We’ve all made mistakes. When it comes to planning for your financial future, mistakes are avoidable with some common sense and professional guidance. Below are some of the most common missteps we see people make.
Sometimes, we can see the train wreck coming before it happens based on the comments we hear, and we’re able to step in. If you’re not working with a professional, beware of the phrases below. They may indicate a financial blunder is lurking.
1. Basing Retirement Needs on Income Instead of Expenses
“In retirement, I’ll have $100,000 coming in each year. That sounds good to me. I should be fine.”
“I’m not sure what happened last year, but I added up my monthly expenses, and I really only need $4,000 per month. I should be fine.”
Those nearing retirement need to be surgical when it comes to planning for retirement income needs. Not knowing how much they’ve been spending recently to use as a baseline (could I live at a lower standard than this?) is a huge mistake but one that’s easily avoidable with a quick forensic look at your spending.
Looking only at monthly expenses neglects to account for the miscellaneous one-time costs that often make up a large percentage of total spending. Taxes and medical costs also need to be considered, and professional guidance can be critically important.
2. Taking Advice From Unqualified People
“My brother-in-law showed me an index fund that he likes, and I put everything in that.”
“My CPA told me he can set me up with an annuity that has guaranteed income.”
“This guy I work with told me everyone should get out of stocks before the end of the year. According to this other guy he listens to, it’s going to get really bad.”
It’s essential to seek advice from qualified professionals with expertise in financial planning rather than relying on friends, family, coworkers, or hearsay. Trusting the wrong advice can lead to costly mistakes, especially when the source of the recommendation comes with conflicts of interest.
3. Planning to Retire but Not for “Retirement”
“I’m ready to just do nothing.”
“I don’t know what my spouse will do, but I’m going to enjoy golfing and fishing.”
“It kind of freaks me out to have nothing to do when I wake up, but I’m sure it will be awesome.”
Retiring is the easy part. Staying retired and enjoying those years takes planning ahead of time. Trial runs can be invaluable. Consider spending three months in a region you’ve considered moving to while working remotely to see how you like being away from friends and family or to try out the local climate, cuisine, and culture. Then you can feel more certain it’s right for you or know in advance if it may not be.
Communicating with your significant other about what their ideal day looks like and figuring out how you can share experiences and still find time for one another takes conversation and constant communication. Silver-era divorce is a phenomenon that often stems from two different sets of expectations around what life will look like after the working years end and retirement begins.
4. Ignoring Taxes and Fees
“I’ve never seen a fee on my statement, so I don’t think I’m being charged.”
“I don’t think my investments affect my taxes. I mean, I haven’t sold anything.”
“I’m not sure why, but I owed a ton of taxes last year. It was strange because the market didn’t even do well.”
If you’re working with a financial professional, they are getting paid. Either you are paying them directly and should see the fees on your statements, or you are invested in products that include your advisor’s compensation in the expense of the investment. The latter has the potential for conflicts of interest, so it’s important to find out how much you’re paying for the advice you’re receiving.
Tax drag can be even more expensive than investment fees outside of an IRA. Funds that pay capital gains distributions in the form of phantom income can result in surprise tax bills even in a down year for the markets.
5. Not Taking Enough Investment Risk
“You can’t make money in the stock market. Every time I invest, it seems to go down.”
“My retirement savings are too important to take risks with. I keep it all in a CD.”
There are two main risks for long-term investors. One is taking too much risk, and the other is being too conservative. Both can be detrimental to your long-term investment goals. Inflation can wreak havoc on investors who play it too safe, and the market can punish investors who don’t diversify and take too much risk. It’s important to work with someone who can determine an appropriate risk level based on your personal circumstances and goals.
6. Putting the House in the Kids’ Names
“I put my house in the kids’ names so the nursing home can’t take it.”
“I put my house in the kids’ names so they don’t have to go through the probate process when I die.
