Deadly Finance

Deadly Finance

We are already done with the triduum of Halloween, All Saints’ Day and All Souls’ Day. While the Halloween part got more and more popularity at our ends only in recent years the other two days were always the occasion for us to visit the graves of our loved ones. This melancholic time of the year is perfect for remembering and reflection. As the weather turns colder, the days darker, and nature slowly slips into its hibernated state our thoughts unintentionally shifts towards passing away and dying.

Death is a scary thing and we instinctively try to avoid even thinking about that. At least for most of us. I don’t know what has changed lately, maybe this comes with age (or maybe, as I hope, wisdom) but I am no more in that camp. I got used to thinking about death and in a strange way it calms me. Accepting that it is the law of nature, that all living things will unavoidably die at some point, in a strange way, provides me with a peace of mind. Just as thinking about the many different ways this could happen.

Maybe it is just the logical thinker in me but it calms me the same way as knowing that I have handled all the possible outcomes while writing computer code. While life is much more complicated than the average software it does not hurt if we build into our program a proper way of error handling. Trust me it is a very shitty thing when while running a program something goes south and when you are debugging the code and find the error all you see is a long forgotten comment /* TODO – error handling */. This is not something you want to leave as a legacy for your loved ones once the source code of your body throws an exception and enters into an infinite loop of noop().

Apologies, I went a little bit too nerdy, it happens every now and then. What I wanted to say is that despite it could be uncomfortable and scary, thinking about the inevitable and preparing for it properly is a must do for all of us (especially financially). Let’s face with those scenarios and draw at least a sketchy plan for handling them.

So what if you would die…

Today

Ok, now you may ask why do we start with the worst case scenario? Well, because in chronological order this is the first possible option (and maybe you will understand that this is not the worst case after all). Also this the most important scenario to prepare for especially if you leave behind some humans who are count on you. As someone pointed out recently, financial dependence is a scary thing (yes, even more than clowns). If you are one of the two or the only breadwinner in the family, like myself, you should not understate this situation. Just ask yourself, if you would stop breathing right after you finish this sentence will your loved ones be covered and set financially to get through the unimaginably hard task of moving on with their lives?

TL;DR: Put the time and effort into learning about your insurance options and shop for proper insurance applicable for your situation (term life, salary, etc… but no whole life, at least for me)!

This is something I keep asking myself lately and the answer still disturbs me. Three years ago when this question started to pop up (alongside with the curiosity about retirement funding and investments) the answer came in the form of an insurance agent. One consultation and some signatures later I became the responsible, proud, and smart owner of a “whole” life policy. I was convinced that this is the financial holy grail as it not just provides you with life insurance but also accumulates “investments” and will pay you back every cent plus a “healthy” profit if you survive the contracted 30 years. I was happy with that for a while but then discovered the personal finance blogosphere and everything changed.

Not today

Now I understand how naive I was and what is the price I paid for it. So I did what anyone else would do in my situation, procrastinated the decision for another year. But as we are getting closer to the next payment of the annual premium, I finally forced myself to review this thing, put the numbers on paper and make a responsible decision. So I put together a spreadsheet with all the info, tailored some formulas and drew the lessons from the numbers.

Long story short, the conclusion was that as an investment it performs awfully and as an insurance, it is pretty expensive compared to the coverage it provides. I had no clue about planning for the future and possible investment vehicles back then. According to the numbers, the best case scenario where I survive the contract and get a payout the accumulated amount would be damaged by roughly 50% erosion in buying power. Also if meanwhile shit would hit the fan the payout would barely cover two years of expenses for my family left without a breadwinner… forever.

So, now I am shopping for a proper term life insurance and about to break that previous contract. It will mean that I will lose the first two years premium but still less than what I would lose if I keep at paying through the thirty year period. In terms of investments, I also will take the control into my hand 😉 An expensive lesson but definitely an important one.

Soon

See, I told you that maybe today is not the worst possible scenario. I would not go into the details how would it be possible, let’s just assume you have a crystal ball and you know for sure that you have a couple of months/years left until a specific date when you will kick the bucket with a 100% confidence. Having the insurance topic, mentioned in the previous paragraphs, already handled what should you do in such a situation?

TL;DR: Put your efforts into fixing anything you can and into leaving an intellectual and financial legacy which will remain here as a guide for the future!

If I have learned something from such real life and fictional (books, movies) situations it is that after you accept the inevitable (finally) and the initial panic will flush away you will get a brutal clarity about what is important to you in life and what is not. Personally, I have never been in such a situation and I hope that I never will but I assume my focus would narrow around my family and their future.

We had a discussion about this with J$ and we agreed that both of us would start to write letters to our loved ones about our thoughts on any situation we think it would be important to the person to hear them. A letter for my daughters to help them get over the first love-sorrow or to express how proud I am at a future success moment. Another for my wife to remind herself the happy moments on nights when she feels so lonely without me. I think writing these would be a time well spent. I would spend as much time with them as I can and write these letters while they are sleeping (“PS I love you” style).

On the financial field, your best guess should not be any less. Try to figure out how could you ensure their financial stability in the future. Also, you should not only create a plan and put it into work, but you also have to teach them how to maintain the system and keep it running when you won’t be there. Moreover, you could leave references and point them towards the sources you were inspired and instructed by. And last but not least encourage them to not only take your words blindly but do their own research, understand the principles, build upon them and get even better than you ever were. After all, this is what we all wish to our kids, aren’t we?

