Having worked in financial services for over two decades now, I have had the pleasure of meeting with hundreds of people from different backgrounds and life stages. Despite their differences, many people I have met make the same financial mistakes. The following are 5 mistakes I see often that have a huge effect on your overall financial health.
Failing to Have a Comprehensive Estate Plan
There is so much more that goes into being financially secure than just how much money is in the bank. Estate planning is a crucial aspect of a comprehensive wealth management plan, especially if you want to pass significant assets to the next generation, or properly plan for the succession of your business. Through the proper use of trusts and other estate documents, you can ensure that what you’ve built over your lifetime is properly passed on while minimizing taxes and probate expenses.
Many high-income earners often overlook the full scope of a comprehensive estate plan and it can have devastating effects on your accumulated wealth. Making sure you are adequately covered now will save you time, money, and energy in the future.
Taking Too Little or Too Much Risk
In finance, every single investment made and penny saved comes with risk. If you buy stock in a new up-and-coming tech company, that will come with more risk than buying short-term Treasury bonds. Even a savings account comes with risk; although your savings accounts are likely insured, leaving your money in a savings account will prevent your wealth from keeping up with inflation.
A big mistake I see people make is having too many debt securities like bonds when they should be considering having more equity securities like stocks. A less common one I see is when people have too much of their wealth in risky investments, leaving their retirement savings vulnerable to high volatility. Proper asset allocation with regards to your time horizon, income, and future plans will allow you to balance making gains from riskier assets and safeguarding your wealth as much as possible.
Not Planning for Unexpected Risks
Very few people, if any, predicted COVID-19 or the Great Recession. But these two events have made it abundantly clear that unexpected economic downturns must be considered when building a comprehensive wealth management strategy. People often think that an emergency fund is enough to ride out unforeseen major life events, but it usually takes more than that. Proper risk management is key to staying afloat during uncertain times. This can be accomplished by considering unexpected risks that are personal in nature, such as divorce, disability, accidents, and illness, and by making sure you are properly covered.
Not Knowing When to Take Social Security
If you are not using a customized strategy for Social Security, you are most likely leaving money on the table. The earlier you take it, the lower the monthly benefit you will receive. Everyone will be different, so considering when to take Social Security should be a decision based on your goals, needs, and preferences. For example, if you wanted to retire next year at age 65, you’d be faced with the decision of whether to collect your benefits right away or to defer to some point in the future. If you decide to collect at age 65, you will receive less of a benefit than if you waited until your full retirement age, typically age 67 for most, and if you delayed all the way to age 70 you would receive the maximum Social Security benefit available to you due to Delayed Retirement Credits. Although for some delaying your Social Security benefits could mean delaying your retirement date, for others it may mean that they need to determine how they will fill the gap that is left between their fixed income and their expenses in the years prior to collecting their benefits. The solution in these cases could be as simple as taking larger withdrawals from their investments in the early years of retirement or working part-time for a few years to cover that gap.
Another consideration in determining when to collect your Social Security benefits could be whether anyone else is dependent upon you or has an interest in the benefits you will receive. Specifically, are you single, married, divorced, or widowed? For each situation, there may be a different strategy available to you when it comes to Social Security. It is important to be aware of this and make sure to customize how you go about utilizing Social Security during retirement.
Paying Too Much in Fees and Taxes
It’s not how much you make, it’s how much you keep. We often speak to investors that don’t fully understand the cost or fee structure of the investments they’re in, or how the taxation of their investment accounts really works. It is important to be mindful of these items as they can take a big bite out of any potential returns you could receive.
These costs include things like commissions, deferred sales charges, 12b-1 fees, and mutual fund expense ratios. Many of these expenses are simply “priced in” to the share price of the underlying asset, but it is important to know what those expenses truly are. Some may very well be justified by the work of the management team and the performance they are able to achieve, but some may not. Taking the time to analyze or inquire about these costs could be time well spent.
Additionally, 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). When deciding things like what trades should be made or where to take a distribution from when you need cash, it is important to have a strategy in place that will help to manage your taxes both in the short-term and long-term. A plan to always minimize taxes today could leave you experiencing far more significant tax consequences down the road.
Not Reaching Out for Help
Anyone who cares enough about their financial future to read this article is already miles ahead of most adults in the United States, but between work, family, and the mountain of other responsibilities you have, it can be hard to always know every option available to you. Having a financial professional in your corner can make a huge difference, not only in the amount of wealth you can build, but to strengthen your confidence in your financial future.
At Center for Wealth Management, we build a personal financial plan that accurately reflects your values, goals, money mindset, and personality. You get to modify key elements of the plan such as income fluctuations, savings allocations, and more with the opportunity to see the results immediately. To get started, schedule a free introductory meeting online, call (248) 220-4321, or email me at firstname.lastname@example.org.
Justin Williamson is a senior partner and co-owner of Center for Wealth Management, an independent, fee-based wealth management company in Troy, Michigan. Justin has been serving clients in the financial services industry since 2001. He spends his days helping his clients achieve their financial goals and make the best decisions for their families so they can spend time on what they love and experience financial peace of mind. Justin is known for his dedication, integrity, personal touch, and ability to simplify complex issues. Justin specializes in serving engineers and other professionals who are close to retirement or recently retired and helping them maximize their benefits and create a retirement plan they can rely on. He is a seasoned public speaker and presents at numerous corporate events each year on retirement planning, Medicare, Social Security, and other financial topics. Justin has a bachelor’s degree in Business Administration majoring in Personal Financial Planning from Central Michigan University and is a CERTIFIED FINANCIAL PLANNER™ practitioner.
Outside of work, Justin enjoys spending time with his family. He lost his wife of 18 years, Heather, to brain cancer in 2020. He and his son, Carter, and twin daughters, Jaden and Kelsey, work to honor her and make her proud each day. Outside of work, you can usually find him coaching baseball, softball, and basketball, and spending time at their family cabin at Higgins Lake. Learn more about Justin by connecting with him on LinkedIn.