How to Stress Test Your Retirement Income Plan

Folks, here’s a question we ask nearly every couple who walks through our doors in Greenville, Spartanburg, or Anderson: “What happens to your plan if the market drops 20% the year after you retire?” More often than not, we get a pause, a shrug, and something like, “I guess we’d figure it out.”

That’s not good enough. A retirement plan that hasn’t been stress tested isn’t really a plan — it’s a hope. And with 30-plus years of retirement ahead of many of you, hope is not a strategy. Today I want to walk you through what stress testing actually means, why it matters more than the simple calculators you’ll find online, and how we approach it here at Common Sense Retirement Planning.

Why the “Average Return” Calculator Lies to You

Here’s something that surprises a lot of folks: even if your portfolio earns exactly the average return you expect over 30 years, that doesn’t mean your plan is actually safe. The S&P 500’s average annual price return has been about 10.5% from 1995 through 2024 — but the index never actually returned exactly 10% in any single year over that entire stretch.¹ The average is a mathematical fiction; the real world delivers a bumpy, unpredictable ride made up of good years and bad years in an unpredictable order.

That “order” matters enormously once you’re retired and pulling money out. It’s called sequence of returns risk, and it’s one of the most important — and least understood — concepts in retirement income planning.

Here’s a simple way to picture it. Imagine two hikers setting out on the exact same trail with the exact same total elevation change over the day. One hiker faces the steep uphill climb first thing in the morning, while they’re fresh and full of energy. The other hits that same steep climb late in the afternoon, exhausted, after already covering most of the miles. Both hikers cover the same total distance and the same total elevation gain — but the one who front-loaded the hardest part when they had the most in the tank has a much easier day. Retirement withdrawals work the same way. A market downturn early in retirement, while you’re actively withdrawing money, does far more damage than the identical downturn happening later.

A Concrete Example of Sequence Risk

Consider two hypothetical retirees, both starting with $1,000,000 and withdrawing $40,000 at the end of each year, with no inflation adjustment for simplicity. One retiree experiences returns of 20%, 15%, 10%, negative 30%, 8%, and 12% in that order over six years — ending with about $1.04 million left. The other retiree experiences the exact same six returns, just in reverse order — negative 30% first, then 8%, 12%, 20%, 15%, and 10% — and ends up with only about $950,000.² Same average return. Same total withdrawals. A meaningfully different outcome, purely because of when the bad year happened.

This is exactly why a straight-line calculator that just assumes “7% every year” can give you a false sense of security. It literally cannot detect sequence risk, because it only tests one flat, unrealistic scenario.³

What Monte Carlo Stress Testing Actually Does

This is where a proper stress test — often run using something called a Monte Carlo simulation — comes in. Instead of running your plan through one single assumed return path, a Monte Carlo simulation runs your plan through hundreds or even thousands of randomly generated, realistic sequences of market returns.⁴

The output isn’t a single yes-or-no answer. It’s a probability. If your plan succeeds in 850 out of 1,000 simulated market histories, you have roughly an 85% probability of success — and just as importantly, you can see what’s happening in that other 15%, which is where the real planning conversation begins.⁵

We think of this the way a good engineer thinks about a bridge. You don’t just calculate whether the bridge holds up under perfect, average conditions — you test it against the worst storms, the heaviest trucks, the most extreme scenarios it might realistically face. Your retirement plan deserves the same treatment.

Three Things We Stress Test Beyond the Market

A lot of people think of stress testing purely as a market exercise — what happens if stocks drop? But a real stress test looks at several categories of risk together:

1. Market and Sequence Risk

What happens if a downturn hits in your first three to five years of retirement — historically the most vulnerable window? Sequence risk is most dangerous in the first five to ten years of retirement; if a portfolio survives that early stretch intact, the odds of long-term success improve dramatically.⁶

2. Longevity Risk

What happens if you or your spouse live to 95 or beyond? Many people underestimate how long they’ll actually need their money to last, and a plan that “runs out” at age 88 is a real problem if you’re still around at 92.

3. Spending Shock Risk

What happens if an unexpected healthcare cost, a long-term care need, or a spike in inflation forces your spending higher than planned in a given year? We build these possibilities directly into the stress test rather than treating them as an afterthought.

