Consumer Reports: 12 Money Mistakes That Could Cost You $1,000,000

In the February issue of Consumer Reports, the magazine has a cover story which lists 12 costly common money mistakes people usually make. Before I bring up the list, may I ask what mistake you think could be the most expensive one in the long term? Not save/invest enough for retirement? Carrying too much credit debt? Or paying too much on your mortgage?

Well, it turns out the most expensive mistake is being too conservative with investing IN retirement, with a price tag between $360,000 to $750,000. Wow! I didn’t expect this to come out as Mistake #1.

From what I have read so far, the general rule of investing in retirement is preserving what you have accumulated and letting them last longer, not seeking rapid growth of the money like you were in your 20s or 30s, because you may not have enough to recover from a market downturn that could last for years. Thus, investment vehicles suggested in retirement are what considered as safe heaven such as Treasury bonds and CDs.

While preserving capital is vital, it’s equally important to continue to grow the money in retirement. After all, we don’t want to face the scenario when we outlive our money. Being too conservative with investing, however, could lead you to that situation, according to Consumer Reports, because you will lose your purchasing power if the inflation rate surpass the return from your conservative investments. The magazine used data from 1940 to 2006 and studied returns of various asset allocations in any rolling 20- and 35-year period. It found that for an investor at age 65 with $500,000 in retirement savings, an all stock portfolio will generate $750,000 more than an all bond portfolio with a 3% inflation adjusted annual withdrawal rate.

That said, I won’t be comfortable of putting all my money in stocks when I am 65 years old living on fixed income. However, I am fine to invest 20 or 30 percent in the stock market to boost my returns. That’s opposite to the 80/20 or 70/30 stocks/bonds allocation suggested by Consumer Reports. Well, I am not sure if I want to go that far, though the potential return is very tempting.
Other 11 money mistakes in the magazine are:

2. Retiring before you need to

• Cost: $237,000 to $309,000
• What it means: Early retirement is a dream that could come with a huge price. For ordinary people (not those who have accumulated enough to retire), early retirement (before age 65) means loss of income, reduced social security benefit, and high-cost private health insurance.

3. Launching a divorce war

• Cost: $49,000 to $188,000
• What it means: A Los Angeles-based mediation service estimated that a court litigated or mediated divorce could cost something between $65,000 to $250,000. When a divorce is inevitable, a mediated divorce can reduce the cost up to 75% than going to court.

4. Underinsuring your home

• Cost: $16,000 to $194,000
• What it means: You could lose all the gains your home has appreciated over the years if your home is underinsured and disasters happen. It is estimated that 55% of residential property in the nation is underinsured by an average 28%. You have to remember updating your home insurance policy.

5. Overpaying your mortgage

• Cost: $27,000
• What it means: Even for the same area, different mortgage lenders could quote rates that are a full percentage point apart. For a 30-year mortgage, that could make a big difference in the total money paid. Shop around to get the best rate you can.

6. Carrying a credit card balance

• Cost: $5,000 to $23,000
• What it means: At 15% interest rate, a $5,000 credit card debt will need 22 years plus 2 months to be paid off if only minimum payment is made every month. When the debt is cleared, the total interest paid is $5,729! Pay the balance in full every month!

7. Maintaining an unhealthy lifestyle

• Cost: $4,600 to $42,000
• What it means: Unhealthy lifestyle costs much more in life insurance premium. For a 40 years old male with a $1 million, 20-year policy, the premium he pays could be reduced by up to $42,000 if he maintains a healthy lifestyle (lose weight, lower blood pressure, quite smoking, and reduce cholesterol, etc).

8. Ignoring Roth account

• Cost: $9,000 to $26,000
• What it means: Roth accounts (IRA and 401(k)) can protect future tax hikes as contributions are made after taxes. Also earnings in these accounts are tax free. Should tax rates go up in the future, contributing to Roth can increase the value of those accounts.

9. Cashing out your 401(k)

• Cost: $6,000 to $17,000
• What it means: According to a Hewitt Associate survey, nearly 45% of workers cash out their 401(k) account when changing jobs. For those who choose to take out cash, not only they have to pay income taxes, but also a 10% penalty imposed by IRS. Don’t cash out. Roll the account to an IRA instead.

10. Underfunding your 401(k)

• Cost: $36,000
• What it means: This year, you can put up to $15,500 in the employer sponsored retirement account. However, many workers don’t take advantage of the plan or contribute much less than the allowed limit. What they miss is the tax-deferred growth of income from the contribution. Contribute as much as you can afford.

11. Paying needless fund fees

• Cost: $4,000
• What it means: Buying mutual funds from a broker or a financial adviser could result in up to 5.75% in commissions or fees and every dollar you pay on fees could be saved and invested if you choose to invest in no-load, low-expense funds.

12. Falling to a scam:

• Cost: $100 to you-name-it
• What it means: When something sounds too good to be true, maybe it is!

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