By Jon Powell, CFP®
We’ve been helping clients for decades, and in that time, we’ve seen a few mistakes investors end up making over and over again. From not having a withdrawal strategy in retirement to not seeking professional help with your financial goals, let’s look at the 6 biggest financial mistakes we see—so you don’t commit them yourself.
Financial planning doesn’t stop once you enter retirement. In order to maximize your portfolio longevity, it’s crucial to create a withdrawal strategy and actively monitor your plan in retirement. This is something many people forget or neglect to do, and it can significantly impact their retirement savings over time.
Different financial accounts are taxed at different rates. Traditional IRAs and 401(k)s are taxed at the ordinary income tax rate when you withdraw. Roth IRAs and Roth 401(k)s are taxed beforehand, so the money is withdrawn tax-free. Funds in a taxable investment account are taxed at the capital gains tax rate, which is different from your ordinary income tax rate.
Creating a withdrawal strategy can help you draw down your various assets at a sustainable rate and do it in a tax-efficient way.
Additionally, there are many times when it makes sense to convert taxable or tax-advantaged funds (i.e., traditional IRAs) to fully tax-free funds (i.e., Roth IRAs). Known as a Roth conversion, this can greatly improve your tax efficiency in retirement. It’s not uncommon for clients to resist this strategy, since it involves an up-front tax bill, but over the long term, Roth IRAs provide many benefits that can improve your overall financial plan.
First and foremost: timing the market doesn’t work. There is no way to predict short-term fluctuations with enough accuracy to consistently make the right decision about when to buy and when to sell. Yet we’ve seen many clients pull their money out of the markets at the bottom and reinvest after investment values have rebounded. This is the epitome of buying high and selling low—and it’s a mistake to avoid.
It’s natural to feel worried when you see your investment values fall during volatile times, but the last thing you should do is pull out of the markets entirely. When you do this, you’re locking in the low value of your accounts instead of letting them rebound before you withdraw. Remember, your investments may lose market value, but you don’t lose any money unless you sell while the value is low.
Similarly, putting your money into a volatile market probably sounds like the last thing you want to do right now, but, actually, the perfect time to buy investments is when they’re at a low. Not only will this allow you to purchase more shares than you would be able to normally, but it will also improve your overall return when the market inevitably rebounds.
One of the biggest financial mistakes I see is not understanding diversification and the role it plays in your overall financial plan. It’s one thing to know in theory that investment diversification is a key strategy, but it’s another thing to follow through by staying on top of your portfolio and periodically rebalancing as needed.
Without vigilance, you may easily find yourself invested too heavily in one industry or one type of investment. Or you may consciously choose to concentrate your position because certain asset classes are underperforming. Just because an asset class is not doing well in the moment does not mean it should be disregarded entirely. In six months, it could be that the rest of your portfolio is down while that asset class is growing.
True diversification is a risk management strategy. When properly implemented, it balances a mix of assets that do not move in the same directions. When one is up, another might be down, but overall the volatility is reduced. Diversification can’t guarantee a minimum level of return, but it will at least act as a buffer against the inherent volatility of the market by mixing a wide variety of investments and asset types into a comprehensive portfolio.
Deciding when to take Social Security benefits is an age-old question that many of my clients face. 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 you expect. On the other hand, if you collect benefits later, you might leave money on the table if you pass away 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 collection could result in a permanent reduction of benefits by up to 30%, whereas delayed benefits could increase your benefits by up to 32%. 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.”
Do you know how long your retirement nest egg needs to last? This is a question that no one can answer for certain. It’s impossible to predict how long you’ll live, but it’s not impossible to plan for the best-case scenario.
Unfortunately, however, many people rely on the average life expectancy to plan their retirement and find themselves running out of money when they live 10-15 years longer. The average life expectancy of Americans has been steadily increasing with the advent of modern medicine and technology. Just age 58 in 1930, the average life expectancy reached age 78 in 2020.
While it’s important to understand the average, you should also be prepared to live beyond it, especially considering the population living past age 90 increases every year. With that increase in life span comes an increase in the length of retirement, exacerbating the need for an innovative retirement plan that can function in a modern world.
Whether you are a teacher, doctor, business owner, or any other professional, you likely don’t have time or simply don’t want to learn the ins and outs of personal finance. Reaching out to an experienced financial professional can help you gain confidence in your financial future and help you avoid the mistakes mentioned here without having to do all the research yourself.
Now that you know these common mistakes, hopefully you can avoid them, and instead build out a robust financial plan that is aligned with your risk tolerance and goals, and addresses all your needs. Not sure where to start? We can help get you on the right path. Reach out to us at 301-670-0994 or by email at firstname.lastname@example.org.
Jon Powell is a financial planner and portfolio manager at Ferguson Johnson Wealth Management, an independent, fee-only fiduciary firm that has been helping clients plan for and enjoy retirement for more than 40 years. With more than 10 years of experience, Jon is passionate about providing unbiased advice that puts his clients first. He considers it a privilege to carry some of the financial burden for his clients and educate them so they can make empowered decisions for their futures. Jon is also the primary author and curator of the Ferguson Johnson Wealth Management blog.
Jon graduated from Virginia Polytechnic Institute and State University with a bachelor’s degree in financial planning and holds the CERTIFIED FINANCIAL PLANNER™ certification. When he’s not serving his clients, you can find Jon spending time with his wife, Erica, and their pets, a black lab named Nugget and an orange tabby cat named Kiwi. He loves to play tennis and golf and won’t turn down a good board game. Jon is a diehard fan of D.C.-area sports teams; you might see him at a Washington Nationals game. To learn more about Jon, connect with him on LinkedIn.