Christine Benz, Morningstar2
As the new year dawns, many investors start out with the best of intentions. They plan to scrupulously document their spending, stick to a budget, pay down debt, and kick up their investment contributions. They aim to overhaul their portfolios so they’re in line with their asset-allocation targets and to ensure that all of their holdings are best of breed. And don’t forget getting organized and creating a will–two tasks that perennially appear on many folks’ to-do lists.
Trouble is, that’s too much radical change–and too much work–to tackle in a short period of time. Individual investors stand a better chance of getting their financial houses in order if they tackle their to-dos in manageable pieces rather than letting themselves get overwhelmed by all they have to do.
To help in that effort, I’ve created a month-by-month framework of financial-planning to-dos, covering everything from your portfolio to taxes to getting organized.
See how you’re doing: Are you on track to hit your financial goals? If you’re still in accumulation mode, review how much of your salary you managed to save and invest last year; 15% is a reasonable minimum target. If you’re retired, review last year’s spending rate to make sure it passes the sniff test of sustainability.
Find your best return on investment: The most successful investors consider their total opportunity set–including not just investment opportunities but debt paydown as well. Are you deploying your money into those opportunities that promise the highest return on your investment? If you have high-interest-rate credit card debt, the answer is easy; you’d be hard-pressed to outearn that interest rate by investing in the market. For investors with lower-rate mortgages and tax-sheltered investment options such as 401(k)s to contribute to, it’s sensible to deploy money into both.
Bump up contribution rates to accommodate new limits: Company retirement plan contribution limits are the same in 2016 as they were last year: $18,000 for investors under age 50 and $24,000 for those 50-plus. If you’re in a position to max out your contribution to these accounts, you’ll need to bump up your contribution rate. (If you have a high income and earn a bonus, just be sure not to run into the high-class problem of contributing too much too early to earn full matching contributions, as discussed here.) While you’re at it, consider putting your other investment contributions–to your IRA or taxable account–on autopilot via automatic withdrawals from your checking or savings accounts.
Important dates: Jan. 15, 2016, is your deadline for paying your quarterly estimated taxes.
Gather documentation on deductible items: If you’re planning to deduct items such as charitable contributions, medical expenses, or mortgage interest, make sure you have supporting documentation. Tax-preparation software programs provide useful prompts to ensure you don’t miss out on valuable deductions. Investment-advisory fees, tax-preparation help, and investment-related subscriptions such as a Premium Membership at Morningstar.com are deductible expenses, though mutual fund expense ratios are not, as discussed here.
Take a good look at 1099s and W-2s: Rather than dutifully copying this information into your tax return, take a moment to gather some intelligence from these numbers. Your 1099 and W-2s provide valuable information about your earnings and investing habits. If your salary has increased, have you also increased your savings rate, including your 401(k) contribution? If you have piddling levels of income from a number of savings-type accounts, can you wring a higher level of income from an online savings account? If your mutual funds made sizable capital gains distributions, would you be better off holding tax-friendly index funds or ETFs in your taxable account?
Contribute to an IRA for 2015: April 18 is your deadline for filing your tax return, and it’s also your deadline for funding an IRA for the previous tax year. If you haven’t yet made your contribution, it’s time to get on the stick. Contribution limits are $5,500 for those under 50 and $6,500 for people over 50; this article details the 2015 income thresholds governing traditional (deductible) and Roth IRAs. (And I will discuss the income limits for 2016 in an article later this week.) Bear in mind that the backdoor Roth IRA maneuver is alive and well for investors who earn too much to contribute to a Roth outright (you simply contribute to a traditional IRA, then convert to a Roth shortly thereafter), but beware of conversions if you have a lot of traditional IRA assets, for reasons discussed here.
Fund your health-savings account for 2015: You also have until April 18 to make a contribution to a health-savings account if you want your contribution to count for the 2015 tax year. For 2015, single individuals can contribute $3,350 to an HSA, whereas those with family coverage can contribute $6,650. People over age 50 can contribute an additional $1,000. An HSA, used in conjunction with a high-deductible healthcare plan, can make an excellent ancillary savings vehicle for investors who are maxing out their contributions to their traditional 401(k)s. Contributions are pretax (or deductible if you contribute to an HSA on your own) and compound tax-free, and qualified withdrawals are tax-free.
Know what to save and what to shred: Many people scrupulously file everything they receive from their financial providers and, in the end, save way more than they need to. If your file drawer is bulging with old statements, prospectuses, and utility bills from 2003, it’s time to do some culling. Before you start shredding old financial statements and trade confirmations, make sure that you have documentation regarding your cost basis–or that your financial provider does. This document details what you can safely get rid of, as well as the documents that you should keep–either in hard copy or electronic form. It also details the documents that are best filed in a safety-deposit box, fireproof box, or password-protected document.
Go paperless: Your financial providers have probably been badgering you for years about switching over to electronic delivery of your statements. It’s time to take them up on it. After all, each piece of financial documentation that passes through the mail puts you at greater risk of financial fraud. Before going paperless, make sure that your computer security is up to snuff.
Create a master directory: Every household needs a basic document outlining financial accounts, along with the provider name, account number, URL, and the names of any individuals they work with. You can create a simple spreadsheet, or use this template. Whatever you do, password-protect your document (or keep it under lock and key) and alert a trusted loved one of its existence.
Important date: April 18, 2016, is your tax-filing deadline. It’s also your deadline to file an extension if you need more time. Individuals will also need to make their quarterly estimated tax payments by this date. Finally, April 18 is your deadline to make an IRA or health-savings account contribution for the 2015 tax year. (See above.)
