The Personal Financial Check-Up

 Your financial health impacts almost every aspect of your life – if not every element – and it is essential to have an ongoing understanding of your financial situation as the years pass.  It can be helpful to have a few high-level items to review.  While not exclusive, the list covers some of the basic annual checklist items.

✓ Review investment allocations (stocks/bonds) for rebalancing or de-risking opportunities

✓ Review upcoming liquidity needs and make arrangements in advance

✓ Review insurance coverages (life, disability, property/casualty, etc

✓ Review your will and payable on death (POD) designations for bank accounts, investment accounts, and life insurance policies

✓ Review progress to goals and corresponding changes to your monthly budget

✓ Review with your CPA a current-year tax projection and look for action items

Rebalancing

Some investors are allocated solely to one asset class (stocks or bonds), but the vast majority have some exposure to both in their investment portfolios.  Generally, at the account’s inception, this ratio is determined in consultation with an advisor and then reassessed at least annually thereafter.  While changes are made periodically, there are usually many years during which the allocation stays the same.  Although the target allocation might be static for a period of years, that does not necessarily mean the allocation is the same.  As one asset class outperforms the other, the account may drift outside of acceptable parameters.  It is not necessarily the case that rebalancing is always wise when the account drifts 3-4% from its objective; however, if the account is drifting outside the target by more than 5% or 10%, it may be prudent to rebalance.  The consequence of rebalancing can oftentimes be capital gains tax.  This, however, should not alter the decision to rebalance; instead, it should be understood as the cost of capturing that outperformance and redeploying those proceeds across the portfolio to realign the account with its risk-return parameters.  Additionally, as you near retirement, it may be prudent to start making gradual adjustments downwards in the risk/return profile, so that you can spread out the capital gains tax over several years.    

Liquidity Needs

Although unexpected expenses, by their very nature, do not give any sort of warning, to the extent that you can, it is wise to plan for liquidity far in advance.  For example, suppose you are aware of a major remodel, vehicle purchase, or other significant event a year in advance. In that case, you can work with your advisor to let investment income accumulate, such that you don’t have to realize capital gains (or maybe fewer capital gains) at the time of the withdrawal.  Suppose you know of an upcoming expense (within the next year). In that case, it is generally advisable to begin a liquidation process immediately to cover that cost – in other words, don’t try to time the market.  If you are hesitant to make a decision all at once, consider a liquidation schedule in which you sell one-third of the amount needed over the course of three months.   

Review Insurance Coverages

It is easy to fall into the trap of thinking insurance is stagnant.  However, as life events occur and you age, insurance needs can shift drastically.  When you’re in the mid-stages of your career, long-term disability insurance is extremely important.   You may be close to your peak earning years, and you have a family to support.  If you become permanently disabled, you will lose many years of future earnings and may be unable to continue the standard of living to which you have become accustomed.  However, in retirement, long-term disability may be less of a priority since you are no longer working and do not have an income to replace.  The same logic (sometimes) applies to life insurance.  When you have high debt levels, many years left in your career (with future income), and a family to support (including house payments, college expenses, etc.), the appropriate amount of life insurance becomes significant.  As you near retirement, your children are hopefully self-sufficient, and if you pass away unexpectedly, your spouse will ideally be able to survive off retirement savings.  You may not need to keep paying premiums on that death benefit.  And of course, when it comes to risk management, it is always prudent to periodically review homeowners and auto insurance to ensure you have the appropriate coverage levels.  If you do not have an umbrella insurance policy, this might be worth inquiring about with your insurance professional.  

Review Your Will and POD Provisions

 Although this may not be an annual review item, it is a good practice to review your estate plan every few years.  Ensure that your will is up to date and that the distribution provisions align with your current wishes.  Ensure the same for any trusts in place and verify that you still have valid powers of attorney (general and medical) and a valid medical directive on file.  Importantly, it is also prudent to review investment accounts, IRAs, 401(k)s, savings accounts, life insurance, and annuities to ensure that if they have a payable on death (POD) beneficiary, that beneficiary is still living, and it is still your wish that those assets are transferred to that beneficiary upon your death (i.e. that you don’t have an ex-spouse listed).  It is also important to consider – if you think your estate will go through probate – that you have some liquid assets that do not list a POD beneficiary.  If the only items flowing into the estate are real property, then you could run into a situation in which there is no liquidity in the estate to pay debts, attorneys, accountants, etc., and your Executor could be forced into selling property sooner than planned. 

Review Progress to Goals

It is essential to check on progress toward financial goals periodically.  Even if it doesn’t require a drastic change, those small changes, when viewed cumulatively, can have a significant impact.  If you check on your retirement savings and realize you’re a little short of where you want to be, you might consider reviewing your budget to see if you can increase your 401(k) deferral.  If you look up and realize you have more than you need in a 529 college savings plan, you might need to pull back on those savings and redeploy that money to retirement.  It all starts with check-in, and even the most minor changes, when made consistently, can have a significant impact over time.      

Review Your Tax Situation

The time and effort it takes to arrange a check-in with your CPA can be well worth it.  Most accountants can look at your prior-year tax return and then gather some data from you for the current year to project where they think you’ll end up at year's end.  That is a relatively simple project, which can yield some tactical action items.  For example, suppose this year is shaping up to have higher-than-normal taxable income. In that case, you may choose to increase the amount contributed to a pre-tax 401(k) or a traditional IRA (assuming qualifications are met) to lower your income tax burden.  If you have experienced higher-than-average realized capital gains, you might now know to go out and look for losses you could harvest.  Suppose you have had less taxable income than is typical. In that case, you may want to consider inquiring about a Roth conversion or accelerating a different type of income from the following year into the current year.  These strategies can make a significant difference, especially when you take the time to look for them on an annual basis.