How to Handle Risk Differences In a Relationship

Hey Mike, My spouse and I have different ideas of how much risk we should be taking when it comes to investing our retirement funds. How can we find a balance that works for both of us?” Discover how to address a divide in risk tolerance and find a solution that works for all parties involved. 

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Mike: 00:05

Welcome to How to Retire On Time, a show that answers your questions about all things retirement. My name is Mike Decker. I'm a licensed financial adviser who can even file your taxes. Now that said, please remember, this is just a show. Everything you hear should be considered informational as in not financial advice.

Mike: 00:21

If you want financial advice, you can contact our team today by going to www.yourwealthanalysis.com. Joining me is David Franson, my colleague. David, thanks for being here. Hello, Mike. David's gonna read your questions, and I will do my best to answer them.

Mike: 00:33

Text your questions in right now to [phone]. Again, that's [phone]. Let's begin.

David: 00:43

Hey, Mike. My spouse and I have different ideas of how much risk we should be taking when it comes to investing our retirement funds. How can we find a balance that works for both of us? Yeah. So you're gonna play a marriage counselor here maybe?

Mike: 00:57

Part of our job is marriage counseling. It really is. The reason I believe it's there is because many marriages have several disconnects. When I say a disconnect, it's very common that one spouse does the finances, and the other spouse turns a blind eye because it stresses them out. I get that finances can stress people out.

Mike: 01:19

I understand that. But actively avoiding pain only creates more pain later on. When you start to approach retirement, the spouse that's concerned about it starts to kind of say, I wanna get more involved, and it's usually the female. And they'll say, I wanna get more involved because I'm probably gonna live longer than you, and I think you're taking too much risk. And I'm concerned that you'll be able to pass and everything will be fine, but I'm the one that's gonna get stuck with a bad situation.

Mike: 01:47

And then they start arguing because she maybe and I I don't wanna just say all she's. There are many females that do the finances too, and the husbands are just they're bringing in the money, and then the woman then takes care of the money. So there's all sorts of situations. But one spouse, the one that's avoiding it, many times is the one that lacks sufficient experience to have context about the decisions being made, while the other spouse, though they have, quote, unquote, sufficient experience over the last fifteen years, is overcompensating what they've done, pounding their chest, saying, I'm a really good investment strategist, and I pick all the right stocks, and are over weighting their portfolio into stocks and risky investments, not realizing that we could enter into a flat market at any point. No one knows when.

Mike: 02:38

And a flat market is when you make no returns for ten plus years. We could hit another market crash at any time. It's not every seven to eight years. It could be next year. It could be the year after.

Mike: 02:48

It could be this year. It could be in ten years. No one knows. But when we invest our assets based on the last fifteen years, which has basically put money in large cap or large company stocks, like Amazon, Nvidia, Microsoft, these big names, then it all magically works out. Well, it doesn't always do that.

Mike: 03:07

That was a season of abundance. And so you've got these spouses who are both correct in what they're saying, but they're not receiving the full context of the risk that they're taking. And oftentimes, you need an intermediary. It could be a marriage counselor, could be a financial adviser that understands marriage counseling and behavior that can not say, well, you're both wrong, or this is how things are done. That's ridiculous.

Mike: 03:34

Whenever someone says, you're dumb, you're wrong, this is how we do things, you're either in or out. I hate that crap. Mhmm. That is so ridiculous. I mean, really, how pretentious do you have to be to say, we're the professionals, so shut up and let us do our job?

Mike: 03:51

That's stupid. I mean, really, that's ridiculous, but it happens. Here's how I believe these situations should be handled and what we do. And our advisors are trained specifically on how to handle these situations from a behavioral standpoint. Okay.

Mike: 04:07

So the round is saying, what is it that you want? And each spouse has to be able to answer their question. Okay. Well, I want growth. Why is it that you want growth?

Mike: 04:15

Because I want more money. Why do you feel that you need more money? And eventually, get to usually a couple of things. One is my ego was associated with greater net worth. I need to earn more money because that's my identity.

Mike: 04:28

Another one is because I'm concerned about inflation. So we need to grow our assets so that we can offset inflation. Another one is we need to grow our money now while markets are good, so that when they crash, we can basically absorb the crash, because markets trend. And by the way, that's not true. For all of you husbands listening in right now that are saying that, here's the reality.

Mike: 04:50

The average that you're assuming is manipulative and deceptive. Let's say you're assuming a 10% average in your portfolio because you're all in in stocks. K? And maybe that's done well and and been true for the past ten, fifteen years. But if the market's okay.

