Podcast Episode 368: Half-Baked Financial Ideas

We’ve all had an idea that we acted on without giving it much thought. That’s fine when you’re choosing dinner or picking out new socks, but it’s not the best approach to managing your finances.

In the latest episode of the Money Wisdom podcast, Matt Pastor, RICP® tackles the topic of “half-baked” financial ideas. These are the types of decisions that might seem clever at first glance but can have significant negative consequences if not thoroughly thought through.

One of the primary examples discussed is the idea of signing your house over to your children to avoid nursing home costs. While this might seem like a smart move to protect your assets, there are some potential pitfalls. For one, if your children own the house and they encounter legal issues such as divorce or lawsuits, the house could be at risk. Additionally, the lack of a step-up in cost basis can result in a hefty tax bill for your children when they eventually sell the house. Instead, you should consider all your options like an irrevocable trust, which can protect the asset while still allowing you to use it during your lifetime.

Another common half-baked idea is starting Social Security early while still working, with the intent of using the extra money to pay off your mortgage. If you start collecting Social Security before reaching full retirement age, your benefits could be significantly reduced if your earnings exceed a certain threshold. This could result in you receiving a much smaller Social Security check than anticipated or even no check at all.

The conversation also covers the topic of Roth conversions. While converting a traditional IRA to a Roth IRA can be beneficial for long-term tax planning, doing it all at once can result in a substantial tax bill. It’s always beneficial to take a measured approach, converting smaller amounts over several years to manage the tax impact better.

Canceling life insurance upon retirement is another topic of discussion. While some might think they no longer need life insurance once they retire, many retirees still carry some form of debt, whether it’s a mortgage, car payment, or home improvement loans. Keeping life insurance can provide financial security for your loved ones in case of unexpected expenses.

Lastly, the episode touches on the idea of investing your emergency fund in mutual funds to earn higher returns. While this might seem like a good idea in a thriving market, the primary purpose of an emergency fund is to be readily accessible in times of need. Investing it in mutual funds exposes it to market risks, which could result in losses just when you need the money the most.

If you find yourself considering any of these half-baked ideas, it might be a sign that you need a more comprehensive financial plan.

Here’s some of what we discuss in this episode:

• Why signing your house over to your kid(s) while you’re still alive might not be the best plan.

• Starting your Social Security as early as possible while you’re still working could cause you to lose some of your benefits.

• Converting all of your IRA money into a Roth at the same time.

• Why you might not want to cancel your life insurance once you’re retired.

• Investing your emergency fund money to get a better return.