We are all becoming experts at making calculations of risk.
The Covid pandemic has turned all of us into gamblers or, to put it in a kinder way, experts in risk-taking probability. Most of our day-to-day activities have become an exercise in weighing the benefit of say going to the supermarket or the pub against the risk of contracting the virus.
We all assess the risk in a different way if only because the consequences of contracting the disease are potentially so different. For every person that is still not able to leave the house, there is another who refuses to have their life controlled by Covid.
The pandemic has unfortunately brought the reality of premature death or serious ill health into the spotlight and, whilst obtaining cover for Covid itself has become problematic, we shouldn’t forget that none of the other everyday risks of getting up in the morning have gone away.
What are your chances?
The online calculator at https://www.calculateyourchances.com/quilter/ uses large amounts of historical data analysed by the Institute of Actuaries to calculate a series of probabilities using just your age, whether you smoke and the age at which you plan to retire. Probabilities can be calculated for either just one person or for a couple.
You can use this tool to find out:
- What’s your risk of being unable to work for one month or more due to illness?
- Are you likely to suffer a serious illness when you’re still working?
- Is it possible you could die before you retire?
So what are the chances of something terminal or unpleasant happening to either myself or my wife before we retire at 65 in approximately 10 years’ time? (We are using retirement as a stop date as logically there is no risk of losing employment or earned income in retirement).
We have a 42% chance that one of us will have either a condition that stops us working for more than a month, a serious injury or illness that will stop one of us from working or that one of us will die.
This breaks down into a 4.7% chance that one of us will die, a 14.3% chance that one of us will either die or have a critical illness and a 39.1% chance that one of us will be unable to work for at least one month.
So what does that mean we should do? As noted above, we are all likely to respond differently to those numbers. The optimist will see 42% as less than half whilst the pessimist will see it as a significant risk.
Suffering one of these events is the biggest risk to the success of any Financial Plan, so how should we understand and act on these probabilities?
Ignore, reduce or eliminate it?
For any particular risk, we can decide to ignore it, reduce it or eliminate it. For example, we can’t buy immortality (at least not yet!), but assuming we can afford it there is a level of protection we could buy that would eliminate any of the financial downside for our family if we were to die prematurely.
By quantifying the impact on your Financial Plan of a particular event, knowing the probability of it occurring and the cost of reducing or eliminating the risk, you should be able to make a rational and balanced choice about how much protection you should have and for what.
Taking a life-centered approach
Risk management is a key area of financial planning as the unknown is almost certainly going to happen, we just don’t know when and in what form.
We take a life-centered approach to financial planning, so it’s about protecting what’s most important to you.
