Author Topic: What are the real risks? And how do you manage them?  (Read 1029 times)

TallMike

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What are the real risks? And how do you manage them?
« on: June 13, 2019, 04:15:53 AM »
The MMM community and blog mean a variety of different things to each of us and sometimes different things to any one of us at different times in our lives. I certainly arrived via the financial independence focus, while also mildly intrigued by the older posts about how to weld deck railings. Eventually, I became equally, if not more, interested in the environmental and philosophical parts of the writing. The posts on Stoicism and optimism, in particular, drew me in, as did the critiques of modern news media and where they attempt to focus our attention.

Recently, in considering this, I've thought of MMM as fairly pragmatic in his optimism. He isn't saying there aren't things to worry about, just that society worries about the wrong things, and overlooks important things. I think this argument is pretty well developed in his writing, so I don't feel a need to rehash it here, but if I'm wrong, please let me know.

So, my questions are: What are the real risks in life, the ones that are important either because 1) the probability of occurrence isn't vanishingly small or 2) the consequences are somewhere between important and dire, AND because you can actually take practical steps that will impact the probability or the consequence? And, for those risks, what can you do to mitigate them? I'm not really talking about investing risk here. At times, I feel like investing risk is a distraction from other bigger picture things you can overlook, assuming you have enough baseline mustachianism up and running that you're not taking on debt, overspending, etc. Let's assume that's "dealt with" for the most part.

This is intended to be a practical exercise. I'm listing some of the big ones I've been able to identify below, but really I'm hoping to crowdsource ideas for things I could and should be doing as non-silly risk management steps. I'm keeping my list to 5 to try to focus my attention. I'm by no means convinced that these are my TOP 5, they feel like more of a random sample...


1. Long term physical health - probability: moderate to high, impact: moderate to high. - Management: exercise and diet are the big ones. This is a toughie because it requires steady, long term management, e.g. consistent exercise

2. Estate planning issues - probability: Zero or near certain, impact: zero to high. Management: get a will in place, sign it, communicate with the executor, etc. This is an example of a risk that can be relatively simple to manage, but people might overlook it. My wife and I became parents in 2009, but we didn't get our act together to get a signed will until 2018. I feel like this risk is now meaningfully managed, but what the heck took me this long?

3. Family memories and digital protections: Probability: low, impact: high. Management: Following best practices on password protections, backing up photos and saving in multiple physical locations. This might seem like an odd one to include, but I had a friend who lost all her family photos in a fire and I've always remembered the story. Similarly, stories about identity theft seem to illustrate that this has a small chance of happening, but can be devastating in its effects. I plan to spend some time in the next couple weeks figuring out if I've actually been doing the equivalent of driving with my digital seat belt off, or if this is something I don't need to worry about so much.

4. Mental/Emotional health (social isolation, meaning creation) - Probability: moderate to high, impact: moderate to high. Management: Prioritize time with my family. Invest in friendships I already have. Enjoy my dog. Look for impactful activities beyond my self and my immediate home. Read. Participate in the arts. I think the default settings of modern U.S. life can be pretty awful on this dimension (partly because so many valuable activities in this realm do not generate profits for anyone...) but some conscious attention can move the needle a great deal.

(And finally, back to the mundane...)
5. Driving accidents - Probability: low to moderate, impact: low to high. Management: Drive less. Don't drive while fatigued. Try to avoid driving when people are likely to be drunk. Teach your kids as best you can how to drive well and manage their own driving risk.

Two big risks that didn't make the list because I'm struggling to articulate meaningful, concrete steps to manage them at the individual level: these require larger-scale social and political change (which are, of course, made up of individual changes...): Climate change and Dementia

My question to the community then: What key risks have you identified as important that people tend to ignore, and what steps have you been able to take to manage them?

Monkey Uncle

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Re: What are the real risks? And how do you manage them?
« Reply #1 on: June 13, 2019, 04:52:59 AM »
Great topic.  Here are a couple I thought of off the top of my head.

Medical bankruptcy (or other major impact on finances).  Probability: low to high.  Impact: high.  This one is pretty much limited to the U.S.  Theoretically, the ACA should have reduced or eliminated this problem.  But the essential components of health insurance mandated by the ACA still leave the potential for catastrophic medical bills due to high out-of-pocket limits, narrow coverage networks, limited geographic coverage, and balance billing.  Solution: make sure your insurance policy has out-of-pocket limits that you can handle and that its coverage network includes all the providers you might use and geographic areas in which you might spend time.  This is easier said than done for a lot of people because they are pretty much limited to whatever crappy plan their employer provides, or whatever ACA exchange plans are available in their area.

