By David Novak
As the calendar turns to a new year, it’s the ideal time to give your financial health an examination. Taking care of the little details now can save a lot of pain and heartache later—for you and your heirs.
Review your beneficiaries
This should include not only retirement accounts, such as IRAs, 401(k)s, 403(b)s, and other qualified plans, but also any taxable accounts that have a Transfer-on-Death feature. Also, make sure to examine not only the primary beneficiaries but also the contingent beneficiaries. Many beneficiary schedules also allow you to select per stirpes as an option—if you are not familiar with this, you should discuss with your investment advisor or estate planning attorney.
Review your insurance coverage
Some of us like to bundle as many different insurance coverages as we can together, while others like to spread our business out to different companies. Whatever your preference, make sure to shop the rates you’re paying on all your policies—auto, home, umbrella, etc.
For various reasons—not the least of which was laziness—I would rarely shop my rates, but once I did, I was amazed at how much variation there was for essentially the same thing.
Furthermore, are all the extras that are supposed to be giving you discounts (like the Big Brother device in my car monitoring my driving) actually helping you? Once I found out it wasn’t giving me anything, I couldn’t get rid of it fast enough.
Review your distribution/contribution rate
If you are still working, how much are you contributing to your 401(k)? Most employers will offer to match contributions dollar-for-dollar up to a certain amount, such as 3% of your income. Taking advantage of this matching amount is a no-brainer; it is equivalent to a 100% return on your investment. You’d be surprised how many people don’t take advantage of this “free” money.
If you are retired, then you are likely in the distribution phase from your investment portfolio. Are you taking money out at a sustainable rate that will not deplete your investments? You may have been planning on living off the income generated by the portfolio, but the current low-interest-rate environment could have thrown a wrench into this strategy.
Furthermore, when calculating the annual withdrawal rate, make sure to include not only the money that comes out regularly each month but also the lump sum distributions. When accounting for these “one-time” withdrawals, you may find out that your current distribution rate is unsustainable over the long term.
Review your asset allocation
You have probably heard the advice to rebalance your portfolio regularly, but are you doing it? If so, how often?
Studies have consistently shown that most investors, left to their own devices, neglect to properly rebalance their portfolio and, in fact, do the opposite—they will buy more of what has recently done well.
The whole point of rebalancing is to “buy low and sell high,” a straightforward concept to grasp on paper, but very difficult to implement, especially in times of heightened market volatility.
Furthermore, this should present an excellent opportunity also to evaluate the appropriateness of your long-term asset allocation target. Since the stock market has done so well these last few years, it’s been easy to rationalize that you need to have a portfolio weighted on the stocks’ side. Think about not only what your long-term asset allocation target is, but more importantly, what caused you to establish that target.
Review your estate plan
It’s essential to review what happens to your assets in the event of your death or incapacitation. Who is your primary and secondary durable power of attorney? Who is your primary and secondary health care surrogate? If you have multiple children, are they all aware of your overall plan? Do they all understand your desires in the event you become permanently incapacitated? The time to talk about all these things is now, in a very transparent way.
I recently went through this exact situation with a parent’s sudden decline and the prospect that he could be in a vegetative state for the rest of his life. Fortunately, we had discussed this possibility and were able to act clearly in accordance with my father’s wishes. While we still had to go through a very painful experience, I took some solace that the entire family had proactively discussed this potential event.
Just as you don’t want to neglect your physical health, it’s crucial to take care of your financial well-being too. It’s a good habit to get into and to keep; doing it regularly at the start of the year makes it easy to remember.
Keep your eye on the news
At this writing, the SECURE Act is heading to the U.S. Senate for confirmation. As currently written, it will make significant changes to inherited retirement plans like 401(k)s and IRAs. The new bill would generate more taxes for beneficiaries by requiring them to distribute the accounts over a 10-year period, thus accelerating the depletion of these accounts. This could greatly affect your estate planning.