How We Manage Financial Risks

I love to write about our outdoor experiences and share how they’ve shaped our philosophies on life and finance.  Our first post that went a bit viral and still seems to resonate most with our readers was “Dirtbag Millionaires”.

Since then, some of the more popular posts have continued on that theme.  These include our guest post swap with our outdoorsy friends at Our Next Life.  They compared their path to FI to climbing mountains and I wrote a guest post on their site about the importance of traveling light in the outdoors and in life.  More recently, I compared our home stretch to FIRE with the mountaineering concept of “Failing Upward”.

Based on our love of climbing, skiing and mountaineering and our plans to retire by age 40 with a young child, you may think that we are big risk takers.  You would be wrong!  In finance and in the mountains, we look at ourselves as being extremely conservative and risk averse.  Today, we will share how we have and will continue to apply a climbing concept for risk management to our finances.

Grand Rappel 2

Redundancy

When climbing or repelling, you must trust that your rope is anchored in a way that it won’t fail when it is holding forces equal to or much greater than your body weight.

What you are anchored to (i.e. into the rock face, large boulders, trees, etc) and each component of your gear SHOULD be strong enough to withstand the loads placed upon them.  This is comforting until you load the rope.

Without being overly dramatic, failure of your anchor will likely result in serious injury or death.  “Should” isn’t good enough.  You want to know that your anchor will not fail when you need it.

The solution is to make the anchor redundant.  In a properly designed redundant system, if any component fails the remaining components should still form a completely independent system that will not fail.

Compare the two photos.

"Should" hold

The anchor in the first photo SHOULD support a falling climber or person on rappel.  However, if any one component fails, it is game over.

Fully Redundant Anchor

A proper redundant anchor will look something more like the second photo.  Notice that with the redundant system that if any single attachment point with the bolts, any single carabiner, or any of the nylon components failed, the system would still work.  You are simply left with the original system shown in the first picture.

Redundancy While Building Wealth

I would love to say that we are a couple of revolutionary thinkers who had this master plan to save 50%+ of our income to retire early on a particular date or by a particular age.  However, it isn’t quite like that.  Actually it wasn’t like that at all.  We stumbled into our system accidentally.

Mrs. EE finished up school a year ahead of me with a small debt (school and car loans) and a starting salary of about $35,000.  We were getting ready to get married and talking about our future finances.  We agreed to have her support us completely off of her salary for one year.  I would use all of my much smaller income earned working part-time to try to get us debt free by the time I graduated and we were married.

Our plan worked.  We started our married lives together debt free. We were then also making two very similar professional salaries.

We now had decisions on how we wanted to spend our money.  We decided to continue to live off of only one salary and bank the other so we would never miss it.

Why Save So Much?

We didn’t start saving 50% of our money to retire by age 40 or even 50 or 60.  We were young and excited about our new, interesting careers.  Honestly, retirement was the furthest thing from our minds.  We started saving 50% of our income out of fear.

I grew up watching my parents constantly working their butts off in their small business to support our family.  We weren’t rich by any means, but we also never really wanted for anything.  However, time was always at a premium.  Our vacations were day trips or if we were lucky a long weekend.  Most weekends were spent working.  I wanted something different than having my life revolve around work to make ends meet.

Mrs. EE grew up with 3 siblings in a two working parent home.  Her childhood was spent in a lifestyle of living paycheck to paycheck, and often a few paychecks behind.  They at times relied on assistance for the basics.  Her brothers still jokingly recall their fondness for “government cheese”.  Even now, many of her thought processes are based in fear of ever returning to that lifestyle.

As we were establishing ourselves, we realized we could continue living comfortably off of one of our professional salaries.  We knew we could “afford” to spend much more, but that would make us vulnerable.  If one of us lost a job, had health issues or if we had an emergency with great expenses we would be in trouble.

We didn’t have an early retirement plan or even think extreme early retirement was really possible.  However, we knew we wanted a more secure and comfortable financial situation than the ones in which we were raised.

Redundancy was our solution (even though at the time we didn’t call it that).  We continued to live this way without ever really paying much attention to how much we were spending or saving.  We  simply liked the feeling of security it gave us.

