What is the Market Risk Explorer?
The Market Risk Explorer lets you simulate various market scenarios, such as a decade of poor returns, to see how they could impact your overall Retirement Chance of Success and projected savings. Testing these scenarios helps you prepare for the possibility of market challenges, especially in early retirement, when downturns can have significant consequences on your long-term financial health.
Why Test for Market Downturns?
Market downturns, especially early in retirement, can significantly impact your ability to sustain withdrawals and achieve your long-term financial goals. By modeling downturn scenarios, you can identify potential gaps in your plan and take steps to mitigate risk, such as building cash reserves or adjusting your withdrawal and investment strategy.
Even if you’re not yet retired, it's essential to understand the impact of potential downturns on your portfolio. The earlier you plan for market volatility, the better positioned you’ll be to weather unexpected market events and ensure your retirement savings are protected.
For example, if you model a decade of poor returns and see a significant decline in your Retirement Chance of Success, you might consider:
Increasing your savings rate before retirement
Adjusting your investment strategy (e.g. more cash/fixed income) to preserve assets during downturns
Working an extra year or two to give your portfolio additional growth time before you begin drawing down
Types of Scenarios to Model
You have several options when testing the impact of a market downturn. Below are the types of scenarios you can model with the Market Risk Explorer:
1. A Decade of Poor Returns
This scenario simulates 10 years of weak market performance starting the year you retire. It assumes modest returns of just 1% annually, reflecting periods like the early 2000s that had minimal growth. This simulation helps you understand how prolonged poor performance could impact your retirement portfolio.
2. Three Year Sequence of Bad Returns
This scenario simulates a sequence of three consecutive years of negative market returns, starting at -15%. It highlights the sequence of returns risk, which refers to the impact of poor returns early in retirement as withdrawals are being made from your portfolio. Since you're drawing down on your savings during this time, the timing of these bad returns can have a more significant negative effect on your overall portfolio than if they happened later in retirement.
3. Create a Custom Downturn
You can also create your own downturn scenario by setting the timing, duration, and severity. For example, you might test a 5-year downturn with a -20% market drop. This customization allows you to model specific situations you’re concerned about, providing a tailored view of how your plan might perform under those conditions.
How to Access the Market Risk Explorer
To access the Market Risk Explorer, go to the Explorers tab on the left side of your dashboard and select Market Risk Explorer. From there, you can choose the scenarios you want to model and see how they affect your portfolio and financial plan outcome.
Model a Bear Market or Sequence of Returns Risk in your Plan
The Boldin Planner does not currently account for negative returns in the Accounts section. However, the Planner does have a Monte Carlo simulation driving your Retirement Chance of Success which accounts for negative returns because it models variability and negative returns are very possible.
If you would like more manual control, one option would be to model a "disbursement' from an account at a specific date.
To model a market loss manually:
Let’s say you want to simulate a 30% loss on a $1,000,000 401(k). Follow these steps:
Create a new scenario
Select Add a Disbursement
Enter the amount and select the affected account
When prompted, choose “Deductible” (this avoids triggering taxable income)
Add notes to describe the scenario
Press Save
8. Go to Scenario Manager and use the Scenario Comparison feature to compare the scenario under your Pessimistic, Average and Optimistic Assumptions as well as with your Baseline and other scenarios.
Want to simulate a recovery?
You can also model a recovery period by adding a Windfall under My Plan > Income for a later year. This can help simulate markets bouncing back after a drop.