My 8 Biggest Financial Mistakes

By AP News Published Nov 8, 2024 04:01 am

Money Matters Morningstar Financial Mistakes

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As a person who writes about investing for a living, it’s helpful (if humbling) to take a hard look at my own decisions from time to time. In the spirit of continuous learning and improvement, I present some of my personal shortcomings.

Roth Conversions

Whether from inertia or income restrictions (probably a bit of both), I never got around to setting up a Roth IRA. Roth IRAs are especially attractive because they offer significant withdrawal flexibility: Assets can be taken out at any time without taxes or penalties. And in contrast to assets in a 401(k) plan or traditional IRA, Roth IRAs aren’t subject to required minimum distributions, which currently kick in at age 73. For investors who have built up significant retirement assets, that can result in substantial tax bills because RMDs are taxed as ordinary income.

A person in my situation could get around some of these issues by setting up a backdoor Roth, which involves making a nondeductible contribution to a traditional IRA and then immediately transferring the assets to a Roth account. I haven’t made this tactic a priority. Instead, I’ll probably take advantage of the window of time between whenever I retire and when RMDs kick in to convert some of my traditional IRA assets to a Roth account.

Late to the Party on HSAs

Healthcare savings accounts, which allow owners to contribute tax-free dollars, let them grow tax-free, and later pay for qualified medical expenses without paying taxes on withdrawals, were first introduced in 2004, but I didn’t start contributing to one until a few years ago. In retrospect, I would have been better off signing up for a high-deductible plan and maxing out HSA contributions earlier.

No Long-Term Care Insurance

On a related note, I haven’t taken out an insurance policy for long-term care. The U.S. government’s Administration on Aging estimates that about 70% of people turning 65 will eventually need some type of long-term care. And long-term care is incredibly expensive. Women typically need 3.7 years of care, while men need care for 2.2 years. While in-home care can be a cheaper option, the cost of nursing home care in a private room averages about $108,000 per year.

While the odds are high that any one person will eventually need care, the odds that both members of a married couple will need care are lower. It’s also difficult to estimate the potential cost of long-term care. Depending on the length and type of care needed, the actual cost could end up being significantly different from the averages mentioned above.

Early Mortgage Payoff

A few years ago, my husband and I decided to pay off our remaining mortgage balance. We had assets available and liked the idea of not being beholden to a monthly payment as we get older.

From a strictly asset-maximizing point of view, we would have been better off keeping our low-interest mortgage and investing the payoff amount in higher-returning assets. That was especially true a few years back, when 30-year mortgage rates were significantly lower than they are now. We also sacrificed liquidity by trading highly liquid investment assets for a single asset that can’t be sold off without a lot of time, effort, and real estate commissions.

Orphan 529 Plan Assets

We started socking away money into two different 529 plans a few years after our kids were born. We tried to budget for college costs that were somewhat middle of the road—not high enough for an ultra-pricey school, but not bare bones, either. As a result, we ended up with “leftover” assets in the 529 plan, which are still sitting there unused.

There are several ways we could fix this problem. We could transfer them to a different beneficiary (such as a niece, nephew, cousin, or eventual grandchild) or convert them to a Roth IRA.

Equity Concentration

Experts often recommend limiting exposure to any individual stock to no more than 5% of total assets. As a longtime Morningstar employee, I’ve been fortunate to receive stock option s and restricted stock units over the years, which have grown in value over time. I have enough other assets earmarked for retirement and other financial goals that I’m not overly worried about short-term swings in the company stock.

Investment Complexity

In addition to shares in Morningstar, I also own smaller stakes in about 15 other individual stocks. I find the process of choosing individual stocks fascinating, although it makes my portfolio way more complicated than it needs to be. In an ideal world, my portfolio would probably only include a small number of passively managed mutual funds and exchange-traded funds.

My husband and I also have several miscellaneous rollover IRAs scattered across different brokerage platforms. This isn’t a major problem at the moment, but it will make things more complicated when we eventually start taking RMDs.

Excess Frugality

This last failure is more of a function of my personality and personal level of risk tolerance. I was raised by frugal parents and usually don’t enjoy spending money, especially on big-ticket items. As a result, I’m currently driving a rusted-out sedan originally purchased in 2006. I can probably afford to replace it, but I don’t relish the idea of shelling out $30,000 or more on a depreciating asset.

Conclusion

Fortunately, none of my mistakes is catastrophic. While I definitely could have handled a few things better, I’ve steered clear of the major pitfalls that can lead to disastrous results. I’d argue that avoiding big mistakes is more important than getting every single financial decision exactly right.

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This article was provided to The Associated Press by Morningstar. Amy Arnott is a portfolio strategist at Morningstar. For more personal finance content, go to https://www.morningstar.com/personal-finance.