Catastrophe and Risk Mitigation
Catastrophe and Risk Mitigation
I’m sure many of you, like me, listened to Suze Ormon on the Afford Anything Podcast with a mix of nausea and anger. In one fell swoop she minimized the FIRE movement and pretty much implied that many of us are chumps. While the anger only lasted for moments, I have to admit that there was also a bit of anxiety. What if Suze is right? What if we are not appropriately planning for the future, and with a little bit of bad luck will become penniless and destitute? The podcast really got me thinking about catastrophe and risk mitigation. Most of us who pursue financial freedom are conservative by nature. We would rather over save then under.
Yet, the truth is that we have little control over the future. Medical or legal catastrophe could be lurking around the corner without us being none the wiser.
Is the financial independence movement grossly negligent in its preparation for such possibilities?
Healthcare
One of Suze’s main arguments is that healthcare is expensive, and a major medical illness or accident could lead to financial destitution. While this is certainly true, Whether FIRE or not , all human beings face this risk. Employed individuals usually have health insurance through their employers.
FIRE folks also need health insurance. Of course there are copays and deductibles. But as many in our community have shown, when you have no income you can purchase fairly robust insurance products with subsidies bringing the costs significantly down. While I won’t go into specifics, there are plenty of options that are not only affordable but limit the out of pocket spending each year.
There are also other options including healthshare ministries and expat insurance for people who travel.
The point is that when it comes to catastrophe and risk mitigation, employed people and FIRE practitioners should generally be on the same footing.
Disability Insurance
Suze mentions throughout the podcast that employed individuals also have disability insurance. And indeed, this is a marvelous way to minimize risk by reproducing income if one is unable to work. I would argue that everyone should have this type of back up plan.
People who have FIREd are no different. Instead of an insurance policy, they have their wealth which provides income by means of dividends, rents collected, or a drawdown strategy. The early retirement crew has pretty much decided to collect on a disability policy without being disabled.
I can’t think of any better way to deal with catastrophe and risk mitigation than this.
Mr. Market
Another of Suze’s strategies is to warn about Mr. Market, and proclaim that if we are not careful that it will leave us poor. She forgets, however, to consult years of data or maybe read a little from Big ERN or Michael Kitces.
The point is that sequence of returns risk is both knowable and can be planned for. Although there are no promises, when it comes to catastrophe and risk mitigation, the FIRE community has done some deep thinking about this issue.
Suze prefers to rely on anecdote. She can point to hundreds who have called her show and described how they have run out of money. She does not, however, point to any data regarding safe withdrawal rates and sequence of returns risk.
Long Term Care
There is no question that if you become disabled and need long term nursing care or home care, you are hosed. Whether employed or not, this is going to be expensive. I believe Suze is wrong in thinking that employed people manage this any better than FIRE people. She seems to assume that employed people have more money saved, but I think this is a fallacy.
There are pretty much three options. Don’t get disabled. Self insure by saving a million extra in case. Or buy long term care insurance.
Catastrophe and risk mitigation planning can only do so much. If you end up becoming disabled and need long term care for decades, you are going broke. It doesn’t matter how well you planned.
Final Thoughts
Suze Ormon gives me pause. Behind all the egoism and audacity there is an important message. We need to plan for catastrophe and risk mitigate as best we can.
Can a FIRE practitioner do this effectively and still retire early.
I believe so.
Agree on all points. Disability insurance is no longer needed as its whole premise is to provide an income when you have something that prevents you from working. Those who rely on their wage income definitely need it. By definition those who have FIREd have broken free of needing wage income and thus disability insurance is superfluous.
Healthcare is the elephant in the room but it is not like FIRE people can’t have insurance. It’s just that insurance is more expensive than what would be available if you remained employed. So if you have decided to FIRE I am sure you have calculated this extra expense ad nauseum and put it in all your scenarios to make sure it does work.
Sequence of return risks affect everyone, FIREd or not but again I think we plan for all scenarios. Gasem did several posts on my blog addressing ways to mitigate it (the Lifeboat was the latest). You might not be able to take advantage of a down market like someone who is employed who can funnel incoming money to buy depressed stocks, but technically you have won the the game already and don’t need to play as much
Agreed on all points. I Thin S.O. is not looking at all sides and is arguing out of emotion.
SORR DOES NOT EFFECT EVERYONE THE SAME! SORR only kicks in when you start to draw from a portfolio. It is NOT active when accumulating. I call it “open portfolio” and “closed portfolio”. A closed portfolio is liable to return but it is not actively being deflated. A closed portfolio merely varies according to compounding, where as an open portfolio is open to active deflation. Deflation is NEGATIVE COMPOUNDING. Several things happen to a portfolio when opened including fees, taxes, and the actual loss in value and the loss in projected value. SORR is the net effect of each of these value suckers on growth (or lack of growth). When you loose the W2, this is the risk you acquire (among others). All of those squiggly lines in FIREcalc represent a rearward looking SORR. To say therefore SORR is the same for everyone just means a lack of understanding of what SORR is. FIREcalc reads-out a failure rate for a given set of parameters. The failure rate is created by sequence of return. If SORR was the same you would have one rate instead of a distribution of fails and successes. The problem with FIREcalc is it’s historical. It looks at one static past and generates many time dependent sequences based on a single very long history. That is a worthless analysis. It analyzes a historic economy where union pensions existed and cell phones did not. It analyzes a history of industrial revolution and certain wars and economic crashes and social order. That past clearly will not exist in the chaos of the future, and as such if you’re planning on the past as prologue YOU’RE SCREWED. This is why I use monte carlo analysis.