Expensive home repairs.  Probability: low to high.  Impact: moderate to high.  Solution: similar to the health insurance problem above, make sure to choose a homeowner's policy with out-of-pocket limits that are manageable for you.  This should be easier to do with homeowner's insurance, unless you live in a disaster-prone area.  Be aware that many expensive repairs are considered normal upkeep and are not covered by insurance (e.g., a new roof).  Make sure your finances can absorb a $10k hit every 10-20 years.

ender

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Re: What are the real risks? And how do you manage them?
« Reply #2 on: June 13, 2019, 06:18:34 AM »
So, my questions are: What are the real risks in life, the ones that are important either because 1) the probability of occurrence isn't vanishingly small or 2) the consequences are somewhere between important and dire, AND because you can actually take practical steps that will impact the probability or the consequence? And, for those risks, what can you do to mitigate them? I'm not really talking about investing risk here. At times, I feel like investing risk is a distraction from other bigger picture things you can overlook, assuming you have enough baseline mustachianism up and running that you're not taking on debt, overspending, etc. Let's assume that's "dealt with" for the most part.

I agree with 1/2. Not sure I agree on the others on your list as being meaningful. For #5, I'd add the biggest risk is probably not you unless you often drive drunk or at times people drive drunk.

A risk a lot of folks seem to ignore is healthcare like @Monkey Uncle says. Another risk I would add is healthcare/end of life care for parents. Many people I know in their 50s/60s end up taking care of parents in some way. That can be a major money and time hit.

One for folks not planning on FIRE is the risk of being able to hold a job into their 50s/60s meaningfully. If I wasn't planning on FI before that point, it'd be the #1 risk I'd worry about. In some industries, there is a strong agism that would make it very difficult for someone at 60 to change jobs.

Folks here likely mitigate a lot of transient risks which are effectively $$$ risks. Basically all the things which might hit an emergency fund - short term job loss, house/car repairs, etc.

nereo

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Re: What are the real risks? And how do you manage them?
« Reply #3 on: June 13, 2019, 08:19:50 AM »
I see the biggest 'risk' as being unable to adapt to changing societal circumstances, and suffering greatly because of it - be it financially, socially or even emotionally. What's more, I'd say that the probability that society will drastically change over the course of a few decades is nearly 100%.

As some examples, consider how people interact and how the world functions in 2019 compared with the 1960s, when many people who are currently entering 'traditional retirement age' grew up.  Throughout their entire education they likely never touched a computer while many learned skills essential to their jobs or lives which are now obsolete.  The extend of social networks was a literal phone-tree or in-person meetings.   Now the more resilient have mitigated this risk by lifetime learning, learning how to use computers and new job skills and how to socialize with others.  But those that resist are at risk not just of being isolated from younger generations, but also of having to hire others to do many things the rest of us consider 'basic knowledge'. Sure, they might have been able to fix the timing belt on their '72 beetle, but they need to rely on the Nerd Squad to uninstall an app on their smartphone.  Worse, those that adjust to these changes become prime targets for fraud and exploitation - which is why people over 65 are disproportionatly scammed.  It's not even limited to computers; the standards and practices of home building have changed dramatically in the last 30 years, and someone who was a carpenter may find current construction and repair projects very foreign unless s/he ahs kept up with these changes.

If it feels like this is unique to those who grew up pre-PC, it's not.  I'm relatively certain my much of my skillset now will be obsolete (and antiquated) in 25 years, and that the fundamental ways which society functions will look vastly different from today, and in ways we cannot predict now.  So my strategy to mitigate this risk is to take a life-long learning approach. 

John Galt incarnate!

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Re: What are the real risks? And how do you manage them?
« Reply #4 on: June 13, 2019, 09:19:00 AM »




Folks here likely mitigate a lot of transient risks which are effectively $$$ risks. Basically all the things which might hit an emergency fund - short term job loss, house/car repairs, etc.

