Surprises like birthday gifts can make for truly special, wonderful moments. But when it comes to surprises about our finances? Yeah, not so much.
It’s possible, of course, to receive terrific, unexpected news that you’ve just inherited a fortune or that the early-stage company you invested in a few years ago has become a unicorn. But it’s not fun when there are surprises about your money and assets that are unexpected and unwanted.
The good news is that you can take steps to avoid being blindsided by financial surprises. These surprises could leave you with anything from a minor inconvenience to a serious cash flow crunch or some other threat to your future security.
With that in mind, we will look at some common financial surprises that individuals, families, and others tend to experience at various stages of their lives. We will also share some tips for avoiding them and keeping you on track to reach your financial goals.
In the blog this month, we will discuss some of the commonly occurring financial surprises you want to avoid.
- Higher than Expected Taxes
- A Longer than Expected Life without Enough Assets to Cover
- Bigger Personal Expenses
- Overlooked Payments
- Home Repairs
- Lawsuits
Unexpected developments when you’re no longer working—and instead relying on savings and investments—may be the most feared type of financial surprise. Without the safety net of a steady paycheck, any uncertainty around money can potentially create a lot of anxiety. Let’s discuss some of the most common financial surprises you want to avoid.
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Higher than Expected Taxes
Many retirees count on sliding into a lower tax bracket after leaving the workforce. While that often happens, the opposite can and does occur—leaving retirees with higher-than-expected tax exposure. That might happen when people forget that Social Security benefits may be taxed or when they start taking out money from certain retirement accounts (particularly if they’re also getting income from pensions, deferred comp plans, and the like).
To potentially sidestep this problem, pay close attention to your annual earnings from all sources as well as the specific income levels of the various tax brackets. In some cases, converting a tax-deferred account to an account that allows tax-free withdrawals in retirement can also help reduce your tax bill.
We believe it is important to do a comprehensive financial plan that looks at all your sources of income and calculates your estimated taxes for the current year, and all the years for the rest of your life. If you have a large amount of money in 401ks and IRAs, this can result in a surprisingly large amount of taxes in your later years, when your Required Minimum Distribution can be very large. Our article “Managing Income in Retirement” references situations like this in further detail that you can discuss with your Wealth Manager.
A Longer than Expected Life without Enough Assets to Cover
Living longer than you thought should be one of life’s nice surprises. And it probably is—unless you’re not financially prepared to fund your lifestyle needs and wants far enough into the future. While it may seem unlikely to think you’ll live to age 100, advances in medicine can, to some extent, roll back the clock on our bodies and are becoming more common. The free website www.livingto100.com allows you to get an estimate of how long you may live. It is 40 questions and takes about 10 minutes.
We highly recommend you do this to estimate your life expectancy. While it is common to hear people talk about how long they think they will live, this survey gives you an estimate based on the data from millions of people.
Bigger Personal Expenses
Pre-retirees may often hear that their expenses will fall significantly once they retire. However, it’s quite common for expenses to hover around the same level they were at during someone’s final few working years. From our experience, a common goal for most people is to maintain the same lifestyle during retirement that they were accustomed to during their working years. And, of course, forces beyond your control (such as inflation’s big surge a few years ago) could cause your cash outflows to rise more than anticipated. An unexpected medical or dental expense can create some strain but can also be considered when planning for retirement.
We believe it is important to get an accurate assessment of your spending in retirement and then complete a comprehensive financial plan to ensure you are on track to have enough money for the rest of your life.
Overlooked Payments
The fees you might pay on overdue bills may not jeopardize your financial health. But why pay them when it’s so easy to put reminders in place to ensure you don’t forget an important financial obligation? It’s easy to set up account alerts via text or email to tell you of upcoming payments due. We also recommend scheduling automatic online payments for your recurring bills.
Home Repairs
A fallen tree, a wildfire, a flood—life happens. Or maybe that roof you’ve meant to have fixed but never got around to finally gave in. An adequate emergency fund is vital for these situations. So, having the right homeowner’s insurance is important for your situation. That goes double if you have two (or more) homes in different states. Such a scenario can lead to complications, particularly if the homes are covered by policies from different insurance companies. Or say your home was built using expensive or rare materials. If you don’t attend to these factors, the rebuilding costs (in case of, say, a devastating fire) could easily be far, far greater than your coverage.
Lawsuits
If you have wealth, you may also have a target on your back as people look to unjustly take your assets from you. Asset protection planning can potentially legally shield your assets from future lawsuits and creditors. However, it’s essential to put asset protection plans in place before you are sued. What’s more, wealth protection plans need to be reviewed every few years and updated when necessary to reflect changes to your bottom line or risk exposure. Having an appropriately sized Umbrella policy is an important way to protect you and your family in the event you are sued.
Conclusion
We strongly recommend that people complete a comprehensive financial plan to give them a proactive view of their financial lives. If you do this, chances are good that you won’t get tripped up by the types of financial surprises outlined above. Still, we recommend regularly updating your financial plan, including your goals, spending, emergency funds, and various types of insurance.
If you have any questions on these items, please give our Wealth Managers a call.
We help our clients make smart decisions (and hopefully avoid the types of mistakes listed above) that align their money with their goals so they can enjoy the journey.
Financial Journey Partners - Partners in Your Financial Journey®
Our Financial Journey Partners office is based in San Jose, California. We have clients that live in many states across the country. If you have questions about your investments or financial situation, call us to schedule time to talk about your specific situation.
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