Angela Bender at AMJ Financial Wealth Management in Leesburg’s pet peeve is having too much withholding.
“They always say it’s like a savings account for them,” Bender says in frustration. But it’s not. The average refund from the IRS is $2,800 and that is money clients could have had working for them all year instead of parking it with the government, she complains.
“You’re losing all that compounding,” she says, referring to the buildup of returns in a tax-free retirement account. And you’re losing not just one year, but every year, by letting the IRS take that money directly from your paycheck and hold on to it. There are ways to reduce your withholding via a W-4 form, either by designating a fixed amount or by increasing the number of exemptions.
For Michael Egan at Egan, Berger & Weiner in Vienna, the most egregious pitfall is paying too much in mortgage or rent. People run out of money for savings because they’re devoting too much of their income to housing and paying for much more room than they need.
“It’s primarily a problem for younger clients,” Egan says. “People in their 50s and 60s have more normal middle-class needs.”
People should not let banks dictate the size of their house by how much money they are willing to lend. Rather, they should decide for themselves what they really need in terms of space. Maximum spending for housing should be 25 percent of after-tax income, Egan says.
Other pitfalls are less dramatic, but still quite prevalent. “I tell people to look at where they’re spending money,” says Rose Price at VLP Financial Advisors in Vienna. “It can be eye-opening.”
Some of her clients find they are spending $1,500 a month on eating out—a sum much better invested in a retirement account or put aside for a rainy day.
Lunch is Paula Friedman’s bugaboo. That $10 a day to buy lunch becomes $50 a week and $200 a month. “Take your lunch from home,” says the financial planner from McLean Asset Management Corp. “Put that money into savings.” The magic of compounding can turn that lunch money into an extra $50,000 at retirement.
Other small things, like cable—especially in the age of streaming and cord-cutting—can add up, she says. But the biggest pitfall in her view is spending too much on children. Parents need to take care of themselves and their retirement first. It may be the best thing they can do for their children.
“I say it’s like the oxygen mask in the airplane,” Friedman says, “You have to put your own on before you take care of your children.”
