“You want to do what?”
As a financial planner, I see clients make some pretty bad mistakes. A sad fact of life is that financial mistakes can be made in a heartbeat.
Sometimes, they can be ignorant mistakes. Other times, they are purposefully done without grasping the gravity of the potential consequences.
Let's say, for example, you have a million dollars as a retiree.
A million dollars sure sounds like a lot of money, but if you’re trying to make that last for the rest of your retirement years, it's really not enough and that’s why making the smartest choices you can about how to spend that money takes a lot of careful planning and consideration.
My duty is to ensure that my clients don’t make any boneheaded decisionswith their money. Granted, it is their money and they’re the ones who have worked their whole lives to accumulate this valuable nest egg. Still, in good conscience, when I see a client who is about to do something stupid, I must object.
Unfortunately, my objections don't always work. Sometimes, against all of my efforts, I just can't get through to them and they go and do something that makes me clench my teeth in anticipation of the dire consequences.
1. The Brand New Retirement Truck
Take, for example, the following story of one of my clients and his brand new Ford F-450 Lariat truck valued at over $60,000. Note: We're changing the make and model of the truck to protect the client.
My client was retied early than most of his colleagues at the age of 60 but it was a few years before he could start taking Social Security benefits so we want to make sure to manage his portfolio valued at a million dollars as best we could.
We had outlined a retirement budget so we had a pretty good idea of what he could spend. What I didn’t plan for was him informing me that he was going to buy a truck – but not just any truck. He wanted to buy a brand new, Ford F-450 Lariat – a $65,000 truck.
I sat there for a moment in disbelief and wondered if this was a cruel joke. He really wasn’t going to buy a truck, especially out of his retirement account, right? Wrong! He wanted to buy it even though I explained to him that for him to buy such an expensive truck he would have to pull out roughly $86,000 to cover the taxes to pay for it. I even asked the client this question: “Do you really want to pay $86,000 for a truck that’s going to be depreciating the second you drive it off the lot?” To that his answer was, “Yes.” Insert face palm.
To this day, that ranks as one of the worst mistakes my clients have ever made.
Knowing that other financial advisors have shared similar pain (in seeing their clients make horrible mistakes), I asked some of them to share their biggest client money mistakes. Let's take a look at some of their stories. Note: Some of the personally-identifiable details may have been changed to protect their clients.
2. The Series of Mistakes Before Retirement
Brearin Land, a financial planner and author of BlackBeltofFinance.com, shares an insightful point regarding mistakes that are made during the accumulation phase of life:
As a financial planner one of the worst feelings is having to sit across from a client and tell them they just have no chance of retiring any time soon. I think there will always be one-off cases of bad judgement when it comes down to the homestretch of retirement, whether that is falling for that annuity pitch at a dinner seminar or taking Social Security too soon. But the worst mistakes I see are actually the series of mistakes made throughout the accumulation phase that lead to simply not having enough money to retire on.
Purchasing a home when they should have rented. Buying that car or boat. Building that patio no one uses. Paying for their kids' education. The worst money mistakes I see are also the most common; people spending their retirement dollars to pay for things they truly can’t afford.
I love Brearin's point here. Sometimes, the worst financial mistakes are the ones that slowly eat away at your wealth. Also, remember that the less money you have, the less money you can make with that money.
Compound interest is a powerful tool to help you save for retirement. The more money that goes to odds and ends during the accumulation phase, the less money you'll have to grow.
3. The Retirement Truck, Camper, and Trailer!
Christopher Hammond, a financial advisor and author at RetirementPlanningMadeEasy.com, shares a similar yet more horrifying story than I did regarding some of the choices of two of his clients:
I once had a couple that came to me. They had relatively meager savings for retirement. The husband had just retired and the wife did not work. He retired toward the end of the year, therefore he already had earned a significant amount of income during the calendar year that he would have to pay taxes on. They wasted no time drawing about $80,000 from his 401(k) to buy a honking big pickup truck with a brand new camper to pull behind it.
The year wasn’t over yet and they were ready to pull more funds out to buy another trailer, I think for transporting horses.
