some time by one's house and other assets up to a point and also by a reduction in discretionary expenditure. Beyond that would you know or care? Not a lot you can do about it anyway.

An incoming government wanting to do extensive wealth redistribution?

Quite possible. At the moment wealthy pensioners can do very well out of the tax system compared with people living on earnings. To balance that out more fairly would require higher tax rates perhaps in the 10%-20% region.

Our personal inflation rising much faster than our income?

"Much faster" seems very unlikely unless the cost of care is included. Most of retirees basic expenditure is shared by everyone else.

Bravepants

I'm in a position to not have to rely on my S&S ISA, it's an extra pot that would make life more confortable even drawing at 3.5%. If you still have a DB pension, and you can afford it, it is worth buying extra pension. An index linked DB pension going forward into retirement is a very valuable asset. This is why transferring out of DB to DC for a CETV, no matter how many zeros you are tempted by, is not good regarding peace of mind.



For the same reason it is not really worth taking lump sum unless it is definitely needed to pay off debt.

hugheskevi

If you still have a DB pension, and you can afford it, it is worth buying extra pension. An index linked DB pension going forward into retirement is a very valuable asset

Very much agree with this.

Defined Contribution pension is excellent, and definitely has a big role to play in retirement, but having a solid Defined Benefit foundation makes planning and risk management a lot easier.

It isn't just the security and lack of need to manage investments deep into retirement that Defined Benefit pensions provide either, they are very useful as part of a combined risk management strategy with Defined Contribution pension for earlier in retirement.

As an example, I plan to use Defined Contribution income between age 55 and age 68 (my probable State Pension age). I'll have a Defined Benefit pension in payment from age 50, so the Defined Contribution pension will fill the gap between that and other Defined Benefit and State Pensions starting later.

But if the Defined Contribution pension doesn't perform as well as expected, I can just commence one of the Defined Benefit pensions a bit early and my lifestyle won't be affected.

doingitanyway

Suffolk_lass wrote: »

My plan B if we can't manage is a combination of options:

• Travel less
• Grow more myself and eat more cheaply
• Use up stores and wine lake (no, really)
• Do a bit of work (DH is a teacher, could do some supply, I have done all sorts)
• Sell house and live somewhere smaller
• Rent out house and move somewhere cheaper
• Sell collectibles
• Sell some surplus possessions
• Sponge off Son

Your last option made me smile

GibbsRule_No3

Single person, paying rent until I die or they put me in a home, when I won’t need to worry, hopefully I will be mentally unaware when that happens. Rent and council tax is the state pension so both rent and SP should keep up with each other. Luckily living on final salary pension that should also keep up with rises when I retire next year. Have been doing a dummy run, by reducing work to three day week and so far I think it will work for me. Small lump sum to use for extra special treats, until I can no longer physically or mentally do them. Of course only time and years will tell if this will work out for me.