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You are an intelligent and well-educated investor. You are doing well in life. But do you still worry about losing it all? Or perhaps, you aren’t worried and you should be.
Below are listed some of the biggest mistakes on the road to wealth. If you’re truly going to be successful, you’ll need to navigate carefully through the many hazards along the way.
Mistake #1 - Mismanaging Cash Flow
Successful wealth managers know that they must be disciplined in their spending. It’s easy to let expenses increase as your income moves up. If you’re not careful, expenses can ruin your chances of capitalizing on that wealth. The first rule of a good financial plan is to “pay” yourself first, in the form of savings. Make sure you are stashing a healthy portion of your income each month and investing it. Don’t fall into the trap of living beyond your means.
Another aspect of managing cash flow is minimizing taxes. As your tax return gets more complex, you need to take advantage of every deduction possible. Your advisor can also help identify other opportunities like additional retirement funding vehicles, mortgage refinancing strategies and/or estate planning techniques. Techniques such as capital loss carryforwards can be used to offset gains.
Mistake #2 - Neglecting Your Finances
One of the biggest mistakes in wealth management is just lack of attention. People are very busy. Sometimes personal finance takes a backseat to other more pressing matters. But if you take that approach, you may wind up feeling that the years have flown by and you haven’t made much progress. Successful wealth creation takes a commitment of time. If you can’t make that commitment, hire someone you can trust. An independent investment advisor watches your portfolio continually, and makes changes as needed. Don’t let neglect destroy your next egg! Mistake #3 - Choosing the Wrong Investment Strategy
Even if you’re able to generate a considerable amount of income, you have to know how to protect and preserve that capital. |
One mistake made by many people is misjudging investment risk tolerance. When the market just kept going up, it was easy to think you could handle the risk. But if the stock market declines, after seeing part of your portfolio value erased, you may be reconsidering how much risk (or loss) is acceptable. An investment advisor can help you evaluate the right risk level for you.
Another common mistake is not rebalancing periodically. Many people refuse to sell if they’ve lost money on an investment. If your mix of stocks, bonds and cash (your asset allocation) makes you uncomfortable, talk to your investment advisor about taking some losses and moving to an asset allocation that is in line with your ability to handle risk.
Mistake #4 - Mismanaging Windfalls
Sometimes life hands you a happy financial surprise. Maybe you receive stock options or an inheritance or experience some other once-in-a-lifetime event. Now that you’ve got that money, what do you intend to do with it?
Most people will benefit from professional advice in these types of situations. There are almost always tricky tax implications. For stock options, you have to understand what type of tax you may trigger upon exercise or sale of your shares: ordinary income tax, capital gains tax, alternative minimum tax, or all of the above. Careful planning can help you keep more of your windfall.
Over the next 10 years, $10 trillion will pass from generation to generation. Most heirs have no idea how to integrate that wealth into their own portfolios. Again, an advisor can help you take appropriate action. Mistake #5 - Failing to Maximize Retirement Plan Benefits
Unfortunately, most participants in company retirement plans don’t put away the maximum contribution. For 2004, you can contribute $13,000 ($16,000 if you are over age 50 and your plan allows it) to 401(k) plans, 403(b) plans, and 457 plans. If you have a Profit Sharing or SEP plan, you may be able to sock away as much as $41,000 a year.
If you are at the executive level of your business, in addition to the “qualified” types of plans discussed above, you |
may be able to take advantage of “nonqualified” plans. Details about these plans are specific to each company – check with your human resources department.
Potential retirement plan mistakes are made when taking out 401(k) money from an employer’s plan. It’s important to understand the tax issues, cash flow considerations, and potential penalties. Rollover IRAs must be handled correctly. An investment advisor can help.
Mistake #6 - Drawing Down Assets in Retirement
Retirees frequently face the risk of running out of money too soon. You need to spend time thinking carefully about what you’ll have coming in during your retirement years as well as how much you expect to spend. You should probably seek professional help to quantify whether your assets will provide the type of retirement income you’ve envisioned. Even with careful retirement planning, you’ll need to revise your plan as time goes by. Once you reach age 70 ½, you are required to start taking withdrawals from IRAs and most company plans.
Mistake #7 - Failing to Plan Your Estate
Estate planning is loaded with wealth management dangers. Many individuals may not have any plan in place at all. This is the biggest potential pitfall. The best way to care for your family if something happens to you is to put an estate plan in place.
Other potential mistakes include setting up a plan but forgetting to fund your trusts, and forgetting to change beneficiary designations on life insurance, company benefits, IRAs, etc. Another important part of your planning should include considerations for disability as well as death. Powers of attorney for health care and property can help if you are disabled, as can living trusts. A professional advisor can help in this area.
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