Financial Planning Mistakes to Learn From

Major Financial Planning Mistakes
... how to learn from them and plan optimally

Dear Clients and Friends,

First off, where did 2023 go thus far? It’s half over and
I’m surely behind in many areas of my life! Hope you're ahead of the game so to speak in your neck of the woods.

We learn from our mistakes – hopefully. But it’s wiser to
learn from other people's mistakes - agree?

If you’ve read my blog posts over the years, you know that I
emphasize the pitfalls of many investments and savings products and I think tell a ‘well-balanced’ story to help you decide if you have enough information to make good decisions. If you can avoid the 'high risk' dumb decisions, what's left probably is a candidate for a higher success rate I say.

It’s an important topic, folks. Your money and health care are at stake here.
So, now that you’ve got your thinking caps on, let’s dive into
what I feel are 4 of the most important personal finance mistakes using real life examples from family and clients / friends.

1. Mistake – Keeping too much of your assets in retirement accounts. Funding your retirement account is a good thing generally. You defer taxes on those earnings, and can then time when you take the money out in later years when you need it; and hopefully pay less tax than when you were working.

But, that retirement money is tied up until you are 59-1/2 years or older usually. And if you need it before then, penalties apply.

Life Example: A friend lost his job at age 53 and then became sick and unable to work for over a year. He had very little money outside of retirement accounts (just enough to live month-to-month), and was faced with both TAXES and a 10% penalty on his pre 59-1/2 IRA withdrawals. Guidelines here are to have 6 months of living expenses set aside outside retirement accounts. Keep it accessible in a bank or brokerage money market / or savings account that’s easily convertible to cash on a few days notice.

2. Mistake – Not updating or changing ownership of important assets like real estate and financial accounts.

One never knows when injury, sickness or death will occur, so it’s best not to postpone financial decsions in this area. Optimally, do this when you are healthy.  Two friends, Bob and Paula (not real names), lived together 10+ years and were a committed unmarried-couple. Paula, being 10+ years older became ill; in-n-out of hospitals. Their intention was for Bob to own the townhouse property (in her name) after her death. The title change never occurred! I remember my heart-felt conversation with Bob after Paula’s passing. “Barry, we were planning to get that done, but it was always something; a medical appointment, we were tired, it was raining the day on our appointment”. After Paula’s passing, at a young 73, Bob had no legal claim to the property, and it became part of Paula’s estate to be sold by her family. 

Lesson: Get your intentions written down and filed with the appropriate jurisdiction.

#2 above would also apply to your naming beneficiaries on your financial accounts also. Think IRA’s, 401(k), non-retirement brokerage accounts. Get the forms from your financial institution and record them with the institution.

3. Mistake – Mortgage mayhem.  A real estate friend shared this story with me a few months ago. A man, who was well-versed in financial matters, acquired a condominium with his family’s support. They together were on the deed; they all owned a percentage of the property and paid the mortgage, insurance and maintenance fees. It carried a 30 year-mortgage that was refinanced at 4.25% about 10 years ago. So, no worries, right? 4.25% for 20 more years, fixed rate – that would be competitive in today’s rate market where 15 and 30 year mortgages are 6.6% to 7.2% respectively. Table source: BankRate.com

Mayhem: the borrowers get a letter this Spring from the lender, a Florida Bank, stating that their ADJUSTABLE rate mortgage (ARM) will ‘adjust’ this October based upon the Secured Overnight Financing Rate and the bank’s formulae used with that. “WHAT?, the man’s son shared with me. Dad said it was a fixed-rate loan. The family thought it was a fixed rate loan”.

What to do now? Pay down the loan by assessing more to each owner? Accept the higher interest rate? Sell the condo? Lesson: Read your documents carefully before and after your property closing if you are the BUYER. Read every page of your documents; read them more than once. Ask questions early when you may have time to correct them. Did the bank make a document mistake; intentionally? Doesn’t matter, the borrowers signed it!

4.  Mistake – Get your legal documents in place concerning your money and your health. The BIG 4 I call them: Health-Care surrogate, Durable Power-of-Attorney, Living Will, and Last Will and Testament. These give your trusted family and friends authority to handle your affairs (financial and medical) when you are alive and unable to communicate your wishes. Your Last Will and Testament gives instructions to the court who will administer your estate and inherit your assets after your death. The Living Will expresses your wishes regarding terminal health conditions and do not resuscitate orders.

This one hits home quite personally for me. My single friend of 30+ years was battling an incurable disease and I was doing what I could to comfort him the past couple years; help with his medical appointments and some bill-paying. Turns out, he didn’t have any legal documents completed as listed above, but he told me he had them 'handled' with his sibling.

With no documents directing his affairs, I enlisted a sharp notary public who helped me personalize the forms. We met at his living facility, had them signed, witnessed, and notarized.

Ready for this? Later that day, after I left, he was admitted to the hospital, and they called me as his contact, stating that he had been admitted and he could not communicate his wishes; and DID I HAVE AUTHORITY TO ACT ON HIS BEHALF with Medical and Financial matters? A few taps on my smart-phone with his information in a cloud-file, and the hospital had the Health Care Surrogate and Living Will documents signed, notarized and delivered to them. 

So there you are: my list of 4 important financial planning mistakes that can have a significant impact on both your health and wealth. I'm sure I'll think of a few more. It's easy to put these off, being optimistic that tomorrow will be pretty much like today. As actress and Poet Maya Angelou (1928-2014) quoted "hope for the best, plan for the worst".

I'll 'hope' this helped you understand this topic better. Now you and I best get movin' and get our houses in order!

~Barry
(954) 560-3622

P.S. This blog is not to be construed as tax or legal advice. Please consult a legal or tax professional with your particular situation. If you don't know where to start, give me a call. I can offer some ideas or a referral.