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.