Everyone makes mistakes, but when it comes to your finances, too many mistakes can have a devastating impact on your ability to accumulate wealth and retire with confidence. Luckily, many common mistakes are completely avoidable with the right knowledge and the right financial partners on your side. Here are the top four financial mistakes I see, and what you can do to avoid them.
Taking Too Much or Too Little Risk
Most people associate risk with a market decline that affects their net worth. If you take too much risk, you may be exposed to unnecessary swings in your portfolio and sleepless nights. However, people are surprised to learn that taking too little risk can be just as bad as taking too much risk. They are two sides of the same coin, after all. If you take too little risk, your portfolio may lack the pop to outpace inflation over the long term. We are certainly seeing the effects of inflation these days, and if you can’t outpace inflation over the long term, your lifestyle and your legacy could be in jeopardy.
Avoid this mistake by having a plan that focuses on what you want to accomplish and the best way to make it happen. There is no cookie-cutter approach to someone’s asset mix. A solid plan is based on your unique personal values, goals, motivations, and priorities. The goal is to get the right asset mix after a thorough assessment of your situation. There is a delicate balance between guarding against a drop in the market while taking enough risk to outpace inflation. Working with a qualified financial professional is never a bad idea when it comes to understanding your investments and your risk capacity.
Not Knowing When to Take Social Security
Deciding when to take Social Security benefits is an age-old question that many of my clients have faced. It can be confusing and overwhelming to navigate, which is why many people take their “best guess” based on information they’ve heard from family, friends, and co-workers. This is a big mistake that could end up costing you in the long run.
For instance, if you collect your benefits too early, you could short-change yourself if you live longer than expected. If you collect benefits later, on the other hand, you might leave money on the table if you die earlier than anticipated.
This issue stems from the fact that Social Security offers three different levels of benefits depending on when you begin collecting:
- Early retirement: You can start receiving benefits as early as 62, but your monthly benefit will be lower than if you waited longer. Collecting early will permanently reduce your benefit.
- Full retirement age: If you wait until you reach full retirement age to begin collecting your Social Security benefits, you will receive your full benefit amount.
- Delayed benefits: Your benefit will increase by 8% for each year that you delay after full retirement age. Once you reach age 70, the amount of benefits you receive will not increase any further.
It is helpful to think of Social Security as a type of “longevity insurance.” In general, the longer you expect to live, the later you should wait to take your benefits. It is crucial to consider your current health, family history, expected longevity, and need for immediate income when making your decision. Don’t rely on your “best guess.” This decision should come from facts, not emotion. Our clients have a plan that incorporates the timing of Social Security benefits.
Not Balancing Income With Desire to Leave a Legacy
Another delicate balance in finances is finding equilibrium between your current retirement income and your desire to leave a legacy. If you don’t have a financial plan, you could end up short-changing your current lifestyle by leaving too much behind, or you could short-change your heirs because your lifestyle came at the expense of your legacy.
The equation becomes even more complicated when couples have differing opinions about how much should be left to people and causes they love and how much should be spent enjoying retirement. The lifestyle-vs.-legacy dynamic is one of the biggest trade-offs you will face in retirement, and it’s a mistake to not plan for it. This complex puzzle involves spending, portfolio risk (see point #1), and longevity. Don’t wait until the money has already been spent to try to solve the problem. Proactive planning allows you to make real-time adjustments to your finances, ensuring you make the most of both your lifestyle and your legacy.
Paying Too Much in Fees & Taxes
It’s not about how much you make, it’s about how much you keep. Many people overpay in investment fees and taxes simply because they don’t know. It is tricky to determine costs just by looking at your monthly statement.
These costs include things like commissions, deferred sales charges, 12b-1 fees, and mutual fund expense ratios. For instance, mutual fund expenses are automatically deducted daily and you are provided with the net asset value of your investment. Combined with taxes, these charges can significantly cut into your investment returns.
Be sure you work with an advisor who is transparent on both how they get paid and how they plan to manage your exposure to fees and taxes. Unfortunately, some advisors don’t pay enough attention to the tax consequences of changes made to clients’ accounts, which can cause undesirable tax liabilities for you (both capital gains tax and ordinary income tax). It is important to look at your entire portfolio and choose the most tax-efficient option before accessing funds.
Are You Making Any of These Mistakes?
If some of these mistakes sound familiar, you are not alone. We have helped many clients overcome these obstacles and more. At FMF&E Wealth Management, we will address all these issues through our comprehensive planning process, allowing you to de-stress and focus on what really matters.
Jeff Campbell is a Wealth Advisor with FMF&E Wealth Management, a financial planning firm committed to providing services and advice that puts you, your family, and your values and goals first. With over 25 years of experience in the financial industry, Jeff is passionate about building relationships with his clients, coaching them to make solid financial decisions, and guiding them as they work toward the financial future of their dreams. He is known for being a good listener and providing clarity and confidence as he helps people secure their retirement and live their best life. Jeff has a bachelor’s degree in Economics from the University of Richmond. When he’s not working, Jeff loves spending time with his wife, Caitlin, his two children, Paige and Colin, and his extended family. He enjoys golfing, traveling, playing the guitar, and seeing live music. To learn more about Jeff, connect with him on LinkedIn. You can also register for his latest webinar on How We Help Business Owners Retire With Confidence.