I came across an article this past week in the Wall Street Journal that discussed financial mistakes that people often make at various stages of their life. I’ll try to recap some of the key points made in the article.
One common mistake younger people make is being too conservative with their investments. That is in their retirement accounts millennials frequently have an excessive amount invested in money market accounts. Even when someone can earn a return of 2 or 3 percent on a money market account that is a poor strategy, and it has been significantly worse in recent years when returns on cash have been essentially zero.
While a number of younger people can be turned off by the volatility of the stock market, over many decades stocks will provide a much higher return compared to more conservative investments. Unless someone is saving an unusually large amount, it is doubtful that person will have adequate retirement funds by having a conservative investment strategy throughout one’s life.
There is one area where young people should be conservative with their investments. That is, if someone is saving for a specific purchase, like a down payment on a house. If money will be withdrawn within a period of several years conservative investments are best, but long-term retirement money should be invested with more of a growth objective.
The other area that younger people need to focus on is building up their human capital, which determines the amount of money someone can earn over one’s lifetime. Having patience is important, as studies have shown that impatient people are more likely to drop out of school, or change careers too frequently thus damaging their long term earnings potential. Obviously there are times when it behooves a person to switch direction in school or employment, but sticking to a plan benefits most over time.
For people who are middle age the biggest potential problem is having too many large expenses. While many people in our local area have done extremely well owning homes over the years, there are others who have over spent on real estate and cannot keep up with their payments.
The other area of large expenses for middle age people are their children. It can be easy to spend large sums on various activities or education. However, parents need to be sure that they are providing adequately for their own retirement before providing optional extras for their children.
For people approaching retirement a major problem for many is inadequate savings. Most private sector workers no longer have pensions, so other than Social Security people are dependent upon retirement savings. Unfortunately, most people in their 50’s have retirement accounts that are not large enough to provide much in retirement income.
There are some with little savings who feel they can work indefinitely to maintain their standard of living. This strategy oftentimes does not work out. Poorer health may limit working options, or jobs may no longer be available in industries people have worked in. In addition some retirees may think freelance or part time work might provide additional income, but that is oftentimes insignificant.
One advantage that older homeowners in our area have is the equity in their homes. This is a major benefit for retirees here versus in other parts of the country. While using one’s house, as a source of income may not be the preferred way to provide additional income, it is an option.
Another problem older people need to contend with is delegating investment authority. Unfortunately, as people age, their financial decision-making weakens. Older people are more likely to fall victim to financial scammers. There is no set age when changes need to be made, but should be done before major cognitive declines take place.
Obviously delegating investment authority to competent children or other relatives makes this decision easier. If a family member is unable to handle this task, then a financial institution would need to be involved. Even with a financial institution involved there should still be a trusted relative or friend monitoring the financial firm.
People at different stages of their life have to contend with various issues.
Hopefully by avoiding certain mistakes individuals will be able to enjoy a reasonable standard of living throughout their life.