By Chris Palabe, CFS®, AIF®
The financial journey is a dynamic one that constantly shifts to the changing landscape of your life. Because of this, it’s natural to make mistakes along the way—and that’s perfectly okay! Rather than allowing these mistakes to discourage you, try viewing them as valuable learning opportunities.
After working in financial services for over two decades now, I have identified typical mistakes that are repeated over and over. By noticing these potential pitfalls ahead of time, you can increase your ability to learn while possibly sidestepping them altogether. Read on for the top 5 mistakes I see that can 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 feel confident 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’re adequately covered now can 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 comes 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 prevents 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 allows 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.
For some, delaying Social Security benefits could mean postponing their retirement date. However, for others, it might require figuring out how to bridge the financial gap between their fixed income and expenses in the years before they start collecting 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 can 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.
Doing it On Your Own
If you’re taking the time to read this article, you’re already ahead of the curve compared to many adults in the United States. However, dealing with the demands of work, family, and other responsibilities can make it difficult to stay informed about all the financial options available to you. Having a financial advisor in your corner can make a world of difference—not only in the wealth you accumulate but also in boosting your confidence about your financial future.
At Palabe Wealth, we create a personalized financial strategy that aligns with your values, objectives, and financial mindset. You have the flexibility to adjust critical aspects of the plan, such as handling income fluctuations and allocating savings, with the ability to see immediate results. To start this process, we invite you to take the first step by scheduling a 15-minute introductory phone call or calling us at 847-249-6600 to learn if we are the right fit for your financial goals.
Chris Palabe is the founder and CEO of Palabe Wealth, a financial services firm providing retirement plan strategies for businesses and individuals. For 25 years, Chris has been serving his clients with customized plans and a boutique approach. He started his firm because of his passion for making a difference in others’ lives and a genuine desire to build long-term relationships with his clients so they can seek to achieve their ideal retirement and manage risk. Chris is a Certified Fund Specialist® (CFS®) and Accredited Investment Fiduciary® (AIF®) professional and has a degree from Université Denis Diderot (Paris VII). When he’s not working, you can usually find him riding horses and competing in dressage at a national level. He also loves reading, watching movies, and eating out. To learn more about Chris, connect with him on LinkedIn.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
This material was prepared for Palabe Wealth Inc.’s use.