I am not a Suze fan. I think she’s way to histrionic. I think she would do more service in trying to educate people about risk than ragging on and on about getting hit by a bus and the fact SS is going broke. BUT the FIRE community is equally as daft in the other direction in minimizing the reality of risk and maximizing the positivity of projections. Projections are NOT WEALTH, projections are presumptions. Money in the bank is wealth. Saying you’re going to do locums or run a blog to make up the difference is fine until it is not. It’s fine till you have a mild stroke that deters your productivity, or get hit by that bus and spend a year rehabbing never to work again, or, or, or.
Many people presume a moderate 7% ROI based on history. Sounds about right? It turns out since the market peak of 2000 and the subsequent dot com bust and financial crisis of 2008 the S&P 500 has returned less than 4% per year (closer to 3.7%) as of Sept 2018. That means over 18 years a 7% projection has under-performed by about half. This under-performance is reality. It is not a projection. It IS sequence of return in action. 18 years is 60% of a 30 year retirement. If you retired on Dec 31 1999 welcome to your under performing reality. If you managed correctly with a tight belt you can probably reach 30 years as long as things don’t get worse, but you may run out of money at 31 years. If things get worse…. you still have 12 years of retirement to cover.
This is what ol’ 67 yo Suze is trying to impart, and what I tend to write about. If you’re a woman you have a 30% chance of living to 90, and a 1.4% chance of living to 100. If your name is Tanya and you retired at 40 in 1999 what do you think your chance of having any money is at 100? In fact you may do OK. There are a whole lot of projections that DO work out.
What Suze did was screw with your denial. Your denial of risk. The entire FIRE literature is geared to creating denial of risk. It is geared toward shifting your natural risk aversion to something that may be more mirage than reality. It’s a great social experiment. It’s an experiment that deserves great humility and not hubris if you are going to participate. Personally I don’t have a lot of faith in its tenets because I think the analysis is way too simplistic and positively biased. I guess time will tell. If Suze backed you up and made you REALLY look again at risk she did her job and you a favor. Now of course we will get into all the discussion of what actually constitutes FIRE: part time, side gig, and so on. Moving goal posts do not directly assess retirement risk.
I agree in so far is that Suze is making us question our assumptions. Her assumptions are less scientifically based than ours. She is all emotional and little data. You can argue that FIRE proponents are misinterpreting the data and I am fine with that. I might even agree. Suze screams about boogyman type risk that either can be mitigated or effects both the rich and poor equally.
FIRE unfortunately isn’t homogeneous. Fat FIRE, THIN FIRE, 50 years, 60 years, etc, those are among the myriad of the projections. In addition there is drift in the analysis. Trinity is based on historical projections over 30 years. How many “experts” fudge the data? I’ve seen on other forums 4% x20 as “good enough”. or 4% x 25 to cover 50 years as “good enough” all based on historical data. I saw yesterday a guy who has a business who is 48 trying to decide if he should work 3 more years and double his money or FIRE. When questioned it was clear he hadn’t given any thought to his actual FIRE expenses. The business was covering his risk. The guy was clueless and on an internet list looking for answers from some plumber. If FIRE was homogeneous you could derive some rational “scientific” or at least statically probable guidelines but 60,000 disparate opinions does not yield tightness in variability. She actually has some pretty good data in that she sees the failures. She gets the letters. Failures are not well reported in the echo chamber. Failure reporting is necessary for error correction.
Fair enough.
If you have FIREd, long term care insurance is not going to be useful. It has a cap and/or a time limit on its use, such as $200,000. For someone who is financially independent, that is not a make or break number. And all those premiums will only return a fixed maximum.
Dr. Cory S. Fawcett
Prescription for Financial Success
LTC insurance may help mitigate the risk of squandering an inheritance. Otherwise I agree.
Also, most of us plan to maintain one or more income streams even after FIRE. I’ll probably work locums a few months a year, both increasing my wealth well beyond FI and preserving the option to return to work full time if needed.
I totally agree.
Honestly I believe there was a significant gap in her logic. Ie the underlining assumption was that having say 3million is functionally less useful in dealing with an emergency then an average paying job. The problem is, even 3 percent bonds on a 3m portfolio have a higher return then the median family income in the US. Ie I can’t see how the person with such a portfolio isn’t more safe from bad situations then the majority of the population. So either the vast majority of the US, up to say 90k a year in income are hosed no matter what they do. or her logic is flawed
I agree, her logic is flawed and preachy.