Mike: 05:05

Here we go. So 10% average of a $100,000, the year, your 100,000 grows to a 110,000. The year, it goes to a 121,000. That's a 10% average return. So if you kind of get there, then regardless of the market volatility, you should end up at around a 121,000 after two years.

Mike: 05:21

K. Well, if the markets crash 30%, things change. So let's say the year, the markets crashed 30%, but the year they recovered 50% recovery, which I can't remember a time that that's ever happened. But indulge me for a Sure. So the year, your 100,000 is now down 70,000.

Mike: 05:40

That's rough. But it grew 50%. Well, that puts you at a 105,000. You're averaging a two and a half percent average return. That's very different than 10% when you look at the cash value growth.

Mike: 05:51

And you might say, well, Mike, you're manipulating the numbers. Okay. Let's reverse it. You grew your assets exponentially. So 50% in the year, your 100,000 became 150,000.

Mike: 06:03

Congratulations. You now can withstand a blow. Oh, wait. The 30% hit happens. You're at a 105,000.

Mike: 06:10

You still averaged a two and a half percent return. All these large cap stocks, the s and p 500, it's a roller coaster. And if that's what you're going towards, you need to understand that this average that you've been experiencing in last ten or fifteen years may not actually work out that way in retirement, especially if we enter into a flat market cycle. And are you willing to risk it based on your biased experience? Experiences shape our behavior.

Mike: 06:37

Our behavior shapes our results. So just because you've experienced over the last ten to fifteen years great growth, that does not guarantee that you will continue to experience great growth for the next ten to fifteen years. Are you willing to risk your retirement for that, or are you willing to admit that maybe the experiences you've been having over the last five, ten, fifteen years have created a cognitive distortion, so a reality that's distorted where you're overestimating your abilities so that you think you're gonna keep doing this. And then when you don't, whenever the markets turn, whenever they go flat, you're the one that has to pay the price. Is that really worth it?

Mike: 07:12

So we have these conversations with them, and we just show historical data, things that they didn't know to ask about or to look for, and they start saying, okay. Well, I do want growth. I say I agree with you. Every portfolio needs growth because you don't know what the future has in store. But there may be a better way to incorporate that.

Mike: 07:28

So we then talk about how much should we focus on the growth, how much does he or she want to manage in the market, and then how much maybe would be more appropriate for a a properly constructed, in our opinion, a properly constructed portfolio. And then we're asking her the same questions. Okay. Why do you want no risk? It's usually things around like politics.

Mike: 07:47

I'm concerned that the current president I'm concerned Trump's gonna take us into a very difficult recession or depression. K. Got it. What else are you concerned about? Well, I'm concerned that inflation's gonna be out of control.

Mike: 07:59

Okay. Got it. What else are you concerned about? I'm concerned that the currency is going to collapse. Okay.

Mike: 08:03

Got it. What else are you concerned about? And then we'd start saying things like, okay. If currency were to collapse, but you wanna be protected, cash is the last place you wanna be for that situation. And then we connect the dots.

Mike: 08:15

We educate and help them understand, and they'll go, oh, okay. I got it. And then we'll say, okay. If inflation got away, then you'd want to be in the market in some situation. And so we just give context.

Mike: 08:27

It's very normal to have fear of money, fear of the market, fear of investments. But we don't want to avoid the conversation or the pain. We want to define things as they are. Both parties need to have a voice, and you cannot and by the I'm gonna say this very clearly. If you come into our offices or you're meeting with us over Zoom, and you're gonna interrupt each other constantly and correct each other, don't even schedule a call.

Mike: 08:51

Don't even talk to us. You have to be able to respect each other, and give each other the time of day to voice it, instead of bullying your way into basically tripping the other spouse up to make them feel dumb so they shouldn't talk. They have a right to have a voice, and part of our job is to make sure that one spouse shuts up and the other spouse speaks openly without fear of retribution, without fear of criticism, without fear of being judged, but we can understand the core of why they're concerned.

David: 09:21

So it sounds like you're not sort of the judge in saying who's right and who's wrong. Are you going more towards like a, hey. What is right? Or let's just answer your questions. Let's address your fears and

Mike: 09:29

talk about it. In the world of psychology, there's around 12 or 13 different cognitive distortions. Basically what that says is they've had experiences which have caused trauma or a reaction that then wants and this is like subcortical, like deep within your being, that has caused you to try and behave a certain way to protect yourself against a pain you've previously experienced so that you don't experience that pain again. People don't actually make decisions to be happy. People make decisions to avoid pain.