Assess your emergency fund: Unexpected expenses can crop up no matter your life stage, making it essential to hold liquid reserves–apart from your long-term retirement assets–to defray them. For most households, holding three to six months’ worth of living expenses in true cash instruments is a good starting point, though investors who earn high salaries or have volatile earnings streams will want to hold more. An online savings account will tend to offer the highest yield of any risk-free investment type.
Assess liquid assets if retired: Retired people will want to hold even more cash, in case one of their income sources is disrupted for some reason. Knowing that their near-term income needs are covered can also help retirees ride out volatile times with their long-term portfolios. This article details the bucket system for managing a retirement portfolio; the system employs dedicated cash reserves.
Create or review your investment policy statement: Running your portfolio without an investment policy statement is a little like trying to build a house without any blueprints. Your IPS needn’t be complicated, but it should convey the basics of what you’re trying to achieve: your financial goals and expected duration/completion, your asset-allocation policy, your criteria for selecting investments, and the specifics of how–and how often–you’ll monitor the whole thing. You can use this template for your IPS, or craft your own. If you already have an IPS, it’s a good time to review it to make sure that it syncs up with your current situation and reflects your current belief system.
Create a retirement policy statement: Retired people may also want to craft a document that addresses the specifics of their spending strategies: their targeted income needs and how much of them will be covered by pensions and Social Security; their portfolio spending rate and the extent to which it might change over time; and whether they’re using an income-centric, total-return, or blended approach. Financial-planning expert Michael Kitces discusses what’s called a withdrawal policy statement in this post on his Nerd’s Eye View blog and links to a sample withdrawal policy statement from financial planner Jonathan Guyton.
Important date: Investors who are paying quarterly estimated tax payments will need to have them in by June 15, 2016.
Evaluate the viability of your portfolio and your plan: Midyear is a good time to conduct a portfolio checkup. Focus on the fundamentals of your plan and your portfolio, including its asset allocation, whether your savings and spending rates are on track, and salient changes with your holdings.
Conduct a cost audit: In addition to checking up on your portfolio plan, it’s also worthwhile to periodically assess the costs you’re paying to keep the whole thing running. Because they rarely write a check for financial services, most investors are tremendously insensitive to the dollars and cents they’re forking over for fund management, trades, and advice. Spend some time reviewing these costs and translating those percentages into dollars and cents; then see if you can shave them down. Swapping high-cost funds for lower-cost ones is one of the easiest ways to bring your cost load down; investors can buy broad-market index funds for well under 0.2%.
Craft or revisit your estate plan: Planning for your own disability or mortality isn’t pleasant, which is probably why estate planning falls by the wayside in so many households. Others may assume that estate planning is unnecessary for them, given that the estate tax exclusion is well over $5 million per individual, currently. But a basic estate plan–in which you determine who will inherit your assets, serve as a guardian for your minor children, and make important decisions on your behalf if you cannot make them yourself–is a must for people at all life stages and wealth levels. Do-it-yourself estate-planning kits are increasingly easy to come by and may help you tick some of the boxes if your situation is very straightforward. But most of us have special situations–special-needs loved ones, our own businesses, or complicated family situations, for example–that call for a customized estate plan drafted by an attorney. This article discusses some of the key estate-planning documents that everyone should have.
Review your beneficiary designations: Many investors aren’t aware that beneficiary designations for 401(k)s, IRAs, and other accounts supersede the information they’ve laid out in their wills. Thus, if you’ve gone to the trouble of drafting a will or creating trusts, it’s essential that your beneficiary designations sync up with what’s in those documents. This article discusses what to keep in mind when naming beneficiaries.
Get a plan for your digital estate: Do you have a plan for your digital footprint–your social-media or email accounts, for example? Didn’t think so. This article walks through what you need to know when minding your digital estate.
Review your long-term-care plan: Long-term care is another one of those topics that is no fun to think about and, unfortunately, there are no easy answers about whether to buy insurance or self-fund using your own portfolio.
Whether to purchase long-term-care insurance or pay out of pocket (or employ some combination) is a highly personal decision. To make an informed decision, it’s helpful to understand the likelihood that you’ll need long-term care, the potential duration, and the costs. This article provides some statistics on all of these matters, and this one discusses some key terminology surrounding long-term care.
Important date: Investors who are paying quarterly estimated tax payments will need to have them in by Sept. 15, 2016.
Kick college funding into high gear: Are your children or grandchildren growing by leaps and bounds yet you haven’t given their college plans more than a nervous thought (or two or three)? If so, it’s time to take a hard look at how you’ll pay for it. This article provides a checklist for would-be college savers.
Conduct an insurance review: Most employers offer open enrollment for health insurance at year-end, but it’s also a good time to take stock of your other types of insurance. This article assesses some of the key insurance types to consider.
Watch out for capital gains payouts: Mutual funds typically distribute capital gains in early December, so by late November, fund companies are usually publishing estimates of their impending distributions. At a minimum, you want to avoid buying a fund just before it makes a distribution.
Be generous: If giving financial gifts to loved ones is on your to-do list, you can be exceptionally generous without making your estate susceptible to the gift tax; each individual can gift up to $14,000 per person per year. Year-end is also a good time to squeak in charitable contributions that may lower your tax bill. Investors who are subject to required minimum distributions can direct their RMDs to charity, thereby reducing their taxable income for the year.
Important date: Dec. 31 isn’t just New Year’s Eve, it’s also your deadline for a number of financial to-dos, such as 401(k) contributions. Investors who are required to take minimum distributions from traditional IRAs and 401(k)s will need to do so by Dec. 31.
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