Stress-Test Your Retirement Plan: Lessons from History

Many retirement calculators use constant returns year after year. This approach, while simple, overlooks a critical limitation: the sequence of returns risk. If you had retired in October 1970, for example, you would have faced a challenging period where market declines combined with rising inflation significantly impacted portfolio longevity. This period, often cited as one of the worst times to start retirement for Australian investors, demonstrates why stress testing against real historical data is essential.

Why Stress Testing Matters

A plan that works with "7% average returns" might fail if those returns come in the wrong order. This is sequence of returns risk. The order of returns matters significantly when you're withdrawing money, unlike during accumulation when you're contributing.

The Ultimate Stress Test: 1970 for ASX, 1973 for Stagflation

For Australian investors, 1970 was the worst year to retire based on ASX performance. The combination of market conditions in that period created significant challenges for retirees due to sequence of returns risk. While markets eventually recovered, retirees who started drawing down in 1970 faced years of poor returns early in their retirement, which permanently impacted their portfolio longevity.

The 1973-1974 stagflation period represents another critical stress test. It combined falling markets with high inflation, a double threat that attacked purchasing power from both sides simultaneously. While your portfolio was losing value, inflation was eroding what little purchasing power remained.

These periods demonstrate why testing against real historical data matters. A retirement plan that worked in average conditions might have faced significant challenges during these periods. Testing your specific plan against these worst-case scenarios shows whether it's robust enough to handle similar future conditions.

Other Historical Crises to Consider

While 1970-1974 represents particularly challenging periods, other historical years test different aspects of your plan. The 1929-1932 period saw extreme market declines that took many years to recover. The 2000-2002 period followed the dot-com bubble. The 2007-2009 Global Financial Crisis saw Australian shares decline significantly from peak to trough. Each crisis tests different aspects of your retirement strategy under actual historical market conditions.

How to Run a Stress Test

Running a stress test against historical periods involves entering your retirement details (super balance, income needs, asset allocation, withdrawal strategy), then selecting "Historical Backtesting" mode in the calculator. You can choose specific retirement start years to test your plan against actual market returns and inflation rates from those periods. The analysis shows year-by-year how your balance would have changed and whether your plan would have succeeded or faced challenges.

What If Your Plan Shows Challenges in Historical Tests?

If your plan shows difficulties during historical stress tests like 1970 or 1973, several adjustments may improve robustness. Reducing your target income amount can give your portfolio more room to recover from market downturns and inflation. Using dynamic withdrawal strategies instead of fixed approaches can help, as these automatically adjust withdrawals based on actual market performance. Maintaining 2-3 years of expenses in cash means you avoid selling shares during market crashes. If adjustments don't provide sufficient improvement, delaying retirement by even 1-2 years can make a material difference, as it provides more accumulation time and reduces the total years you need to fund.

Beyond Single Years: Rolling Period Analysis

Testing against all possible retirement start years reveals the full range of potential outcomes. The calculator can run your plan against every retirement start year from 1928 onwards, showing your best case outcome (the most favorable historical period), worst case outcome (often 1970 or 1929), average outcome across all periods, and the percentage of periods that demonstrated sustainability. If your plan succeeds in 90% or more of historical periods, this may indicate a robust strategy, though past performance does not guarantee future results.