Contingency Planning

[imoldernu]

An unwelcome subject.

Doctor Doom is not the favorite actor in the early retirement scenario, but sometimes, negative possibilites have to be considered... when actions CAN ameliorate a difficult situation.

The first line of defense in planning for retirement, is having more money than what is needed. The safety net. The second obvious protection is the ability to reduce one's expenditures. And we usually stop there, as it seems there is little more that can be done. Thus the reason for the subject of the thread.... To explore some of the possibilities that could provide a third line of defense...

A starting point for discussion...
Hyperinflation.

There are some things that can be done, besides converting cash to gold and burying it in the back yard.

Wkipedia has a very good explanation of hyperinflation, and IMHO, a worthwhile read... not just to skim, but to understand. The statistics, history and explanations provide a good framework for building a plan of action, to stay ahead of the problems and to come out at the other end without being a victim.

Some things to consider, and to understand.
-What happens to your investments... annuities... and the companies where they are managed?
-What happens to Federal Taxes?
- Keeping money offshore? Which stable currency?
-What happens to your personal debt?
-Will credit be available?
-What are the early warning signals?
-Availabilty and cost of necessities... food, shelter
-What constitutes hyperinflation? Percentages - Time period
-A time to invest?
-What happens to Social Security... Pensions... Government Subsidies etc.
-Status of world economy... Wars...
-Timetable for confidence loss...
-Investing for post inflation...
-The early rush to buy "safe" investments... commodities... land... etc.

Excerpt:

Much attention on hyperinflation centers on the effect on savers whose investment becomes worthless. Academic economists seem not to have devoted much study on the (positive) effect on debtors. This may be due to the widespread perception that consistently saving a portion of one's income in monetary investments such as bonds or interest-bearing accounts is almost always a wise policy, and usually beneficial to the society of the savers. By contrast, incurring large or long-term debts (though sometimes unavoidable) is viewed as often resulting from irresponsibility or self-indulgence.[citation needed] Interest rate changes often cannot keep up with hyperinflation or even high inflation, certainly with contractually fixed interest rates. (For example, in the 1970s in the United Kingdom inflation reached 25% per annum, yet interest rates did not rise above 15% – and then only briefly – and many fixed interest rate loans existed). Contractually there is often no bar to a debtor clearing his long term debt with "hyperinflated-cash" nor could a lender simply somehow suspend the loan. "Early redemption penalties" were (and still are) often based on a penalty of x months of interest/payment; again no real bar to paying off what had been a large loan. In interwar Germany, for example, much private and corporate debt was effectively wiped out; certainly for those holding fixed interest rate loans.

Yeah... negative... an annoyance... but it might not hurt to be aware of the possibilites, and to consider the what ifs...Hyperinflation - Wikipedia, the free encyclopedia

 

[jebmke]

I'm more worried about deflation than hyperinflation. The US economy is increasingly a service economy. There is significant excess capacity of labor. I can't see high inflation anytime soon.

 

[48Fire]

A starting point for discussion...
Hyperinflation.

Wow, I thought this was my Dad talking at first. He beat this drum pretty loud to discourage me from ER. But now that I have, I should probably prepare a little.

 

[brett]

Not worried about any of that.

Now that I am retired, my only concern is that I get to travel to all of the places that I want to, do the things I want to while I have the good health to do it and to enjoy it to the fullest.

The rest is noise level stuff for me. Cannot spend my time worrying that the sky will fall.

 

[braumeister]

Having lived through the Jimmy Carter years, I think I'll be able to recognize hyperinflation when I see it starting.

I also lived in Brazil during its hyper-inflationary times (they would periodically just lop three zeros off the currency and change its name, so I often found myself with, for example, a 5,000 cruzeiro/cruzado note as the smallest denomination I could carry), so I know it's survivable. People can cope.

 

[MichaelB]

Having lived through the Jimmy Carter years, I think I'll be able to recognize hyperinflation when I see it starting.

I also lived in Brazil during its hyper-inflationary times (they would periodically just lop three zeros off the currency and change its name, so I often found myself with, for example, a 5,000 cruzeiro/cruzado note as the smallest denomination I could carry), so I know it's survivable. People can cope.

+1

Yeah... negative... an annoyance... but it might not hurt to be aware of the possibilites, and to consider the what ifs...Hyperinflation - Wikipedia, the free encyclopedia

The same holds true for asteroid impact, but that doesn't mean we need a contingency plan. Impact event - Wikipedia, the free encyclopedia

Aside from war, hyperinflation is most often the result of economy wide indexing. When all wages, interest rates and prices are indexed to the inflation rate an upward spiral is created that feeds itself and cannot be broken.

