I once heard a story about a gentleman who scrimped and saved for years so that he could go on a once-in-a-lifetime cruise to the South Pacific.  To save money during the trip he packed his own food (instant oatmeal, granola bars, freeze-dried snacks, etc). He had an amazing time seeing the sights of the South Pacific. On the last day of the trip, he decided to splurge and purchase a nice dinner on the ship. He ordered his supper and had a wonderful meal. When he asked for the bill, the waiter informed him that all meals (breakfast, lunch, and dinner) were included in the cost of his cruise. Only then did he realize that he had missed out.

As a Certified Financial Planner, I have seen many parallels to this story where people are missing out on great planning opportunities. Below are just a few examples of these:

Free Money via the 401k match — What if you could double your money with zero risk? Seems impossible? It actually isn’t as certain companies match 401k contributions dollar for dollar up to certain percentages. Some companies offer incredible matches, up to 10%, and yet a recent study shows that 1 in 4 employees are missing out on this incredible benefit leaving up to $24 Billion on the table each year.*

Free Money via HSA employer contributions - Some employers also make contributions to employee’s Health Savings Accounts (HSA). HSAs are one of the only investments that are triple tax-free. To qualify for an HSA, you must participate in a High Deductible Health Plan. If you are healthy and can afford to pay for your current medical expenses out of pocket, HSAs make a lot of sense, and you may be missing out on a great benefit. I have provided more detail on HSAs in a previous blog which you can find here: Unusual Financial Planning Advice - Diet & Exercise.

Here are a few more instances where some people may be missing out:

Not Maxing out your 401k/403b/457 - In 2021 people under 50 can contribute up to $19,500, and those 50 and older can contribute an additional $6500 (for Simple plans contribution limits are $13,500 with a $3000 catchup for those 50 and older). These accounts provide tax-deferred growth which can be a significant advantage you could be missing out on if you don’t max out your contribution. See this blog for why tax deferral can be so helpful to building wealth: See That All Things Are Done in Wisdom and Order.

Here are a couple of things to consider when maxing out your 401k/403b/457 type plans:

•          Traditional 401k/403b/457b plans — If you are in a high-income year, it may be beneficial to contribute to a pre-tax 401k/403b/457b. The reason being is that in high-income years you may be in a higher tax bracket than you will be in retirement when you withdraw these funds.

•          Roth 401k/403b/457b plans — If you are in a low-income year (usually early in your career) you may want to consider maxing out a Roth 401k/403b/457b as your income taxes will likely be lower now than what they will be in retirement. Additionally, all distributions in retirement will be tax-free.

There are a number of factors to consider before maxing out retirement accounts. Some of those are outlined in my blog First things First, which you can find here: First Things First.

Not contributing to an IRA/Roth IRA - As noted above there are significant advantages to tax-deferred growth, and yet many miss out when they do not max out IRA or Roth IRA contributions when they are eligible. What may surprise some is that even if they max out their 401k/403b/457b plans, they may still be eligible to contribute to a Roth IRA. Since there are a number of factors to consider before you max out an IRA, I’d recommend speaking with a Certified Financial Planner™ first.

Not Saving and Paying for College using 529 accounts — Those with young kids and grandkids could be missing out by not saving for this future expense via 529 accounts. 529 accounts work well because your money is invested and can grow tax-free, so there is more of it when your kids/grandkids attend college. You can learn more about how college got to be so expensive and how best to pay for it here: The Cost of College & How Best to Pay For It.

There are several other possibilities where people could be missing out in ways that they could more effectively and efficiently increase their wealth. A few more examples would include ignoring old 4o1k accounts that may have higher fees and/or be invested poorly, paying for life insurance you don’t really need (permanent vs term insurance), or finally, all bias aside, not working with a CFP®. While many don’t have the time to devote to learning what they should do to make the most of their financial opportunities, they also don’t work with an Adviser. Some may think the “expense” isn’t worth it, but the items above show how costly it can be to try planning without one. The data also shows that people who work with a Financial Planner build more wealth. A study from John Hancock showed that 70% of those who work with a Financial Advisor are on track or ahead in saving for retirement, compared to just 33% of those who don’t use an Adviser.**  Your future is too important to leave to chance.

Thank you very much for taking the time to read this blog. I do hope it was helpful. If you are a client and would like to discuss the strategies above in more detail, please schedule time with me by clicking here.

If you are not a client and would like to schedule a no-cost introductory meeting with me, you can click here.

 

Resources:

*https://www.finra.org/investors/insights/take-maximum-match#:~:text=According%20to%20a%20new%20report,company's%20401(k)%20match.

** https://www.chrishogan360.com/investing/why-you-need-a-financial-advisor

 

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