There is a great article in last weeks Economist about how to prepare for a systemic financial catastrophe (they talk about gold, equities, real estate, etc…). The gist of the story was that you can’t prepare for those events and even those who do tend to lose everything anyways.

Phil: Personally, I’d want a margin of safety in my retirement calculations as well. But the truth is with at least two decades to go, I don’t bother with an exhaustive analysis. I figure if we save a bit, invest prudently, keep costs under check and don’t chase investment fads we should be okay.

Although catastrophic financial events like the examples I cite are rare, it illustrates the point although whatever inflation or market downturns we experience will hopefully be milder ones than those examples. If I equate it back to engineering analysis, we always like to add some kind of “safety factor” once we calculate what the “minimum” requirements are, in order to hopefully capture any conditions outside of the assumptions that we made in the original design. So, you should always put some kind of “safety factor” in your financial planning, in case something you do not expect happens…