No ‘Do Over’ Financial Mistakes
When we were children trying something new, we all called ‘do over’ when we failed to get it right the first time. Only as adults do we usually realize that for some things, there is no ‘do over’. Some are devastating and final. Things like: that quick glance at the phone or the map while driving that causes an accident in which you die or cause another to die; a criminal act done in a moment of extreme personal angst that sends you to jail for life; ingesting a contaminated street drug one time and destroying part of your brain. For these, you’d like to reset and do over to get a different result. You can’t. All you can do is pick up the pieces and move on.
Likewise, there are financial mistakes that have no do overs. Here are some examples.
Having a baby.
Don’t get me wrong, I’m all for babies. Having a baby isn’t a mistake, but it is a financial event that you can’t get a do over on. After all, you aren’t going to shove the kid back in. You accept responsibility (of all sorts including financial) when you have and raise a child.
This no do over life event could cost you more than $500,000 to raise and educate that child through 4 years of in state college.
The USDA calculator gives an estimate of $288,000 to raise your first child in Midwest US in family of just three (2 parents and the child) with income less than $105,000 a year to age 18 or high school graduation.
Sending the child to college will almost double your cost.
Failing to correctly handle an inherited retirement account.
There are multiple ways to lose out on money with an inherited IRA.
You currently (in 2016) are still able to take distributions from an inherited IRA over your own lifetime – stretching out the benefits of tax deferral. BUT, if you fail to do so in a certain time-frame, you will be forced to take all of the money within 5 years. This could (depending on how much is in the account) cause your income taxes to sky rocket in addition to losing the income you would have received if you had stretched the distributions over your lifetime. Note that the stretch IRA is under attack by US lawmakers and may not be around in the near future.
You have the wrong beneficiary on the account when you die. If you are married, your spouse can basically make your IRA their own. They can then take distributions over their lifetime and change the beneficiary. Also, they could disclaim the IRA so that it will pass to the next level of beneficiary (beneficial if the stretch option is available as the secondary might be younger).
You claim the inheritance, but can’t figure out if the deceased owner had already taken out their required minimum distribution for the year. The IRS wants someone to take that required distribution each year. If the deceased owner didn’t and you fail to do so, then half of the distribution is donated to the US treasury via the IRS 50% penalty for not taking that distribution.
Dying without a plan to handle your estate.
Well, maybe YOU won’t care, but I bet your heirs will. If you have a sizable estate that may be subject to some form of taxes on your death (in addition to your final income taxes for the year that is), then having a plan in place to mitigate the effect of federal or state estate taxes or state inheritance taxes will allow more of your estate to go to the people you intended to gift and less to the government.
Failing to cover your risks.
Lets face it, unexpected things happen. Although it seems a bit like paying the mob protection money, going with appropriate insurance can be a no do over financial mistake.
Maybe you lost your job and decided that the home insurance was one thing you could do without. Then, disaster strikes and the home is destroyed. You can’t go back in time and keep that insurance coverage in place – no do over on carrying the policy.
Another example is failure to carry adequate liability insurance.
What if the neighbor kid is playing in your yard on the tire swing you hung from the tree branch – the rope breaks and the neighbor kid falls and breaks his neck. The neighbor sues because the kid is now paralyzed for life. Without adequate liability coverage, you could lose it all (in addition to feeling really really bad).
Another example is failure to research and plan for legalities in your business.
You have your very own web business, and are doing business under your own name. You inadvertently break a law and are sued. Unless you have your business as a separate entity, the person suing can come after any and all personal assets as well as business assets.
In addition, sometimes we do stupid human tricks – ones where do overs aren’t allowed.
Remember Martha Stewart and her insider trading?
According to the SEC her stockbroker had an inside source that told him that the Food and Drug administration was NOT going to approve a cancer treatment made by a company Stewart owned. The broker passed that information along to Stewart and she sold her shares based on it to avoid losses.
From that stupid decision, she had enormous financial and personal repercussions. She went to jail for 5 months, had 5 months of home confinement and was barred from serving as director on boards, or CEO and CFO of any public company for 5 years. She had to pay $195,000 as a penalty for the losses she avoided (3 times what she would have lost). In addition, since she now has a criminal record, she is restricted in things she can do (like travel to other countries).
If you knew something about your company that would affect the share price of a company whose stock you own, you might be tempted to sell that stock (or buy more). Who thinks about insider trading when you are a lower level employee in a company? Yet, this could happen to you too!
Have you experienced a no do over financial mistake? What was it?