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Sunday, December 21, 2014

Black Swan Events

Posted by Tim Stobbs on July 21, 2014

Three doors door down from my parents cabin a natural disaster has struck, the slope that nine cabins sit on is unstable and now slowly falling into the lake. This isn’t anyone’s fault and in fact the entire event would have been impossible to predict as a perfect storm of conditions occurred to cause it to happen.  In short the flood of 2011 cut the toe of the slope, then the recent heavy rains saturated the soil and raised the water table which lubricated a shale seam and presto you get a slow moving landslide on a slope that hasn’t moved in 60 years prior.

Now losing your cabin at the start of the season sucks, but the real shit hit the fan for the cabin owners when they started to look at their insurance coverage.  This is apparently classified as an “Act of God” thus in all likely hood their insurance on their properties are nil and void.  Ugh, but you may think they could get something from disaster relief from the government.  Well so did I until it was pointed out that only covers primary residences, not second homes like cabins.  So in the end, they have no cabin and also no means of getting a dime of compensation from anyone.

If that isn’t a black swan event for those people, I don’t know what is.  So the owners of these cabins are getting out what they can and trying to accept that rebuilding isn’t an option unless you happen to be sitting on a far bit of cash.  Needless to say this has also freaked out my parents who are just down the road from this.  It also likely means that my father’s retirement project to rebuild the cabin (which is almost at the drywall stage) could end up falling into a lake or not (so far their property is stable).  They just don’t know what will occur in the long term (at least in their case the cabin is their primary residence so they could get some money).

The point is tale is you can’t plan for everything.  With retirement planning we tend to pretend we can cover all our bases when in fact they are very real situations that can occur that you can not predict, defend against or even do anything about when they occur.  In short, shit happens.  So what can you do?  Really not much other than have a robust plan with some slack in it.

The other lesson I learned on this entire disaster is you can’t depend on your equity of your vacation property in your retirement plan.  Actually in fact, any house equity isn’t a stable long term investment as you local market can go to hell just when you need to sell.  So I would suggest never being at a point to depend on it, which makes me feel good about my choice not to include the house equity in our retirement plan.

So have you ever seen a black swan event?  What happened and how did the people cope with it?

Adjusting to a Rising Net Worth

Posted by Tim Stobbs on March 27, 2014

When you start saving towards an early retirement, you understand that your net worth will steady increase, but I don’t think many of us consider what that changes in your life.

The first most obvious change becomes the ability to self insure on more minor things.  You don’t buy the extended warranty because if something stops working you can just buy a new one.  Then later on when you have even more saved you can raise your home insurance deductible since you can handle even larger costs.

While those did cross my mind, I didn’t realize another insurance adjustment you can make down the road is having less life insurance.  After all life insurance is about replacing lost income and when you have a large amount of money saved you really don’t need to replace as much income.  So right now I’m in the process of reducing our life insurance coverage by half.  We previously had $500,000 each for coverage, but that is becoming obviously overkill with the steady increase in our investment net worth.

Yet the most profound change of a growing net worth I have noticed is the ability of increased choice.  Money ceases to be a major barrier to your decision making process, the question of ‘can I afford this’ isn’t relevant to many discussions.  Instead your questions turn to: do I want this?  Will this be a good value for my money? If there another choice I would prefer to do instead?

More money also allows for more opportunities in your life.  For example, a real estate deal comes up that is attractive, if you have enough money to invest you can potentially take on something that otherwise would be out of reach.

There is also a dark side to having more choice, your ability to put up with bullshit and crappy situations goes down hill since you know you can walk away from many more of them.  For example, for most people walking away from your job after a crappy week isn’t a valid option, since you have bills and a mortgage to pay and usually not enough savings for a long period of not working.  Yet when you have several years of living expenses saved up, the situation changes and you can walk away.  Then I find I have to take a break from the situation and determine if the issue is temporary and if I can cope with it.  Or if the situation is more permanent in nature how to get around it or determine a threshold at which I won’t put up with it anymore.  I once spent six months in a really crappy job situation and it was too long as I was become someone I didn’t like.  So now I have a much shorter fuse.

Overall I find having more choice just causes me to think more about my options.  So while that can be a good thing, it can also result in over thinking about some situations.  So what do you enjoy most about your increasing net worth?  Or what is the worst part of it?

Up a Creek

Posted by Tim Stobbs on July 5, 2013

So the other day I was watching what was happening in Calgary in stunned shock, when I heard a news report about the fact that most people didn’t have insurance coverage against a flood (they may only had sewer backup coverage, so if in comes in the front door or windows they are up a creek…or river).  I thought that seemed fairly silly, so I looked at my own insurance renewal forms to check my coverage.

I was a wee bit stunned to see towards the bottom of the fine print: there is no coverage for seepage or flood. WTF?!?! To put this into context I live within 300 meters of a small creek. Ugh, perhaps it is time to do a little investigation into my coverage (I do have sewer backup coverage).

Well after a wee bit of research I understand why most people don’t have flood insurance…it is hard to create a business model where the insurance product would make sense.  For example, in fire insurance the reality is the majority of people want that insurance and only a very small number of homes burn up each year.  So it is fairly easy for people to pool their risk via an insurance policy and not pay too much.  Flood insurance is a bit different as the only people who would buy it would be those at risk by living on a flood plain.  So your pool of people to spread the risk out by would decrease dramatically so to afford to pay out coverage you would need really high premiums to make it work.  Of course high premiums makes it unattractive to sell so your coverage pool gets even smaller.  So one big flood could bankrupt the insurance company.

So what happens when you have a large flood like Calgary…do people just lose their houses?  Well not entirely, often the provincial and federal governments step in offering some degree of compensation to help with the rebuilding.  Will it cover everything…not likely.  In the end, water front views are nice, but you also have to consider the risk of where you live in terms of disasters.  A friend of mine lives in Calgary and the garage of his building was flooded, but he lucked out it didn’t get to the first flood where his condo was.

In my case, I’m not too worried.  My house is on a bit of a local high point and the creek near me is actually part of the flood control system.  So rainfall is collected in a few nearby man made lakes and then slowly released into the creek via a dam.  I’ve seen that creek with local flooding issues and while it gets a bit high it is still a very long way from getting into my house.

Do you know your insurance coverage for flood or sewer backup?  Anyone got any insurance horror stories where they learned what you policy doesn’t cover the hard way?