Mike: 10:00

And so when you understand that and you understand that maybe one spouse wasn't involved with the finances because they just have a lot of pain with finances, so they've avoided it and let the other just take over. Or the other one has had pain of not making decisions, so they took over, and now they're overestimating their abilities, whatever it is, that creates a situation to where you have to question if the sky is blue. And can the gravy train continue to grow? Right? Can the stocks continue to perform as they have done for the last five, ten, fifteen years?

Mike: 10:31

Basically, what you're saying is, are you willing to assume that something that has happened will continue to happen even though there's no historical precedent to back up your assumption? Part of our job is correcting the distortions and the assumptions being made so that people have a proper understanding of what to expect moving forward so that they can increase their probability of future success. Is the answer buying an annuity and turning on lifetime income? Well, if you've read my book, how to retire on time, you would know we don't believe in that strategy. Some people will buy annuities and turn on lifetime income because it helps those people, whether it's a single person or a couple, just have a little bit more stability.

Mike: 11:13

They sleep better at night. Is it financially in your best interest? I would argue not. But you have to understand how to play into these emotions. Because if you don't, what's the alternative?

Mike: 11:23

You work longer than you need because you were scared to face your reality. Well, let's ask them one simple question. How much is a year of your life worth? Put a dollar to that name. I mean, really, put a dollar to that name.

Mike: 11:34

Yeah. And do you wanna keep working at a job that you may or may not like for longer than you need to because you're avoiding answering these questions? You're avoiding a possible argument. The reality is conflict is healthy. Contention is bad.

Mike: 11:51

Let me define the two. Yeah. Conflict is when you both have a singular goal that you've agreed upon and you're trying to work towards, and you're having discussions that may be uncomfortable on how to get to that goal. Contention is two different goals and two different paths to take. Why are politicians contentious?

Mike: 12:10

They have two different goals and two different ways to get there.

David: 12:13

Yes. That's illuminating.

Mike: 12:14

Yeah. So why are we, in our offices, able to have healthy productive conversations? Because we do conflict. Not conflict resolution, you know, whatever corporate training you've had, forget that. What I'm saying is, okay, how much does it cost to be you?

Mike: 12:28

What's your your amount of money you wanna do? Okay. And what's the legacy purpose here? Let's define what the couple both want, and then let's figure out how we can make that work. And these are some common examples.

Mike: 12:39

Husband gets upset because the wife in retirement is spending a lot of money on gifts to the kids and grandkids. But the wife's upset because they keep paying this very high membership to some golf club. Uh-huh. They're both spending money how they want, but they don't see the value in the other person. So you just have to understand how do you build the plan that allows you to do what you want, your spouse do what they want, and build it in a way that's in in harmony with each other, that supports each other, but still handles both of the financial objectives.

Mike: 13:08

Most people that have come into our office based on just my anecdotal recall have been pleasantly surprised that we can accomplish more things than they thought they could, and that we could figure out the right balance between the two. But if you're not solving it on your own, then you probably need a mediator or someone to help you articulate it, understand the risks associated with your goals, and then how to solve it so that it also appeases the other side of the party. You can have growth with protection. You just have to understand how to structure these portfolios, and know they're not your typical sixty forty stock bond fund split portfolio. It's not buying annuity, turning on income, and it just forgetting about It is a more comprehensive and nuanced conversation, but it's one that people can have.

David: 13:54

Yeah. Do you remember that line in the princess bride? He says to the princess, life is pain. Anybody else who's trying to tell you differently is trying to sell you something.

Mike: 14:02

Oh, I love that line. Yeah. Yes. Such a classic movie. See, principle taught in a classic eighties film.

Mike: 14:08

Yeah. Remember, actively avoiding pain only creates more pain, but we need to have these conversations to figure out what is right for you so that we can then start to craft the appropriate plan, and we always do the plan then the efficiencies, the strategies to get more out of your money, and then we can start to construct a portfolio that allows all involved parties to sleep well at night, including us. Yeah. Because I don't wanna lose sleep over your planner portfolio either. Right.

Mike: 14:38

And no one in the staff here wants to either. Nope. So it's a fun conversation, but you have to be willing to well, I'll just say it in this way. You've gotta be able to face your demons, but you have to start somewhere. That's all the time we've got for the show today.

Mike: 14:52

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Mike: 15:18

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