Not only was this crazy since their overall savings were pretty meager as it was, but it was also crazy from a tax perspective. This large lump sum withdrawal (on top of the earnings he had already made during the calendar year) put them into a higher tax bracket.
I was thankfully able to talk them out of withdrawing more for the horse trailer until the beginning of the next year, when the retired husband’s income (and hence tax bracket) would be lower.
Ugh, this is pretty bad. At least they listened to some of Christopher's advice, but still: a truck, camper, and trailer? Granted, maybe they had a lot more money than my client, but that's sure a lot of vehicles to purchase at the beginning of retirement.
I think we're starting to see a recurring theme here. When people retire, the temptation is to buy some new, expensive toys. Granted, maybe these folks had a real need for a truck and perhaps a trailer. But there are less expensive ways to acquire these items.
The takeaway here is to make sure you consider the short-term and long-term costs of making big purchases with your retirement accounts before you run out to spend some money. By making huge purchases upon retirement, you may or may not be buying yourself a ticket back into the workforce.
4. The “All In” Retirement Portfolio
Brian D. Behl, CFP®, CRPC®, CDFA™, a wealth advisor who can be found at BELR.com, shares about risky a mistake he has seen clients make time and time again:
Unfortunately, I have seen a very concerning client mistake on multiple occasions. A few times we will have a potential client come to us as they are nearing retirement to review their overall plan. As we review their situation we find out, way too often, that they have a very high allocation to company stock. Sometimes the allocation can be over 80% or 90% of their net worth. As it is a company they feel they know very well, they feel comfortable investing in it.
We then begin an education process on portfolio risk and diversification. As they already depend on their employers for their salary, benefits, pension, and potentially retiree health insurance, we explain that it is very important not also have their entire investment portfolio dependent on the same company. We would like to see the allocation reduced to 5% or less of their net worth.
If the company stock has done well this can be a difficult and emotional decision for them. Often, we will model out the returns they need to meet their goals and show that a diversified portfolio can help them do so with significantly less risk. If they do decide to work with us, reducing that risk will be one of our first priorities. If they do not decide to work with us, we still encourage them to take these steps to put themselves in a better situation.
While investing a large portion of your portfolio in company stock is risky when nearing retirement, it's even riskier to invest in one company's stock. Yikes.
Make sure to have a diversified portfolio that is appropriate for your circumstances. An experienced financial advisor can help.
5. The Emotional Non-Diversifier
Tony Liddle, an investment advisor who can be found at SarkInvestments.com, shares a devastating story of a man who let his fondness for a company get in the way of a properly diversified portfolio:
A man visited our investment office shortly after retiring from a tech company. He had over $4 million in company stock and no other savings or retirement accounts to his name. He worked for the company most of his life and loved it as if it was family.
From day one, our advice to him was to sell all the stock and diversify. His concern with that advice was that selling all the stock would cost him $600,000 in taxes (regular capital gains of 15 percent). With more attempts to convince the man to sell the company stock, he finally agreed to sell 1,000 shares every week until it made up only 50 percent of his portfolio.
A couple of months later the man came back to our office and stopped the systematic selling of the company stock. His reason for doing so was because the stock had risen 10 percent and as his advisors, we had cost him money by selling the stock over those two months. Unfortunately, within eight months the stock had fallen drastically from its high losing 96 percent in value.
The fact that this man knew the tax amount he would have to pay, but saw it as a cost burden rather than as a reward for investing well, was a certain sign that he was destined for trouble. By simply diversifying his portfolio, he could have protected his life savings.
It's clear that Tony was giving the right advice to his client. Sure, taxes are hard to swallow, but it's worth lowering the risk of potentially losing most of your portfolio to a drop in stock value.
The lesson here is to do what you must to diversify your portfolio, even if you have to sacrifice pretty heavily to do so.
6. The Devastated Non-Diversifier
Wayne Connors, a portfolio strategist at RetirementInvestor.com, shares a devastating story of a man who didn't follow sound advice and paid a big price:
A common mistake investors make is becoming too attached to their employer’s stock. This reminds me of a specific client who founded a company and sold it for stock in the company he subsequently began working for.
