6 Biggest Retirement Planning/Wealth Building Mistakes

Written by Chris DeVito

1. Thinking our 401(k)’s will be enough.

For many people, the 401(k) may provide enough of a retirement nest egg to live off. For higher income earners (think $200,000 & up) this likely won’t be the case. Take the following scenario for an example:

1. You are maxing out your 401(k) for the next 30 years (current contribution limit is $23,500). 
2. You earn an average return of 10% (for reference the S&P 500 averages between 7-10% annually). 
3. You use the 4% Rule for withdrawals – meaning you can safely withdraw 4% of your account without dramatically affecting the balance over time. 
4. After 30 years of investing, you have a balance of roughly $4,250,000 (before taxes – assuming you did Traditional 401(k)). Meaning, using the 4% Rule you can safely withdraw around $170,000 per year before taxes are taken out. Now remember, that doesn’t factor in inflation. If we discount an inflation rate of 2% (The Fed’s target rate), then that $170,000 becomes about $115,000 in today’s dollars. Would that be enough for you to live off? If so, then don’t worry. But if you think you might need a little more cheddar cheese to spend then you might want to consider supplementing your 401(k) contributions with other accounts and assets.

2. Not automating our investment flows.

401(k)’s are great because they help force save and automate your investments. So why not do the same with your other accounts? We said before that the S&P 500 averages about 7-10% per year. However, in the last 50 years the index has only had gains in that range 3 TIMES!!! Automating your investments (or Dollar Cost Averaging) will help you avoid the emotion of investing in a fluctuating market and prevent you from trying to time your investments. You’ll wake up one day with a lot more money than you thought was possible. 

3. Investing too conservatively or too aggressively.

Many people are risk-adverse when it comes to investing. Not wanting to see their hard-earned money lose its value, I get it. Investing more aggressively can obviously increase your returns over time, but you’ll experience more volatility. But what about investing too conservatively? This can be equally detrimental to your long-term investments, but why do you ask? Because of the silent killer, inflation. The post-COVID world went through this experience seeing the cost of everyday things go up dramatically, from gas to groceries and even cars or utilities. Now, inflation may not be the 9% we experienced during this time, but with a target of around 2%, that means your money is losing 2% of its value each year from the jump. You’ll want your investments to grow by much more than that, so they not only maintain their current value but accrue even more long-term appreciation as well. 

4. Investing the same way in all our accounts.

Not all accounts/assets are created equal. What does that mean? All accounts have their own unique characteristics. 

1. 401(k)’s can allow for tax-deferred or tax-free growth, the catch? You can’t access them for the most part until you turn about 60 years old. The same goes for IRA’s.
2.  Assets like Cash Value Life-Insurance can offer tax-free growth and non-correlation to the equities markets. While you don’t have to wait until you’re 60 to access the cash, you still usually are more illiquid in the early years of building the asset.
3. Taxable investments accounts (think brokerage accounts) can be great because there are no contribution limits, and you can withdraw funds at any time. What they don’t do is offer any tax benefits. You must pay taxes on interest and dividends you receive each year, and when you sell investments for a gain you have to pay taxes as well. The rate for that depends on how long you held onto your investment. Less than 12 months then you are paying your income tax rate on the gains, anything over 12-months you’ll pay Long-Term Capital Gains Taxes which can be anywhere from 15-20% (right now) depending on your income brackets.

The mistake many of us make is investing in all these accounts the same way. Whether you’re an 80/20 (stocks/bonds) or a 70/30 investor, it likely doesn’t make sense to invest that way in ALL your accounts. You may want to consider having more of your equities in your 401(k) since you can’t access that money for a long time. If you use an asset like Cash Value Life-Insurance that offers more stable growth, then you may be more comfortable owning more equities across all your other accounts. If you’re investing using a taxable brokerage account, then you may like the idea of owning municipal bonds that offer tax-free income. Whatever you are doing, it’s worth taking a look at how your time horizon and risk tolerance come into play regarding how you use all of your different accounts.

5. Not protecting our dependents in case something goes wrong.

When we’re building wealth, we’re always focused on the future. How do I make more money, how do I make my investments grow more, what other things can I be doing? Very few people (myself included at one point) give much thought to what can go wrong. Now, this might not be a huge issue if you’re single or don’t have people that depend on you financially. But if or when that time comes, you should probably start thinking about those things. I have two kids, 4 & 2 at the time of me writing this. Outside of making sure they’re fed, clothed, and treated for new germ of the week from school, I must think about the things nobody wants to think about. Things that seem so implausible, so crazy, so unlikely that 99.99% of us are wasting our time giving it headspace. Things though, that I’ve seen happen to others. The 27-year-old attorney found by her roommate who died because of an aneurysm. The 35-year-old partner with two kids and a stay-at-home wife that was diagnosed with Parkinsons. The 42-year-old kicka$$ mama bear Partner at a top 10 law-firm who just had a stroke and can no longer work. Hopefully these things never happen to you or I, but they do happen. The biggest mistake we make here is thinking these are things that just happen to other people. If you have kids or people financially dependent on you then you should probably have things like a basic will, life-insurance, or disability insurance.

6. Not diversifying your taxes.

Diversification is not a new concept when it comes to investments. People understand this, having all your eggs in one basket may be a bad idea for some. But, what about when it comes to how those investments are taxed? Should you do all Tax-Deferred investments? Should you utilize things like Roth IRA’s or just post-tax brokerage accounts? Well, what do you think your tax bracket will be 30 years from now? If you have absolutely no idea, much like 99.99% of us, then diversifying among these different accounts might be a good idea. I can’t tell you how much income I’ll be wanting in 30-years anymore than I can tell you which political party will oversee tax-rates. Even if I could, would that remain the case for my entire 30-year retirement? Most likely not. Imagine for a moment if you could be selective on which accounts you withdrew from based on the tax rates at the time. Diversifying based on taxation could reap huge rewards in the future and provide a lot more flexibility to your overall finances. 

If any of these resonate with you, don’t worry you’re not alone. Many clients come to us for these exact reasons. Wanting to get a better understanding of where they are, what they can do, and how they should be doing it. 

_{Source: https://www.macrotrends.net/2526/sp-500-historical-annual-returns}

_{The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Past performance is not a reliable indicator of future results.}

_{Dollar-cost averaging cannot assure a profit or protect against loss in a down market.}

_{All examples are hypothetical example and not representative of any specific strategy or situation..7573008RG_Jan27}