Strategies That Actually Improve Your Stress Test Results

The value of stress testing isn’t just seeing the number — it’s using that number to make specific, targeted adjustments. Some of the levers we look at with clients include:

• Flexible withdrawal strategies. Rigid, fixed withdrawals are the worst-case approach for sequence risk. Strategies that reduce withdrawals modestly in bad years and allow more spending in good years can improve a plan’s probability of success by a meaningful margin — often cited in the range of 10 to 20 percentage points in industry research.⁷

• A more conservative allocation glide path in the early retirement years. Shifting to a somewhat more conservative mix during the first several years of retirement — sometimes called a “bond tent” — can reduce the impact of an early downturn, with the allocation gradually shifting back toward growth assets later.⁸

• Layering in guaranteed income. This is where the five-year income bucket and Retirement Income Generator approach come back into play. The more of your essential expenses that are covered by Social Security, pensions, and predictable contractual income, the less your household depends on selling investments during a down market.

• Building in a cash reserve. Having several years of essential expenses set aside in stable, low-volatility holdings means you’re never forced to sell investments at depressed prices just to pay this month’s bills.

A Hypothetical Example: George and Patricia from Spartanburg

Let’s say George and Patricia, both 63, plan to retire next year with $950,000 saved and combined Social Security of about $4,200 per month. On paper, using a simple average-return calculator, their plan looks comfortable.

In a hypothetical stress test, we might discover that if a significant market downturn hits within their first two years of retirement — a real historical possibility, not a hypothetical worst case — their probability of the portfolio lasting through age 95 drops meaningfully lower than they’d assumed. From there, we could walk through specific adjustments: building a larger cash reserve to avoid selling investments in a down market, adjusting their withdrawal approach to flex with market performance, and considering whether a portion of savings should be shifted into more predictable income sources. The stress test doesn’t just flag the problem — it points toward the specific fix.

This is a hypothetical illustration only. Every client’s actual results depend on their specific portfolio, spending needs, and risk tolerance.

How This Fits the Common Sense Retirement Roadmap

Stress testing touches every one of the five pillars we build with clients:

• Income Planning — Does your guaranteed income cover essentials even in a bad-market scenario?

• Investment Strategy — Is your allocation appropriately positioned for the sequence risk window you’re entering?

• Tax Optimization — Are withdrawal sources sequenced to minimize tax drag during down years?

• Healthcare & Asset Protection — Has the stress test accounted for a potential long-term care event?

• Legacy Planning — Does the plan still leave what you intend, even under a challenging scenario?

Don’t Wait Until the Market Tests You First

The market will eventually test your retirement plan whether you’ve prepared for it or not. The only question is whether you find out how your plan holds up ahead of time, in the safety of a planning conversation — or in the middle of an actual downturn, when the stakes are real and the options are fewer.

We’d love to run a full stress test on your specific numbers. We offer complimentary consultations at our offices in Greenville, Spartanburg, and Anderson, convenient whether you’re coming from Travelers Rest, Clemson, or anywhere in the Upstate. Visit getmyroadmap.com or call (864) 235-2790 to schedule a time, and let’s find out — together — exactly how your plan holds up before the market decides to test it for you.

References

1. Darrow Wealth Management, “Stress Test Your Retirement Income Plan,” March 2026.

2. Simulations4All, “Free Monte Carlo Portfolio Simulator,” February 2026.

3. Darrow Wealth Management, “Stress Test Your Retirement Income Plan,” March 2026.

4. Kiplinger, “Stress Test Your Retirement Plan: Because Life Happens,” June 2025.

5. RetireCrunch, “Monte Carlo Simulation for Retirement: Why Average Returns Lie,” February 2026.

6. Simulations4All, “Free Monte Carlo Portfolio Simulator,” February 2026.

7. Retirement Lab, “Sequence of Returns Risk: Stress-Test Your Retirement Plan,” February 2026.

8. Retirement Lab, “Sequence of Returns Risk: Stress-Test Your Retirement Plan,” February 2026.

Securities and advisory services offered only by duly registered individuals through Madison Avenue Securities LLC, member FINRA/SIPC and a Registered Investment Advisor. MAS and Phillip Allen Inc. or Common Sense Retirement Planning are not affiliated entities. Artificial Intelligence was used to create this content. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Common Sense Retirement Planning.

A Roth IRA conversion is a taxable event. Our Firm does not offer legal or tax advice. Consult with your legal or tax advisor regarding your situation.

Investing involves risk, including the potential loss of principal. Any references to protection, safety or lifetime income, generally refer to fixed insurance products, never securities or investments.

The examples above are hypothetical in nature and intended for illustrative purposes only. Your results will vary. Past performance does not ensure future performance or results.

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