When I began talking to him he had approximately $15 million in stock and the price per share was around $13. This was a tech company that had a nice run during the late 1990s but now it was the early 2000s and this particular stock’s price was volatile and had fluctuated +/- $2 over the previous month.
We had mapped out a financial plan and had several lengthy discussions about the stock. I advised my client to sell the entire position immediately, pay off his $2 million, 8.5% mortgage note, and invest the rest in a broadly diversified portfolio of institutional class mutual funds.
My client refused to sell the entire position at once since the price had recently dropped by a couple of dollars but agreed to use dollar-cost averaging to get out of the position. He decided that he would liquidate his position over the course of the following 10 days, 1/10th per day.
At the end of this period, around day 14, I called my client to check in, as I had been doing every few days, and before I could say hello to him, he said, “I’m sorry.” I asked, “What do you mean?” He then went on to explain the first three days went as planned but on the 4th day the price fell by about $1, so he decided not to sell and waited for the stock to rebound. Well, it never did. The price on the 10th day was around $11.50. On day 11 it was $9. And, on day 14 when I called, the price had just fallen from $7 to less than $1 and would never recover.
I expected my client to be thankful that I was able to convince him to diversify but instead I received an apology because he neglected to follow the plan and decided not to tell me until that time because he knew I would have instructed him to continue to sell even though the price had gone down.
The only bright side was he did liquidate about $3 million over the course of the first three days so he was able to pay off his mortgage and had a little left over to invest for retirement.
Wow. This financial mistake cost this man $12 million – and it happened over the course of just a few days. This is tragic.
This story is similar to our previous one. Again, the lesson here is to make sure you diversify – even if it costs you something upfront!
7. The Timing of the Market
Taylor R. Schulte, CFP®, a financial planner who can be found at DefineFinancial.com, shares a heartbreaking story of a relationship strained by the financial markets which resulted in a horrible mistake:
In March 2009 – after the market dropped over 50% from peak to bottom – we had a client call and tell us that his wife was going to leave him if he didn’t liquidate their investment and retirement portfolios. We did our best to coach the client through this difficult time, but ultimately, their request was fulfilled.
I tell this story only to remind people how destructive our behaviors can be to our long-term financial plans during challenging market cycles.
I think this story also shows how important it is for both individuals in a relationship to be educated about the markets and shown how over long periods of time the markets have proven to be reliable.
8. The Fee-Avoiding Fee Payer
Andrew McFadden, CFP®, MBA, a financial advisor and founder at PanoramicFinancial.com, shares an ironic story of a client who was looking to save some money on investment fees but ended up paying more than they saved:
At a previous firm I worked for, one of our clients had hired us to manage a decent size IRA for him. Over time though, we came to find out that he had even more investable assets outside of our oversight. I’m not sure the specifics about how this particular fact came to light, but it turned out that the client was trying to make the same trades in his other accounts that we were making for him in his IRA.
He was obviously doing this in an effort to save on the asset management fees he was paying us. What he didn’t know was that he was buying the A share of each mutual fund in his other accounts, while we were purchasing the institutional class of each fund. By doing so, he was paying about about six times our annual Asset Under Management fee all up-front just to get into the mutual funds. Long story short, he didn’t save any money. And he wasted a lot of time making those trades on his own.
This really goes to show you that it makes sense to leave the investing up to the professionals – especially if you really don't know what you're doing.
Perhaps you can relate to this story. Maybe you've tried to save money on something and then thought to yourself, “You know, this just might be a waste of my time.” It's important to look at the big picture when you're trying to save money, because sometimes, you might just be shooting yourself in the foot.
9. The Silver-Loving Mr. Garage Door
Jose Sanchez, an investment advisor with RetirementWealthAdvisors.com, shares a story about a man who had a passion for precious metals – in and outside of his portfolio:
A successful, self-employed garage door repairman, passionate about silver, ignored our sage advice for good investment diversification.
In the spring of 2009, shortly after the market hit rock bottom, I met with Mr. Garage Door and reviewed his holdings. Shocked, I discovered that he owned over 50% of his retirement portfolio in silver and had been collecting it out of concern for the global economy since the Twin Towers fell on 9/11.