It also allowed us to live without any type of strict budget.  If an opportunity came up like traveling for a skiing or climbing adventure with friends, attending a Super Bowl or taking a big international trip, we did it.  We had so much excess in the system that we could take advantage of opportunities to do some amazing things without feeling any financial pain.  If something major unexpected happened like Mrs. EE finding out she was pregnant after 10 years of marriage when we thought it was impossible and didn’t plan for it, it was not a big deal financially.   We could weather any financial storms with little stress.  This is something we want to continue into our early retirement.

Redundancy In Early Retirement

Most people that we have read in the FIRE community talk about working until they have at least 25X their annual expenses and assume that they will be able to withdrawal 4% of their portfolio, with minor adjustments as needed.  Simulators based on past data will tell you that with a reasonable asset allocation, this will give you a greater than 90% chance of success defined as never running out of money.  But what if with current high valuations and horribly low interest rates, this is one of those times it is not successful?

What if one of us develops a serious medical condition and we greatly underestimated our health care costs?  What if, even if we are healthy, health insurance premiums continue to skyrocket?  What if in different political times ACA subsidies go away causing premiums to eat up 25% or more of our budget each year?

What if we simply decide that we want to spend more for something really good and important.  What if there is another surprise pregnancy?  What if we got serious about adopting a child as we have talked about for years but have never pursued because we haven’t had the time to do it?  Or what if we simply want to indulge if an opportunity to do something really cool or amazing presents itself but it is not in our budget?

The answer to all of these questions, in our minds, are to continue to have multiple streams of income that are redundant.  This means that they are completely independent of one another and under ordinary circumstances would support all of our spending.  If all goes well, we will simply grow our wealth in retirement and have extra money to do good things for others.  If anything unexpected happens, we will continue to be able to roll with the punches without having to worry about it.

How Will We Actually Do It?

I know that many of you are thinking that sure this is a great climbing concept where you sacrifice at most a few minutes to build another anchor or even seconds to clip another set of bolts.  But how would we ever create an entire second, independent, fully redundant income stream when it has taken over 15 years to get to financial independence?

The short answer is that we think it won’t be all that hard.  Since this post is getting long, we’ll make that question the topic of our next post.

Until then, I’m curious to hear how others think about the transition to early retirement.  Are you concerned about the psychological effects of going from having a large savings rate to spending down your investments?  Are you concerned with having to live on a budget or are you unlike us and used to making and following a strict budget?  Are you comfortable with your plan’s ability to address the scenarios I’ve outlined and any others specific to you?  Are we being too conservative?  Please share your thoughts below.

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25 comments on How We Manage Financial Risks

  1. Those anchor pics remind me of how many times I’d be out in the woods, tie off on a tree (single tree) and jump off a rock face screaming towards the bottom. I miss rappelling… I could also smack myself back before I used double anchor points for being so naive and reckless. Yeah to no catastrophic gear failures!

    I’m a little concerned about going from dual fat incomes to almost zero incomes, and how the psychology of all that will play out. Like Mrs. EE I was also raised in a household that played, “Which bills HAVE to get paid this week, and how much is elft over for groceries”, so I am worried about ending up in that situation again. I know it’s totally irrational, and we are WAY better at money management than my folks were, but still, it’s an underlying fear like a shark below the surface of the water. Just lurking causing a little dread.
    I don’t dwell on it because at the end of the day, a leap of faith that we’ve hit “good enough” and can start making our Lifestyle Changes is what it boils down to. Come hell or high water stuff is changing in 2 years or less! Since we already spend close to what we’re budgeting in “retirement” with no additional income, i don’t think the spending will be an issue, rather the thought that we can mess it up pretty easily at that point. 🙂

    1. Ha! The stupid stuff we do when we’re young that could have killed us. Yeah indeed to still being alive to worry about our first world problems of early retirement planning;)

      There is a great section in the book “Secrets of the Millionaire Mind” by T. Harv Elker about how deeply we are affected in how we perceive money based on how we were raised. Mrs. EE and I had very different upbringings and reading that made me realize why we often see things so differently. I don’t have that deep seeded fear as she does, though I also remain very conservative in my spending b/c that is the way I was raised.

