8 Ways To Stress Test Your Savings If You Plan To Retire in 2025

The prospect of retirement can be both exciting and a little scary. On the one hand, you’re entering a stage of life with a lot more freedom to do what you want to do and live where you want to live. On the other hand, you’re leaving a steady paycheck behind — and all the financial security it brings.

One way to keep the excitement and ease the fear, even if you plan to retire next year, is to conduct a stress test of your retirement plan. A stress test is a simulation designed to help you gauge how well a system functions under severe conditions, according to Northstar Financial Planners.

For retirement purposes, it means analyzing how well your savings can hold up to unforeseen circumstances such as increased medical bills, a sudden rise in living costs or a market downturn.

Here are eight ways to stress-test your savings if you plan to retire in 2025.

The first thing you want to make sure of is that the income you counted on in retirement is both accurate and secure. Here are some suggestions:

• Double-check your Social Security benefits to confirm how big your monthly payment will be.
• Review your 401(k)s, IRAs, pensions and other retirement accounts to get an accurate total of all balances and how long they will last.
• Review any investments that might provide income in retirement to see how they are performing.

Before making the decision to retire, be sure you have enough money in emergency savings to cover at least three to six months’ worth of expenses should you run into unexpected costs or losses in income.

This should be something you did regularly during your working years as a way of adapting to changes in income, expenses, family situation and financial goals.

A detailed budget takes on added importance in retirement because you’ll be living on a fixed income for what could be decades. The budget should include all sources of income and expected expenses each month, broken down by different categories — for example, income from retirement savings and Social Security, and expenses such as housing, utilities and groceries.

Your retirement stress test should also cover expenses that fall outside the usual items. For example, factor in money that might be needed to pay taxes, support family members or help grandkids go to college.

If you own your home, Fidelity recommends setting aside 1% of its value each year to cover maintenance, repairs and improvements.

Healthcarefor seniors is both unpredictable and potentially very costly. Northstar Financial suggested that you use your stress test to evaluate how much to set aside for healthcare costs.

On average, healthcare comprises 9% of spending for retirees ages 55 to 64 and 13% for retirees ages 65 and older, according to Fidelity.

Putting your retirement plan under a microscope can you help identify potential vulnerabilities, according to RetireGuide — especially when it comes to investments. Make sure your portfolio has the right balance of assets to help you avoid unexpected surprises in retirement. You don’t want to be overexposed to volatile assets that could suffer steep declines during a market downturn.

In addition to checking for potential weaknesses in your portfolio, create a list of different scenarios that could negatively impact your finances, such as an unforeseen medical condition or Social Security benefit cut. A good stress test will let you know if you are financially secure enough to withstand a sudden loss of income or spike in expenses.

Northstar Financial recommendedworking with a financial advisor to run simulations based on different scenarios. For example, software tools can model different economic or market conditions and their potential impact on your retirement savings.