In addition, Mr. Garage Door shared stories on how he explored the New Mexico countryside in search of precious metals with his handy dandy metal detector – his treasured hobby. He continued to detail all of his findings, and I enjoyed his excitement. He described awesome discoveries including several wedding bands and other valuables found in public parks and on walking trails.
Truly, he was a marvelous story teller and showed me pictures of his most recent findings. I was in total amazement and awestruck by his tenacity and conviction in his hobby. As a professional, I was bothered by his portfolio. It was not easy to bring him down from these high-rising cumulonimbus clouds and warn him of the potential storm that we have in the southwest.
I failed to earn his business that year for investments but he became my client for a basic life insurance policy. I continued to call and message him often, to share interesting articles on precious metals and the value of diversification.
I stayed true to my battle cry and repeatedly suggested that he seek diversification before he loses his gains which started at about $4.54 per oz when he started collecting in 2001. While he felt secure and believed his logic to be sound, time would prove differently. Over the next two years, silver rose from $14.67 an oz to $40.33 in March of 2011. Despite my guidance, he never acknowledged the downpour of the upcoming storm.
After three years of his portfolio hindered by silver's downfall, most of his incredible gains washed away. At last, he closed the garage door on holding no more than five percent in silver. As you can imagine, I still see him yearly to review his now well-diversified portfolio and enjoy hearing his enchanting stories of his silver findings.
There was little more that I could have done to steer Mr. Garage Door in the right direction, but he chose to ignore the warnings. We can all appreciate the incredible recent volatility of precious metals and what is sometimes mistaken as a stable investment assets class. Today, silver sits at $13.94 per oz.
Buy gold! Buy silver! Buy precious metals!
Perhaps you've heard these late-night infomercials. There is a group of people out there who believe in investing in precious metals because they have more faith in those metals than in a well-diversified portfolio.
Somehow, some of them think that if the economy tanks, precious metals will retain their value. The truth is that precious metals are hyped and probably wouldn't retain their value in a true economic crisis.
Think about it. What do you need when an economic apocalypse happens? Gold? Silver? No! You're probably going to need food, water, and perhaps even arms to protect your family.
The recurring advice throughout this article is to diversify. Make no exceptions – even for precious metals.
10. The Tax Time Bomb
Robert C. Henderson, an advisor and president of Lansdowne Wealth Management, LLC, can be found at LWMWealth.com and shares a story about a prospect who needed some serious retirement planning help:
A few years ago a prospect came to me looking for retirement planning help. He was actually in decent financial shape. There were two pensions (husband and wife) and two streams of Social Security, which totaled almost $65,000 in guaranteed annual income. Plus, their house was fully paid for and they lived a fairly modest lifestyle.
Their plan was to buy a cottage up in the woods and live there part of the year, and then eventually sell their existing home and move into the cottage full-time. The challenge was that he did not have enough cash to buy the second home, and was not willing to take out a mortgage to buy it. So his plan (which he was pretty determined to follow through on) was to cash out his entire $250,000 pension plan at once to buy the house. So not only would he pay taxes on the entire withdrawal, but because he and his wife were still working and also earning some of their pensions already, it would have kicked their income taxes up into a much higher bracket – as well as phase out their personal exemptions. Between state and federal income taxes, they would have netted closer to $175,000 of the original $250,000, a tax bite of around $75,000. But because all of those funds had been contributed by his employer (it was a non-contributory pension plan), his rationale was that this was “found money” and he wasn’t really giving away his own money.
When it came down to it, I walked him through the various options we had, and what the ultimate costs would be. In the end, we ended up taking out a five-year ARM at around 3.25%, which cost him only about $7,000 a year in interest, and he ended up selling the primary house within 18 months. So by educating him on his options, the pros and cons, and the risks, I ended up saving him over $60,000 and the continued tax deferral of his retirement account.
Paying tax on retirement accounts stinks. But the truth is, sometimes it has to be done. In this case, they found a great outcome, but that doesn't always happen. Sometimes, there's an urgent financial need.
The takeaway here is to look at all your available options before you decide to cash out a retirement account. You just might find a better plan.
