Building Climate Change Into Your Early Retirement Plans

As much as I talk about rising health care costs and uncertainty about which social programs will still exist by the time many of us reach traditional retirement age, the truth is that the far greater threat to financial solvency for early retirees is climate change. And people don’t need to agree on why it’s happening to acknowledge that it is happening. The United Nations’ Intergovernmental Panel on Climate Change recently released a horrifying report on what we’re likely to face, with severe effects coming by 2040, just over 20 years from now. We won’t even be traditional retirement age by then.

But this isn’t a hypothetical future event that may or may not arrive. In the report, the panel makes clear that climate change is already happening. It’s here, and it’s getting worse. As Vox put it, this new report “slams the door on wishful thinking.”

So here we are. Sea levels are already rising, we’re already seeing more and increasingly severe hurricanes and winter storms, droughts are longer and more devastating, and both water and food shortages are already a reality in many places. (Cape Town, South Africa, recently came this close to completely running out of water, an event they termed the most apocalyptic “Day Zero.”)

Undoubtedly, those of us who save money and prepare ourselves financially for the future will be far better off than most people in the world when the truly horrific effects of climate change arrive, but that doesn’t necessarily guarantee that we’ll be well prepared. Will the FIRE community eventually be forced to become one big roving band of RVers, scouring the desert wasteland for resources like Mad Max, but without the violence? Only time will tell. (I call dibs on the guitar guy, though. He’s definitely riding with us.)

If you’re like me, you don’t want Mad Max to be your only option. And that’s why it’s worth making sure that you’ve thought through what climate change will mean for your early retirement and traditional retirement, and then account for it in your financial plan.

Climate change is a big topic, and it has the potential to have a huge range of economic impacts on all of us. This is a research-packed post, so I encourage you to look at the resources linked for much more information than I’ve included here. Let’s dive in.

Low-lying areas are most at risk

The most visible effect of climate change for much of the world’s population is sea level rise, and it’s already well underway. When I visited Miami last year, there was standing water in many of the streets, and locals assured me it wasn’t hurricane-related, but was just “king tide.” And Miami’s fresh water supply is already jeopardized by rising seas, with salt water regularly infiltrating it. New Orleans, despite new fortifications since Hurricane Katrina, could be all but washed away in another big hurricane. New York City may be facing major floods as often as every five years. Or large parts of it could even be underwater full time. At least one California beach community is considering a retreat from the coast.

And every low-lying coastal region in the country (really the world) will be affected.

The map above represents what will happen if the ice caps melt entirely, which isn’t expected to happen in the next few decades. But if you’re interested in seeing what projections are for your area or your prospective future home over a shorter time horizon, you can look at a whole range of scenarios on the NOAA Sea Level Rise Viewer.

ACTION STEPS: Ensure you aren’t planning to stay put or move to a place that is likely to be underwater or affected by king tides. If you are, make sure you have adequate reserves so that you can afford to move and continue to be comfortably housed even if you aren’t able to sell your property. Remember that homeowners insurance will never pay for you to buy a home or rebuild somewhere else if your home is destroyed, only where it had been located. Suck it up and pay for flood insurance, something two-thirds of the 41 million Americans who live in flood plains don’t have. And if you enjoy world travel, visit those low-lying and glaciated areas soon, before they’re gone.

Higher, inland areas are affected, too

The bummer news is that you can’t just move somewhere inland and assume that you’ll be insulated from the effects of climate change. Large parts of the western U.S. and Midwest are projected to have increasingly long and severe megadroughts, which you can in more detail with this NASA megadrought visualizer. Megadroughts mean less water for drinking and household uses, and it’s not unthinkable that desert cities like Las Vegas and Phoenix could face their own Day Zero water apocalypses in the next couple of decades. But severe drought also increases wildfire danger, a terrifying prospect for those of us who live in mountains and other fire-prone areas and already have fire on the brain at least half the year. (At the USAA mini-conference I attended before FinCon, they asked everyone in the room what they’d grab if they had 30 minutes to evacuate ahead of a natural disaster. Nearly everyone looked panicked, and started listing off things, only to realize later they’d forgotten something important. Those of us who live in wildfire areas didn’t have to think about it, because we keep our evacuation bags packed until snow is on the ground. My answer: “Grab the two bags by the door, put the dogs in their carrier, get our laptops and peace out.” When you live in a wildfire area, the fear of fire never leaves your brain.)

