We can handle emergencies today, but tomorrow?

Published: August 11, 2017 at 12:47 pm

“Pessimism is a self-fulfilling prophecy”. These words by Sandeep keep ringing in my head all through the day. Two days ago I was chatting with a few friends on FB. I stepped out for a bit, and came back to find my less than 2-year old laptop screen say, “ disk not found”. A few days later the service person told me that the disk drum is broken. A new hard disk set me back by a few thousand and I am yet to know the cost of data recovery from the old disk – my guess, at least 15K.

Last month, I was shocked to find that the electricity bill for the last two months was a big fat zero! This is impossible as someone is always at home. Turns out, my neighbours had gone to the US and my EB meter was connected to theirs and vice versa. The wrong-connection was made in Sep. 2015. Since then we have been paying each others bill! So when I sat down to check, turns out I need to pay him about 10K!

Perhaps I am to blame for the first expense for taking regular backups (oh that is so boring), but the second expense?! That is the nature of emergencies. We can neither predict their source or nature.

Yes, a healthy emergency fund is essential, but it is important to recognize that the ability to replenish the fund after each emergency is more important.

We can replenish the emergency fund from our salary, reduce the investments that we make for a few months or as a last resort redeem from some of our investments, depending on the nature or severity of the emergency. That is life, no amount of planning can help beyond a point.

The question is, how are we going to handle emergencies after retirement? Especially when so many of us dream and plan for early retirement? I cannot live without a PC today. It is where I work, read, engage socially and get entertained. So if the PC fails, it is an emergency for me and it could well be for the rest of my life. I have regularly spent new PCs or repairs every other year. So it is practically a regular expense that will persist after retirement.

Imagine if the electricity meter situation had hit a senior citizen in the 5% or 0% slab with most of the income from pensions and interest. A sudden expense of a few thousand (will not as big as mine, but still) will rock their boat. How do you think the retirement crisis gathers momentum?!

Well, the point is, people who use my retirement calculators complain that I am being pessimistic and those who read my early retirements posts or e-book refer to me as “that conservative author”. Such expenses justify my conservative stand.

Once the salary stops, our ability to handle emergencies will take a beating, unless we have a large enough corpus. In order to have a large enough corpus, we must invest with the right asset allocation and strategy and invest as early as possible. More importantly, we must invest enough.

We will invest enough only if we err on the side of caution and work with at least 8% inflation and only 10% return on equity. Change these numbers today in the assumption that “it will all turn out fine” or “God is there” and invest less, then a single emergency can crack our financial castle.

Bottom line: invest at least as much as you spend today, preferably more. As they say, pray for the best, but prepare for the worst.

If only optimism was a self-fulfilling prophecy!

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