By Michael Gold, CFP®, MBA, Founder & CEO, Wealth Advisor
As hard as we may try to keep track of every penny, many of us are losing cash without even realizing it. Whether it is in the form of drive-through coffee, online shopping, or the temptation to sell stocks after a market crash to avoid further losses, there are endless ways to mismanage our finances. For now, let’s focus on how to avoid 10 shortsighted things people do with their money that can cost them big in retirement.
1. Not Defining a Post-Retirement Income Strategy
The end goal of financial planning is to ensure adequate income. A 2019 study found that roughly half of Americans are concerned about running out of money in retirement, according to a 2019 study. Many people start by asking the wrong question: “How much should I save for retirement?” The better question is, “How much income will I need in retirement?” Savings will likely provide a portion of post-retirement income, but not all. It is important to anticipate which income sources will fund retirement, and in what sequence. For instance, if you delay drawing Social Security benefits, you can increase your benefit amount.
2. Overpaying Taxes
Retirees find themselves in a financial bind when they fail to take advantage of tax-saving strategies throughout their working life as well as post-retirement. Tax-deferred instruments such as a 401(k) or a traditional IRA can provide advantages in the here and now, but tax deferral can work against you if tax rates increase in the future. There is no one-size-fits-all answer for everyone, which underscores the importance of working with the right professionals to develop a custom strategy.
3. Reacting Emotionally to the Market
People who try to “time” or “chase” the market almost always end up losing. When economic downturns devalue investments, investors panic and cash out at the worst possible time. A less- obvious emotional reaction can lead to putting money into “safe” investments that are guaranteed to lose money. The right advisor can help you understand the real risks inherent in the marketplace and can recommend the right diversification strategy. Many times, the perceived risk of market volatility can work in your favor.
4. Investing Too Little Too Late
Returns are exponential. Each year that you put off investing for retirement, you are losing out on compounded gains. Let’s say you invest $5,000 per week, with a 2% return after inflation. In this scenario, if you wait 10 years to start investing, the delay will cost you over $50,000 in returns.
5. Living Large
Frivolous spending and accumulating credit card debt are common factors that starve your retirement of much-needed cash in later years. Buying too large a house or too expensive a car inflicts even more damage, since long-term purchases of this nature obligate you to an ongoing financial burden. Retirement planning can provide the needed objectivity and perspective to help you see the long-range impact of your existing lifestyle.
6. Paying Off Low-Interest Debt First
If you are carrying a balance on your credit cards, it makes no sense to make an extra mortgage payment or extra payments on other low-interest debt such as student loans. Use the “debt avalanche” method to pay off debt with the highest interest first. In addition, keep in mind that low-interest debt can work in your favor. Instead of paying it down, you can put the additional money into a vehicle that generates a rate of return higher than the interest on the debt. Getting “debt-free” is not necessarily the goal. Instead, learn to use debt effectively.
7. Letting Your Estate Plan Grow Stale
Life happens, and circumstances change. I always advise clients to review their estate plans every three years at a minimum, even if it seems like nothing has changed. Even minor life events can change the landscape of your estate plan, in addition to new tax laws and the availability of different investment options.
8. Neglecting Crucial Insurance Coverage
It is easy to be both over-insured and underinsured at the same time if you don’t structure your insurance coverage correctly. Life insurance policies offered through employers can increase aggressively in cost and vanish as soon as you leave your job. Long-term care insurance is often overlooked, even though rising healthcare costs often devastate retirement cash. Reviewing insurance coverage is essential each year.
9. Underestimating Expenses After Retirement
Retirement funds can dry up more quickly than expected for a variety of reasons, such as inflation, taxes, medical expenses, and dependent care. Keep in mind that while you may plan to work until a certain age, forced retirement due to unforeseen health problems or family circumstances, like the need to care for an ailing parent, can irreparably derail how you expect your retirement years to play out.
10. Going It Alone
The biggest financial mistake of all may be attempting to figure out the details without recruiting the right professionals to your team!
If you’d like to enlist help in avoiding these mistakes and developing a winning strategy to build long-term wealth, we at Gold Family Wealth are here to help. Reach out to me at [email protected] or (800) 303-2533 to schedule a complimentary consultation.
About Michael
Michael Gold is the founder & CEO – Wealth Advisor of Gold Family Wealth, an independent wealth management boutique and named one of The Top 100 Magazine’s 2020 Top 100 People in Finance. Michael has 20 years of experience in the financial industry and has a bachelor’s degree in business and economics from the State University of New York College at Oneonta, an MBA from NYU Stern School of Business, specializing in Quantitative Finance and Leadership and he is a CERTIFIED FINANCIAL PLANNER™ professional. He serves business owners and entrepreneurs by stress-testing their financial plan to identify red flags and missed opportunities. Michael strategically outsources knowledgeable professionals from various fields, such as tax, insurance, retirement and trust, and estate law to collaborate on potential solutions to help position his clients to pursue their desired goals.
Michael currently lives in Westport, CT. When he is not working, you can find him spending time with his wife, Giselle, their three children, Sebastian, Aria, and Pierce, and their dog, Charly. To learn more about Michael, connect with him on LinkedIn.
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