Most retirement plans look fine when everything goes according to plan. The problem is that real life rarely cooperates for 20 or 30 years straight.
Markets drop. Inflation runs hotter than expected. Healthcare costs rise. Spending in the early years ends up higher than projected. Someone lives well into their 90s or beyond.
If your plan only works under ideal conditions, it is not a plan — it is a hope.
That is why stress-testing matters.
Over the past few weeks we have been walking through the three-bucket retirement income approach. First we looked at how to build and invest the buckets. Then we covered how to withdraw from them. Today we focus on the step that often gets skipped: stress-testing the plan.
Quick Review of the Three Buckets
For anyone new to the framework, here is a simple overview:
- Bucket 1 is your Early Retirement Income Bucket. This holds money set aside for the next 3–5 years of spending. It is designed to be more stable so you have a ready source of income without needing to sell growth investments during a market downturn.
- Bucket 2 is your Mid-Term Bucket. It typically covers years 6 through 20–30. This bucket can take on moderate growth while remaining relatively balanced.
- Bucket 3 is your Long-Term or Leave-On Bucket. This is money you hope not to spend during your lifetime or that you intend to pass to the next generation. Because of the longer time horizon, it can generally take a more growth-oriented approach.
The core idea is straightforward: match the risk level of your investments to the time horizon of when you will need the money.
What We Actually Stress-Test
When stress-testing a three-bucket plan, we typically examine several key scenarios:
1. Sequence of Returns Risk What happens if the market drops significantly in the first three to five years of retirement while you are drawing income? The early years carry the highest risk of creating a lasting negative impact on the plan.
2. Higher Inflation What if inflation runs at 4% or 5% for several years instead of the long-term average? Does Bucket 1 still last long enough? Do Buckets 2 and 3 keep pace?
3. Longevity What if you or your spouse live well into your 90s or beyond? Does the plan hold up, or does it begin to thin out in the later years?
4. Higher Spending Periods What happens if spending is elevated for a few years due to travel, helping family, or unexpected costs?
5. Asset Allocation Inside Each Bucket Is the mix of stocks, bonds, and cash inside each bucket well matched to its time horizon? Is Bucket 1 carrying more stock exposure than it should? Is Bucket 3 too conservative for money that may not be needed for decades?
With real-time financial modeling, we can evaluate different asset allocation approaches inside each bucket and see how those combinations may affect the plan’s overall probability of success. This helps us compare more conservative versus more growth-oriented mixes and better understand which structures appear more resilient under a range of market and inflation scenarios.
6. Combined Stresses Often the most realistic test is a combination — for example, a market drop early in retirement happening at the same time as higher inflation.
These tests do not predict the future. They help you understand how resilient the plan may be under different conditions.
Why the Three-Bucket Structure Is Built for Stress
Bucket 1 is specifically designed to provide a buffer during the early years. When markets are down, you have a pool of more stable assets to draw from so you are not forced to sell growth investments at a low point.
Bucket 2 is meant to carry the mid-term load. It can still grow while remaining more balanced than Bucket 3, and it can help refill Bucket 1 when conditions allow.
Bucket 3 is the long-term growth engine. Because you are not relying on it for near-term spending, it has more time to recover from downturns.
When we stress-test, we are essentially asking: Does this structure still give you flexibility when conditions become difficult? In many cases the answer is yes — but only if the buckets were sized and invested appropriately to begin with and the withdrawal approach is followed with discipline.
A Practical Example
Imagine a couple who plans to draw $90,000 a year from their portfolio. We run a stress test that assumes a 25% market drop in the first two years of retirement, followed by a more normal recovery.
Because they have roughly five years of spending in Bucket 1, they can continue drawing income from that more stable pool while the growth assets in Buckets 2 and 3 have time to recover.
We can also test higher inflation. If Bucket 1 gets depleted faster than expected, we may need to adjust how much is held there or how aggressively it is refilled after stronger market years.
The goal is not a perfect forecast. The goal is to identify where the plan is more vulnerable so thoughtful adjustments can be made while there is still time.
Stress-Testing Only Helps If You Act on It
Sometimes the results show that Bucket 1 needs to be larger. Sometimes they show the overall withdrawal rate is too high for the level of risk in the portfolio. Sometimes they highlight that certain tax strategies, such as Roth conversions or more intentional withdrawal sequencing, could improve the long-term outlook.
This is why a real-time financial model matters. You cannot effectively stress-test a plan by looking only at average returns on a spreadsheet. You need the ability to run different scenarios and see how the pieces interact over time.
Building the three buckets is step one. Knowing how to withdraw from them is step two. Stress-testing the plan is step three — and in many ways it is the step that turns a good idea into a more resilient strategy.
If you would like to see how your own numbers hold up under different conditions, I am still offering to build your Smart Retirement Model at no cost or obligation while time slots remain available. We can look at sequence of returns risk, inflation, longevity, asset allocation, and other key stresses using your actual situation.
You can book a quick 15-minute call at LeonardiFamilyWealthcare.com. Look for the Contact and Calendly links.
There really is a smarter way to retire — especially when you stress-test the plan.