The Fine Line Between Good Fear and Bad Fear

By Chris Duderstadt

February 4, 2024

The Fine Line Between Good Fear and Bad Fear

Key Points – The Fine Line Between Good Fear and Bad Fear

  • The Differences Between Good Fear and Bad Fear 
  • Defining Risk and Investment Loss 
  • Good Fear vs. Irrational Fear 
  • What Are You Afraid of? 
  • 8 Minutes to Read | 24 Minutes to Watch 

The Fine Line Between Good Fear and Bad Fear 

Fear is a very real thing in the financial business, and how you react to it can make a huge difference. There’s a fine line between good fear and bad fear.  

Good fear can lead you to being educated about what’s going on in the markets and being dynamic with your financial plan. Bad fear involves overreacting to things you shouldn’t be too concerned about and doesn’t allow you to live life like you want to. Dean Barber and Bud Kasper, CFP®, AIF® are going to help us review the different types of fear in the financial industry so that you can understand the differences between good fear and bad fear.   

Schedule a Meeting Get the Retirement Plan Checklist

Fear Is a Very Real Thing in the Financial Business 

Are you a big fan of scary movies? Some people are. Some people like to poke fun at them and try to predict what happens next. People have different responses to fear when it comes to scary movies, but in the financial industry, fear is very real. However, not all fear is bad in the financial industry. There’s good fear and bad fear.  

The Differences Between Good Fear and Bad Fear 

Ask yourself the question, “What are you really afraid of?” It’s critical to step back and ask what you’re afraid of missing out on so that you can see if you might be afraid of the wrong things.  

When some people think about investing, they have this innate fear of loss. So many people want to have their cake and eat it too. They want to make money, but never have a chance of losing money. That’s not a reality, though.  

Even fixed index annuities don’t provide that. Your principal value can’t go down so you can’t go negative, but the risk of loss of gain is huge. They’re going to cap out your potential long-term performance. All that fear of loss comes from a true lack of understanding of your overall financial picture and what your money needs to do. 

As we discuss good fear versus bad fear and what people might be afraid of, we’re going to talk about the heart of where financial planning really comes into your life. Along with eliminating those unnecessary or unhealthy fears, we want to provide more confidence that you’re doing the right things with your money, freedom from financial stress, and time spent doing the things you love 

Fear Surrounding Inflation, Interest Rates, and the Markets 

There has been no shortage of fear factors in the financial industry over the past two-plus years. Inflation soared to 40-year highs, which led to the Federal Reserve implementing a series of interest rate hikes. While inflation has slowed in recent months, Federal Reserve Chairman Jerome Powell said to expect for rates to be higher for longer to ensure that inflation remains under control.1 

The high inflationary and high interest rate environment led to turmoil in the stock and bond markets. In 2022, we saw double-digit losses in both. While we saw some recovery in 2023, the losses from 2022 haven’t been fully recovered. The uncertainty we’ve seen in the markets has sparked a lot of fear, leading to people making knee-jerk reactions. Making financial decisions based upon your emotions is a prime example of bad fear. 

Controlling What We Can Control 

It’s critical to remember that while market downturns, inflation, and interest rate hikes are out of our control, we can plan for them. You might be thinking, how can I plan for things that are unknown? That’s where a forward-looking financial plan comes in. Understanding that there are risk factors that can impact you and planning accordingly to mitigate them is a prime example of good fear. 

Look into the future and ask yourself, “If there is heightened inflation, high interest rates, a market downturn, etc., will I be OK?” That’s what we call stress testing. We can’t predict when those things will happen, but we can look at a wide range of historical economic cycles that have included those things to see if your plan can survive them. Having that clarity and confidence from your financial plan is crucial so that you don’t make costly decisions when it seems like fear is everywhere.  

You’ll see that there are several examples of stress testing referenced in our Retirement Plan Checklist. It’s comprised of 30 yes-or-no questions that assess how ready you are to retire as well as age-and date-based retirement timelines that reference several important retirement considerations. Download your copy below. 

What Are You Afraid of? 

We led off by discussing inflation, interest rates, and market downturns because they’ve been sources of fear for a lot of people lately. Hopefully we helped you understand that you have a choice between responding with good fear or bad fear in those situations. However, those three things are far from being the only sources of financial fear. Ask yourself again, “What are you afraid of?” 

Are You Afraid of Running Out of Money in Retirement? 

One financial fear we hear from people all the time is outliving their money. Life expectancy is another big unknown, which is why longevity risk is a very real fear. Just because your parents and your spouse’s parents lived into their 80s doesn’t mean that will be the case for you and your spouse.  

You could both live into your 90s or even longer. That’s great if you built a financial plan that takes that into account. That’s taking bad fear out of the equation and acting on good fear. But if you live way longer than you expected to and run out of money, bad fear can be overwhelming. 

Unfortunately, the good fear versus bad fear fine line comes into play when there’s an early/unexpected death of a spouse as well. No one wants to plan for that, but you need to know if you and your spouse can get through retirement as a surviving spouse. The surviving spouse only gets to keep the higher of the couple’s Social Security benefits and becomes a single tax filer. There are several implications to consider in this scenario as well. 

So, no matter your situation, you have two options. Are you going to respond with good fear or bad fear? Good fear is all about building a forward-looking financial plan that considers your needs, wants, and wishes. Inflation, interest rate hikes, and market downturns can impact everyone to some degree, but you’re going to have risk factors that are unique to you as well. Those can be related to your health and age like we just mentioned. Or they can be related tax situation and investments. The list can go on and on. 

