I started my firm because I wanted to spend my days making and saving money for other people. I believe that those two aspects of financial planning are the key to what I do. For this reason, I just cringe when I analyze a potential client’s financial situation and discover that they are unnecessarily losing money. The underlying reason people are losing money in the following scenarios is because they’ve talked to an industry “expert” who was working hard to sell them on a certain product. What’s more unsettling is that these issues resurface weekly in my office, and it’s likely that many of you are facing them as well. Read the three scenarios below to see what the pitfalls are, and how to solve them.
Scenario 1: Paying too much for life insurance
A lot of the people I meet with are paying too much for life insurance and, because of the terms of the policy, will never actually receive the death benefit they believe they will receive. One client, in particular, was paying more than $1,200 a month for a million dollar whole life policy that they purchased from an insurance salesperson who honestly believed in the product he was selling (and thought that it was a good deal). The truth is, when insurance people start working at their companies, they become indoctrinated to the beliefs of their company’s products. They have to believe in it at some level to sell it. However, in my position, I deal with many different insurance brokers and am able to analyze what they have to offer my clients to ensure that they are getting the best rate relative to the terms they require. In the above scenario, a couple phone calls later we reduced my client’s monthly insurance premium to $100 for a term life policy with the savings able to be invested in his IRA each year.
Scenario 2: Losing money on an investment that used to be great
Investing is a tricky game, and the great investments of yesterday are typically not the same ones as today. The scenario I commonly see is that people are leaving money in an old employer’s 401k or in an investment account because they want the money they’ve lost on the “once great investment” to return to them, or believe it will come back eventually. This is your grandpa’s style of ‘Buy and Hold’ investing and it’s incredibly outdated given our economy and the number of great investments people have to choose from today. If you have an old 401k that you’ve not looked at in a while, or if you’re watching your quarterly statements, it’s possible that it’s still making money. However, it’s also common that the return is far less than what you could be making if you rolled it into an IRA. The process is so simple, and at an annual cost of roughly 1%, the management fee you are charged by an advisor for the IRA is often absorbed because the new investment has the potential to make 1% more than the 401k. I can’t ever guarantee returns, but this scenario is common.
Scenario 3: Choosing to not plan for the future
Often, the first meeting breathes new life into the financial future of a potential client because they realize that there is a whole world of financial possibilities they never imagined. They are, like all of us, immersed in the grind of daily life, and are truly unable to see the forest from the trees. We are all incredibly busy these days, but working every day with the assumption that one day it will all work out is dangerous. It is necessary to set a goal of some kind (whether it’s related to when you want to retire, how much you need saved to put your kids through college, what you would like to have as a monthly income upon retirement, etc.), and then set the rest of your financial life up to meet that goal. When I do this for people, they often seem amazed that the hardship they presumed would occur doesn’t – just a reorganizing of their current financial life. The fact that I can provide that level of peace of mind for my clients is truly priceless.
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John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit https://www.chladekwealth.com.