MAKING CENTS: Stress test your forecast for retirement

With an eye toward summer vacation, this is a good time of year to think about how you would spend your time if every day was vacation.

For many, the goal of not working some day is still alive. Retiring isn’t what it used to be, however.

Today, retirees want a lifestyle that may be more active than their lifestyle while working, and that scares them. Most are keenly aware that the lifestyle costs when you are done working may be even higher than they were while you were working.

Forecasting is the first step of assessing the consequences of working less and spending more. It starts with your cost of living as you know it today. Be careful to not underestimate this amount. Your ultimate “proof” of the number is to look at the total amount that leaves your checkbook every month. Count your ATM withdrawals in that amount you will call your total cost of living.

Next, add the wish-list items. Quantify the cost of your lifestyle while not working. To make this data a forecast, simply apply a net rate of return on assets and investments and choose an inflation rate to grow your cost of living. It’s fairly simple math, but here are some ways that many forecasts get thrown off track:

The first way is to make incorrect assumptions. Just like our federal government now imposes stress tests on banks, you ought to perform a stress test on your personal financial well-being. You should test your forecast the government does banks -- with a higher rate of return and a higher inflation rate. Do not wait for any of these possibilities to come true. It is best if you know in advance the consequences from your stress test activities, should those situations arise during your lifetime.

Add in a few of life’s predictable obstacles. Matters such as healthcare emergencies, loss of employment or a child needing assistance will throw off the most accurate forecast. For the healthcare part, stress test your forecast by factoring in the material cost of long-term care insurance and the consequences of an uninsured long-term illness. If the former looks OK, consider making the purchase. If not, consider alternative forms of protection including at-home family care.

Understand what you need from your assets. Many people are walking around with a collection of investments and following the markets as if their life depended on it. Some are taking more risk than is needed and some aren’t taking enough risk to generate the desired rate of return. Construct a portfolio that will attempt to find as little volatility as possible within the confines of your desired rate of return.

Don’t forget taxes. With rates higher than in past years, pay attention to the location of your assets and the timing of your buys and sells. A little extra attention to tax matters should be beneficial in today’s world.

 John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthmanagement.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

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