Retirement advice is as plentiful as the bills that roll in each month. But despite the avalanche of tips for boosting your savings, people still make dreadful financial decisions. And these gaffes, which range from embracing get-rich-quick schemes to treating a 401(k) retirement plan like an ATM, can often sabotage a financial plan, retirement portfolio or debt reduction program.
In finance, just like in tennis, unforced errors — those you have no one to blame for but yourself — usually trip you up and are bad for your bottom line. In fact, they can be the difference between a happy retirement and financial problems when you leave your job. Here’s a short list of terrible financial decisions you should avoid and, if you’re guilty of any of these money-related blunders, some specific actions you can take to fix them.
1. Using 401(k) funds to buy a house
Buying a nice new house or second home often requires a sizable down payment. But raiding your 401(k) or IRA to purchase your dream home is a no-no. “One of my biggest pet peeves is when people consider pulling $100,000 or more out of a retirement account to buy real estate,” says Andrew Wood, a retirement planning adviser with Daniel A. White & Associates.
There are a number of downsides, he says, to tapping your nest egg to put a roof over your head. For one, you’ll be paying taxes on the large distribution for the down payment (which can also push you into a higher tax bracket). If you’re in the 24 percent tax bracket, for example, that $100,000 down payment will really cost you $131,579. Adding to the financial hit is the fact that you’re subtracting from your 401(k) or IRA account balance, which means you have fewer investable assets, such as shares of stocks or mutual funds, with the potential to keep growing and provide you with an income stream in retirement.
“Treating a retirement account as ‘found money’ when buying a home or when unplanned expenses arise may seem like a quick fix, but it’s a bad financial decision,” says Greg McBride, chief financial analyst at Bankrate.com. It’s especially bad if you make the withdrawal before age 59½, because you’ll have to pay not only taxes on the distribution but a 10 percent early withdrawal penalty as well, he says. And remember, “any withdrawal from a tax-advantaged retirement account is a permanent setback,” McBride says. “The money comes out, but it can’t go back in.”
2. Carrying debt on too many credit cards
Many people fool themselves into thinking their debt is under control by carrying what appear to be manageable account balances on multiple credit cards. The reality is that they’re racking up sizable debt when all the balances are added up, says Rob Leiphart, vice president of financial planning at RB Capital Management.
“While one card with a couple thousand dollars is not usually too much of an issue to pay off, when you have five or six cards with that size balance, it’s a problem,” he says. If you have one card with a balance of $10,000 or $12,000 or even more, however, you’ll more quickly recognize you have a mounting debt problem, he says. The average baby boomer — those born between 1946 and 1964 — has $6,043 in credit card debt spread out over nearly five credit cards.
Leiphart says spreading the debt around to multiple cards provides a false sense of “emotional comfort” but doesn’t fix the problem. And don’t make the mistake of taking advantage of one of those zero-percent APR teaser rate cards to save on interest and then not pay off the balance before the offer expires, he adds. Often people who use these offers are “simply trying to buy time for the inevitable — which is an inability to pay,” Leiphart says. The problem is that the interest rate skyrockets once the zero-percent offer ends, resulting in much higher payments if you continue to carry the balance.
The fix: Look at your credit card debt in its entirety. And if the amount you owe is mushrooming, identify the root cause of the overspending problem and create a debt repayment system that is doable.
3. Planning for retirement when you retire
Karen Altfest, executive vice president at Altfest Personal Wealth Management, cringes when she recalls a sit-down with a recent retiree. “The man said, ‘Could you help me know if my portfolio will last through my retirement?’ I asked him when he was planning to retire, and he responded: ‘I retired last month.’ ” In Altfest’s mind, the question came years, if not decades, too late.
It’s a tough situation, she says, when people don’t start to plan for their golden years until the day of their office retirement party. “These people forfeit the time factor in planning for their goals, which means the adviser is limited by … client decisions that have been made to date (and may not be easily reversible) and assets there are at this time.”
That’s not to say a plan that includes such things as estate planning techniques and tax strategies can’t be assembled at the 11th hour, Altfest adds. She reviewed her client’s portfolio and assets, talked to him about his risk tolerance and financial goals, explored the costs of staying where he lived versus downsizing. “What I could not do was tell him how to save more and plan better for a retirement that was still years away,” she says.
The fix: A better approach is to hatch a plan in the years leading up to retirement, she stresses. “If he had made that call to me some years earlier, I might have presented him with a variety of ways he could have prepared for his and his family’s future,” Altfest says.
4. Chasing the latest investment fad
From Merriam-Webster: fad (noun): a practice or interest followed for a time with exaggerated zeal: CRAZE.
Whether it’s meme stocks such as GameStop, cryptocurrencies like Bitcoin, or blank check companies dubbed special purpose acquisition companies (SPACs), investing in fads can be dangerous to your financial health, says Jan Blakeley Holman, director of adviser education at Thornburg Investment Management.
Holman isn’t a big fan of Bitcoin, the wildly volatile digital currency that has made many people rich but that has also saddled many others with devastating losses due to huge downdrafts after hitting all-time highs.
“It’s difficult to avoid all the hubbub about Bitcoin,” Holman says. It’s in the news, in conversations at the golf course and dinner table, and even in Super Bowl ads, she notes. There’s just one problem: “The jury,” Holman says, “is still out on whether cryptocurrencies are lasting investments.” For now, she says, Bitcoin appears very speculative. And while everyone wants to get rich quickly, Holman offers a dose of humility: “History is littered with stories of fad investments that turn into bubbles. From tulip bulbs to the dot-com stock mania, eventually all bubbles burst and fall back to earth.”
The fix: Stick to established investments such as stocks, bonds and real estate, and diversify your investments to avoid having all your eggs in one basket. And if you do want exposure to Bitcoin, make sure it’s just a sliver of your overall portfolio and use money you can afford to lose.
5. Letting emotions dictate portfolio moves
The emotional impact of investing can be costly. That might mean getting caught up in the euphoria of a bull market, for example, and betting it all on stocks and buying when prices are high. Or, conversely, letting fear and panic spook you out of the market and selling low after the stock market has already fallen off a cliff. “The emotional roller-coaster is responsible for more wealth loss than probably any other single factor,” says Neel Shah, a certified financial planner and estate planning attorney with Shah Total Planning.
Ignoring time-tested financial principles, such as buying low, selling high and staying the course during market downturns, is a recipe for investment failure, adds Thorne Perkin, president of Papamarkou Wellner Asset Management. “Paradoxically, the stock market is the rare store where people race for the exit at the sight of discounted prices — when everything is on sale,” he says. “While staying the course can be difficult to do when financial markets get tested, history has shown that steadfast investors heap rewards. Investors are well advised to maintain some patience and employ a nonreactive, long-term investment horizon. Rome was not built in a day.”
The fix: Maintain a disciplined approach and regularly revisit your risk tolerance to ensure that you’re meeting your goals, Shah says. If you think you’re prone to panic buying or selling, seek out a financial professional to guide you.
Adam Shell is a freelance journalist whose career spans work as a financial market reporter at USA Today and Investor’s Business Daily and an associate editor and writer at Kiplinger’s Personal Finance magazine.