Understanding the full scope of your financial picture can be difficult, to say the least! You need to consider your investments, retirement planning, budgeting, short-term and long-term goals, among many other things. It’s no wonder that so many investors make mistakes—it’s hard to consider everything!
When talking about making financial mistakes, I wanted to highlight three of the biggest financial mistakes I see when clients come to me for help. They include not fully understanding your retirement plan, cashing out investments incorrectly, and trying to manage your investments on your own.
Let’s look at each of these common financial mistakes and then dive into how you can avoid making them.
1. Not Fully Understanding Your Pension & Retirement Plans
If you have a pension or employer-sponsored contribution plan like a 401(k), great! Retirement plans are an extremely important part of your financial strategy. But it’s important to understand all the fine print of your plan so you don’t run into issues down the road.
One of the most important things to understand is what happens to your retirement plan or pension when you retire and want to start living off the assets you have accumulated. Every retirement plan is different, so it’s important to understand how you will be paid out (will you receive a lump sum or a monthly check?), if there are any fees associated with your payout, and the tax implications of your pension income.
Speaking of taxes, many investors forget to consider the tax consequences of their pension or retirement plan. According to FINRA: (1)
- You have to pay income tax on any withdrawals from a pension or tax-deferred contribution plan in the year that you withdraw the money.
- You will owe income tax at your regular rate as you receive money from your pension or retirement plan annuities and payments if you choose a monthly payout.
- If you take a direct lump-sum payout from your pension instead, you will pay the total tax due when you file your return for the year you receive the money.
- Taxes on pension income vary by state.
All this to say: Make sure you read the fine print of your retirement plan carefully and consult with a retirement planning professional if you have any questions.
2. Cashing Out Your Investments Incorrectly
Another common mistake I see investors make is overpaying capital gains tax when they cash out their investments incorrectly.
Capital gains tax is the tax you pay on the capital gain from your investments. There are two types of capital gains tax: short-term capital gain and long-term capital gain.
Short-term capital gain is from the sale of an investment you’ve had for less than a year; anything over that is considered a long-term capital gain. The short-term capital gains rate is the same as your regular income tax rate, and the long-term rate is between 0-20%, depending on your tax bracket. (2)
With this in mind, you can make strategic choices to help minimize your capital gains tax, such as holding an investment longer to lower the taxes or selling your winning investments when it’s more advantageous for you. You can hold on to your profitable investments indefinitely or sell them when your taxable income is reduced, such as when you retire. You may also be able to reduce your taxable income with increased charitable giving or by making maximum contributions to your retirement accounts.
3. Trying to DIY Your Investments
The last mistake I commonly see investors make is trying to do their investments themselves. While you can make a lot of decisions on your own, it’s more advantageous to work with a professional who understands the market. Too often, investors try to DIY their own strategy and end up burning up their money in the process. In addition, according to Vanguard, the value of using an advisor is around 3% additional net annual gains for the investor. (3)
Don’t Make These Mistakes With Your Money
These are just a few of the many mistakes I see investors make. Luckily, all of them can be remedied with the help of a qualified financial advisor like myself. I can help you understand your retirement plan, tax liabilities, investment portfolio, and much more. Ready to give it a shot? Schedule a no-obligation introductory meeting by calling me at (619) 681-1911 or emailing email@example.com.
Paul Neves is president and wealth manager at FSI Wealth Management, a leading independent wealth management firm based in San Diego, California. Paul is a CERTIFIED FINANCIAL PLANNER™ professional and a Chartered Financial Consultant®. Working with clients in the financial industry since 1989, Paul has dedicated his life to seeing his clients and their families reach their goals and fulfill the financial plans they have created for their life. He believes that trust and respect are key to building strong, long-lasting relationships with his clients. Paul is known for helping families take the mystery out of preparing for today and tomorrow.
Paul graduated from San Diego State University in 1989 with a bachelor’s degree in business administration, concentrating in financial planning and services. He is currently a resident of Point Loma, California, where he spends his free time with his family and friends either boating, cooking, farming, or traveling. To learn more about Paul, connect with him on LinkedIn.