It Comes in 3’s
“When ill luck begins, it does not come in sprinkles, but in showers.” — Mark Twain
Sometimes things just go south. In personal finance, it is common to dress it up and talk about “risk mitigation strategies,” but maybe it’s just easier to call it what it is: plain bad luck.
It ranges from the routine (car breakdown) to the substantial (loss of job) to the profound (serious illness or death). No amount of planning keeps it from happening; all you can do is be prepared to react. But are you prepared?
To adopt the lingo of risk management, there are a few basic techniques for meeting the financial consequences of an unfortunate occurrence. You can:
Let someone else worry about it. You transfer the risk by, for example, buying life insurance.
Accept the risk by setting aside your own funds to meet the possible moment. For example, a house fund to cover repairs in the future.
Do absolutely nothing. Sometimes that’s a perfectly valid choice. You would not buy comprehensive car insurance for a vehicle that an old friend of mine would have described as a “hooptie.” (Which, according to the Urban Dictionary, is an actual word.)
The key to deciding the right course of action is understanding, at a granular level, the actual nature of the risk.
For example, becoming disabled during your working years is more common than you might think. According to the Social Security Administration, about one-quarter of 20-year-olds today will experience a disability at some point during their working years that will take them out of the workforce for an extended amount of time. That seems absurdly high to me, but consider what the four most common disabilities are: musculoskeletal disorders (tendonitis, arthritis, etc.), cancer, pregnancy, and mental health issues. Depending on your household, your “correct” response may be a mélange of the three options above: an emergency fund to cover the immediate financial consequences of a disability plus long-term disability insurance in case the situation persists plus an ability and willingness to change other financial goals in your life to compensate for the loss of income.
The risk of dying is another area where the most obvious response (Buy life insurance. Duh.) may be an overly simplistic solution. On one side, you may easily under-insure by not thinking through all the financial ramifications of your death on others in your life. At the risk of being a bit cold, your death is not actually the problem; the problem is the loss of your current income and your future savings. This leads us to the other end of the spectrum: over-insuring. If you are older with no dependents and substantial retirement savings, well, yes, your family will be sad that you passed away, but will they actually be financially worse off? In this case, the third option above — doing absolutely nothing to meet this risk — may be perfectly fine.
My final example is the risk of needing long term care. It is among the hardest of risks to mitigate. Statistically, most people will need some kind of long term care, but none of the usual go-to solutions are particularly attractive. Long term care insurance is famously expensive (and increasingly hard to obtain), and self-funding is unrealistic for many. Doing nothing becomes the most popular choice not because it is a good selection, but because it is the only one left on the menu. It is a problem that is ripe for a public policy solution.
Well, this was a fun one, wasn’t it? If you are reading this blog just after preparing your tax return, I suggest following this up with a visit to the dentist to achieve the trifecta of unpleasantness. Truly, I don’t mean to bring you down. I don’t want you to spend a lot of time catastrophizing. But I do want you to give due attention to the what-ifs, put an appropriate plan in place…and then go get your teeth checked.
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