By: Colleen Weber
News and Updates
Comments: No Comments.
Over the course of my 15 years in this industry, I’ve seen my fair share of successes, hurdles, and mistakes. While working with clients, when we talk a lot about what success looks like, it’s just as important to know the potential potholes and how to avoid making the mistakes others have made.
While there’s a long list of mistakes I’ve seen, I believe there are five crucial mistakes I believe are important to avoid making.
1. Paying Excessive Fees
Many people don’t realize just how much fees can add up. These include everything from investment fees to the fee you pay your advisor. Unfortunately, you can’t line up all the financial advisors and products on a shelf so you can compare them. It’s up to you to research on your own and figure out if you are paying premium, retail, or discounted costs on your investments. It’s essential to know this because over the course of your working career all the way through to your retirement, fees can add up and make a substantial dent in your savings.
You should be asking your advisor or financial institution how much you are paying in fees. You don’t want to lose your hard-earned money if you can avoid it. A financial advisor should be open about sharing with you how much they charge and what fees you can expect to pay for insurance, annuities, and other products.
2. Overlooking The Value Of Tax Planning And Tax Strategies
As Benjamin Franklin famously once said, “Nothing is certain except death and taxes.” While this is true (and they can have a significant impact on your financial plan), it is possible to mitigate the toll they take through strategic planning.
Tax planning helps you develop strategies to reduce your tax burden in a legal fashion. This can entail utilizing tax-favored investment strategies, deducting eligible charitable contributions, investing in a college savings plan, and more. Many people only think about their taxes come tax season. However, working on tax strategies with a professional throughout the year can help you save. Because I am a CFP and a CPA I bring financial planning and tax planning advice together. I strive to ensure my clients’ financial strategies are also tax efficient.
3. Underestimating Life Expectancy
According to the Social Security Administration, the average life expectancy for males who are 65 today is 84, and for females, 86. But 1 in 4 will live past the age of 90 and 1 in 10 will live past 95. (1) Based on these numbers, your retirement could easily last 30 years instead of 20. Since those ten years have the potential to make or break you financially, how can you plan for longevity and make the necessary adjustments to ensure a financially stable retirement?
Too often, I see clients try to plan for a set retirement time frame, but as much as we wish we could, there’s no way we can predict how long we will live. Retirees need to secure an adequate stream of income for an unpredictable length of time. If you plan to live to age 82, and you end up living until 92, how are you going to stretch your savings to last the additional ten years? It’s important to plan for a potentially longer retirement than you anticipate.
4. Reacting To The News
Short-term reactions to the news headlines or market volatility can result in crippling, long-term mistakes. In fact, a DALBAR study revealed that investors’ decisions were the biggest reason for underperformance. (2) Simply put, behavioral biases lead to poor investment decision-making.
Behavior can have a significant impact on the success of our investment returns. How we respond and react to market fluctuations — and, particularly, market exuberance and its inevitable crashes — affects our financial success. I try to remind my clients to focus on the long-term to avoid making irrational, short-term decisions. Remember, the markets are always changing. If you check your performance every time there’s a shift in the markets, you may end up feeling constantly overwhelmed and stressed. Maintain a long-term perspective and stay disciplined in your approach.
5. Forgetting About Inflation
Inflation is often considered a slow and silent assassin because so many people forget to factor it into their future financial plans. Over the last 50 years, the cost of goods and services has increased an average of 3.7% per year. Even if your spending habits don’t change, you need to prepare for annual increases in your spending due to inflation. If your monthly expenses are $3,000 today, they might be $6,000 in 20 years and even $9,000 in 30 years.
Don’t forget to plan for extra spending. Additional expenses always turn up in life, no matter how strictly you adhere to your budget. You want to make sure that you have the margin for extra spending, including travel, and you need to plan for the associated expenses in future dollars. This is particularly important when calculating your estimated needs in retirement, including housing, healthcare, and living expenses.
The Next Steps
Are you concerned that you may be making some of these mistakes or want to learn more about how to avoid them? I’m available to help. I strive to serve as a trusted financial partner with whom my clients feel at ease talking about their financial concerns and dreams. Along with instilling a sense of confidence, my goal is to provide them a comprehensive and personalized strategy that incorporates their objectives and outlines how they can transition from where they are today to where they want to be in the future.
If you’ve yet to make a financial plan for your future or have questions about your current strategies, book a free introductory meeting online! We’ll review your questions and discuss actionable steps you can take right away.
Colleen Weber is a fee-only financial advisor, CERTIFIED FINANCIAL PLANNER™ professional, and CPA with more than 15 years of financial planning experience. Providing comprehensive financial planning and wealth management, she specializes in serving clients nearing retirement, retirees, busy professionals, and women. She is passionate about developing financial plans that save clients on taxes, and investment strategies that help them pursue their goals. Learn more about Colleen by connecting with her on LinkedIn or booking a complimentary phone call meeting.