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.