SERVING UNIQUELY SUCCESSFUL FAMILIES
Where it all went wrong

Where it all went wrong

How to avoid financial regret

We’d guess that not one single person reading this remembers the name Stu Inman – he’s the brilliant chap from the Portland Trailblazers who had the second pick in the 1984 NBA Draft. First pick went to the Houston Rockets, who drafted Hakeem Olajuwon (Hall of Famer). Up next, good ole’ Stu drafted none other than…wait for it…Sam Bowie. Third pick went to the Chicago Bulls, who drafted a young man named Michael Jeffrey Jordan. Now after the first season or two of seeing what this “MJ” cat was doing combined with the highly sub-par highlight reel from Portland’s Sam Bowie, it’s safe to assume the “Stu Crew” was starting to second guess their draft pick. But in an exhibition game to kick off Bowie’s third season with the Trailblazers when he managed to break not one, but both of his legs running down the court unguarded…that’s probably when it really sunk in for Stu that things had gone horribly wrong.

There are tons of stories like this across time, leading to the common adage “Hindsight is 20/20” – it’s easy to look back and see that pivotal moment "where it all went wrong” because of a particular decision. For many, their story of regret has to do with money or something related to their finances. We understand your pain, and want to share the top 15 financial lessons we’ve seen people learn the hard way as they make their way through this crazy thing we call life…These are hypothetical examples inspired by real-life stories.

Let’s work together to try and make sure your family doesn’t suffer from similar regrets.

 

FINANCES 101

It was always nice to get $100 from each of your grandparents every year for birthdays and holidays, particularly when you got to hit the toy store and reap the “rewards” of such benevolence. But what if you were “encouraged” to invest – NOT SAVE, INVEST – half of all such “found money”? Given, the S&P 500 has reported average annualized returns of about 10% since its inception in the 1920s*, simple math and the power of compounding tells us $50 bucks twice a year for 16 years invested in the S&P 500 and LEFT ALONE TO PERCOLATE until age 65 (assuming the same annualized historical returns of 10%*) equates to about $384,000! We're guessing on your 65th birthday, you would look back on your childhood and realize you didn’t really miss that Rock 'Em Sock 'Em Robots…but the lessons learned about investing and how the markets work probably had a massive – dare we say priceless – impact on your financial life (and an extra $384k certainly wouldn’t hurt either). 

 

THE VALUE OF A TAX-FREE DOLLAR

We all remember how excited we were the first time we got paid for a job – maybe it was babysitting, or a paper route, or mowing lawns. But man oh man, nothing beat the feeling of first earning a couple hundred bucks of COLD HARD CASH! No Tax Man, plenty of dough for movies, ice cream, and other well-earned teenage fun and merriment. While cash will always be king, in our opinion Roth money is the queen. Instead of pocketing all that cash under the table, we would argue it may be better to let Uncle Sam take a very small piece now. Ewww…pay taxes??! We know, we know – it sounds awful. But by claiming the income (thereby paying income tax on your cash earnings), you open up the window to make Roth contributions. Do your future self a favor and take 50% of your hard-earned (by teenage standards at least) cash “wages” and deposit them into a Roth IRA to grow tax-free for your ENTIRE lifetime (and maybe even longer). We’d wager that half your teenage jollity and shenanigans is probably more than enough, and building a “boatload of dough” in a Roth IRA growing tax-free is worth the “sacrifice”. 

 

TAX DEFERRAL IS NOT TAX AVOIDANCE

Think back to the days of “yester-year” when you got your first “real job” with an actual paycheck and everything. You’re offered the chance to put some of your wages into the company 401k plan before you even have to pay taxes, and you think to yourself… “Wait, I don’t have to pay taxes on the money I put into my 401k? Well heck, who likes paying taxes?! Sign me up!!” 45 years later those pre-tax dollars have appreciated significantly, and you’re ready to retire. But now, when you have to take money out of your 401k or IRA, you have to pay tax at your current income tax rate, which is probably higher than what it was when you were “20-something” years old starting that first job…Turns out you didn’t actually AVOID taxes on that money, you DEFERRED taxes – big difference. If you’d had a Dashboard Planning “ninja” on your side from the beginning, he/she could have explained that as a “20-something-year-old” entering the workforce, your income tax bracket was literally the lowest it would ever be. It’s possible you could have reduced the amount of taxes paid over your lifetime by biting the bullet and letting Uncle Sam take his piece of the pie earlier in life by adding to Roth retirement accounts instead, either directly or via conversions. “Woulda, coulda, shoulda…” 

