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The Invisible Losses

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The stock market goes down by 10%, your $500,000 account drops $50,000, and panic sets in.  It drops another 5%, and you decide to act and sell. Your worry is relieved as you see the market go down another 5%, but since you sold, you are now safe. A short while later, the market starts to move higher and higher, but you feel it is just a short-term phenomenon and sit patiently out of the market. Six months later, the market is significantly higher, and unless you bought back in with impeccable timing, you just experienced one of many kinds of invisible losses. The money you would have gained back if you had not sold is an invisible loss. Invisible losses happen on tax returns, buying goods or services, getting insurance on your business, home, or automobile, working with Social Security, claiming a pension, making a Roth IRA conversion, and the list goes on and on and on.

An invisible loss happens when life goes on, and you never realize how much a decision cost you. Ignorance may be bliss, but it can be quite costly. No matter how good you are with personal finances, you are going to experience an invisible loss, but the object is to minimize these invisible losses as much as possible. Let’s look at some of the potential invisible losses.

  1. You take Social Security when you retire at age 65, because you calculated how much you would get now compared to waiting and decide to claim now. Unfortunately, your analysis was flawed, because you did not take into consideration taxation, inflation, or survivor’s benefits. If you had, then you would have realized that your actual breakeven point was not even half the time that you calculated, and when you live beyond the real breakeven, you experience invisible losses.
  2. You have been with your auto and home insurance company since you were a kid and are quite satisfied. You also assume that the loyalty to this insurer will prove to be of great benefit. Unfortunately, there is no loyalty with insurers, and the premium is 10-50% less with other great companies that do not advertise on TV.  You are experiencing a yearly invisible loss.
  3. You go to buy a car at a dealership. You get a new Toyota with a warranty and a maintenance contract, and you are quite happy, for all was well within budget.  Unfortunately, the buyer the day before got the same car with warranty and maintenance for $6,000 less than you. You experienced an invisible loss by not knowing how the Toyota dealership may negotiate that deal.
  4. You go to a lawyer to get your estate documents done, and the lawyer is very knowledgeable and does a nice job. It cost you $6,000 for the work they did, but unfortunately, because you did not know what lawyers charge and what documents you may need, you paid $6,000 for what should have cost you $3,000: an invisible loss.
  5. You are 71, and as usual you give $10,000 to your church and present it to your tax preparer for an itemized deduction. Unfortunately, because you did not make a Qualified Charitable Distribution from your required minimum distribution of $25,000, you end up paying $4,000 more in taxes and have an invisible loss.

These are just five out of hundreds of examples of invisible losses that you may never realize happened. Compounded over a lifetime, the costs could prove astronomical. This is what a professional comprehensive advisor should do for you – not just invest your assets.  As we discuss in the Financial Physical®, a Comprehensive Advisor should be very much like a general practitioner of medicine. A financial advisor should be highly educated with a broad comprehensive knowledge of personal finance, not willing to take commissions or referral fees, be independent of product companies, and always act as a fiduciary working in your best interest. Before you make decisions about insurance, estate planning, tax preparation, retirement, large item purchases, Social Security, or company benefits, be sure to discuss it with your Consulate Advisor.

Financial Consulate aims to help lessen the worry and burden of wealth management and enhance financial wellness so our clients can pursue relationships and true fulfillment. Choose the professionals at Financial Consulate as your Certified Financial Planners™ (CFP®) to take advantage of our educational, ethical approach to financial planning. Our services are comprehensive, including tax planning, investment planning, retirement planning, estate planning, and more. We operate completely independently and offer fee-only services to keep your vision in line with our recommendations at all times. While we have offices in Hunt Valley, Maryland, Fernandina Beach, Florida, and Gettysburg, Pennsylvania, we serve clients across the nation. To begin your partnership with a trustworthy wealth advisor, please contact Financial Consulate today.

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