It’s great to focus on the little things that save you money, like The Expensive Coffee-Related Drink Factor. Reducing small, regular expenses add up over time. But all that focus on the minutiae is for naught if you make big mistakes. Consumer Reports recently published an article that explains how much some of those big — thought not always apparent at the onset — mistakes cost.
1. Investing too conservatively during retirement. I had a major problem with Kiplinger Personal Finance‘s recent series on saving $1,000,000 for retirement starting at various ages. The authors there suggest shifting your retirement asset allocation away from equities much too quickly. Retirement funds have to last longer than the beginning of retirement. With people living into their 70s, 80s, and even 90s, retirement funds have to last much longer than they used to. Unless you can afford to withdraw only 1% of your assets every year for expenses, you’re going to need to stay strongly invested in stocks. Consumer Reports says this mistake can cost you $360,000 to $750,000.
This is risky; stocks fluctuate, and a drop in the market at the wrong time can have some ill effects. It makes sense to have more stable investments once you retire, but you’ll need those equities to make the funds last. Here’s what Consumer Reports found:
Overall, we found that an asset mix leaning more toward Standard & Poor’s 500 stock index than bonds provided bigger returns and annual cash draws. On average, over a variety of 20- and 35-year periods from 1940 through 2006, an all-stock portfolio provided our investor with $750,000 more than an all-bond one.
2. Retiring before you need to. Early retirement is tempting. I’d like to stop working while I can still enjoy my life. There is enough I’d like to do that I won’t get bored with my time. But Consumer Reports says that early retirement can be an idea that provides the opportunity to forgo $237,000 to $309,000. Stay in the workplace longer, and the nest egg with which you start retirement will be significantly larger and will last longer. Also, the earlier you retirement, the less you’ll receive from Social Security. I’d hope that by the time I retire (if I take the traditional career path), Social Security will be the least of my concerns.
What else? Health care costs can be brutal if you quit the workforce before Medicare can help you:
What’s more, Medicare won’t cover you until age 65, so you might have to buy individual health insurance at an age when costs are apt to be at their highest. And each year you postpone is one less year your savings will need to support you.
3. Launching a divorce war. Unless you’re a “gold digger,” divorce can be a costly action. If it’s a particularly nasty divorce, not only can it drain you emotionally, but financially as well. A divorce could cost a person $49,000 to $188,000, though Consumer Reports cites an expert who says that a full courtroom ordeal could easily exhaust $250,000. That’s a quarter of a million dollars for a judge to say, “You get the house and you get the retirement accounts.”
So what do you do? Skip the divorce and live unhappily ever after? Mediation is a common cost-cutting measure. Finding a new rich spouse is an option.
4. Underinsuring your home. I am a poor example. I’ve been meaning to ask my insurance company about and shop around for renter’s insurance. I find myself busy during business hours and I put it off, even though I know that’s not an excuse. A home that’s not properly insured could end up costing you $16,000 to $194,000 more than necessary, according to Consumer Reports.
This has more to do with damage to a house, which as a renter I currently don’t need to worry about other than the contents inside. That could certainly contribute to a loss of $16,000. Consumer Reports explains that home owners, if they haven’t updated their insurance policies from the time they purchased their homes, could lose out on all gains if the house is damaged or destroyed. And if they’ve been living in the same place for a decade, that could be significant gains. The money you would receive from the insurance agency, while an amount that might have helped a decade ago, would be insufficient considering the climb in house prices.
5. Overpaying for your mortgage. You better shop around. It is absolutely worthwhile to look at different lenders when you plan on initiating a mortgage. Consumer Reports shows that a difference of 750 basis points between two otherwise similar mortgages could unnecessarily cost $27,000 extra down the road. Why pay someone an unnecessary $27,000? If someone asked me for that amount of money for no reason, I would turn them down. Why give such a gift to a mortgage lender? Find the lowest cost mortgage possible.
6. Carrying a credit-card balance. When should you carry a credit card balance? I can only think of two situations. The first is if you are using the credit card for arbitrage: earning more from a liquid investment than you’re paying in credit card interest. That’s a dangerous adventure for someone who isn’t prepared. The other situation is if a credit card is the only source of funding for starting out in a career. If your first job out of college requires a suit and you have no money saved up after boozing your way through higher education, you’re going to need to make do. Of course, it’s imperative to get rid of credit card debt as soon as possible.
If you have a card with an interest rate of 15 percent and you pay only the minimum due each month, it will take you 22 years and 2 months to retire a $5,000 debt, and you’ll have paid $5,729 in interest.
Minimum payments are not the way to go. They’re designed to keep you in debt for a long time. You must pay more than the minimum payment suggested by the credit card company. In most circumstances, take Consumer Reports’ advice and use credits only for security features (and I would add for rebates) and pay off the balance every month. Otherwise, you can end up paying $5,000 to $23,000 over the course of your life in credit card interest alone.
Common sense will help you with the small mistakes that add up over time. It often takes some education and awareness in addition to common sense to avoid wasting hundreds of thousands of dollars unnecessarily.
Image credit: banjo d
12 money mistakes that could cost you $1,000,000 [Consumer Reports]
Updated August 9, 2011 and originally published February 16, 2008.