In California alone, more than 2 million households (that’s 5-6 million people) are at high or extreme risk from wildfires, with another 715,000 households in Texas, 366,000 in Colorado, 234,000 in Arizona, 171,000 in Idaho and 150,000 each in Washington, Oklahoma and Oregon. And if your house burns down from wildfire, it’s the same as with flood insurance: your insurance will only cover rebuilding in the same place, not relocating.

Droughts and fire aren’t the only threats in the country’s interior. We’re also seeing an increase in damage from tornadoes and hail. This chart from III shows a noted increase in damage from “convective events,” which includes severe storms, hail and tornadoes.

ACTION STEPS: Make sure you’re aware of the risks where you live or plan to live. Prep your home to give yourself the best possible chance of withstanding whatever natural disaster is likely in your area, and regularly check in on your homeowners insurance to make sure all the likely events in your area are covered. If you live in wildfire country, maintain your defensible space diligently and take additional steps to protect your home. Know how you’ll evacuate and what your backup housing plan will be if it takes a few years to get your home rebuilt. If you live in an area with hail events, make sure you maintain your roof well, and invest in storm windows. If you live where tornadoes are likely, have your roof strapped to your house by a professional and prep your interior and exterior so you’re ready when storms hit. Inquire about where your city and region get your water, and look into how sustainable that water source is given the climate change projections as well as whether there are backup options. Consider moving before the water runs out and property values plummet. And no matter where you live, stockpile water, at least three gallons per person per the Ready.gov recommendation, but more is better.

Where you live will matter for more than just weather events

Climate change is already affecting people’s health in a range of ways that vary by region.

Just ask anyone in the Western U.S. how much wildfire smoke they suck down in the summer, or ask pretty much anyone anywhere about the record high summer temps. And that stuff matters, and is worth considering for your own long-term health. But it’s not the biggest problem.

The biggest issue is how your local area or region responds to the effects of climate change, by putting emergency response plans into place, improving infrastructure and otherwise planning for the worst case scenario, and accounting for factors like income inequality and health. This Environmental Protection Agency study maps out the most and least resilient counties and finds that, “areas like Appalachia, the southeast, and western Texas are on course to suffer far worse than the average American,” thanks to a lack of local resilience and an unwillingness prepare for the inevitable. It notes, “The state of Georgia, for instance, is no more at risk from climate impacts than the average state, but is nonetheless acutely vulnerable to climate-related events, thanks to less-stringent building codes, a high number of vacant structures, and old public infrastructure.”

It’s worth looking at the resilience rating of your county, and considering what other parts of your state may be facing that could strain resources. For example, living at 6,000 feet in Tahoe, we’re not in danger from rising sea levels – but a huge portion of our state is, and that’s bound to cost a lot of money as communities figure out how to cope with that or to deal with disasters, all of which will draw resources away from things we need, like wildfire protection.

Unfortunately, there’s a lot of dumb advice out there on this particular question. For example, this Business Insider story lists a bunch of places where you can “escape” climate change, but nearly all of them are directly threatened by it. For example, NRDC says Phoenix will be uninhabitable, NASA says Denver and Salt Lake will be in a persistent megadrought and NOAA says most of Portland, Seattle, San Francisco, Baltimore and Philly will be underwater. But, like, they have parks and stuff, sooooo.

ACTION STEPS: Research your county resilience and potential climate impacts to your whole state, not just where you live. Consider whether the health effects that are likely to worsen are things you can live with. Decide if you’d prefer to deal with your local challenges or relocate.

Insurance may not protect you

It’s getting more and more expensive for insurance companies to do business, given the escalation of natural disasters around the world. The National Association of Insurance Commissioners reports that, “According to a study by Munich Re [the world’s second largest reinsurer], extreme weather events (such as prolonged droughts, hurricanes, floods, and severe storms) led to $560 billion in insured losses from 1980 to 2015. Experts predict climate change will continue to intensify the frequency and severity of these types of weather related events.”

