It is hard to believe that a year could go by as fast as this year has, considering the emphasis of sheltering in place and minimizing activities. Even with the lack of family and friend gatherings, weekend outings, and traveling, the year still flew by.
So, as we are approaching the middle of December, it is appropriate we dedicate this UPdate to year-end planning in preparation for 2021. Schedule some time in your calendar to review the following:
A. Non-Retirement Investment Account Review:
a. Compare the investment returns of your accounts to the S&P 500 and adjust based on the risk level of the investments. Most people have different investments for their accounts (e.g., savings, short term funds, longer-term, retirement, etc.) and will vary in percentages allocated to equities (stocks) and income (bond funds, money market) based on the amount of account fluctuation they will tolerate. If your longer-term accounts were 100% equities, you would expect the account performance to match or exceed this year’s return of the S&P 500 (14.59%).
b. How much is in your checking or savings account? Our experience is the busy, successful people dedicate the least amount of time to their personal finances. One indication is high balances in checking and savings accounts. If this is you, then schedule a date with your investment advisor to discuss investing a portion that exceeds what you need for immediate short term expenses. We regularly discuss with our clients the importance of reducing drag in their portfolio with balances in non-performing checking and savings accounts.
B. Retirement Account Review
a. How much did you contribute this year to your retirement account? Could you contribute more, and did you maximize your employer’s matching program if they have one?
b. Determine if you can increase your per pay period deductions for your 401k and make the changes to start in 2021.
c. Evaluate your account performance to the S&P 500 in the same manner outlined above. The difference is your retirement account should be near or at the top of your risk tolerance with maximum allocation to growth funds. As volatile as this year has been, the end result has been an outstanding year for growth funds and especially technology sector funds.
d. Look at all the available funds in your plan and their investment returns. Note the top five best performing funds, how many of them are in your account, and what percentage of your total balance they represent. We suggest that every quarter you do this analysis and add or increase the allocation to the prior quarter best performing funds.
e. Have you had any changes with your family and do you need to change your beneficiary designation form with your plan administrator? Several times during my career, I have seen employee distributions to whom family members would consider the wrong beneficiary because the now-deceased employee never updated their beneficiary form or estate plan.
C. Estate Planning
a. Speaking of estate planning, have you updated your will and trust? Do you have a family revocable trust, durable powers of attorney, and wills? If not, commit to 2021, the year you meet with an estate planning attorney to prepare these documents for your family. You will find that the process is much simpler than you expect, and the hardest part was scheduling the appointment.
D. Financial Plan
a. If you work with a financial planner and have a financial plan, it should be updated every one or two years, depending on how close you are to retirement. December is a good month to contact your advisor to schedule a date in 2021 to review and update your financial plan.
E. Life insurance
a. Once a year, you should review your insurance policies and determine if the coverage is appropriate for your financial needs. I advocate term insurance for most situations, and if you have term insurance, it is worth noting when the premiums change and if you should have a new policy(ies) issued to replace the expiring policy(ies).
F. Tax planning
a. You have three more weeks for any last-minute tax planning strategies. This may include making double payments on mortgages for more interest deductions in 2020 (less in 2021), contributing to charities, increasing your 401k deduction, and purchases that qualify for tax deductions that include business vehicles and energy qualified home upgrades. Other considerations are taxable events that you could push into 2021, such as defer selling assets with gains into 2021 and retirement account distributions.
b. Do you have any capital losses in your investment accounts that you could sell now and claim the tax loss? This process is called “tax harvesting” that works particularly well with stocks and mutual funds because of their liquidity. Be sure to know which stocks or mutual funds you can buy as the replacements, as some will not allow you to claim the loss until the replacement investments are sold (called a wash sale).
G. Debts
a. How did you do in reducing your debts in 2020? Did you lower your debt usage percentage (amount of debt to total available debt)? What could you do differently to increase the pace of reducing your debt? One strategy with your home and investment property mortgage(s) is to contact your mortgage lender and increase the auto-deduction amount applied to principal reduction. It is a quick phone call or logging onto to your mortgage lender’s site that will instantly accelerate the date you are date free.
What Does This Mean to Me?
Everything. The most successful people are very proactive in managing their affairs. One of my wife’s many sayings is, “if you don’t manage life, life will manage you”. From morning to early evening, most people are working for someone else and advancing their net worth. Developing and achieving your personal goals starts before and continues after your “employed” time. It is like a second job pursuing personal goals, but remember you receive all the benefits.
We are thankful for your readership. As we near the completion of another year, we appreciate all the comments we have received and look forward to another year of analyzing events and reporting strategies to assist you in achieving your goals. Let us know if you have any questions or comments regarding this UPdate or your own financial planning. We are here to help.
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