In the song Brand New Day, Sting asks, “Why would you want to put yourself through all that again?” Indeed. It is now 2021 – a brand new day and a brand new year. It’s time for a fresh start, with the confidence that this year will be better than the last. There is reason to be optimistic – an approved vaccine for the coronavirus is in the process of being widely distributed, with anticipation that a return to everyday life is within reach.
Each New Year provides an opportunity to reset our goals and identify a list of the things we want to achieve. This year, let’s add to the old New Year’s resolutions about eating less and exercising more, with a few that focus on your financial health. Here are 12 resolutions that can help ensure your financial confidence is achieved -
1. Get your “personal financial statement” in order
You can’t expect to reach a goal if you don’t know your starting point. Using December 31 as a benchmark, update your net worth (assets versus liabilities) and your cash flow (income versus expenses – see #2). If you’re retired, note your income from Social Security, pensions, retirement plan assets, or other sources. Everything proceeds from this first step, so take the time to bring these numbers up to date.
2. Review your budget and spending
How closely did last year’s spending match what you’d planned? Were unexpected increases one-time items or ongoing costs? Are there specific areas where you can trim expenses? For example, many of us found savings opportunities in 2020 through work-related expenses such as gas, lunches, and dry cleaning. For your reference, attached is a budget worksheet to help you reevaluate your spending. Click here for a copy of our Budget worksheet.
3. Review your account titling
Putting names and titles on bank, savings, and retirement accounts often occurs haphazardly, creating problems down the line. If one partner dies and an account is titled only in their name, those assets can’t be readily accessed by the survivor. One solution may be creating joint accounts, but it’s not always that simple. Titling has implications across a range of estate planning issues, as well as other areas like Medicaid eligibility and borrowing power.
4. Designate and update your beneficiaries
If you don’t correctly document your beneficiary designations, who gets what may be determined by federal or state law or by the default plan document used in your retirement accounts. When did you last update your designations? Have life changes (divorce, remarriage, births, deaths, state of residence) occurred since then?
Update your beneficiary listings on wills, life insurance, annuities, IRAs, 401(k)s, qualified plans, and anything else that would affect your heirs. If your estate is designated in a trust, have any relevant tax laws changed? Have you provided for the possibility that your primary beneficiary may die before you? Does your plan address the simultaneous death of you and your spouse? An estate attorney can help walk you through these various scenarios.
5. Evaluate your cash holdings
A certain amount of assets should be set aside in cash accounts that can be readily accessed – talk with us to determine whether your current allocation is appropriate. (Note that the cash portions of your brokerage and retirement accounts serve a different purpose and shouldn’t be counted as emergency reserves.)
6. Revisit your asset allocation
Appreciation in one asset class or underperformance in another can leave your portfolio with a different allocation ratio than originally intended. Compare your current versus ideal asset allocation at least once annually and rebalance as needed (consider rebalancing with new contributions to help avoid capital gains taxes). Go to the Client Portal to access your investment allocation information.
Consider also whether you’re comfortable with your portfolio’s current level of risk. Risk tolerance isn’t static – it changes based on your net worth, age, income needs, financial goals, and other considerations. Please contact us if you would like to review your current risk position.
7. Evaluate your retirement income sources
Most retirees have several income sources, such as Social Security, pensions, retirement portfolios, rental properties, notes receivable, inheritances, etc. Think about how secure each source is. Can you count on that inheritance? Would rental property vacancies interrupt your cash flow? If too much of your retirement income is from unreliable sources, it may be time to reposition your assets.
8. Review your Social Security statement
If you’re not yet retired, go online and establish an account with the Social Security Administration at www.ssa.gov (note - the SSA doesn’t mail out individual benefits statements anymore). Review your statement, and be sure all your earnings over the years have been recorded. Use the SSA’s online calculator to compute your benefits at various retirement ages. If appropriate, revisit your spousal plan and revise as needed.
9. Review the tax efficiency of your charitable giving
Think strategically about your contributions – for example, consider whether it’d make sense to donate low-basis stocks in place of cash or learn about establishing a donor-advised fund to take an upfront deduction for contributions made over the next several years. Give for many reasons, but remember that you can potentially reduce your tax liability when you do.
10. Check whether your retirement plan is on track
What changes are needed given your current lifestyle and the market environment? Don’t fixate solely on your retirement assets’ value. Financial goals have many moving parts that must be monitored on an ongoing basis. Consider:
• What types of assets do you hold?
• What is your required cash flow?
• What rate of return are you assuming?
• What inflation rate are you assuming?
• How long are you planning for?
11. Make the indicated changes
You should have a good idea of your current cash flow situation, what your retirement income picture looks like and where other challenges may lie. Do you need to adjust your 401k, IRA, or 529 contributions or tax withholding? Are you taking full advantage of your employer’s retirement plan options, particularly any contribution match? Go after any problem areas – or opportunities – systematically and promptly.
12. Check in with your financial professional
Prosperity Wealth Planning can help you keep these financial resolutions by offering the guidance gained through our experience in dealing with many market cycles and client situations. Communicate openly and candidly about what’s happening in your life today and what you foresee in the future. Let’s establish a regular meeting schedule to review your portfolio and financial plans. You can schedule up to five months in advance with our online calendar tool. Click here to schedule an appointment.
Important numbers to know for 2021
- 401(k)s. The salary deferral amount for 401(k)s remains the same at $19,500, while the catch-up amount of $6,500 remains unchanged as well. However, the overall limit for these plans will increase from $57,000 to $58,000 in 2021.
- Individual Retirement Accounts (IRA). The limit on annual contributions remains at $6,000 for 2021, and the catch-up contribution limit is also unchanged at $1,000.
- Roth IRAs. Roth IRA account holders will experience some slightly beneficial changes. In 2021, the Adjusted Gross Income (AGI) phase-out range will be $198,000 to $208,000 for couples filing jointly, increasing from the 2020 range of $196,000 to $206,000. For those who file as single or as head of household, the income phase-out range has also increased. The new range for 2021 will be $125,000 to $140,000, up from the current range of $124,000 to $139,000.
Although these modest increases won’t impact many, it’s natural to have questions anytime the financial landscape changes. We’re here to help.
Financial Articles of Interest
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Make 2021Less Stressful with These 7 Financial Moves
This truly is a brand new day with many new days ahead. We have opportunities to create fresh starts, new passions, hobbies, and beliefs. Choices to make about our lives (and our finances). Hope for the future. Gratitude for today. Recognition of what matters and what doesn’t (with the realization that what matters most are the people closest to us). Here’s hoping for more opportunities with those folks in the days and years to come.
Happy New Year!