  2. Certainly resonates with me. We were a spendy couple simply because we could. Although we would describe our former selves as decent savers. Not great but decent.
    We have actually been surprised by our discipline over the last 6-9 months in particular to ratchet our savings rate much higher, particularly into our taxable accounts.
    And modify our restaurant, groceries inflated lifestyle. These were two very big spend areas for us. In FIRE, we are looking forward to having more free time to plan meals, cook a lot more (which we love doing) and minimize those areas of the budget even further. We see a lot of what we are doing today as the practice runway for the real flight. Of course the real flight will mean watching the controls very carefully also and managing the inevitable turbulence.

    1. That is an interesting concept of “watching the controls carefully”. That is the thing we have never done very much. We like the idea of automating our savings and then just living without thinking much about money, more on autopilot. I certainly can see where our method has made us wasteful in our spending as it is pretty easy to lose track of things when not paying close attention. This was true of little things like our cable bill to massive things like our massive investing and tax planning mistakes. However, the “autopilot method” is very low stress. I suppose that as with most things, the truth of what is the best method lies somewhere in the middle.

  3. The idea of redundancy is very well explained here. I like the idea of living on only one salary… we are not there yet, not even close. Reaching that point would be great.
    For now, we like too much the living now and enjoying beyond the little frugal things…

    1. AT,

      I agree that it makes little sense to defer all pleasure in the name of a high savings rate and you should enjoy life now. However, I don’t feel that it needs to be either/or. For those like us with a higher salary, it is pretty easy to live an amazing lifestyle with far less cost than the average person by being creative and focusing on those things that are most important. For those with a lower salary, I would simply take a different approach such as using leveraged real estate that requires a bit more work, but offers the potential for far greater return than paper assets if you’re willing to apply that effort. Just some food for thought. Either way, I love your family first focus and hope you don’t ever lose that as it is easy to do when you start thinking too much about money and early retirement.

      Best,
      EE

  4. Maybe you’re being too conservative, or maybe you’re actually still being too aggressive — this is stuff we can only know in hindsight, and like you, we’d always rather err on the side of too conservative on our finances. We haven’t always been as good of savers as you guys, but we definitely feel that same fear. It’s why both of the places we’ve bought have been way below what we could technically “afford,” because we wanted to be sure we could pay all of our bills on one of our salaries, in case the other lost a job. And looking forward, we’re also on the multiple streams idea in a big way. We love knowing that our rental income could support a modest existence all on its own, as could our investments alone, and we could live for a long time on the proceeds of selling or downsizing our house if need be. I would probably call these things contingencies more than redundancies, but you know I like a good climbing metaphor. 🙂 Speaking of — that rock in your first pic is rad! Can you share where that is?

    1. I think it is interesting that we are so on the same page when it comes to risk. When we tell people some of our hobbies, they think we’re all like Alex Honnold free-soloing up El Cap when that couldn’t be further from the truth. Our experience with the outdoor community is that most people are pretty conservative. The person climbing that rock face has the same fears as the person standing in the meadows looking up, shaking their head, and saying they would never do that or even criticizing climbers for being reckless or crazy. The biggest difference between the two people in my mind is that one is better at managing their fear and assessing risks, and that risk is rewarded with some amazing experiences. Kind of like FIRE!

      Not very good at labeling our many pics but it is from the Tetons, either coming off the Grand or Nez Perce.

      1. Haha, yeah — no free soloing here, either! We’re the ones wearing climbing helmets when no one else is (still not sure why helmets are totally normal now in skiing, but not climbing), and building the most ridiculously overkill anchors. 🙂 Or taking the unnecessarily conservative skin track route up in the backcountry. But I take that whole living-to-100 thing seriously, and way too many outdoorsy people die young. Especially in mountain towns, it’s hard to escape that fact.

        Mr. ONL spent a season in Jackson Hole, but I’ve never been to the Tetons, other than seeing them from the air. Climbing the Grand is high on our list for ER, though!

  5. Excellent analogy and I love that climbing picture! I especially like how the sky blends into the background of your site.

    Anyway, with regards to your questions. Right now, my wife is a stay-at-home mom so we’re living on my salary alone; therefore, if she starts working at some point, my intention is to continue doing so and invest everything that she makes. Additionally, once we reach financial independence (when I reach about 45 at our current rate – I’m 29 now,) I intend to continue working a few shifts per month or take a 3-month travel nurse assignment once a year, make $20-30+k, and then continue enjoying retirement for the remainder of the year.