 

HSA’S ARE THE BOMB-DOT-COM

Ok, you’ve officially been kicked off your parents’ healthcare plan. Thankfully you’re still an “invincible 20-something” year-old, so you can save some money by opting into the SUPER CHEAP (aka High Deductible) healthcare plan at work. You put a little bit of your paycheck into this special account called a Health Savings Account (HSA), and they give you a debit card to make it super easy and convenient to pay for your annual physical at the doctor’s office – nice! But wait, here comes the “ghost of financial success past”! She proclaims “Don’t you know that HSA’s are the only truly tax-free accounts that exist?! Contributions are tax-deductible and earnings are tax-free as long as funds are used to reimburse yourself for qualified medical expenses in the past, present, or future!” Whoa, it might have been better to heed this “ghostly warning” by contributing the maximum allowable amount annually into your HSA ($3,600 in 2021), investing these dollars for growth, and letting the power of compounding do its magic – when you retire, you might have $100,000’s of tax-free money to spend! 

 

PAY YOUR FUTURE SELF FIRST

You’re moving up in the world! You’ve gotten some promotions that included raises and/or bonuses, and it no longer feels like you’re living paycheck to paycheck. You allow yourself to indulge in more luxuries – new car, vacation, installing that outdoor modular kitchen you always wanted…After all, you’ve worked hard to be successful, and deserve to treat yourself! Oh no, here comes the “ghost of financial success future”! She speaks of the dangers of “spend creep”, and warns “the more money you earn, the more you should save…” as she eerily dissipates. Here at Dashboard, our mantra that we often repeat with clients is to “save until it hurts…then save a little more”. Before allowing yourself to “indulge”, it’s vitally important to develop a savings discipline that will set your future self up for financial success! In particular, we often suggest striving to first maximize retirement savings – including 401k and IRA – before anything else. While not nearly as exciting as a new car, practicing this savings habit will grant your wealth the time it needs to grow with the help of compounding. 

 

NEW BUNDLE OF JOY

Oftentimes it seems to us that parents measure their love for their new baby by the speed in which they open and initially fund a 529. Don’t get us wrong…we think education is important. But we wouldn’t be doing our jobs as your advocates if we didn’t challenge you to consider all the options and their respective consequences. You can certainly fund a 529 which will grow tax-free for 18-25 years and reduce your future college cost commitments. You could also fund a Custodial account, invest for growth, and instruct your kids not to touch this money for 50+ years to let the truly awesome power of compounding work its magic. Assuming the same annualized historical returns of 10% for the S&P 500*, a $5,000 deposit into a custodial account at birth could mean upwards of $2.4 Million by the time your child reaches age 65! With this I mind, while adding to 529s certainly wouldn’t be considered a “wrong decision”, that doesn’t necessarily make it the “best one” for your family. Yes, it often gives parents a “warm fuzzy” to offset future college costs by contributing to 529s, but there is an inherent “shelf life” where these dollars are growing efficiently. Instead, you may consider essentially “betting on yourself” and your ability to cashflow future college costs, and allocate those dollars into different savings “buckets”. 

 

LIFE INSURANCE

With a new and growing family comes a new and growing worry about what might happen if you – as we like to say – get hit by a beer truck tomorrow. Thankfully, your neighbor sells life insurance and he was named Salesman of the Year at his company, so he must know his stuff. After a long talk over the grill at the block party, you’re convinced that you need several whole life policies to cover your spouse and kids – it’ll be a little pricey, but necessary, right? Well…sort of. Yes, you absolutely should think about life insurance to protect your family if something happens to you. Can you feel the “but” coming? Here it comes… BUT instead of buying a bunch of whole life policies, instead consider buying a simple and relatively cheap TERM Life Insurance policy to act as income replacement for your future earning years. This may be a much more efficient means of shoring up the gaps in needed funds if you aren’t around anymore. 

