I AM OTHER PEOPLE
Over the course of my lifetime, I have learned many important things. One of which, in my experience, is that most folks truly believe that bad things only happen to other people. The second is that I am other people. Don’t get me wrong here, I’ve lead a fairly charmed life all things considered, however, when something is bound to go wrong, I generally seem to find myself somewhere toward the front of the line. For whatever reason, it just seems to be the way it works out.
That being said or, more importantly, acknowledged, I simply make planning for possible adverse situations an integral part of my life. Your kayak is taking on water 5 miles offshore in Mexico? No problem, I have the repair kit, tow rope, radio and flare gun. Stranded at O’Hare International and can’t make your connecting flight? No worries, I can tell you how you can actually make it to your destination on time or even earlier. Anyway, you get my drift. To be clear, I’m not burdened with catastrophic thinking and, in fact, I rarely even ponder these types of ugly scenarios, but being relatively prepared for some of the things that life may throw at you has, generally, served me well. Of course, it’s impossible to inoculate oneself from all of life’s little ugly surprises, but better something than nothing, I figure.
Not surprisingly, I have also used this type of worst-case scenario contingency approach for my early retirement financial planning. Now, I know that many of you are already thinking, “Aw, Mr. Fate, you’ve been shooting up way too much of that whack Suze Orman junk.” I understand that sentiment, but you’d be patently incorrect. Unlike Orman, I do not suffer from a dystopian delusion where artificially intelligent robots are going to take over the world in 11 years, nor do I believe that one needs a minimum of ten million dollars to retire early. As a profligate spendthrift, Orman, likely, needs far, far more than that. The rest of us? Not so much. Nevertheless, bad things can and will happen to all of us fairly consistently over the course of our lifetimes. It’s an absolute function of human existence. That said, how best to financially contemplate these entirely predictable (they will undisputedly happen), but totally uncertain (when & to what extent) events?
GETTING COMFORTABLE WITH YOUR TOLERANCE FOR RISK – TODAY & TOMORROW
I believe the fundamental initial step is to have a thoroughly comprehensive understanding of one’s tolerance for financial risk. And because risk tolerance can change over time and under differing circumstances, one ought to, as best one can, attempt to anticipate the possibility or likelihood of that tolerance into the future. To shed some additional light on this notion, I’ll use myself as an example.
Throughout the decades of my accumulation phase and up until a few years prior to retirement, my tolerance for risk was high – excessively high. In fact, it was the highest of anyone I knew. With only an infinitesimal cash reserve, I was 100% invested in equities. While I was indexing, I also did strategic stock picking (which I wholeheartedly advise nearly all investors NOT to do). Perhaps the best example of my high tolerance for risk was during the Great Recession in 2008/9. Like many during that time, I lost my job. Fortunately, I was given a very large severance package – which I, promptly and without hesitation, invested right back into the worst stock market since the Depression. I then decided to double down by borrowing a six-figure sum and proceeded to invest all of it in a few individual stocks with solid fundamentals that were unnecessarily getting pummeled by the larger market conditions. A good example was picking up SBUX at $4.23 ($90.67 as of this writing). Another was AAPL which has since yielded a return in excess of 1200%. Was that an insanely risk-infused gambit? Hell yeah! Were there many nights where I was white-knuckled with a water-tight sphincter whilst eating my Top Ramen and nursing a Colt 45? Fuck yes.
And while I would never advocate anyone doing what I did, it is a fine example of someone who had a clear understanding of his tolerance for risk and all of the possible beneficial and adverse consequences. If it all went tits up, I figured, I’d just continue to work into my mid-50s.
This also serves as a great example of how my own tolerance for risk has changed drastically since I’ve retired and my portfolio has transformed from one of accumulation to one of distribution. My objective nowadays is the preservation (and continued growth) of my wealth. As such, my tolerance for risk is very low. As I see it, unnecessary risk at this point has a corresponding adverse psychological impact. I have zero desire, after working hard and saving for so long (and surviving insane, high-risk investment moves), to be in a constant (or even sometimes) state of anxiety over possible financial destitution. But that’s me. And that’s the point here – having a very clear understanding of and comfort with your tolerance for risk. Once you are good with that and know your anticipated expenses, you’re pretty much set to go from a planning perspective.
MY APPROACH TO “MY REALITY-BASED” EXPENSE PLANNING
Like most anyone reading this, I meticulously tracked all of our spending (over 5 years) and used this for the basis for our overall retirement plan. There were some adjustments made to contemplate our upcoming relocation to a less expensive state and no mortgage payment. However, being acutely aware of the seemingly consistent instance of life kicking me in the proverbial nuts, as well as some other risks I merely wanted to avoid entirely (sequence of returns issues for example), I started to build my plan and required savings to reflect that. Some things I elected to address financially in The Fates’ retirement plan? No human capital from Mrs. Fate (who has no desire to stop working), no social security income for either of us, annual double-digit healthcare premium increases, out of pocket maximums every year until Medicare age for Mrs. Fate, and a 100% annual expense buffer are a few of the more notable examples.
Is this too much? Is this too little? My opinion is that is precisely the perfect amount we need for a low-risk, capital preservation (and growth) strategy that incorporates some of the most prevalent, but financially devastating curve balls life tends to throw at we humans and to help maximize our positive psychology. Did this plan require that I continued to work well after being financially independent? Of course, but in job I loved, was having a great time at and completing the last of my professional goals in, so… cool! Two birds and all that. Is this how much you need? I don’t know and, frankly, I don’t care. What I do care about is that your plan works for you!
