For whatever reason, people love to ask me about my biggest money mistake. Other bloggers will ask it when they are compiling a top ten article. For a few years, I had gave some answers, but I didn’t have any strong conviction behind them. There was a brief period of day trading after college. I also bought a convertible after college. Basically, the “after college” time wouldn’t make many of my financial highlight reels.
However, in hindsight, I don’t think either were big money mistakes. I didn’t lose too much day trading and I learned a lot. I still have the Mustang convertible today (20 years later) and have paid roughly about $1400 a year (or a little more than $115/mo.) for it. Things could have been a lot worse.
I think it’s difficult for many people to talk about their biggest money mistakes. In about 99.9% of the cases, it is because they are embarrassed that they made the mistake in the first place. I’m finding it difficult to write about my financial mistake, but for a completely different reason. My biggest money mistake comes from a situation when it’s considered a “good problem to have” such as having two great starting quarterbacks or being at a great buffet and realizing that you only have one stomach. (Does anyone remember buffets?) Because most people would love to have this kind of problem, it may sound tone-deaf. If so, I’m sorry in advance.
I Saved Too Much for Retirement
For years, I made it my mission to max out my retirement accounts the best I could. As a software engineer, I was pretty successful. As a blogger, less so. My wife, as a pharmacist was able to max out her retirement accounts as well. It turns out that if you max out your retirement you can have a million dollars in 20 years. Neither of us are there, but, as you can imagine with our retirement accounts are not small. Given the stock market run of the last decade, maybe a lot of people find themselves in this situation.
In general, putting more money into retirement accounts is a smart move. You get to delay paying taxes during what is, for most people, their peak earning years. Then you can pull out the money and pay taxes on the smaller amount because you don’t have your main income. The downside to most retirement accounts is that you can’t easily access the money until you are older, typically around age 59.5.
Having too much money in the future isn’t the problem. The big money mistake is that the money we have access now is 7% of that retirement nest egg. That’s not a lot of liquid cash.
I should have planned it so that we set aside 35-45% of the money to use now and 55-65% that we can use later in retirement accounts. It’s a lopsided situation, where it feels like we are just getting by now, but are set up to have a lot more money in the future.
That’s why we stopped retirement contributions, with the exception of Roth IRAs. We continue to contribute to Roth IRAs because we can pull those contributions out at any time without a penalty. In fact, the ability to do this may turn out to be very important in the future, but we’ll put that aside for the follow-up article.
There was another reason why we put so much money for the future. Simply put, we could. We didn’t have kids for a long time, so the dual-income, no kids gave us a lot of financial flexibility. More importantly, we have my wife’s military pension and rental properties to help supply income before retirement. Unfortunately, we still have to wait five years for the mortgages on those rental properties to be paid off. They won’t produce income until then.
There’s one other “problem” with this lopsided situation. When you combine a pension, rental income, and a big IRAs it has the potential to lead to a high tax bill. The IRA disbursements are taxed as regular income which may be 37%, or (much likely) even higher in the future. I’ve forgotten a lot of math over the years, but if memory serves, the commutative property of multiplication means that it doesn’t really matter when you pay the taxes, you just want to pay the lower amount. If we had invested money in a regular taxable account, it could be subject to long-term capital gains rate which maxes out at 20%. The money could also be invested in a way that paid qualified dividends that would realistically max out at 15% for us. (You need over $500,000 in qualified dividends a year for a married couple to get to the 20% range.)
If we could pay taxes of between 15-20% it would be a lot better than paying taxes of 40%.
Fixing My Biggest Money Mistake
Sometimes there are problems you can’t fix. As the saying goes, you can’t put the toothpaste back in the tube.
Fortunately, in this case, there are some things we can do. OThe solutions that I initially found were less than ideal. However, with a little more time and focus, I think I’ve found some ways that it won’t be so terrible…
… but that will be an article for another day.