3 Common Money Mistakes Even Successful People Make

While New Year’s resolutions are likely long forgotten, it is never too late to revisit your financial plan. Here are three common mistakes that may keep even savvy investors from achieving their financial goals.

1. Saving Too Much in Some Retirement Accounts

We often hear about the importance of saving for retirement and contributing to employer programs. Pre-tax deferrals into retirement accounts allow employees to lower their income tax liability and collect free dollars that may be provided by their company’s match program. This is typically an efficient strategy to reduce taxable income during working years and, in later years, spend down the account while in a lower income tax bracket.

However, high earners and business owners who contribute annual maximums may find these accounts become a significant portion of their balance sheet. The original intention of reducing taxable income might actually have the opposite effect. When it comes time to take required minimum distributions (RMDs), large mandatory withdrawals are then subject to ordinary income tax rates that may come with hefty tax bills. Having significant assets tied up in retirement accounts also leaves you subject to steep penalties if taken before 59 ½, whether for early retirement, vacations, or home improvements. Fortunately, there are several ways to mitigate these issues.

Solution: Many retirement accounts now offer Roth options. While Roth contributions are made with after-tax dollars, they grow tax-free, and withdrawals can be taken tax-free. If you have been contributing to a qualified retirement plan, consider splitting contributions between Roth and Traditional accounts. In retirement, tax-free assets may strategically be your last place from which to spend to help maximize growth.

Additionally, you can consider using an investment or brokerage account for long-term savings and growth. Unlike qualified retirement plans, regular investment accounts can be subject to lower income tax rates, providing another source for withdrawals that may increase tax flexibility, especially for early withdrawals before age 59 ½. Having employer-sponsored plans, both pre-tax and Roth, along with a regular investment account, provides the best flexibility for retirement and legacy goals.

2. Letting Your Estate Plan Collect Dust

One of the biggest mistakes is not updating your estate plan or not having one at all. An estate plan includes key documents, such as a will, powers of attorney (financial and healthcare), and advance healthcare directives. In instances where no will exists, asset distribution is subject to state law and may not reflect an individual’s intentions. If no will is established, minor children also may be impacted as the will is the document that names a legal guardian. Without powers of attorney, family members may struggle to gain access to healthcare updates or facilitate financial transactions in the event of a medical emergency. Lack of planning can place an unnecessary burden on family during an already stressful time.

Solution: An estate plan should be revisited as your assets grow and family circumstances evolve to assess whether your goals have changed since your documents were last executed. As assets grow over time, families may contemplate the best strategy for transferring significant wealth to the next generation. In certain situations, the creation of trusts may be beneficial. Since changing legislation also can impact estate tax exemptions, a periodic plan review is essential.

In addition to asset distribution strategies, fiduciary appointments should be revisited regularly. Over time, a parent, older relative, or friend may no longer be fit to serve or have difficulty fulfilling such duties. With larger and more complex assets, it may be prudent to consider a corporate trustee, in addition to the individuals that have been named.

3. Overlooking Insurance Needs

Insurance plays a vital role in a comprehensive financial plan, although its significance can sometimes be underestimated or ignored entirely. Whether it is health, life, disability, or property and casualty insurance, appropriate coverage can safeguard you and your family from financial distress in the face of unforeseen events or tragedies. Without adequate insurance protection, unexpected circumstances could lead to substantial financial strain, making it essential to prioritize thorough coverage tailored to your specific needs and circumstances.

Solution: Review your policies annually to ensure you have adequate coverage that meets current needs and protects against potential risks. While insurance premiums may seem like an added expense, their contribution to your peace of mind and financial security can be invaluable.

As a partner and trusted resource, Haverford helps clients avoid these common mistakes through thoughtful planning, frequent communication, regular reviews, and timely insights.

This content was originally published in partnership with Philadelphia Business Journal. To see the original article, click here.

These Wealth Planning Insights are for informational purposes only and should not be construed as investment advice or recommendations with respect to any information or specific securities presented. Each individual investor’s circumstance is unique and you should consult with your investment professional prior to any financial decisions.

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