These are five common (but fixable!) financial planning mistakes we see every week.
1. Making investments without a true retirement plan
It isn’t difficult to have vague goals such as “I want to retire” or “I want to pay for my children’s college education”. What truly give goals their special powers is having them be clear enough where they help you delay gratification, avoid dumb behaviors and focus on long term rewards. The more specific you can be the better. For example, on education goals you might focus on things like: Where do you want your children to go to college? Do you want to pay for any graduate degrees? When do you want this goal to happen? Also, write your goals down and have make yourself accountable to someone else for them being achieved!
2. Being Too Optimistic—or Pessimistic—About Retirement
Many people have a hard time getting a real grasp on their financial situation and either have saved too much or too little (but may have no idea which it is!) We've had clients who have almost zero retirement savings, and no pension or investments, yet swear that in six months when they turn 65, they’ll be able to retire, travel the world and live their dream retirement—regardless of the fact that they will be living on Social Security.
3. Putting too many eggs in the company basket
Many employees have a significant portion of their retirement portfolio invested in their own company’s stock. Some employees maintain this exposure over long periods of time, often into retirement, because they are familiar with the company or simply feel some obligation to maintain positions in who they work for. But this type of overexposure can greatly increase the risk of a portfolio.
Another scenario might be that a high-earning professional thinks they’re off the hook on retirement planning because they get company retirement contributions and/or stock options. However, relying solely on your employer isn’t a diversified strategy and puts you at financial risk. Proper financial planning can help diversify your investments and keep you protected in the future. Your salary is already one major asset that is tied up in your employer; you don't want too much of your other wealth dependent on the same source.
4. Omitting activities entirely
Sometimes even the highest net worth or net-earners will omit very basic planning activities, such as executing a will, buying life insurance to protect dependents, or buying disability insurance. You might make these omissions due to busyness or feeling overwhelmed by all the other (more-pressing) items on your to-do list. Yet, the fix doesn’t have to be time-consuming –2-3 meetings with a financial planner is enough to get key documents and protection plans in place.
5. Failing to calculate tax considerations
People tend to underestimate the impact of taxes on their retirement income because they simply don’t think about it. They generally contribute to a traditional 401(k) at work, which means they don’t pay income tax on that money and it grows tax-deferred. But when they begin to take distributions, which they can do after age 59½, the IRS will tax them on whatever they take out at the regular rate of taxation. So if their tax rate is 25%, their 401(k) is only 75% as valuable as it seems. And that’s not taking inflation into account.
Different investments provide different tax savings at different times. Many people assume that tax savings now are beneficial, but for some individuals it may be more beneficial to pay the taxes up front and then withdraw the money, without taxes, later on.