This is the third part in a five-part series adapted from the Ty J. Young Inc. webinar, “5 Major Mistakes Retirees Make and How to Avoid Them.”
If you have a leak in your roof, it’s a problem. The degree of the problem depends on how big the leak actually is. Either way, the best thing to do in that scenario is to call in an expert to repair the spot on your roof that is leaking—to address the problem quickly and efficiently. The same holds true when it comes to your money. Allowing wealth leakage is one of the major mistakes that investors make make both leading up to and following retirement.
What is wealth leakage? Just what it sounds like. There’s a hole somewhere in your financial plan through which money is being spent unnecessarily. If you have a hole in the bottom of your financial bucket and your money is running out, it’s time to plug the leak.
There are two major places where allowing wealth leakage most commonly occurs:
These are the fees that you are paying that you can stop. Many people have retirement accounts that they are paying high fees to maintain—as much as 3 percent per year. The majority of those people may not even know they are paying them. Perhaps it was in the fine print, but they weren’t outlined up front.
Think about this. If you are paying 3 percent in fees and you have $100,000 invested, you’re paying $3,000 a year in fees. If the market goes up big, you might be OK with that. But if it goes down big, are the companies managing your retirement accounts going to waive the fees? No. You’re paying them 3 percent of your money to have them lose your money.
Over a period of 10 years paying 3 percent in fees per year, you’re going to end up paying $30,000 in fees! Most people who are within five years of retirement or who are already retired want to enjoy the period of their lives when they are no longer working. They want to see their grandchildren, play golf, travel and do all of the things they didn’t have time to do when they were working. Would an extra $30,000 help with that? Surely.
Eliminating or greatly reducing those fees allows you to get more growth out of your money and gives you the money to do the things you want to do.
Another area where investors are unnecessarily allowing wealth leakage is taxes. The biggest expense you will ever have in your lifetime is taxation. By the time you take into account federal income tax, state income tax, sales tax, gasoline tax, hotel tax, rental tax, property tax—it feels like we are taxed to death.
The good thing is that just about anyone can save money on taxes if he or she spends 10 minutes planning it at the beginning of the year. For example, the sequence in which you take money out of your retirement accounts can affect the amount of taxes that you pay—and doing it in the correct order can greatly reduce them. That’s because some accounts, like a Roth IRA, are tax free, so you will likely want to leave your money to compound in those accounts longer. Work with a tax specialist or your financial advisor to determine the best order to withdraw from your various retirement accounts.
Wealth leakage can negatively impact your finances if you let it go for too long, but stopping it is as easy as identifying the leak and addressing the issue.
Stay tuned to Retirement You Earned for the fourth in our series of “5 Majors Mistakes Retirees Make and How to Avoid Them.” To learn more about how our Ty J. Young Inc. financial advisors can help you make the best decisions for your retirement, call us today at 877-912-1919!