The loss trends that are already affecting insurance payouts are quite clear, per III:

None of that should shock anyone who’s paying attention to world news, but what is shocking is how little attention insurers are paying to the impacts of climate change. A HuffPost story on insurance and reinsurance companies shares this:

Cynthia McHale, director of the insurance program for Ceres, a nonprofit group that pushes investors to pay attention to the financial risks of climate change, said in an interview earlier this month that neither insurers nor their government overseers have a good handle on the risks that climate change poses to insurers’ various financial assets. McHale compared the situation to the one faced by big banks in 2008, when few sufficiently realized the magnitude of potential losses from the U.S. property bust.

If the magnitude of climate change is not built into insurance pricing in short order (it’s currently not), and if insurance companies don’t substantially increase their reserves (something that will almost certainly have to be driven at the policy level), then insurance companies may simply be unable to pay out when disaster affects you, or they may go under entirely. The federal government can probably handle a few bailouts of the insurance industry, like when they bailed out AIG in 2008, but that can’t happen an infinite number of times.

It’s not remotely unthinkable that you could end up in a situation in which your home or property is severely damaged or destroyed in a natural disaster and either your insurance company is unable to pay the full cost of your claim, leaving you on the hook for much of it, or your rates go up so dramatically that they bust your budget.

ACTION STEPS: Maintain solid insurance on all your property, but do what you can to self-insure as well, and to build in contingency plans in the case that you lose most or all of your home equity in a disaster. Factor in costs that increase faster than inflation in your future budget projections, especially for all forms of insurance (including health insurance).

Investments may not perform as hoped

Anytime we talk about future market performance, it’s all a guess, and we have no way of knowing what will or won’t happen. But if you have millions of people in the U.S. displaced by rising sea levels, most of whom will now be out of work, that will place enormous strain on our economy. Productivity will go down, with fewer people working and less overall economic production. Those people who are out of work won’t have a paycheck, and therefore won’t spend as much, which will bring down corporate profits, share prices and dividends. Those unemployed folks also won’t contribute to their 401(k)s and IRAs while out of work, meaning less demand for shares. We have no way of knowing if we’ll have lots of people out of work for a short time or lots of people out of work for a long time, because we don’t yet have any sense of how our government is going to address climate change, and that will make a huge difference in how badly climate change hurts the economy.

But even within the financial services sector, which is not run by politicians, action has been incredibly slow to come. According to the HuffPost, “Many of the largest U.S. investment funds, including pensions, are doing nothing to protect their investors’ savings from the financial risks posed by climate change, according to an analysis by the Asset Owners Disclosure Project, a nonprofit. At least 117 American funds, with a combined $4.6 trillion in assets, have taken no action to mitigate the risks associated with a warming planet.”

With the financial services sector not (yet) taking action to protect investors, the federal government not yet signaling how they will address widespread coastal flooding and increasing natural disasters, and the possibility for global famine and long-term recession, it’s impossible to say what will happen to share prices, but it’s foolish to assume it will be business as usual forever.

ACTION STEPS: Contact your investment brokerage(s) and tell them you want to know what they’re doing to insulate investors from climate impacts. Investigate your bond holdings to ensure you’re not too heavily invested in bonds that states may be unable to pay back if strained by natural disasters. Build your financial models to assume more conservative growth than historical market averages and that allow for higher future inflation. Create alternate sources of passive income that do not rely on market performance.

Taxes could go up

Bailing out insurance companies, paying for more disaster relief, building and repairing infrastructure, potentially relocating entire communities – the federal government and state and local governments could be on the hook for quite a few big ticket expenses in the coming decades. While current tax laws are incredibly favorable to early retirees, that could change if, for example, long-term capital gains taxes go up to pay for increased disaster expenses, or if property taxes go up to pay for fortified infrastructure, an expense that will affect homeowners directly and renters indirectly.

ACTION STEPS: Stay flexible in how your finances are structured so that you can adapt if tax rules change. Or factor higher future taxes into your projections.