On time

TL;DR: Reach FIRE asap to free your time

This is an ambiguous description but you will get it when you read further. By “on time” I mean in case your life goes on like the average and your final hour come around the expected age of yours. How could you know when will it be? If you Google it, you can find out that the current life expectancy is 76 for man and 81 for women. My reaction when I read about a new actual number somewhere always was “hurray, we are living longer again”. Only recently found out that it only applies to someone who borns now and we have to search for our stats a little bit differently.

You can find a table here where you can look up your numbers or if you prefer calculators here is one for the same purpose. It tells me that as a 34 years old male I could expect living another 48 years and my target year could be around 82. I am kind of comfortable with this estimation, I have seen some fellas with that age and it seemed to me that they were pretty satisfied with their lives and what they have achieved.

Old couple

By that time you should have applied the insurance advice from the “Today” part through the past years and maybe you did the exercises from the “Soon” part, even if it did not happen. This option is when our beloved FIRE community enters the big picture, as this is the scenario where your main focus should be reaching FIRE asap. The sooner you get there the more years will you have left for doing whatever your heart desires. Maybe I am biased on this topic and I accept that this is not the only way of living a successful life but I honestly think that this should be the basic goal for everyone.

Much later

There is another factor what we did not take into account in the previous scenario. According to the historical life expectancy numbers, we can observe an annual rise in the expected age by 0.2 years. This addition alone would add 9.6 years to my 82 years expectation, but there is more. This rise is caused by the improving standards of living for the population alongside with the development of medicine and science. And because of the huge amount of resources and effort channeling into these fields, it is very likely that even this rise will accelerate in the future. Besides these improvements, humans started to become more conscious about their health and the environment. We still have a long way to go on these fields but this can also boost that acceleration as many top death causes are connected with our own bad habits or pollution in general.

TL;DR: Go for the hardcore FI way and NTYP

What impressed me is that if you make a little bit of research you can find hundreds of ideas of the possibilities here about future life expectancy, ranging from 100 to over 200 years. Please note that many of these estimations are not originating from some science fiction movies but from legit scientists. If you think of it how many things became a reality for today which was pretty wild dreams in the last century, and even some folks were burned for such ideas a couple of centuries earlier, these numbers aren’t that insane. In my opinion, this is a possible future scenario for the humankind and I hope that this will actually happen.

Same time, despite the benefits of prolonged lifespans, a whole new variety of problems will arise. First of all, I am pretty sure there will be a huge debate if the whole process is morally right or not. Prolonging our lives beyond the natural range isn’t the phenomenon we call “playing God”? Or this is just the next step of the evolution of the humankind and this possibility always was there encoded into our DNA just the circumstances weren’t optimal? The answers for these questions will come from smarter folks than me. Also, the increased population will have huge requirements of resources but I hope that amongst the increased number of humans there will be even more geniuses living a much longer life to reach breakthroughs and they will solve these problems.

Dr Evil

Last but not least there is the question our financially nerdy minds would ask, how will this affect the economy, the financial system, and our beloved personal finances. Today the 4% rule is the gold standard but some folks are already more conservative with withdrawal rates. Some even say that a longer life is a big threat for a happily funded retirement but this is a problem everyone would welcome I think. So what if we start from today’s principles but we have to plan not for only a couple of decades of retirement but a century or more? I think that the definite goal, in this case, would be reaching the ideal withdrawal rate via the “Never Touch Your Principal” method. Sam wrote a good article about calculating that number at Financial Samurai, according to his reasoning you should aim for 2.2-2.8% WR. This would change our worshipped 25x number to 40-50x in terms of nest egg accumulation. The good news is that with a prolonged life you will potentially have much more time for that accumulation phase.

Maybe Suze Orman has some oracle-like skills and that’s why she is echoing the 70 years barrier? By our current numbers the traditional retirement age is at two-thirds of a person’s life, early retirement age is somewhere under that but at least at the one-third mark. So if we extrapolate that to a prolonged life (and assuming that aging will slow down accordingly) when life expectancy will hit 210 years the old school retirement age would reach 140 years of age. It would be really funny to see them joking on future FIREfolks.

Conclusion

So here you have it, my complete life-ending scenario list. This is the first time I walked through even myself on all possibilities chronologically. It even surprised me how different our focus should be in the different scenarios. So if you want to have a bulletproof plan for the future start with preparing for “Today”, then put some thoughts into the “Soon”, set your goal according to “On time” and try to improve that towards the “Much later” case. Start today and if this article helped you secure your financial future buy me a $60 beer sometime in the next century. 😉

Artifical

What about you? Which scenario is the scariest in your opinion? Which is the most probable? Which is the one you are actually preparing for? Did I miss something? Am I crazy? Will AI have an intelligence explosion by 2060 and erase humanity from the surface of the Blue Planet once and for all? Let me know in the comments and let’s have a conversation until the end of the time!

3 thoughts on “Deadly Finance

  1. Any time my mind start moving towards the idea of living forever (or at least a long long time) I worry about our population numbers. We really need to get a handle on the whole birth control thing. This is why I was obsessed with Malthusian black comedies/dystopias as a young man.

    1. I share your worries as overpopulation could cause serious harm with the current mindset and way of living. What I tried to point out that with an increased population the collective brainpower of humanity could also increase and maybe this could lead us to find better solutions much faster. It is true that our food resources are finite and an exponential population growth could cause hard times. Same time besides the development of agriculture and expansion of the growing areas (maybe into space?) the first punchline should avoid waste. Our current food supplying system (and the way of consumption) works in a very inefficient way and optimizing this could help to solve the problem, at least partially. Also if we would not prolong our lifetime biologically but would go through a transition and “upload” ourselves and continue living in the cloud, that could also lower our carbon footprint 🙂

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