Does your number need to go up?

Do you even have a number?

The future is both under and out of your control. Financial planning is just trying to surf on a wave of possibilities. There is no guarantee of success, but not trying means almost certain failure.

I really enjoyed Martin’s latest blog post, Number go up.

In it, he explored a few things that might mean we’ll need more money in the future. Climate change, Japan’s economic decline, and the devaluation of currencies. He suggests we up our number by at least 10-20% to ensure we’re in better shape to deal with these.

But what is your number?

Planning for the future

We’ve talked a lot about thinking about the future here on the blog and also on the YouTube channel.

It’s pretty simple.

Figure out how much you want to spend in retirement. I usually try to figure out three ‘bands’:

1. how much you would need to spend to survive, ie the bare minimum;
2. how much you would need to spend to live a reasonable life (similar to your life now); and
3. how much you would need to spend to have an awesome life.

If you have those three numbers you can start thinking about different scenarios.

Next figure out how much you’re going to get in pensions or other reliable sources of passive income. This gives you your income floor.

If your pensions etc are enough to cover your spending, you’re done.

But for most people there will be a gap between what you need/want to spend and how much you’ll get from pensions. To fill that gap you will need to save and invest enough money to make up the shortfall, or reduce the amount you need/want to spend.

The last step is to make a plan to save/invest. And then carry out that plan. Make adjustments as you go, but keep going in roughly the right direction and you’ll end up much better off than you would do without the plan.

Black swan events

Like Martin, I am also worried about extrinsic events that might mess up my plan.

My top seven (in no particular order) are:

• Stock market crash combined with a strenthening yen
  This could wipe out 70%+ of our net worth, although hopefully just in the short term
• Regional war
  Most likely is China invading Taiwan, which would drag in the US and Japan and likely result in China attacking US bases in Japan. North Korea and Russia also possible.
• Another pandemic
  One with a much higher death rate. I’m not sure we did very well responding to the last one, so a pandemic involving a more serious disease worries me.
• Huge natural disaster in Japan
  3-11 was bad enough (especially in Sendai) but even worse disasters are very possible. I worry about Japan’s ability to come back from a Nankai trough mega-earthquake and tsunami.
• Climate change
  On top of extreme weather (heat waves, storms, flooding), I can see food shortages, a breakdown of international relations, 100s of millions of refugees. This could have a huge influence on our quality of life, regardless of how much money we have.
• Demographic collapse in Japan
  Not just the economy in general, but I worry about the lack of workers to keep society going. Things like maintaining infrastructure, providing services, etc. This is already visible in terms of restaurants or companies not having enough staff to stay open, but it’s also starting to affect medical services, transport, construction, etc.
• Debilitating illness or accident
  I am not worried about dying (I won’t care, I’ll be dead) but I do worry about becoming disabled or getting dementia.

Having more money will help us deal with most of these, but not all.

Perhaps more importantly, thinking about them allows us to plan and think about what we might do. It might allow us to notice them early enough to do something about them (like when we decided to leave in 30 minutes after 3-11).

Planning is never over

The thing I have learned about financial planning over the last fifteen plus years is that it is never over.

Many people make the mistake of thinking that they need to come up with the perfect plan, and that once they have it that is it, they just need to implement it.

Nothing could be further from the truth.

Financial planning is a process, not a result. You plan, see how things go, adjust your plan, run into setbacks, adjust your plan again. The longer you do this the better you get at it.

No plan survives contact with the enemy (or reality).

That’s not a bug, it’s a feature.

If you fail to plan, you plan to fail

The only fatal mistake is to not plan at all. If you’re not sure how much money you will need in retirement, and you don’t know how much your pension is going to pay, and you haven’t thought about saving and investing, you’re likely to end up in a bad situation eventually.

But all is not lost. You can start planning today.

If you’re not sure how to, the RetireJapan site has all sorts of information, a forum, and even a consultation/coaching service if you need more help.

Recently I’ve been doing a lot of consultations. They can be about anything, but by far the most common ones are people who want to start but are feeling overwhelmed, people who want a financial ‘health check’, or people trying to make a plan for retirement.

For most people, getting clear on what they need to do or understanding their situation (or just getting a push to get started) makes the fee well worth it.

How about you? Do you have anything to add to the list of black swan events?