 

[robnplunder]

Yes, hyperinflation is one of my worries after FIRE. Although the chance of it happening to US in my remaining life time is remote, I would not rule it out. I will at least educate myself on the topic and be prepared to take action if the warning signs are there.

My more immediate worries are global stock market gyrations a la 2008. That was a rude awakening to me even after the dot.com crash. I rode them out but that was due to sheer luck than planning.

 

[W2R]

The same holds true for asteroid impact, but that doesn't mean we need a contingency plan.

+1

This is why many of us provide AMPLE leeway between our needs and our planned retirement income. There are a multitude of possible disasters that could radically affect how much money we need to spend and/or our retirement income.

Believe me, being a worrier at heart, I thought about almost all of these possible disasters before retirement. Well, except for the housing bust.... that floored me! But the housing bust isn't going to affect me unless I move. It does beautifully illustrate that all the planning in the world won't predict every single disaster.

If my spending remains the same then when I claim SS, well, at that point it looks like I will no longer have to rely on my portfolio at all. My portfolio's role by that time will be to help with massive inflation, asteroids, SS cratering, and similar disasters either predicted or out of the blue.

And then, if that isn't enough, gosh. I guess that if my spending doesn't go down all by itself due to advancing age, then I can pull out those old severely LBYM habits that have been up on the shelf getting dusty....

 

[imoldernu]

To drop back to the title... Contingency Planning...
and to this lead in -

A starting point for discussion...

Before the thread dies a natural death:

1. A quote from the quote...
"In interwar Germany, for example, much private and corporate debt was effectively wiped out; certainly for those holding fixed interest rate loans."

2. A reminder of the market loss in 2008 and 2009... and the losses incurred... even in balanced portfolios

3. Will a future market drop, or correction be short term? Would a ten year recovery suit retirement needs as well as the last recovery?

4. The Federal Reserve has absorbed debt allowing for continuation of the US dollar as the world's base currency. Likely to recur in January of 2014.
With the same results?
..........................................................................
So back to contingency:

Hyperinflation would likely be the latter part of any problem, though probably the worst. As previously mentioned by jebmke, the precursor would probably be deflation. In this case, though, economists are far apart in estimating the timing.

The planning that we logically make is... The cash reserve... and the plan to spend less. After that, the plans may get a little fuzzy:

As in the past several market "drops"... most people who are still solvent, rode it out... Reallocating assets, moving into cash, or doing things like paying off mortgages and loans.
Those who stayed with their advisors and funds managed reaonably well, as up until now, the recovery has been quick and, if anything, very positive.
Forgotten are events of 1929, 1937-38, and the long periods of recovery through to the mid 1950's.
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Without going to the extremes... Survivalist.info : Popular Survivalist Websites (and Survival Websites)

...am thinking there are a number of options open to those of us who are already retired, or have accumulated sufficient wealth to be able to be self sufficient, apart from employment. Options to protect wealth, or to change our lives to adapt. In short... ways to insure the years we have left, as apart from relying on a management fund to ride out a storm.

So... some thoughts...
... Timing... recognizing the IF's and What's of a direction rather than a blip... when to make a change
... Where to keep money safe? Gold? Land? Commodities? Cash? Properties? Spend down? Buy goods?
...Stay or go... either moving to another location... house, town, state or country.
... How long to plan for? 6 months? 10 years?
... Calculating an Austerity Budget in advance.

Michael mentioned an "asteroid impact" as a matter of odds against. .. and we all hope he's right... but some thought to possibilities doesn't take a long time, and the upside, is... like hitting your head against the wall.... It feels so good when it stops.
...................................................................................

On personal note, with a short timeline (perhaps 10 years)... the center of my own plan is to set aside the assets that I project will carry me through in our CCRC. A relatively easy decision, because it doesn't require investment or major change. Given a 20 or 30+ year period of retirement window, my plans would be quite different.

 

[Jager]

History would suggest it is difficult-to-impossible to avoid being affected in a true hyperinflationary environment. I certainly hope it's something we never have to experience, but given the debt levels across nearly all western economies today, the political exigencies which nearly always impel governments to monetize those debts, and the sanguine view that so many have - I certainly don't discount it.

That said, the prevailing macro influences today are very much deflationary.

Fire or ice?

Perhaps we'll see both. Perhaps neither.

My contingency is to have zero debt, a very small expense footprint, and to be as independent of others as possible.

 

[robnplunder]

My contingency is to have zero debt, a very small expense footprint, and to be as independent of others as possible.

Yup. Sounds good to me, too.

Anyone watch Doomsday Preppers program? I find it very amusing. One episode had a prepper who stashed away 20 year worth of non-perishable food. Now, that's a contingency!