 

NON-QUALIFIED DEFERRED COMPENSATION

Alright!! You finally got that big promotion, and you are now a member of the “C Suite Club”! With your new, fancy executive position comes lots of new, fancy executive benefits and perks! One “perk” everyone is talking about is the Non-Qualified Deferred Compensation Plan that seems too good to be true – you can defer up to 100% of your income taxes…seriously! Seeing as you’re getting to be a pretty big deal, and with that comes a higher tax bracket, you decide to take advantage of the plan and defer the majority of your income for the next 10 years and have your company prudently invest these dollars along the way. Now, you’re ready to take a step back from “the grind” and open up your own consulting practice that will allow you to cut back on your hours. What you didn’t realize was that as soon as you left, that deferred compensation plus all the earnings had to be paid out immediately, creating a massive tax bill charged at ORDINARY INCOME tax rates. Ouch – it probably would have been cheaper to just pay ordinary income tax along the way instead of deferring compensation, and then pay capital gains tax on the earnings…Oh well, win some lose some. 

 

TIME IN THE MARKET

You did it!! You officially accumulated 7 figures of wealth as you crossed the ONE MILLION DOLLAR mark!! Such a round and wonderful figure…it’s a ton of money and you don’t know too many people that have that much dough invested. After achieving this level of success, you couldn’t really let market volatility “take it away” from you…Luckily you were “smart enough” to go to cash right before the market went down almost 30% in 3 weeks! Whew!! Dodged that bullet!! Except now the markets have since risen 75% from that recent bottom…Now what?? As if on cue, the “ghost of financial success present” shimmers into view. She decrees “Time in the market is far more important than timing the market,” and then disappears as quickly as she came. Maybe instead of letting your fears guide your actions, you should take a step back and evaluate your portfolio allocation logically to identify small changes that can be implemented to dial down risk without taking a “hard left” and veering off course. After all, your goals never really changed…only your ability to withstand market volatility. 

 

MAXIMIZE GIFTING

Cheers to your retirement! You made it!! Now that you have more time on your hands, you think about how you can continue to help the charities and causes that are important to you, with both your money and your time. You always donate annually to a handful of organizations and will continue to do so, whether you get the tax deduction benefits or not. Too bad you didn’t have a Dashboard Planning “ninja” in your corner before you retired to suggest determining your annual “charitable budget” and setting aside enough cash in a Donor Advised Fund to cover your giving intentions through age 70 – you could have received a whopper of a charitable deduction in your last high income earning year and still benefit from the standard deduction while your income is low in retirement before Social Security and Required Minimum Distributions (RMDs) kick in. You’d have rather seen those tax dollars go to one of your favorite charities, but oh well. 

 

RETIREMENT INCOME BRIDGE

Retirement really is the best! Your income is almost nothing, and you made the decision to defer Social Security – so aside from taxes on your investments, you don’t owe the federal or state Tax Man much at all! “This is the life,” you think to yourself, “…at least until I’m forced to start drawing on my IRA assets in a few years.” Suddenly, poof! Your “fairy tax advisor” appears in a puff of glittery smoke and waves her calculator around while saying the magic words “Bibbidi-Bobbidi-Conversion!”. A scroll unfurls before you with a detailed schedule of IRA assets to convert into a Roth IRA annually until you turn age 72. “It would be silly of you not to fill up your low tax brackets with taxable conversions from your IRA,” she says in her sing-song voice. “Better to pay less tax on those dollars over time before the clock strikes 72 and you’re forced to take distributions that could push you into a higher bracket.” Her outfit is a little too bedazzled for your taste…but maybe she has a point? 

 

FAMILY MATTERS

You figured your parents’ estate wasn’t organized the best, but you never felt like it was your place to “butt in” on their business. They have wills and trusts, so everything is probably fine. Sure, you knew one day you would be the executor and have to sort it all out, but it always seemed too hard to have the “doom and gloom” conversations – “I’ll deal with it when the time comes,” was the mantra you’d recite to yourself. Turns out, even though your parents paid to have estate plans drawn up, the big fancy binder might as well have been a glorified paper weight… Apparently no one bothered to follow up on those estate plans and ensure assets were retitled appropriately and beneficiaries were designated to the proper individuals and/or entities. Now your family is “sharing” some of your inheritance with “Uncle Sam” and “State Sam”. Maybe it would have been better to have those tough conversations after all… 