    This “redundant” income will act as a buffer in the event of needing to ride out a down market and avoid selling. Otherwise, when the market is going well and we don’t “need” the money, I can either choose not to work or that income can be further invested, simply given away, or frivolously blown in any way we deem fit at the time.

    1. That is definitely a great option for those in the healthcare field. It is one of the strategies I’m really considering and will outline in our next post.

  6. Are you comfortable with your plan’s ability to address the scenarios I’ve outlined and any others specific to you?

    This question came up recently as the wife and I talked. The most important thing is her family and taking care of them. She asked what if her parents or mine needed support? I couldn’t but help to answer that is one of the main reasons to put ourselves in such great shape financially. Could it derail the plans if we are taking care of our parents? I think depending on the costs medically it could, but I really think it would only take away from the travel plans rather than the finances. If it means going back to work to have another stream of income, I’m not opposed to helping my immediate family when in need. I don’t think we will ever be “taking care” of either of our parents but a possible crutch to help them walk a little better.

    We have also had talks of buying/converting a property to have our parents live in the same area as us, possibly adding a bedroom or building a complex style housing arrangement in more of a country setting. Either way I can’t stress enough the value in having options and then dreaming a little. I don’t know the answer but I want to have the options to find them.

    1. Steven,

      I think the biggest drawback of the assumptions of financial independence using a particular WD rate is that it assumes your expenses will remain constant forever. I personally can see scenarios where we spend less when we’re not working, however I can also envision us spending much more. I feel much more comfortable admitting that I don’t know what the future entails and planning accordingly than not being prepared for any number of scenarios that could cause us hardship.

  7. Love to see other outdoor minded people working toward financial independence. You’re right, redundancy is so important when you’re climbing, mountaineering, or even backcountry skiing. Even when rapelling would set up an emergency brake. This way if I accidentally let go of my hands, the brake would kick in to stop me from falling.

    1. Tawcan,

      Glad that you found us! I agree that there are a lot of applications for the concept of redundancy. I recently listened to a Tim Feriss podcast w/ former Navy SEAL Jocko Willink who shared a phrase that the SEALS use. “Two is one and one is none.” Essentially it means that you better have a backup when the stakes get high b/c nothing ever goes according to plan.

      Cheers!
      EE

  8. I am retired and the thought of spending down my savings makes me very uncomfortable. My mother always said “never touch your principal.” With rental property income and a pension I have gotten by without spending savings and am able to delay social security.

    The concept of backup rings true for me. While having social security in the future as a backup and savings that generate income to look forward to, I am comfortable in the knowledge running out of money does not seem likely.

    1. Jeff,

      I always appreciate hearing perspectives of those already retired. I agree with the concept of not spending down, or at least minimizing, spending of your assets. This is especially true with a long retirement such as we will have.

      Thanks for reading and taking the time to comment.

      EE

  9. Glad I read this article!
    I am currently hammering at debt but I wonder how I will get to my retirement. Will it be slow and steady or will I put it into fifth gear and retire as soon as possible (This is what I would rather do)
    I don’t believe I will ever completely stop working, but I would be happier working when money wasn’t a priority.
    I think I would feel a lot more comfortable with passive income along with retirement funds. Whether that be in real estate or whatnot. Just something that would put my mind more at ease when it comes to being retired and living off a depleting budget.
    Great Article!
    Gets ya thinking!

    -KB

    1. Kevin,

      Glad you found us and we made you think. Two key things that I picked up from your comment. First is that you have already taken the hardest, first step and got the process started. Once out of debt, you can simply roll that $ into investments which should be relatively easy. Second, you have already realized that there is no right or wrong way to do this. You have many options and you can choose how you want to use your finances to build the life you want. May sound obvious, but it took us a while to figure that one out.

      Cheers!
      EE

  10. As a risk averse person, I am with you on this. I assume that very little is actually reliable. My first version of financial freedom will include being able to quit my full time gig to only do my LLC work that I fully enjoy. My second version of financial freedom will likely look like something I cannot even imagine yet.

    1. ZJ,

      I am with you on embracing the uncertainty of the future. I think that to assume that you know what the future holds and that it will look anything like the present is a big error that sets you up for failure.

      EE

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