Will your financial planning strategies and methods get you the results you want? How do you determine whether your business and wealth planning efforts are “working?”
It’s all too common to find wealth plans that aren’t fully aligned with their owners’ goals, which can lead to disappointing long-term results. A business stress test can help you understand where you are, and what adjustments need to be made to get you where you want to go.
What is Stress Testing?
Stress testing is a process that carefully examines your business and wealth planning efforts to determine how the strategies you have in place are likely to hold up in various scenarios. Ultimately, stress testing can help you see if your planning is likely to lead to the outcomes you desire.
For years, stress testing has been a common practice for people with a net worth of $500 million or more, but it is becoming increasingly common among a wider population to assess both personal wealth planning and business strategies, as well as how those two areas intersect.
A stress test looks for any severe disconnects between your financial goals and the actual results your current strategies are likely to produce. A successful stress test also takes into account the personal and emotional aspects of wealth planning, including what is most important to you, everyone and everything that could be affected by your wealth planning decisions, and how well your planning is set up to fulfil your unique goals and priorities.
What Financial Areas Does Stress Testing Cover?
Stress testing can analyze a specific aspect of your wealth planning or can serve as a general assessment of your financial strategies. The three areas that tend to be the focus of stress testing are:
- Exit planning: Minimizing future estate taxes, identifying ways to seek to retain maximum value if a business is sold, etc.
- Asset protection planning: Strengthening indemnification language in corporate documents, ensuring adequate commercial insurance coverage, and determining if wealth is well-insulated based on risk tolerance, concerns, and goals.
- Retirement planning: Reviewing intended outcomes and determining how likely a plan is to reach those goals.
How to Determine if You Need a Stress Test for Your Finances
Stress testing can be an involved process that takes substantial time and monetary resources. Ask yourself these key questions to determine whether stress testing makes sense for you:
- When was the last time you evaluated your financial and wealth planning strategies?
- Are you confident that your current strategies will enable you to pursue or manage your long-term financial goals?
- Have you adequately planned for unforeseen circumstances such as the sale of a company or the death of a partner or important company personnel?
- Have there been significant changes in your life, your business, your finances, tax laws, or the economy overall that might require an adjustment to your strategy and planning?
- Are you using the most comprehensive risk mitigation strategies and pursuing the most benefit from retirement plans?
If you’re not sure about the answers to any of these questions, or you have not evaluated your wealth planning strategies in several years, stress testing can help you give you the clarity you need in order to move forward with purpose and confidence.