Exercising Proper Risk Management  

When acting upon good fear over bad fear, you’re putting a plan in place that accounts for all the risks that you’re currently facing and could encounter down the road. It’s all about risk management. Let’s use health insurance as an example and compare you and your spouse’s situation to your best friend and their spouse. You’ll see that there are several key considerations just with these hypothetical and generic scenarios.  

Your Best Friend’s Retirement Plan Might Be Similar to Yours … 

In this situation, all four of you are 62. That means you all have three years before you’re eligible to get on Medicare. Your best friend and their spouse have done a great job of saving for retirement and have their money dispersed among all three tax buckets—tax-deferred, taxable, and tax-free. They’re in good health and are going to delay claiming Social Security until they’re closer to 70 rather than claiming it right away at 62. That way, they can maximize their benefits over the course of their retirement. 

They’ve done a good job of positioning themselves well for retirement. And on top of that, they built a spending plan that shows them that they can retire today and get to and through retirement with a 90% probability of success. That means that 90% of the time, they can get through retirement without ever having to change how they spend. And 10% of the time, they might need to make some slight adjustments.  

They were initially concerned about needing to work until 65, but the clarity of a financial plan that includes a forward-looking tax plan, estate plan, distribution strategy, and spending plan gave them the clarity that they could successfully retire at 62. The planning they went through illustrated what good fear is all about. 

… But It Won’t Be the Same 

Now, let’s go over more details of you and your spouse’s hypothetical situation. You and your spouse also want to retire at 62 rather than waiting until Medicare age. However, all your money is in taxable and tax-deferred accounts. While you’ve been paying as little tax as possible each year to this point, all the money in your tax-deferred accounts has yet to be taxed. And don’t forget that Required Minimum Distributions will enter the taxation equation later as well. The RMD age is 73 as of 2023, but it will increase to 75 by 2033. 

You and your spouse also just started claiming Social Security after turning 62. While you get those benefits now, they will be smaller than your friend and their spouse’s benefits and will be depleted much sooner in your retirement. 

So, while you and your spouse have a similar amount saved for retirement compared to your friend and their spouse, there are a few big differences. When you configure your probability of success to get to and through retirement, you find that it’s significantly lower than 90%.  

Having a short-term focus of trying to retire ASAP rather than building a plan that takes you through retirement is an instance of bad fear. That short-term focus led to missed opportunities that could have significantly improved your probability of success. And it can snowball from there with making some emotional financial decisions that aren’t thought through. Hopefully, you can begin to see just with these hypothetical and generic examples that there’s a fine line between good fear and bad fear.  

What’s the Most Important Thing in Your Life? 

When you’re figuring out that fine line between good fear and bad fear, there’s one more question that needs to always be top of mind. What’s the most important thing in your life? 

When you really think about it, it’s not money. Or we hope it isn’t anyway. It’s all about doing the things you love with the people you love. Yes, in many cases that does involve money. But your plan needs to be designed around your specific needs, wants, and wishes. Once those are determined, then you build out a spending plan and figure out the costs associated with those things.  

It’s Not All About Money 

If you get tied up on the money part of it, you’re going to miss out on things that you really want to have in life. As we’ve discussed so many times, creating memories is the most important thing. What is it that you’re afraid of losing? Here are just 10 things—many of which we’ve already touched on—that we all value that we can lose due to fear. These are not in any specific order.  

  • Time 
  • Confidence 
  • Control 
  • Experiences 
  • Opportunities 
  • Trust 
  • Love/Companionship 
  • Self-worth 
  • Lifestyle/Living Your Life 
  • The Use of Your Money 

Understanding the Differences Between Good Fear and Bad Fear

Before we ever start making any kind of recommendations of what a person should do from a financial perspective, we take people through a prioritization exercise. During that exercise, we have a lengthy conversation about what’s most important to you and your spouse. We’ll ask what’s important to each spouse individually and then compare answers. Then, we’ll figure out the most important things to them as a couple. 

After figuring out what’s important to each couple, we measure those things against all the resources that they have. A lot of times, we have people doing more than what they ever imagined that they could do because they get that permission slip.  

We show them what their money needs to do for them to accomplish all those things. We explain the reality of that happening, and the probability of success of it happening. While we may have to adjust along the way, they still have that permission slip to live that one best financial life that they’re looking for. 

There Are a Lot of Moving Parts When Assessing Good Fear Versus Bad Fear 

It’s so easy to be consumed by bad fear if you’re taking the DIY approach with retirement planning. It’s critical to work with a team of financial professionals that puts their interests ahead of their own so that you’re on the good fear side of that fine line. To learn more about our personalized financial planning approach, start a conversation with our team below.

Schedule a Meeting

We’re here to educate you to make informed financial decisions. There is a lot of planning required to end up on the right side of the good fear versus bad fear equation. That’s why we recommend starting a conversation with a team of professionals sooner rather than later so that you have that clarity and confidence to get to and through retirement. 

The Fine Line Between Good Fear and Bad Fear | Watch Guide

00:00 – Introduction
– What Are Good Fear and Bad Fear?
– Good Fear: Fear of Paying Too Much Taxes
– Good Fear: Fear of Missing Something
– Identifying the Differences
04:34 – Sales People Prey on Bad Fears
– Looking Back at 2000
– Misunderstanding the Capital Markets Drives Bad Fear
– Stress Testing Your Financial Plan
– Fear of Missing Opportunities
– What We Learned Today


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Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.