Transferring assets such as a home to your children may have unintended consequences and is not a substitute for proper estate planning. Lack of control and loss of tax advantages are two potential pitfalls of carelessly changing the title of a home. It’s crucial to work with an estate planning attorney to determine the best strategy for protecting your assets.
7. Taking Social Security Too Soon
“As soon as I turn 62, I’m taking my $1,200 per month from Social Security. I’m taking it now before it runs out.”
While it’s tempting to start receiving Social Security benefits as soon as possible, taking them early will result in a permanent reduction in your monthly benefit. Delaying benefits can result in a higher payout, making it a better long-term strategy for some retirees, especially those for whom longevity runs in their family. The health of the Social Security system, in our view, should not be a major consideration for those claiming benefits in the near term.
8. Dismissing Renting as a Viable Option in Retirement
“We’re going to buy a home in Colorado because we love hiking and skiing. We looked at renting, but we know that’s just throwing money away.”
Retirees often neglect to account for the transaction costs of owning real estate. Purchasing a home that doesn’t work out because of health changes or a surprising dislike for a new location can mean realtor fees on both ends. Maintenance costs or mortgage interest on top of transaction costs can quickly erode any savings from not making rent payments. A decline in the local housing market is always possible as well. And since most of a mortgage payment may be interest early on, you may be “throwing away” money even by purchasing.
In many cases, renting before buying, especially if you are moving to a new region and haven’t had a trial run, can be a very wise move and should not be dismissed as an option.
9. Assuming You’re Ready to Manage All of Your Investing Yourself After Hitting a Home Run on One Stock
“I was just looking at the returns on the account my advisor manages. It made 7% last year, but the stocks I’ve been playing with in my online account made 24%. I think I’m going to do this myself.”
“Why would I pay someone when I seem to make all the great calls on stocks myself? I don’t remember my advisor ever getting a double-digit return in a short period of time like I have.”
This is a common one. To be fair, it can be difficult to determine when investment returns were a result of good luck versus shrewd investment decisions. Instead of getting overly excited when you see a stock you purchased surge in price, ask yourself the following questions:
- How much risk did I take to realize this return? In other words, was this investment decision closer to gambling or investing?
- Do I have a long track record of getting these kinds of results, or do my losers more than offset my winners? It’s human nature to discount our losers since we rarely talk about them; talking about the winners is more fun.
- Do I have a process for choosing investments? Do I have a process for selling? Do I know how to measure the risk I’m taking? Hopefully, you can answer “yes” to all of these. Otherwise, you’re going to struggle to keep emotions out of your decision-making.
10. Going it Alone to Avoid Paying a Professional
“I talked to a financial advisor that wanted to charge me 1% of my account values to work with them. That’s thousands of dollars. I can’t see how that’s worth it.”
“I started managing my money on my own. My accounts lost money last year, and I couldn’t see adding an advisory fee to that. It just means I lose more, right?”
It’s reasonable to question the fees you pay any professional. When it comes to wealth management, a down year in the market can be extremely unnerving and can even lead to resentment when considering that you paid for that result.
It’s important to realize that, were it not for professional management, it’s entirely possible you would have had an even worse short-term result. You aren’t paying for someone to ensure you never have a down year; you’re paying for someone to ensure you avoid the really big mistakes that virtually everyone left to their own devices makes eventually:
- Selling in a down market
- Failing to rebalance in a good market
- Not taking an appropriate amount of risk given the time horizon
- Choosing expensive investment vehicles without much value
- Managing tax drag
In Vanguard’s landmark study from 2014, they concluded that financial advice was worth approximately 3% per year to a typical advisory client. The study reiterated that eliminating common major missteps really adds up over time.
While an advisor could correctly be accused of bias on this one, take it from Vanguard, who made a name for themselves by touting low costs at all costs. Even they’ll admit it’s the value of the guidance, not just the cost, that needs to be considered.
Just as you consult with doctors for their medical opinion, you should always consult with a fiduciary financial professional when making big financial decisions. Of all the mistakes we see people make, simply not asking for help is the biggest and most avoidable blunder of all.