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All Contents © 2017The Kiplinger Washington Editors
By Bob Niedt, Online Editor
| October 2016
Financial regrets. We’ve all had a few. But there’s a big difference between making an impulse purchase that you second-guess the morning after and making a major decision about your money that could haunt you for a lifetime.
We reached out to dozens of financial planners and personal-finance experts for their views on some of the most consequential mistakes people can make with their money. We also offer advice on fixing these mistakes — or avoiding them altogether — so you’re not left ruing the day when you blew your budget, wiped out your savings or otherwise sabotaged your financial future. Take a look.
Financial professionals have heard the refrain before: “I’ll start saving for retirement when I make more money.” But that fiddling while Rome burns won’t cut it as retirement nears.
“Many people do not start to aggressively save for retirement until they reach their 40 or 50s,’’ says Ajay Kaisth, a certified financial planner with KAI Advisors in Princeton Junction, N.J. “The good news for these investors is that they may still have enough time to change their savings behavior and achieve their goals, but they will need to take action quickly and be extremely disciplined about their savings.”
Morningstar calculated how much you need to sock away monthly to reach the magic number of $1 million saved by age 65. Assuming a 7% annual rate of return, you’d need to save $381 a month if you start at age 25; $820 monthly, starting at 35; $1,920, starting at 45; and $5,778, starting at 55.
Uncle Sam offers incentives to procrastinators. Once you turn 50, you can start making catch-up contributions to your retirement accounts. In 2016, that means older savers can contribute an extra $6,000 to a 401(k) on top of the standard $18,000. The catch-up amount for IRAs is $1,000 on top of the standard $5,500.
Sure, you want your children to have the best — best education, best wedding, best everything. And if you can afford it, by all means open your wallet. But footing the bill for private tuition and lavish nuptials at the expense of your own retirement savings could come back to haunt all of you.
“You cannot borrow for your retirement living,’’ says Joe Ready, executive vice president of Wells Fargo Institutional Retirement and Trust. “[But] you may have other avenues beyond [borrowing from] your 401(k) plan to help fund a child’s education.” Instead, Ready says parents and their kids should explore scholarships, grants, student loans and less expensive in-state schools in lieu of raiding the retirement nest egg. Another money-saving recommendation: community college for two years followed by a transfer to a four-year college. (There are many smart ways to save on weddings, too.)
No one plans to go broke in retirement, but it can happen for many reasons. One of the biggest reasons, of course, is not saving enough to begin with. If you’re not prudent now, you might end up being the one moving into your kid’s basement later.
We all can use a hand once in a while, especially when it comes to tricky aspects of our financial lives. For example, some of the financial professionals we talked to pointed to the panic brought about by the sharp economic downturn in 2008 and 2009. Many individuals poorly timed when to get out of the stock market and when to get back in.
“Investors who aren’t very experienced tend to buy high and sell low, when you’re supposed to buy low and sell high in the stock market,” says Catherine Shenoy, director of applied portfolio management and senior lecturer at the University of Kansas Business School. “That’s one way a professional financial adviser can help you.”
Advice isn’t limited to investments. The right financial pros can assist with everything from taxes and insurance to retirement savings and estate planning. And good advice can pay off for you and your loved ones. Common but avoidable mistakes such as dying without a valid will or failing to designate the correct beneficiaries for your retirement accounts could leave your heirs in limbo and even see your wealth go to the wrong people.
“Not carefully choosing your financial adviser can be a huge mistake,” says Andy Tilp, an investment adviser representative with Trillium Valley Financial Planning in Sherwood, Ore. “It is very important to have an adviser who is a fiduciary for the clients and is working solely in the client’s best interest. An adviser who sells high-fee, commission-loaded products is helping his own net worth but can be a disaster for the client.” (Learn more about what to ask a financial adviser when hiring one.)
Taking a loan from your 401(k) can be tempting. After all, it’s your money. As long as your plan sponsor permits borrowing, you’ll usually have five years to pay it back with interest.
But short of an emergency, tapping your 401(k) is a bad idea for many reasons. According to John Sweeney, executive vice president for retirement and investment strategies at Fidelity Investments, you’re likely to reduce or suspend new contributions during the period you’re repaying the loan. That means you’re short-changing your retirement account for months or even years and sacrificing employer matches. You’re also missing out on the investment growth from the missed contributions and the cash that was borrowed.
Keep in mind, too, that you’ll be paying the interest on that 401(k) loan with after-tax dollars — then paying taxes on those funds again when retirement rolls around. And if you leave your job, the loan usually must be paid back within 60 days. Otherwise, it’s considered a distribution and taxed as income.
Before borrowing from a 401(k), explore other loan options. College tuition, for instance, can be covered with student loans and PLUS loans for parents. Major home repairs can be financed with a home-equity line of credit.
You’re entitled to start taking benefits at 62, but you probably shouldn’t. Most financial planners recommend waiting at least until your full retirement age – currently 66 and gradually rising to 67 for those born after 1959 – before tapping Social Security. Waiting until 70 can be even better.
Let’s say your full retirement age, the point at which you would receive 100% of your benefit amount, is 66. If you claim at 62, your monthly check will be reduced by 25% for the rest of your life. But hold off until age 70 and you’ll get a 32% boost in benefits – 8% a year for four years – thanks to delayed retirement credits. (Claiming strategies can differ for couples, widows and divorced spouses.)
“If you can live off your portfolio for a few years to delay claiming, do so,” says Natalie Colley, a financial analyst at Francis Financial in New York City. “Where else will you get guaranteed returns of 8% from the market?” Alternatively, stay on the job longer, if feasible, or start a side gig to help bridge the financial gap. There are plenty of interesting ways to earn extra cash these days.
