Whatever your New Year’s resolutions are this year — be nicer, get healthier, get the Covid-19 vaccine — don’t forget to include your financial planning New Year’s resolutions.
And now is the time to make those resolutions and act on them. Start by making a list.
“Without a checklist, you’re at risk of being paralyzed when challenges come up,” said Dan Hoffman, financial advisor for Trailhead Retirement Planning Group, an affiliate of Morgan Stanley. “And you’re at risk of not taking advantage of opportunities as they come up.”
These resolutions apply to your overall personal finances. For advice that applies just to your retirement savings planning, see this other IBD report about your must-do retirement savings steps for 2021.
New Year’s Resolutions #1: Plan Ahead
Draw a roadmap. This should head your list of New Year’s resolutions. “If you don’t already have an overall financial plan, make one,” said T. Rowe Price senior financial planner Judith Ward. The plan should describe your financial goals and timetable. It may help if you write out an annual budget.
In addition to helping you, a written plan will help your spouse and other loved ones in the event you die or become incapacitated. So the plan should include a net worth statement and a list of your assets and accounts, detailing where accounts are held, with account numbers and passwords.
Include documents such as deeds, birth certificates, marriage licenses, insurance policies and a list of workplace benefits. You can store originals in a bank or home safe. Many online cloud storage sites such as Dropbox and Google Drive are free up to a certain amount of data.
New Year’s Resolution #2: Do Your Estate Planning
Create your estate plan. Be sure you’ve created all of your estate planning documents, including a will, advanced medical directive and durable power of attorney.
A will spells out how you want your assets dished out after your death. Those goals may differ from how your state would divvy up your wealth in the absence of a will.
The medical directive spells out which procedures you want and don’t want if you become too ill to speak for yourself.
And a durable power of attorney is your Swiss army knife of documents. It has multiple functions. It can give the person you designate the authority to make health care decisions, do financial transactions or sign legal documents when you’re too sick to do them.
Have You Divorced? Had A Kid? Are You Close To Death?
Review your beneficiary designations. Once a year — now — you should make sure the people you’ve listed as beneficiaries for various financial accounts are the still the ones you want. Those include retirement accounts like employer-sponsored 401(k)s, IRAs as well as insurance policies. The same goes for amounts that go to various beneficiaries.
Those designations may change due to divorces, deaths and births, and the financial fortunes of the intended recipients.
The people you list trump any names in your will. Further, “if you don’t make any designations, your state will decide who gets what,” Ward said. “And your state’s rules for dividing assets may differ from what you want.”
Lack of a will could mean that heirs would have to go to probate court — costly in some states like California — to see who gets what.
Tell Heirs What Your Plans Are
Communicate with loved ones. If you’re giving someone a complex or just an important task to do after your death, give that person written instructions. And make sure they match what’s in your will.
Also, remind beneficiaries of key rule changes. For example, make sure your heirs understand that so-called stretch IRAs no longer are available, Ward says. Heirs who inherit your IRA will no longer be allowed to stretch withdrawals out over their life expectancies. Instead, they must empty the IRA within 10 years.
New Year’s Resolution #5: Review Your Investment Allocations
Review and rebalance your investment allocations. This applies mainly to your overall investment plan and to the diversified portion of your portfolio — the portion devoted to mutual funds and ETFs.
Do weights of individual holdings, sectors and markets jibe with whatever your investment plan calls for? “With the market near its all-time highs, some assets and classes have grown exponentially more than others,” Hoffman said. “This can throw off your growth in the future.” It can also increase risk of sharp declines in your account balance.
You can rebalance by reallocating money among your investments. You may find it easier to simply change allocations of 2021 contributions to restore your planned asset mix.
In the portion of your overall portfolio that uses individual stocks, your buy-sell decisions should be based on the time-tested CAN-SLIM strategy. And this is the time to do a post-analysis of all your trades for the year.
New Year’s Resolution #6: Check Your Credit Report
Check your credit report. You’re entitled to a free report from each of the three national credit bureaus once every 12 months. So if you stagger them at four-month intervals, you can do it for free three times a year. You can do that through FreeCreditReport.com. Some financial firms also offer eligible clients free periodic reports. Morgan Stanley offers free monthly updates by email.
Set Aside Cash For Emergencies
Beef up your emergency cash fund. Many financial advisors recommend setting aside cash for an emergency such as an unexpected car repair or paying living expenses if you’re laid off. “You need at least six months of living expenses in case of an emergency,” Hoffman said.
In the era of Covid-19, having an emergency stash has never been more important.
Whether you are unemployed or just trying to reduce your vulnerability to financial unpredictability, consider trimming your household spending.
Help Pay For Kids’ Educations
Make 529 plan contributions. If you have kids or grandkids and can afford it, kick in money to each child’s 529 account. There’s no IRS annual contribution limit. But federal tax rules treat contributions as gifts. You can contribute up to $15,000 to each recipient in 2021. So can your spouse.
Any amount more than $15,000 each gets counted against your lifetime estate and gift tax exemption. Also, you must report it on Form 709 when you file your taxes. In 2021 individuals can gift up to $11.7 million without having to pay federal estate or gift tax.
Many states allow you to deduct contributions on your state tax return.
New Year’s Resolution #9: Do Well, Do Good
Donate to charity smartly. Odds are that you own stock or fund shares in a taxable account that have risen a lot in value. If you’re in a philanthropic mood and can afford it, donate appreciated shares that you’ve owned more than a year to an eligible charity rather than selling them first, then donating cash.
If you donate them directly and you itemize, you avoid incurring a capital-gains tax. That can increase the value of your contribution by up to 20%.
Also, you can claim a charitable deduction for the fair market value in the year of your gift. “Remember, you get those benefits if you make the donation to a donor-advised fund too,” Ward said.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and active mutual fund managers who consistently outperform the market.
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