Volatility comes in many forms – The Human Side Of Money presented by Client Care

In Financial Planning the word “Volatility” is often used to describe market movements or different types of asset classes. It is at times incorrectly associated with the word “Risk” which means it can conjure up negative thoughts and feelings. While this type of volatility is real, it is not the only form we need to be aware of when doing our planning.

Acclaimed author, Morgan Housel talks about “Life volatility”. Things such as recessions, wars, divorces, illnesses, moves, floods, changes of heart. These things are difficult or almost impossible to predict but yet we need to be able to plan for them, if or when they should occur in our lives.

The graphic above represents “Life volatility” The first way to build resilience against these types of events if to get rid of debt. For most of us incurring debt at some stage of our life is almost inevitable, it is how we are able to buy a house or a car, but paying this debt off as quickly as possible is vital. Having no debt serves to insulate us against the different types of life volatility. The less debt we have and quicker we get rid of it the better. The graphic below represents the number of volatile life events we can withstand with no or little debt.

While the next graphic represents our resilience against the same life events while having a lot of debt.

Life volatility is a given but often something that is not built into our financial planning or retirement plan. Many retirement plans are over simplified and make the lazy assumption that the rest of a retiree’s life will follow a simple straight trajectory, escalating annually with inflation. If this is how your plan has been built perhaps you should relook at it.

We all like certainty, especially in retirement. It is something that we yearn for, however believing we have it can prove to be dangerous. Ideally, we need to be able to face up to the fact that we do not know what our lives will look like in 3 years’ time let alone 5 or 10. The answer is not to panic or to become despondent but to rather test our plan against potential dangers.

I have said in many articles that proper cashflow planning is absolutely essential when doing retirement planning but even when doing so, oversimplifying one’s future life might give us false confidence. The answer is to anticipate potential threats and find ways of counteracting them. There are always 4 levers in any retirement plan and any combination of these can remedy a bad situation. Make sure you test your plan!

 

 

Dirk Groeneveld, Certified Financial Planner.