Allworth Co-CEO Scott Hanson shares a few of the biggest financial 'must-don'ts.'
When it comes to money management, while there are a million things you should do, just as often it is the things that you don’t do that are what pay off in the end.
What follows are four things you should avoid doing with your money or investments.
#1. Avoid making emotional decisions about money and investing
Over the last several years, I’ve frequently written about avoiding the influences of behavioral finance, which is how emotion impacts decisions about money and investing.
And with good reason.
That’s because market corrections, bubbles, and even crashes are often brought about by behavioral finance. (Specifically, the instinct to follow what other people are doing.) And, as an extension of that, when it comes to individual investing patterns, throughout my 30-year career as an advisor, I’ve found that it is the emotional, and often reactionary, types of financial decisions that I keep clients from making that are among the most important things that I do.
One common example would be that when the market declines, there is a tendency for some investors to want to move everything to cash or buy fad investments.
But selling when the market is down only locks in your losses.
While I am not saying it is easy, my advice is to tune out the news headlines. That’s because on a day-to-day and month-to-month basis, market movements rarely matter. And because remaining steady and consistent is what I believe pays off over time, I recommend that you work with a fiduciary advisor to build a personalized plan, and that you stick to it.
Remember, markets have historically always moved higher over time.
#2. Avoid automatically taking a distribution instead of a rollover
Just because you change jobs (or in the unfortunate event that you get laid off) does not mean the balance in your retirement plan (401(k), 403(b), etc.) automatically goes along with you. If you change or leave your job, the first thing you’ll likely want to do is get in touch with your former employer’s plan manager to work out a rollover into your new employer’s 401(k) plan or an IRA.
What you almost never want to do is take the balance as a distribution, which will, first, depending on your age, potentially trigger a 10% early withdrawal penalty, but will, second, absolutely trigger a taxable event.
Mistakes in this scenario are complicated, so I recommend that you meet with a 100% fiduciary advisor to decide what the ideal next steps are for your unique financial situation.
#3. Avoid neglecting your retirement account
It is an unfortunate reality that not all employer sponsored retirement accounts are created equal. That includes variances in the breadth and sophistication of each plan’s investment offerings, the level of support and expertise you can expect to receive from employers and administrators, and how much of your contributions to the plan your employer is willing to “match.”
Remember, your defined contribution plan is an investment account, and that takes management and oversight, which includes periodic rebalancing and re-allocation based on your personal risk tolerances and time horizon (AKA, when you will need the money).
Speak with a fiduciary professional to make sure that your money is allocated in a way that supports your goals and needs. For instance, are you too close to retirement to have 90% of your 401(k)’s investments in stocks?
Another thing to avoid is leaving money on the table. Be it 3%, or 6%, or more, far too many plan participants do not contribute enough money to receive the full employer match.
Make no mistake, an employer match, when your employer contributes (up to a certain percentage) to your retirement account savings plan in an amount equal to what you contribute, is free money.
#4. Avoid leaving the wrong beneficiaries on your retirement accounts
It is a little-known fact that the beneficiaries (the person who will inherit the money in the event of your death) on your retirement account usually supersede those listed in your will.
To be clear, if you have been with the same company, and contributing to the same plan for a long time, and you’ve remarried, or your personal or familial life has changed in some small or large way, it’s possible that the person(s) you have listed as the beneficiary on your retirement account is no longer the person that you’d like to inherit that money.
And almost no matter what your last will and testament says, if an ex-spouse is the person listed on the actual retirement account, they will get that cash.
Using your plan’s portal, it takes but a few short minutes online to check and update your retirement account beneficiaries.
If you have any doubt whatsoever, I suggest you do it right now.