Coping with uncertainty
Because the future is uncertain
I spent decades studying, working, and saving. In “Preparing for retirement”, I wrote about the need for planning. And sooner or later, I will get to the point when I need to execute the plan. Retire and enjoy it. Right?
Maybe not so straightforward.
I just read a blog post by Morgan Housel. It is long, but very good. One section caught my eye: “frugality inertia”.
If you develop an early system of savings and living well below your means – congratulations, you’ve won. But if you can never break away from that system, and insist on a heavy savings regimen well into your retirement years … what is that? Is it still winning?
A lot of financial planners I’ve talked to say one of their biggest challenges is getting clients to spend money in retirement. Even an appropriate, conservative amount of money. Frugality and savings become such a big part of some people’s identity that they can’t ever switch gears.
… Refusing to recognize that you’ve met your goal can be as bad as never meeting the goal to begin with.
It would be a pity if I cannot enjoy retirement because I “cannot switch gears”. I need to be conscious of how past habits can affect future decisions.
And sometimes the frugality inertia might be caused by fear.
Fear of uncertainty
Looking at the historical economic landscape, fortunes can change unexpectedly.
Even if I think I have saved enough. I may be okay according to calculations and projections that are based on what I know at present and current assumptions.
But circumstances can change. Assumptions are just that: assumptions. They look solid now, but they may be wrong in the future. There are much that I cannot predict.
What if an unplanned bad situation happen and the retirement fund gets depleted faster than expected? Or a good situation. What if my lifespan turns out longer than average expected lifespan and I outlast my retirement fund?
This fear can make me want to stay as frugal as I can until I die. But what if what I fear does not come about? Then I would have a lot more savings than planned when I die and I do not get to enjoy it. I want to avoid this scenario.
I would not like to live in fear all the time. I need to accept that there is a risk that an unplanned situation may unexpectedly occur. I need to assess its likelihood and build the scenario for it as one of my retirement scenarios.
Let’s say such a scenario occur in the future and I am in “retirement phase” already. I would need to make adjustments.
This may mean that I may not be able to live out the “Ideal retirement” as hoped for. I may need to live more frugally for the rest of the retirement. To do that I need to understand the expense baseline so I know how frugal I can fall back to.
I may get a job during the retirement phase. If so, what kind of skills do I need to learn now (and maintain going onward) so I have the fallback option of earning some income?
Having fallback scenarios are important in planning.
I do it with data.
I am starting to pay more attention to my financial details and track them periodically. I build out the retirement scenarios based on the data and plot the target savings trajectory.
When actuals differ from plans, I recalculate. If necessary, I may make adjustments in my current spendings or savings. The aim is to return the savings trajectory back on target.
(I am still experimenting. I will share my observations in future post.)
Have a great day.
Disclaimer: Anything I share is not intended as financial advice; I am merely sharing personal opinions and experiences. The information is of general nature and you should only use it as a place to start your own research and you certainly should do your own due diligence. You ought to seek professional financial advice before making any decisions.