A financial plan is a tool and, just like any other instrument in your life, should take into account all of the aspects of your situation – the good, the bad, and sometimes, the unfortunate! Considering the important questions about your financial future, which we wish we had a crystal ball for, will put you ahead of the majority of those that do not have a financial strategy in place. Before you know it, your plan looks better every year, and an ideal retirement is in sight; but an unexpected change can cause everything to fall flat.
One of the most overlooked components of financial planning is preparing for the unexpected. Stress testing your financial plan provides you with the security that your current strategy will perform well, even through the things you can’t plan for. Running scenarios that are less than ideal, to see if your plan can stand up against them, is as important as the initial planning itself!
Everyone’s situation and focus is different, so what you stress test against might be nothing like your friends or colleagues – is it a hike in interest rates or more children than you planned for initially that will cause your plan to derail? Maybe it is a shortened career, or the untimely death of a spouse. Whatever it is that will have a significant impact on your plans, you should be considering your top concerns that could erode your forecasted financial picture.
A stress-tested plan should still be reviewed with your advisors consistently, but typically the events that can cause a lot of strain are less evident in a plan that has been properly stress tested when it was initially drafted.