As a person who writes about investing for a living, it’s helpful (if humbling) to take a hard look at my own decisions from time to time. I’m fortunate to be surrounded by some of the industry’s best thinkers on investing and personal finance issues. And whenever I learn something new, I usually try to implement it if it makes sense for my own situation.
That said, I don’t have a perfect record when it comes to financial decisions. In the spirit of continuous learning and improvement, I present some of my personal shortcomings.
Whether from inertia or income restrictions (probably a bit of both), I never got around to setting up a Roth IRA. Roth IRAs are especially attractive because they offer significant withdrawal flexibility: Assets can be taken out at any time without taxes or penalties. And in contrast to assets in a 401(k) plan or traditional IRA, Roth IRAs aren’t subject to required minimum distributions, which currently kick in at age 73. For investors who have built up significant retirement assets, that can result in substantial tax bills because RMDs are taxed as ordinary income.
A person in my situation could get around some of these issues by setting up a backdoor Roth, which involves making a nondeductible contribution to a traditional IRA and then immediately transferring the assets to a Roth account. I haven’t made this tactic a priority. Instead, I’ll probably take advantage of the window of time between whenever I retire and when RMDs kick in to convert some of my traditional IRA assets to a Roth account. If I end up retiring at age 65 and delay Social Security until age 70, for example, I should have at least five lower-income years in which to make Roth conversions. Any assets converted will be subject to ordinary income tax, but potentially at a lower tax rate than I’d end up paying if a higher traditional IRA balance led to hefty RMDs.
Late to the Party on HSAs
Healthcare savings accounts, which allow owners to contribute tax-free dollars, let them grow tax-free, and later pay for qualified medical expenses without paying taxes on withdrawals, were first introduced in 2004, but I didn’t start contributing to one until a few years ago. In retrospect, I would have been better off signing up for a high-deductible plan and maxing out HSA contributions earlier. That would have given me a longer runway to build up HSA assets and take advantage of tax-free growth over multiple decades. I’m still pursuing that strategy, but my HSA balance will be much lower than it would have been if I had started contributing back in 2004. That will leave me with fewer assets that I can withdraw tax-free to pay for higher medical costs later in life.
No Long-Term Care Insurance
On a related note, I haven’t taken out an insurance policy for long-term care. The U.S. government’s Administration on Aging estimates that about 70% of people turning 65 will eventually need some type of long-term care. And long-term care is incredibly expensive. Women typically need 3.7 years of care, while men need care for 2.2 years. While in-home care can be a cheaper option, the cost of nursing home care in a private room averages about $108,000 per year.
Long-term care insurance can help defray some of these costs, although it typically only kicks in after a waiting period of about 90 days. Why haven’t I signed up yet? I’d chalk it up to inertia, avoidance, and indecision. It’s not fun to contemplate the possibility of a chronic medical condition or disability that would make it impossible to care for myself. It’s also tough to assess whether the cost of paying premiums for long-term care (currently averaging about $3,600 per year) will turn out to be worthwhile. While the odds are high that any one person will eventually need care, the odds that both members of a married couple will need care are lower. It’s also difficult to estimate the potential cost of long-term care. Depending on the length and type of care needed, the actual cost could end up being significantly different from the averages mentioned above.
Without an insurance policy in place, I’ve effectively made the decision to self-insure. Only time will tell if that’s the right decision or not.
Early Mortgage Payoff
A few years ago, my husband and I decided to pay off our remaining mortgage balance. We had assets available and liked the idea of not being beholden to a monthly payment as we get older.
From a strictly asset-maximizing point of view, we would have been better off keeping our low-interest mortgage and investing the payoff amount in higher-returning assets. That was especially true a few years back, when 30-year mortgage rates were significantly lower than they are now. We also sacrificed liquidity by trading highly liquid investment assets for a single asset that can’t be sold off without a lot of time, effort, and real estate commissions.
Has it been worth it? Maybe, maybe not. In retrospect, we could have made a lot more by keeping assets in the market instead of paying off a loan with a relatively low interest rate. But there’s a certain comfort and peace of mind that comes with no longer having any type of debt. The mortgage payoff also gave us a guaranteed rate of return, whereas keeping the assets in stocks would have had a much more uncertain payoff.
Orphan 529 Plan Assets
We started socking away money into two different 529 plans a few years after our kids were born. We tried to budget for college costs that were somewhat middle of the road—not high enough for an ultra-pricey school, but not bare bones, either. Our estimates ended up being partly right. Our eldest went to a music conservatory, and his total costs for tuition and room and board lined up almost perfectly with the 529 plan balance. The other child went to a cheaper school, graduated in 3 1/2 years, and received some merit-based scholarships. As a result, we ended up with “leftover” assets in the 529 plan, which are still sitting there unused.
There are several ways we could fix this problem. We could transfer them to a different beneficiary (such as a niece, nephew, cousin, or eventual grandchild) or convert them to a Roth IRA. With no grandchildren on the horizon as of yet, though, it’s tough to decide on the best course of action. Eventually I’ll find a way to redeploy the leftover assets, but for now, inertia and indecision are winning out.
Experts often recommend limiting exposure to any individual stock to no more than 5% of total assets. As a longtime Morningstar employee, I’ve been fortunate to receive stock options and restricted stock units over the years, which have grown in value over time. I sold off some shares a few years ago and have made progress toward diversifying my position, but still have significantly more single-stock exposure than most financial experts would recommend. That could backfire, but I think my position is small enough that it shouldn’t drastically affect my future even if it declined in value. I have enough other assets earmarked for retirement and other financial goals that I’m not overly worried about short-term swings in the company stock.
In addition to shares in Morningstar MORN, I also own smaller stakes in about 15 other individual stocks. As a former stock analyst, I still have an interest in stock investing, and occasionally purchase shares in companies with wide Morningstar economic moats that are trading at a discount to our analysts’ estimates of their fair value. I find the process of choosing individual stocks fascinating, although it makes my portfolio way more complicated than it needs to be. In an ideal world, my portfolio would probably only include a small number of passively managed mutual funds and exchange-traded funds.
My husband and I also have several miscellaneous rollover IRAs scattered across different brokerage platforms. This isn’t a major problem at the moment, but it will make things more complicated when we eventually start taking RMDs. To figure out the required amount, we’ll need to collect numerous account statements and add up the totals for each person’s IRA and 401(k) assets. If one of us were to pass away, it would also add an administrative burden to the remaining spouse who will have to contact multiple providers to close the accounts and transfer assets.
This last failure is more of a function of my personality and personal level of risk tolerance. I was raised by frugal parents and usually don’t enjoy spending money, especially on big-ticket items. As a result, I’m currently driving a rusted-out sedan originally purchased in 2006. I can probably afford to replace it, but I don’t relish the idea of shelling out $30,000 or more on a depreciating asset. I also don’t always align my spending perfectly with my personal values and goals. I spend plenty of money eating at restaurants and ordering takeout, but don’t always spend as much as I could on other things that might add more value to my life, such as travel, yoga classes, or hiring a house cleaning service.
Fortunately, none of my mistakes is catastrophic. While I definitely could have handled a few things better, I’ve steered clear of the major pitfalls that can lead to disastrous results, such as overspending, racking up credit card debt, engaging in speculative trading, and buying high-cost insurance products like whole life. There’s always room for improvement, but I’d argue that avoiding big mistakes is more important than getting every single financial decision exactly right.
The author or authors own shares in one or more securities mentioned in this article. Find out about Morningstar’s editorial policies.