Americans’ plastic addiction is taking a toll on their bottom lines. The average household with debt owes $15,762 on credit cards, according to personal finance website NerdWallet.com.
“It can take years and years and years to potentially pay off that credit card debt with the amount of mounting interest costs,” says H. Kent Baker, professor of finance at the Kogod School of Business at American University, “especially if one continues to charge more and more and more.”
Consider this example: You have a $5,000 balance on a card with a fixed rate of 12.5%, typical of what banks are charging these days. If you only make minimum payments, it’ll take nearly 10 years and $1,700 in interest to eliminate that $5,000 debt, a Bankrate calculator shows.
What to do? First, stop making new charges. Second, if possible transfer the balance to a lower-rate card. Third, pay more than the minimum. Even a small boost to your monthly payment can result in significant savings on interest. Above all, advises Baker: Live within your means. (Kiplinger’s Household Budget Worksheet can help you get back on track.)
Shying away from stocks because they seem too risky is one of the biggest mistakes investors make. True, the market has plenty of ups and downs, but since 1926 stocks have returned an average of about 10% a year. Bonds, CDs, bank accounts and mattresses don’t come close.
“Conventional wisdom may indicate the stock market is ‘risky’ and therefore should be avoided if your goal is to keep your money safe,” says Elizabeth Muldowney Samuelson, a financial adviser with Savant Capital Management in Rockford, Ill. “However, this comes at the expense of low returns and, in fact, you have not eliminated your risk by avoiding the stock market, but rather shifted your risk to the possibility of your money not keeping up with inflation.”
While there are no guarantees when it comes to stocks, you can lessen the likelihood of taking a big hit. Diversification is the key. Keep your money in a mix of large, small, domestic and foreign stocks. We favor low-cost mutual funds and exchange-traded funds because they offer an affordable way to own a piece of hundreds or even thousands of companies without having to buy individual stocks. If you aren’t comfortable picking your own funds, hire a financial adviser to help.
And don’t even think about retiring your stock portfolio once you reach retirement age, says Sweeney, of Fidelity Investments. Nest eggs need to keep growing to finance a retirement that might last 30 years. You do, however, need to ratchet down risk as you age by gradually reducing your exposure to stocks.
Rarely is the student who skips school going to soar in life, financial planners and experts warn. Sure, you’ll dodge the albatross of student loans by not going to college, but the short-term savings could eventually be offset by smaller paychecks and missed promotions.
“All the income studies have shown that college graduates earn two to three times more [on average] than high school graduates,” says Shenoy, of the University of Kansas Business School. “Quitting school without your degree really puts you behind the eight ball in terms of your career.”
Based on U.S. Bureau of Labor Statistics data, a high school graduate working full time will have median lifetime earnings of $1.4 million, while a worker with a bachelor’s degree will earn nearly $2.4 million. A doctoral degree leads to median earnings of about $3.4 million over a lifetime.
Remember that what you study can have a big influence on your prospects. Some of the best college majors for your career in terms of future pay and employment opportunities are in the areas of health care, technology and finance. Conversely, majoring in, say, fine arts or design tends to have the poorest financial payoff.
It’s easy to see why people fall for time-shares. Happy vacationers revel in the thought of visiting a favorite spot year after year. Get bored? Simply swap for slots at other destinations within the time-share network. Great deal, right? Not always.
Buyers who don’t grasp the full financial implications of a time-share can quickly come to regret the purchase. In addition to thousands paid upfront, maintenance fees average upward of $660 a year, and special assessments can be levied for major renovations. There are also travel costs, which run high to vacation hotspots such as Hawaii, Mexico or the Bahamas.
And good luck if you develop buyer’s remorse. The real estate market is flush with used time-shares, which means you probably won’t get the price you want for yours – if you can sell it at all, says Ron Kelemen, a Salem, Ore.-based financial planner. Even if you do find a potential buyer, beware: The time-share market is rife with scammers.
Experts advise owners first to contact their time-share management company about resale options. If that leads nowhere, list your time-share for sale or rent on established websites such as www.redweek.com and www.tug2.net. Alternatively, hire a reputable broker. The Licensed Timeshare Resale Brokers Association has an online directory of its members. If all else fails look into donating your time-share to charity for the tax write-off.
We all like to pretend we’re too savvy to become victims of such offers. Yet, in 2015 Americans lost $765 million to scams, according to the FTC. Common cons ranged from investment scams (Get rich quick by investing in ostrich farms!) to prize scams (Congratulations, you just won a foreign lottery you never played!). Come-ons are delivered by telephone, text, mail, email and even face-to-face.
The South Carolina Attorney General’s office and the FTC offer tips for spotting too-good-to-be-true offers. Tell-tale signs include guarantees of spectacular profits in a short time frame without risk; requests to wire money or pay a fee before you can receive a prize; or unnecessary demands to provide bank account and credit card numbers, Social Security numbers or other sensitive financial information. Also be wary of – in fact, run away from – anyone pressuring you to make an immediate decision or discouraging you from getting advice from an impartial third party. Oh, and steer clear of any and all Nigerian princes promising big payoffs.
What do you do if you suspect a scam? The FTC advises running the company or product name, along with “review,” “complaint” or “scam,” through Google or another search engine. You can also check with your local consumer protection office or your state attorney general to see if they’ve fielded any complaints. If they have, add yours to the list. Be sure to file a complaint with the FTC, too.
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