11. The Tragic Case of a Lack of Insurance
Peter Huminski, AWMA®, is a wealth advisor and president of Thorium Wealth Management at ThoriumWealth.com and shares a story about a client who didn't want to increase their insurance policies:
I work mainly with business owners and earlier in my career I had a client who owned a very successful technology company. He had a partner and the two of them worked very well together.
We had done a significant amount of planning for my client but had not been able to help the partner at all. In 2006 we did a complete buy-sell planning agreement for the company that we funded with life insurance policies. At that time we suggested annual reviews for the policies since the business was experiencing substantial growth and the company's value was growing about 35% a year.
Initially we funded $10MM of life insurance and by 2009 the company was worth about double that. The partner didn't want to increase the policies. He didn't see the need since he was young. Unfortunately in early 2010 the partner was killed in a private plane crash.
Left without his partner my client went to execute the buy-sell agreement but his partner’s widow challenged the buy-sell agreement because the company was worth more than was being offered in the buy-sell agreement. The widow ended up suing and it ended up costing my client millions of dollars and almost put the company out of business. My client did not plan on being in business with his partner's spouse and because he did not have enough life insurance he was forced to.
The entire tragic situation could have been avoided if they had reviewed the insurance annually and increase it as needed. They were always too busy or didn't think it was necessary. Not only is proper buy-sell agreement funding necessary, it is vital to proper succession planning if you have partners.
There is an extremely important takeaway here: review your insurance policies on a regular basis! Not doing so can be financially devastating.
It's a good idea to review your policies once per year around the same time each year. Make it a tradition!
12. The Clients Who Love Their Former Employers' Stock
David Wilson, CFP®, AIFA®, shares how a few of his clients wanted to hang onto their former employers' stocks and some of the advice he gave them:
Clients are very attached to the stock of companies for which they once worked, which can be a mistake.
This can be for sentimental reasons, or the thought that they should remain loyal to the company they worked for by owning stock in that company.
The ones that come to mind are clients that held United Airlines and Bank of America.
My client retired from United Airlines with significant holdings in United stock as part of his retirement that he wanted to remain intact. While United Airlines still flies, United declared bankruptcy and wiped out shareholder value. When they reorganized, they issued new shares that did nothing for former shareholders.
Another client acquired Bank of America stock from employment, which was a significant part of her portfolio. Bank of America stock traded in the $50 range in 2006 and later dropped as low as $4 in 2009.
While she would not take my recommendation to diversify, she did take my recommendation to place stop losses on her stock prior to the crash, which saved her a lot of money when the stock plummeted.
If people won’t part with their company stock, I encourage them to use stop losses to help protect their holdings ahead of time. This way, they decide ahead of time and without emotion how much they’re willing to lose if the stock goes against them.
The challenge is to choose a loss limit that allows for some normal fluctuation, yet helps prevent as much downside risk as possible.
The idea of selecting a loss limit is a good one, especially when the client won't take the advice to diversify well. This is a great takeaway for financial advisors.
13. The Troubling “Investment Opportunity”
Katie Brewer, CFP®, a financial coach to Gen X and Gen Y with YourRichestLifePlanning.com, shares a story about a client who didn't consult their financial team before signing up for an investment:
Physicians get pitched a lot of “investment opportunities.” One of my physician clients at a previous firm was pitched a real estate investment that sounded too good to pass up, and he signed on the dotted line before consulting with his financial planning team.
Unfortunately, upon review, it was a highly speculative investment and did not allow him to easily get a return of principal, so he had a good amount of his portfolio tied up in an expensive and speculative investment for quite a while.
The moral of the story is that clients should always read the fine print or get someone else to read the fine print before signing on something that he or she doesn’t understand!
Katie has a good point here. There are a lot of “financial professionals” out there who really just peddle risky investments. Why not talk with a variety of financial professionals to see if an investment makes sense before you buy?
These are no doubt some really bad financial mistakes.
Unfortunately, some people make not just one bad financial mistake, but two or three or four in their lifetime. Even only one can have devastating consequences.
The best advice I can give you is to seek the opinion of multiple financial professionals (except for the bad ones) before you make any large financial decision. Then, make sure you listen to their advice. They just might save you from a world of pain.
This post was originally featured on Forbes.