White Swan Events
White Swan Events
We spend a lot of time worrying about black swan events. Per Wikipedia these are events that comes as a surprise, have a major effect, and are often inappropriately rationalized after the fact with the benefit of hindsight. Nothing can throw a the path to financial independence off more than one of these unexpected and rare phenomenon. Therefore, we spend much time worrying and planning for them. We set or SWR to 2% in case there is a world war. We learn how to live on 20K a year or have contingency plans that include geoarbitrage to the middle of nowhere. Yet, as unlikely as these events are, we spend much more time worried about them then what I like to call white swan events.
White swan events are much more common but can be no less devastating to a financial plan.
So why do we spend so little time thinking about them?
Health/care
If you live long enough, you are likely to face some sort of healthcare crisis or another. Whether it be a chronic illness or a tragic accident, most people get stuck with unexpected bills from time to time. A true white swan event, a large minority of people will eventually require costly long-term care as they grow older.
Even if you are lucky enough to avoid these traps, the future cost of healthcare insurance is unknowable and likely uncontrollable. The perfectly healthy could fall into this trap just as quickly as the chronically ill. You can’t exercise your way out of this problem.
Health issues happen. Many are unavoidable.
Economy
The economy also provides many opportunities for white swan events. We discuss sequence of returns risk often but seem to forget how real this issue can be. Many believe that we are heading into a long-term bear market at some point soon, and yet tend to freak out when the market drops a few fractions of a percentage point.
There are many economic unknowns that face us over the next few decades. Recession, inflation, a housing crisis, infrastructure problems. The list goes on and on.
The point is that these white swan events are much more likely than the catastrophic occurrences that fill our nightmares. We need to be just as aware of them.
Tax
There are only two things certain in life: death and taxes. Hence we forget the large event looming in our hazy futures, most of us carry a huge tax burden. Especially if we have been diligently funding our tax deferred accounts. The cloud of required minimum distributions is a white swan event that can’t be avoided.
There are many who think that converting all their money to the Roth space will fix this problem, but that is much easier said than done. Often when people calculate the SWR they forget to think about how much of a tax burden they will pay on some of their money.
While certainly we have some tools and resources to minimize this burden, it will still be a burden suffered by most.
Final Thoughts
Black swan events are scary but unlikely. White swan events are common and likely. We need to learn how to plan for the latter adequately, and risk mitigate the former to the best of our abilities. Healthcare, the economy, and taxes are some of the simple white swan events we can plan for. There are many others that have not been mentioned here.
Does this mean that our financial future is in peril?
Likely not. I think we just need to make sure we concentrate on the obvious before we spend too much time and energy on the rare and improbable.
White swan events are about all I worry about. You can’t plan for a meteor and I have bullets enough to trade for hamburgers so black swan planning is done. I was reviewing my budget yesterday and my biggest single expenditure category at this point is insurance. Between health cars and home its 20% of my budget. Taxes come in second. The tax picture is dramatically different. Taxes account for 18% of my budget since I’m Roth converting. so nearly 40% of my money is lost to taxes and risk management. I am neither over insured or under insured but properly insured and I’ve tuned my tax bill to a fare thee well. DO NOT MISS THIS CALCULATION IN YOUR PLANNING. There is no cutting back on these 2 line items and 4 cents out of every dollar goes their way. Eventually my tax bill will be less because of the Roth conversion as I am paying Uncle Sam now for peace in my life and especially in my wife’s life later. I owe the money anyway so may as well get over the pain. Be very clear what I’m saying of your plan is based on 100K per year your take home is going to be 60K so you better be able to live on 60K or get a better plan.
I also an self insuring for future disaster using asset allocation across accounts. I have Roth TIRA Post tax and LT cap loss. 4 account classes. I was going to convert ALL of my TIRA to Roth but did a big analysis and found I could keep my bond allotment of my portfolio in a TIRA and still have small impact on RMD. Bonds don’t grow much and by clearing my TIRA down to about $500K the RMD takes a long time to kick me into a new tax bracket like 15 years and even then I go from 12% to 22% so the average increase in tax burden is small over decades. I calculated it’s the equities in the TIRA that is responsible for the majority of the blossoming tax burden of RMD so get the equities OUT and leave the bonds. There is a substantial tax saving between say 250K conversion and 341K conversion (absolute top of the 24% bracket) I chose 250K because over 250K an additional 3.8% surtax is imposed on you. My net tax saving per year conversion is $34K so that money stays in the post tax account compounding and will easily pay for the additional RMD taxes 20 years into the future.
My cash flow will be independent of the Roth so the Roth is merely an accumulation vehicle and self insurance. My cash flow is SS + RMD + taxable mixed with LT cap loss which makes my taxable act like a Roth. That money will easily fund 30 years of cash flow white swan expense. The Roth is available in case of disaster like a cancer diagnosis or 24/7 neurodegen disease. The chance of Alzin at 65 is 1/10. The chance at 85 is 1/3. Once diagnosed the life span of living with the disease is 10-12 years. The chance of getting cancer is 1/3 for all sites. The chance of dying from cancer once you have it is 1/5. The chance of being 100% wiped out financially from a cancer diagnosis 2/5 or 40%. Those are the risks so a plan is necessary and they are pretty white swanny at a 1/3 probability of incidence. The people with left main disease are the lucky ones.
This is an extremely important topic not well covered in the FIRE media.
I agree. It’s all about careful risk mitigation. As always, you have put a lot of thought into it.
I’m an anesthesiologist and I found early retirement (at 48) through real estate, both passively and actively. It basically replaced my doctor income in less than 5 years.
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