The importance of stress testing your finances – How to build resilience alongside wealth

Building wealth is only half the task. The other half is making sure that wealth can withstand the shocks life inevitably brings, whether that is a market downturn, a change in interest rates, ill health or a change in family circumstances.

Many of us will have heard or read stories about once wealthy individuals forced to live meagrely due to unexpected changes. Financial resilience is not something that happens by accident – it is something you plan for over a lifetime.

What financial stress testing actually means

Stress testing uses cash flow modelling to show how your finances would hold up under different scenarios.

This might include a sustained market fall early in retirement, a period of higher inflation, rising care costs later in life or the loss of a source of income.

Rather than a single forecast, it gives you a range of outcomes, so decisions are made with the full picture in view so you can build plans and take actions that provide greater financial security against a wide range of challenges.

Sequencing risk in retirement

One of the most overlooked risks is sequencing risk, the danger that a market downturn in the early years of retirement, combined with regular withdrawals, can permanently reduce the size of a portfolio, even if markets go on to recover.

Two people who hold identical investments over identical periods can end up with very different outcomes, purely because of the order in which returns arrived.

Testing for this in advance allows a withdrawal strategy to be adjusted before it becomes a problem.

How to build greater resilience into your wealth plans

There is no golden solution for financial resilience, but here are some steps that are generally recommended to ensure you have the means to meet your lifestyle, come what may:

• Insurance – Income protection, critical illness cover and life insurance written in trust can protect a plan from events that are impossible to predict. All of these types of cover are underutilised by many, as no one expects the worst to happen, but they can give great peace of mind.
• Diversification – We know financial advisers mention it time and time again, but holding all of your eggs in one basket creates risks that a resilient plan should aim to reduce. No one can tell what tomorrow holds, so placing your capital across a wide gambit of investments, savings and assets can help to protect you.
• Life event planning – Rather than reacting to a divorce, business setback or care need as a one-off crisis, building these possibilities into the plan from the outset means the response is already prepared. Many new investors don’t realise the breadth of advice that financial advisers can provide, but we will take the time to understand your current needs and goals to create a well-rounded plan that accounts for all eventualities.

The time to build resilience is now

You never know when the next crisis may hit. In the last few years, we have seen rising living costs driven by events that are beyond our control.

Knowing that you have a wealth life plan in place that protects, as much as possible, against most eventualities can bring great comfort to you and your family.

How can we help

The LFWM team works closely with individuals and families to create personalised financial plans, model future outcomes and develop strategies designed to improve long-term resilience and confidence.

If you would like to understand how your own finances would withstand a downturn, a rate change or an unexpected life event, please get in touch with our team at Lubbock Fine Wealth Management to arrange a review.

The information included in this article may be subject to changes in taxation following its publication. This article is intended for informational purposes only and does not constitute advice.

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