A few weeks ago, I packed for a 6-day family vacation with three generations and cousins. I did my usual contingency planning of packing an extra day of clean clothes and three extra days of contact lenses. But what started as a 6-day round trip flight to one city unexpectedly turned into a 14-day multi-city trip, adding a car rental to cross the state to reach an open airport.
Ice and some other unlucky twists required not just contingency planning but whole new decision-making. We immediately consumed our back-up supplies and had to create new plans, challenging our expectations. Extra clothing got me through an unplanned rental car trip to a relative’s house, where we could all do laundry. My contact lenses were not going to last me on a trip that (at that point) had no known ending date. The solution was to switch to wearing glasses for the rest of the trip, saving the lenses for the final leg of travel, whenever that might occur.
New decisions had to be made for the actual travel: find a rental car, drive across the state, and buy new airplane tickets. The trip had to be re-planned in real time with countless other people competing for the same airline seats.
We use the same principles in financial planning. The scale is different, of course. The need for new or re-assigned resources emerges when we live longer. Statistical life expectancy is mid-80s, and a financial plan takes into account the range of 70s to 90s. I like to look at scenarios to 95-years-old, building in contingencies for changes in health.
Just like an unexpected delay on vacation, we adjust. A cash buffer can cover needs or buy time before making new decisions. (On my vacation, my extra clean clothes were a buffer, giving me enough time to make a plan for laundry.) In retirement, a cash buffer gives time for the market to recover or, if it doesn’t recover quickly, time to make other changes. Buffers can take different forms, such as a safety net from a savings account or government bonds.
When unexpected events demand big changes, we can respond if the financial plan has taken into account long-term assets that can be tapped. (On vacation, we had to make an unplanned drive to another city, renting a car and borrowing a house to land at the right airport.) Financial assets can serve as a backup plan, from Social Security and pensions to a reverse mortgage. The asset may be in the form of income (made higher through delaying Social Security payments, for example) or any number of investments.
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