To be clear, I am not advocating any position here on how much it is you need to save to meet your retirement goals. Ultimately, that is your very personal decision. I am espousing that you have an understanding of your own tolerance of financial risk and having a solid command of your current expenses so you can make a more informed one. To illustrate, let’s take two examples from the opposite ends of the continuum.
At the extreme end of conservatism and high spending, let’s cast our gaze back to our pal, Suze Orman. With a seemingly non-existent tolerance for any risk whatsoever, robots soon to be taking over the wold, living on a private island, having a yacht so large it requires an actual captain, a fleet of vehicles, a staff of employees, and other miscellany, Orman’s approach is to have a net worth in excess of $200M and to increase this by millions each year by continuing to work at age 68 and beyond. While my tone here sounds mocking, I’m not actually judging Orman (outside of the the insane robot thing, of course). She clearly has extremely high expenses and wants only for her net worth to grow and to be immunized from every possible financial catastrophe. If this is, indeed, her goal, this method will virtually guarantee success.
On the other side of the spectrum, we have one of my favorite and coolest FIRE bloggers, A Purple Life. APL, is gearing up to retire next year at the age of 30 with an estimated portfolio worth $500K. This is, clearly, much less than Orman. However, APL, has annual living expenses below $20K (which Orman probably spends each month on her stylist). APL’s tolerance for risk is exceedingly high. In fact, I’ll easily concede that it eclipses my own back in in 2008/9. To be sure, she has done a solid job of anticipating and planning for possible financial catastrophes and is quite content with the possibility of having to return to full-time employment should things completely derail. Honestly, my today-self starts to hyperventilate when I think of this, but I also know that my accumulation, high-risk self would buy a shit-ton of APL stock if it were available. I am rooting hard-core for her and will always follow her story to see how it pans out.
The key point here is that both women have a keen understanding of their individual risk tolerance, expenses and financial goals and have, subsequently, architected financial plans to achieve their retirement objectives. While the amounts in each plan vary substantively, each are appropriate as considered by the individual.
*Author’s note – I totally despise the ridiculous, nouveau terms “Fat Fire,” “Lean Fire,” et. al as they invoke disquieting images of a bunch of insecure guys huddled in a locker room with a ruler trying to find out who’s got the 10.5″ which is why I have couched all of this in the traditional context of risk tolerance.
THE PLAN IN PLAY – YEAR ONE
Well those were two, examples, but what’s actually been happening in the Fates On Fire camp? What has been interesting is experiencing the very realistic difference between pre-FIRE planning and post-FIRE living, specifically as to what to is playing out and how reality is manifesting in light of how we projected. A few highlights (read – lowlights):
- As we all know, the market took a bit of a spill in Q4, 2018. Coming off of a ridiculous 2017, I figured 2018 could not have ended up in the positive and it didn’t. I expected this to last longer than it did, but we’re back up so far in 2019. The reality is that 2018 ended in the negative.
- Mrs. Fate (early 40s) had some chronic health conditions before, but was diagnosed with a very ugly, very rare disease called Autoimmune Encephalitis within 6 months of FIRE. It is debilitating, chronic and, at this time, sadly, incurable. She cannot really walk, lost her ability to (mostly) speak and struggles throughout most of the day. It, literally, has turned her life (and ours) upside down. As you can imagine, it has been tremendously difficult and will require outlandishly expensive treatment for a year (and possibly in perpetuity).
- As a result of the above, Mrs. Fate does not work and will likely never be able to work again.
- We had a totally unexpected expense in excess of $30K. There was no way to have seen this coming, it was just there.
- There has been an unforeseen slip in the timing of our relocation plan which is resulting in an, approximate, $15K unplanned expense.
Like I said up front, I am “other people” and am grateful I already knew that and planned accordingly. All of these unexpected blows, particularly the health issue with Mrs. Fate, have been harrowing and have caused unbelievable, prodigious amounts of stress as you can only imagine. Like always, we’ll do our best and work through them and adapt. I am a firm believer in the law of averages, so I expect, mathematically, next year to be a bit more fortuitous. My purpose of sharing this is that it can, hopefully, be a bit of an object lesson that reality and life are what happens when you’re busy planning other things, even early retirement. I’m not attempting to use the above examples as a cautionary tale, but rather fodder for your introspection as you consider your own retirement plan.
CONCLUSION
Fortunately, as a result of knowing my own tolerance for risk, my actual expenses and having chosen to incorporate some of life’s major curve balls into the retirement plan, our current and long-term financial position is not particularly impacted, even with these setbacks. I agree with Mr. Money Mustache that going on and on about what horrible things can happen is a total waste of time and counter productive and I always have my Optimism Gun locked and loaded. Do I worry or ever think about my kayak taking on water 5 miles out? Nope. Do I ever fret about my plane connection being missed and not making it home? Of course, not. However, I openly acknowledge that evil, ugly shit from life that pushes me to the edge of my existence does (and has) occur(ed). And I planned for a bit of it, so no need to sweat too much.
Hell, I guess, if things ever get really, really bad I can always get a job cleaning and repairing robots.
HOW ABOUT YOU?
How have you chosen to address life’s unexpected realities into your retirement plan? How has your tolerance for risk informed that? Has your risk tolerance and investment approach changed demonstrably over time? If so, how?