Food (and maybe everything) will get more expensive

Even if you live in a place that’s as insulated as possible from the climate effects, the reality for all of us is that things are going to get more expensive. Food prices will be hard to miss. The Global Sustainability Institute’s research determined that food prices will increase four-fold by 2040 over 2000 prices after being adjusted for inflation, and that they are already twice as high as they were in 2000. That’s an effect that’s not entirely visible to most people now because processed foods are cheaper than natural foods, and we’re eating increasingly more processed foods. But at some point, we won’t be able to escape those price increases, and we’ll feel it in our budgets.

The Independent reports that, “Michel Jarraud, the WMO’s Secretary-General, said of all the dangers posed by climate change – from increasingly intense storms and a growth in disease to rising sea levels that may submerge cities – the greatest threat is from dwindling water supplies. About 1.6 billion people already live in areas that are classed as having ‘water scarcity’ and that number is forecast to reach 2.8 billion by 2025. It will go on climbing after that as the planet continues warming.”

That water shortage will likely increase water prices to account for new infrastructure needed, but more importantly, it will affect agricultural regions. For many people around the world, food shortages will be a reality. If we assume that those with financial resources will always have access to food, then you may not be at risk of starvation, but food is likely to get a whole lot more expensive when there’s dramatically more demand than supply.

Could climate change drive other prices up as well? Quite possibly. Most manufacturing requires a lot of water. And carbon taxes could be introduced that raise the price of manufactured goods as well as fuel, utilities and airline travel. Of course, some prices could drop if climate change results in global recession or stagnation that lowers demand in many industries. But for the things we know we all need – most especially food – expect prices to go up. And expect that they may go up for everything else, too.

ACTION STEPS: Factor higher inflation on food costs in your projections. Consider other ways you could lower food costs, like by eating less meat and dairy. Experiment with growing your own food. Keep building the muscle of shopping secondhand instead of buying everything new. Know what you could cut out of your budget if you had to because of rising prices.

Our Approach to Climate Change and Early Retirement

We live in a wildfire zone in a big state with a lot of densely populated coastline. We’re under no illusions about what the future may hold, and climate change been a huge motivation in our efforts to build many layers of contingencies into our plans. We’ve made peace with the fire risk for now, particularly because before we lived here, we lived in LA, where there were any number of things to consider: earthquakes, tsunamis, rising seas, floods from uphill dam failures and – yes – fire. We get small earthquakes in Tahoe, but it’s not considered an area that will get The Big One, so our risks here feel comparatively lower. And given that we’d have some risks anywhere, we’re comfortable with the ones we’ve chosen. We’re happy to be surrounded by several big lakes and reservoirs, something that’s not true everywhere in the West, and we purposely bought a metal roofed house, which is safer for fire. So given that we’re in wildfire country, we have a pretty good setup. And we joke that, if the house burns down, probably also our big trees will burn, and then we won’t have so much shade and can build a greenhouse. Silver lining. ;-)

But beyond our physical location and the structure in which we reside, climate change and health care together have been two big drivers in why we’ve structured our early retirement the way we have. To account for potentially higher future costs and to ensure that we always have a plan B, our financial plan includes:

• A two-phase approach with early retirement and traditional retirement as separate phases, and our assets stacked to cover much higher spending/expenses in traditional retirement
• A budget that includes padding that can be cut to accommodate higher costs like food or insurance in the near term
• A retirement projection that relies only on 1-2 percent annual real returns after inflation, far below historical averages
• Multiple layers of contingencies to free up capital, like being able to downsize to a smaller home, being able to sell our rental property, etc.
• A well-funded donor advised fund (DAF), because there are going to be a lot of people in need if global food shortages or mass displacement happen, and we have zero interest in providing for ourselves and helping no one else

Your Turn

Whew! That’s 3600 words on climate change and early retirement. Now it’s your turn, so share your thoughts! How are you accounting for climate change in your planning? What did I miss here?

Psst. If all of this bums you out, here’s a listing of 23 charts that show how the world is getting better. There’s definitely bad climate news, but also tons of good news. AND, Wednesday’s post is the exact opposite of this one: full of happy news and excitement. :-)