As nice as it would be, it’s impossible to live a life without mistakes. Thankfully, most mistakes are minor, don’t cause much regret, and give us an opportunity to learn. But financial mistakes? They’re in another category altogether and are often a lot harder to swallow or difficult to recover from.
That’s why knowledge is power when it comes to avoiding financial mistakes. The more you know, the better prepared you are to make the right decisions and be proactive about your financial future. Here are 5 common financial mistakes I’ve seen over the years and how you can prevent them from wreaking havoc on your finances.
1. Trying to “Beat” the Market
In investing, the long term is what matters. While a select few mutual funds might outperform their benchmarks in any given year, over time we see that this outperformance usually doesn't last. No matter how hard they try, even the most highly educated and experienced financial analysts have no way of knowing what the markets will do on any given day. While we may hear stories of people who have found incredible success through the stock market, those who accurately time the markets are very lucky and very rare, and those who follow all the “ups” also have to follow the “downs.” If you want to see growth in your portfolio through the stock market, stick to your investment strategy and ignore the short-term noise.
Investors have historically been much better served by focusing attention, time, and energy on things they can manage, such as how much risk to take in the first place, rebalancing periodically, having realistic growth rate assumptions, and developing their investment strategy as part of their financial planning process.
2. Not Developing an Income Plan in Retirement
A well-developed retirement plan should include the following types of income: guaranteed income, such as a pension or Social Security, and investment income, such as real estate or income from your retirement account.
But it takes more than just saving a specific amount of money to prepare your finances for retirement. Aside from the types of income, you also need to think about the timing of your retirement withdrawals. You likely know that you can start withdrawing Social Security at an earlier age; however, if you delay taking benefits until you are 70, your monthly benefit amount will increase.
There are also tax implications of withdrawing certain investments at different times that could affect your investment and retirement strategy. It is a good idea to outline an income plan with your financial advisor that takes these considerations into account.
3. Failing to Develop a Comprehensive Estate Plan
When was the last time you updated or reviewed your estate plan? Perhaps more importantly—do you have an estate plan that includes all the necessary documents and covers all your bases? If you have money or other assets to leave behind, you need an estate plan. A solid estate plan protects you, your assets, and your family. It ensures your wealth is distributed to the people or charities you want to receive it, and it makes it much easier for your executor to manage the affairs of your estate.
Your estate plan will be as unique as your life, but it should include a will to provide for guardianship and asset distribution, medical directions and healthcare proxies, powers of attorney, and possibly trusts.
4. Not Utilizing Matches on 401(k)s
It should go without saying that you should take full advantage of matching 401(k) programs that your employer has set up. This is because you risk losing out on potentially thousands of dollars just by ignoring this one step. Many employers match anywhere from 5-100% of a percentage of your contribution.
For example, if your employer offers a 100% match up to 6% of your pre-tax income, you should plan to contribute at least 6% toward your retirement account each pay period. This means that, with your employer’s contribution, you’re actually saving 12% of your pre-tax income for retirement. Even if you can’t save the maximum amount allowed in your 401(k), at least save enough to get the full benefit of your employer match.
5. Not Planning for Long-Term Care Costs
As healthy as you and your spouse are now, it is difficult to imagine a future where one or both of you may need long-term care or in-home assistance. However, most Americans will need long-term care as they age, with some statistics suggesting that 7 out of 10 people turning 65 will now require some form of long-term care in their lifetime. (1) As you can imagine, long-term care costs are steep and steadily increasing. (2) In 2021, the average monthly cost for a private room in a nursing home in California is over $11,000. But by 2030, that amount is expected to rise to over $15,000. (3)
There are several different strategies to prepare for this expense. Be sure to rely on a financial professional to walk you through some of the more popular options, which include a traditional long-term care insurance option or a more hybrid policy, which combines life insurance or an annuity with long-term care insurance. These types of policies provide for your or your spouse’s long-term care needs while keeping your estate intact.
Are You Making Some of These Financial Mistakes?
That’s what we’re here for. At the Nichols Financial Strategies, we help you avoid these common mistakes and plan your financial future with intentionality. Reach out to us at 559-440-6999 or by email at email@example.com to get started.
T. Matthew Nichols is founder, CEO, and wealth advisor at Nichols Financial Strategies with more than 20 years of experience in the financial industry. He spends his days serving business owners and families, specializing in helping those in the agriculture industry proactively prepare for the unique challenges they face in a rapidly changing economy. Matt is an Accredited Investment Fiduciary® (AIF®) professional and holds his FINRA Series 7 and 63 securities registrations with LPL Financial and his California State Life & Health Insurance license. He’s also pursuing his ChFC designation and is dedicated to continuing his education and staying abreast of the latest financial trends and strategies. Matt’s mission is to help his clients transfer wealth from one generation to the next and work toward achieving their goals so they can spend more time on what they love most. Matt was born and raised in the California Central Valley and resides in Fresno with his wife, Christy, and their two daughters, Holly and Jillian. He enjoys golf, traveling, skiing, and spending quality time with his family. To learn more about Matt, connect with him on LinkedIn.