One $$risk$$ I think about that wouldn't be transient  is  changed  tax policy and increased tax rates.


spartana

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Re: What are the real risks? And how do you manage them?
« Reply #5 on: June 13, 2019, 10:16:43 AM »
The only real risk I felt I couldn't mitigate in some way was the risk of becoming injured, disabled, old, infirm or dead before I got to do many of the things I wanted to do in retirement. I was unwilling to work longer for increased saving for "potential" future risks that may never happen. Getting old and not being as physically able to do more physical adventurous things is likely going to happen to us all. Unless we die young that is. I managed that risk by FIREing as soon as I could.

fattest_foot

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Re: What are the real risks? And how do you manage them?
« Reply #6 on: June 13, 2019, 10:36:41 AM »
I agree with 1/2. Not sure I agree on the others on your list as being meaningful. For #5, I'd add the biggest risk is probably not you unless you often drive drunk or at times people drive drunk.

Interesting you mention this one, because it's one I don't consider as a risk often because I typically don't leave the house after 6pm.

A few months ago, however, I saw a recent car accident (car crossed the median and hit a tree on the other side) on my way into work in the morning. I kind of forget that getting to work early in the morning overlaps with the drunks from the previous night. So now I'm thinking getting to FIRE as fast as possible is a mitigation for this. It avoids being out of the house so early that it's "late, late night."

I also often forget that there are lots of irresponsible people. Ones who likely do drugs during the middle of the day and then go for a drive. Also, not quite as irresponsible, but plenty of new drivers (teenagers) who are possible threats to my safety.

RyanAtTanagra

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Re: What are the real risks? And how do you manage them?
« Reply #7 on: June 13, 2019, 10:39:32 AM »
I'll add two:

1)  Communication with your partner.  Few things will derail your life more than a divorce/life partner breakup.  And one of the biggest causes is poor communication.  Make sure you're proactively taking care of your relationship, even if everything seems fine.  Everyone agrees they should be doing this, but few actually do.

2)  Remaining open minded and fighting stubbornness as we get older.  It seems almost inevitable that as we get older we get more set in our ways.  This causes problems in so many ways (including with #1 above).  People always say 'i won't be like that', as if we know what we're going to be like when we're older.  I'm (only) turning 40 this year and I can already see it in myself.  It's a constant struggle to fight my mind closing down to new ideas and ways of doing things, and I know it's only going to get worse, which is why it's important to me to curb it as much as I can, while I can.  Not sure how to best deal with this one, though.

spartana

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Re: What are the real risks? And how do you manage them?
« Reply #8 on: June 13, 2019, 10:58:46 AM »
I agree with 1/2. Not sure I agree on the others on your list as being meaningful. For #5, I'd add the biggest risk is probably not you unless you often drive drunk or at times people drive drunk.

Interesting you mention this one, because it's one I don't consider as a risk often because I typically don't leave the house after 6pm.

A few months ago, however, I saw a recent car accident (car crossed the median and hit a tree on the other side) on my way into work in the morning. I kind of forget that getting to work early in the morning overlaps with the drunks from the previous night. So now I'm thinking getting to FIRE as fast as possible is a mitigation for this. It avoids being out of the house so early that it's "late, late night."

I also often forget that there are lots of irresponsible people. Ones who likely do drugs during the middle of the day and then go for a drive. Also, not quite as irresponsible, but plenty of new drivers (teenagers) who are possible threats to my safety.
It's not the drunks that will get you, it's the texters and they are out there 24/7. Then there's falling in your bathroom which seems to take out 90% of people. You're not safe anywhere!! https://www.nytimes.com/2011/08/16/health/research/16statshtml'

ctuser1

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Re: What are the real risks? And how do you manage them?
« Reply #9 on: June 13, 2019, 12:42:52 PM »
"Risk" is external - by it's very definition! It's what happens to you!!

I personally feel it is better to think in terms of "options" - since that is lot more proactive. There is a large correlation between having more options, and doing more effective mitigation of when risks materialize and become issues.

Many actions you take in life either decreases or increases options:
1. Go to school and get a marketable degree - you increase your employability and hence options.
2. Move to a midwest city with much more limited set of employers for your skillset - you likely decrease options for yourself.
3. Buy a house with price < 1 year's income -> no change in options since you can move and buy another one if required.
4. Buy a house @4X income that goes underwater - options severely decreased.
5. Live a Mustachian lifestyle -> options increase a lot. You could quit your job < 40 if you want.
6. Live a Bogleheads lifestyle -> options increase a bit or remain same.
7. Actually retire early after hitting the FIRE numbers -> Options decrease a lot.
etc. etc. etc...