 

DOWNSIZING

It’s official…this big house is just too much for you now. It’s time to downsize, maybe move to Florida or another “tax-friendly” state to live out your days. Amazingly, while on vacation you manage to find the perfect new home! Now you have to figure out the logistics…You don’t want to list your current home until you’re already settled in the new place, and you don’t want to jump through all the hoops of a mortgage when you have plenty of money in your after-tax investments to cover the purchase. Maybe you could even get a better deal on the new place if you can pay cash? Yes, that definitely sounds better to you – selling your after-tax investments to create the cash needed to buy the new place, and then replenishing with the proceeds from the sale of your current home and buying everything back. Sure, there might be some tax consequences by doing it this way, but it’s just so much easier. Too bad you didn’t have a Dashboard Planning “ninja” on your side to help you establish a Securities Based Line of Credit in advance – then you could have had easy and cheap access to the temporary liquidity needed without having to sell your investments to raise cash. 

 

PRE, POST, AND NO

You love your kids and grandkids dearly, and also have charitable intentions you’d like to see supported even after you’re gone. In your estate plans, you decide to divide every account up into 3 buckets – kids, grandkids, and charity. What a wonderful legacy… But in your advancing years you forgot about the 3 types of money – pre-tax, post-tax, and no-tax. If only you had remembered that your kids and grandkids would have to pay tax on any inherited pre-tax dollars, but the charity would not! You could have kept more money in the hands of the people and causes you care about, and not in the Tax Man’s pocket. 

 

GETTING REALLY OLD

As you’ve gotten on in years, you’ve noticed that you’ve become more and more forgetful. While you hope this trend doesn’t get any worse, your family history tells a different story. It’s so frustrating knowing your missing things and making mistakes. If only you had acknowledged the signs earlier and taken steps to complete your Durable Powers of Attorney and Healthcare to allow for a smooth, easy, and dignified transfer of roles and responsibilities to your children – that might have been much better. 

 

There are many other stories we could share where we’ve seen someone make a key financial decision that has had lasting repercussions – both positive and negative. Let’s all channel our own inner “Air Jordan” and strive to make as many “good decisions” as possible for you and your family! 

 


*The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance is no guarantee of future results.

The examples provided are hypothetical and for illustrative purposes only. They do not represent actual client experiences. Actual results will vary. All investing involves risk and investors may incur a profit or a loss regardless of strategy selected. 

Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes. To learn more about the potential risks and benefits of Donor Advised Funds, please contact us.

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Raymond James Financial Services, Inc. does not provide advice on mortgages.

Life insurance policies have exclusions and/or limitations. The cost and availability of life insurance depend on factors such as age, health and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Guarantees are based on the claims paying ability of the insurance company.

A Securities Based Line of Credit (SBLC) may not be suitable for all clients. The proceeds from a SBLC cannot be (a) used to purchase or carry securities; (b) deposited into a Raymond James investment or trust account; (c) used to purchase any product issued or brokered through an affiliate of Raymond James, including insurance; or (d) otherwise used for the benefit of, or transferred to, an affiliate of Raymond James. Raymond James Bank does not accept RJF stock or any securities issued by affiliates of Raymond James Financial as pledged securities towards a SBLC. Borrowing on securities based lending products and using securities as collateral may involve a high degree of risk including unintended tax consequences and the possible need to sell your holdings, which may lead to a significant impact on long-term investment goals. Market conditions can magnify any potential for loss. If the market turns against the client, he or she may be required to quickly deposit additional securities and/or cash in the account(s) or pay down the loan to avoid liquidation. The securities in the Pledged Account(s) may be sold to meet the Collateral Call, and the firm can sell the client's securities without contacting them. A client is not entitled to choose which securities or other assets in his or her account are liquidated or sold to meet a Collateral Call. The firm can increase its maintenance requirements at any time and is not required to provide a client advance written notice. A client is not entitled to an extension of time on a Collateral Call. Increased interest rates could also affect LIBOR rates that apply to your SBLC causing the cost of the credit line to increase significantly. The interest rates charged are determined by the market value of pledged assets and the net value of the client's non-pledged Capital Access account. Securities Based Line of Credit provided by Raymond James Bank. Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. are affiliated with Raymond James Bank, a federally chartered national bank.