Is There A Margin Of Safety In Your Financial Plan?

Have you ever gotten onto a overcrowded elevator and stared anxiously at the “Maximum Capacity” sign wondering how close you really are to the limit? The good news is that when engineers design elevators, they include a margin of safety above and beyond the limit suggested for standard operation. The same is true for airplanes, cars, and just about anything else with strict regulation.

Your financial plan should have a margin of safety, and you’re the one to regulate it. That may be the reason most individuals don’t include one - It’s difficult to know exactly how much safety margin is right. Always preparing for doomsday will leave us with a life barely enjoyed. And never thinking about unexpected risks will leave us blindsided. The right answer for me is to expect the future to be just a bit below average. Could the future be much worse? Sure, but I’m willing to take that risk so I can enjoy life in the meantime.

A few margin of safety examples might include -

(1)   If you expect 7% returns, plan for 5%

(2)   If you expect to live to age 90, plan for age 95

(3)   If you expect your average lifetime taxes to be 20%, plan for 30%

The list could go on. The key is a balance you are comfortable with. You need to be comfortable with the decisions you make because it will require some amount of financial sacrifice above and beyond what is “average.” If you expect lower than average returns or longer longevity, it will require a greater savings level than someone simply planning for the average.

If you don’t want to plan with a margin of safety, you should at the very least have your plan B. For example, If you planned for 7% and got 5%, how will you cut back to make the plan work?

Happy planning!

Thank you for reading,

 Alex

This blog post is not advice. Please read disclaimers.