Explicitly mitigating or managing the risks require you to first "know" the list of risks you need to worry about, and then being able to semi-accurately estimate the impact and probability. These are not easy tasks, and especially difficult (bordering on impossible) when your "population size" is basically 1.

I personally tend to worry more about which actions are giving me more options for future as a risk management measure. If I have a lot of options in my hands, and a load of flexibility, then my ability to handle Risks that materialize becomes much better - irrespective of whether the risk is a "known known" (car needs to have oil changed every 5000 miles), "known unknown" (e.g. my washer crapped out 6 months ago. impossible to predict exactly, but very possible to plan and mitigate) or "unknown unknown".

Bottomline, don't try to enumerate and explicitly manage any except the very top risks (medical insurance, home insurance, auto insurance, liability insurance). Even in those cases, I don't do anything unusual except getting insurance. Everything else is just a matter of remaining nimble on your feet should anything bad occur!! 
« Last Edit: June 13, 2019, 12:47:28 PM by ctuser1 »

John Galt incarnate!

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Re: What are the real risks? And how do you manage them?
« Reply #10 on: June 13, 2019, 01:32:16 PM »
I agree with 1/2. Not sure I agree on the others on your list as being meaningful. For #5, I'd add the biggest risk is probably not you unless you often drive drunk or at times people drive drunk.

Interesting you mention this one, because it's one I don't consider as a risk often because I typically don't leave the house after 6pm.

A few months ago, however, I saw a recent car accident (car crossed the median and hit a tree on the other side) on my way into work in the morning. I kind of forget that getting to work early in the morning overlaps with the drunks from the previous night. So now I'm thinking getting to FIRE as fast as possible is a mitigation for this. It avoids being out of the house so early that it's "late, late night."

I also often forget that there are lots of irresponsible people. Ones who likely do drugs during the middle of the day and then go for a drive. Also, not quite as irresponsible, but plenty of new drivers (teenagers) who are possible threats to my safety.

Scary too are all the distracted motorists who drive while using/playing  with electronic gizmos. I was almost hit by a fellow who, as he drove around a blind curve was looking down at  something in his lap. Luckily he was moving at only ~15 MPH.

Buffalo Chip

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Re: What are the real risks? And how do you manage them?
« Reply #11 on: June 13, 2019, 03:58:48 PM »
The number one risk is the health risk. To paraphrase a popular line: over a long enough time horizon, the chance of survival drops to zero. The key then is to push your life expectancy  to the right side of the curve. So what are the most likely causes of death and how do you mitigate them as best you can? Answer those questions and act on the information.

onewayfamily

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Re: What are the real risks? And how do you manage them?
« Reply #12 on: Today at 10:08:03 AM »
Re: Medical bankruptcy - if any of you 'only-US-citizens' can get a European or any other western passport via parent/grandparent birth rights etc. it's worth going through the process. You'd be surprised how many European countries have these paths to citizenship. Having an additional citizenship (or multiple ones) in places like Australia, Canada, any of the EU countries and many other places gives you the benefit of universal healthcare in an emergency or chronic health situation. Hopefully you would have time and the ability to travel there but that's a separate issue. I didn't realise until recently how much peace of mind this provides us (being a non-American).

RyanAtTanagra mentioned your marriage which is a biggie that is often overlooked.

As noted by TallMike and Buffalo Chip - health risks really are the major one and luckily one that we do have a lot of control over (within the limits of randomness and bad luck). The boring causes of death are the most common - luckily a lot is known about how to mitigate and avoid/delay them.

Re: Driving risks: yes avoid drowsy driving etc. Some other pointers:
- driver's main or only focus should be driving (not talking, dealing with rowdy kids in the back, changing the podcast etc.)
- watch out for erratic drivers and avoid them
- intersections and freeways are the major hotspots for accidents
- faster driving drastically increases the risk of a crash - so slow down and even go a bit below the speed limit
- wet road conditions are very common in accident reports
- accidents are much more common at night per mile driven (~ 3x a likely apparently)
- keep both hands on the wheel at around 9:30 and 2:30 - this can help in a situation where you need to take evasive measures extremely quickly (have personal experience with this one...)
- good (unworn) tires and keeping headlights bright is smart

Some other risks/tips:
Fire: keep smoke alarms around the house and check that they work regularly, as well as fire extinguishers in easy to access/remember locations.
Drowning: be very careful with kids around water/pools - basically there must be an adult with eyes on them at all times without exception. Also - swimming lessons.