Yeah, I listened to the entire interview and like you, I felt that she treated the FIRE community as a straw man to knock down. At the same time, I truly appreciate that both Paula and you are stepping back and asking the question about how prepared people really are, especially the young early retirees. We all have such a variety of stories, income streams, net worth, ages, and goals. Most people I’ve met in this FI community are devouring ideas, educating themselves, and preparing their financial lives in ways that far surpass everyday people. As a result, there are probably more FIRE people with “one more year syndrome” due to wanting to err on the side of caution than those that FIRE the minute they achieve their 25X number. It is good food for thought.
There is definitely a culture of caution.
I was totally turned off by her demeaning tone and aggressive dislike and dismissal of the movement. I also was really glad to hear something like this ringing through the echo chamber, as it is crucial for us to take an objective view at how we are planning our lives.
I disagree with her ideas of what kind of money we need to live, and I feel that she has lost touch with those of us worth less than $10m. I also felt that most of her doom and gloom prophecies were things that would have an extremely negative effect on someone’s life whether or not they were employed, and the main tenet of high savings rates practiced by the FI community is actually one of the best protections one can have for situations like those she described.
The most important thing to come of this, in my opinion, is the conversation we are now all having.
She could get so much more accomplished with a better tone.
Hi DocG,
I helped my son start a tax free fund. And he knows that that is not to be used until he is 65. He gets it already. He can accurately state that he will likely need to work full or part time until then. Never does he ever say “retire” since he understands the math. He can also say clearly that “you know mom, life happens…”. My son is 20 and has no dependents and he can see this rationally.
I have been frugal for almost my entire 50 years. It will be things you never see coming that happens to you. In my case it was always for people I love. Would you really deny them just so that you can go on the internet to espoused being retired early?
I could not and thus I will gladly get my butt back to my medical career.
If you can take that “go back to work” attitude AND if you have a career that you can even get back- then “retire” any time you want. I don’t even know many self employed docs who have that luxury.
Ultimately however, it is to each his own. There is no point arguing. There is no right or wrong. No matter how much others agree with you, would they spot you if you do not meet your financial targets? If they will not, take all they say with a healthy dose of your own reality.
None of us know one another’s true life situations. Hopefully, if you guessed wrong, you will recognize it early enough to recover.
I think you are write in the sense that each of our situations are different. Having a job you can go back to is always a positive.
Continuing to work is not always a choice I read that most people leave the work force earlier than they wanted to.
Working has risks too # cause of death for young people is driving
And the stress of some jobs can kill you
Saving towards Fire gives you options like down shifting to easier job or if your company says we may down size next year one can not panic because your already are at lean Fire.
Chasing the next dollar can cause harm to others like when you scam people on high fee per paid credit cards
The key is options. That is why I pursued FI.
I had no problem with anything she said, but you’re right, she replied completely on anecdotes – which of course she has plenty of. Just realize her tone and message intends to get people fired up. She’s drumming up scare tactics to push her own brand and products – frequently mentioned throughout the episode. My being polarizing and firing everyone up, everyone in the FI world is writing about her, which blasts her name all over the internet, and helps her return to national attention.
If it helps people think of risk mitigation more thoroughly, good for her.
I’m sure no one had a problem her her discussion of a purpose driven life. We constantly question, what are you retiring TO?
But really, who cares what she thinks? Someone who brags about flying in a private jet and retiring to a private island doesn’t know anything about FIRE – because it’s a philosophical framework, one that she knows nothing about.
True. She is not really “our” people. She values different things.
I have never been a fan of Suze, her style or message, but must give her props for her success. She has moxie!
I also view the FIRE movement through a somewhat jaundiced eye. I worry about all of the negative things that can happen, and I enjoy living a life of relative comfort and purpose. Perhaps I fear losing that life of comfort and purpose if I pull the FIRE trigger to soon.
No one gets to live the “perfect life”, not even Suze. We do the best we can, we make some mistakes, and hopefully we get more things (and bigger things) right than we get wrong.
It sounds like you have a nice mix of work and life. Suze has moxie but she also can be irritating and formulaic.
Great post as always Doc. Like you I got angry at first then said “Wait, who is this person? Her opinion matters no more than mine”
Paula gave her a hypothetical of a $20 million portfolio and $80k withdrawal. She shit on it. “Not ready for a big disaster” Well, Ms. Orman, the average 45-55 yr old has a net worth of about $100k. So if the person with $2 million isn’t ready, then the average person is 20 times LESS ready.
In other words – nobody is potentially ready for a major disaster.
In other news, bears shit in the woods and the Pope is Catholic.
Ms. Orman would be enlightened to look up the word “risk” in the dictionary and realize it permeates through all aspects of life, not just with money.
Yep. She glosses over the fact that we all are at risk FIRE or not.