The New Year is always a good time to take stock of your health.
But it’s not just your physical health that needs a checkup—make sure to give your financial health one as well.
Review your distribution rate
Most retirees need to take money out of their investment portfolio on a regular basis in order to meet all their living expenses. What is a sustainable rate to do this?
The traditional approach many retired clients have taken is to spend the income generated by the portfolio, while not touching the principal. However, the cumulative effects of almost a decade of low interest rates have thrown a wrench into this strategy.
A better way to think about this is to consider what the overall distribution rate is on the entire portfolio, including both income-oriented and growth-oriented assets. Do not be afraid to sell some growth-oriented investments, especially if they have had a recent period of strong performance.
Also, be aware of the effect that lump sum distributions can have on the sustainability on the regular monthly withdrawal rate over the long term. For example, I have a client who takes $1,000 a month out of her portfolio, which we have determined to be a sustainable rate over the long term. When she wanted to take $3,000 out for expenses for an upcoming vacation, I made sure to point out that while we could accommodate this, we also needed to adjust the monthly amount lower to compensate.
Review your asset allocation
It is no secret that the stock market has had a couple of strong years recently. Is it time to take some money off the table, and re balance into other areas of your portfolio?
While it can be tempting to “let your winners run,” never forget what your long-term asset allocation target is, and more importantly what caused you to establish that target. It’s easy to be prisoner of the moment and assume the good times will last forever.
You also want to make sure to re-balance not only among the main asset classes of stocks, bonds and cash, but also within them as well. You don’t need me to tell you that not all stocks are created equal, nor are all bonds created equal. For example, if you own high yield bonds as part of your overall fixed income exposure, because that sector has performed so well, it would be prudent to consider trimming some of those gains.
Review the implications of the new tax plan
As I write this, Congress is putting the finishing
touches on the new tax plan. It will be important to understand exactly how this will affect you.
Should you consider changing the federal and/or state withholding percentages based on the new rules? Many clients have maintained the same withholding rates for years, and may need to modify these based on new federal brackets and/or potential changes in state tax rates and deductibility.
Do you need to make any changes in your charitable gifting? Make sure under the new plan that you are still getting the most bang for your buck with your charitable donations. Also be aware that one thing expected to remain the same is the ability to make charitable contributions directly from your IRA, in order to satisfy your Required Minimum Distribution (RMD).
Make sure you are up to speed on the ability to designate specific tax lots when selling an investment in a taxable account. At the time of this writing, it is under strong consideration to make first in-first out, or FIFO, the mandatory election for selling any investment. This could have a meaningful effect on low-basis
stocks that have been held for many years.
Review your estate plan
Are your accounts’ primary beneficiaries still exactly how you want them? Have those beneficiaries had children themselves, resulting in a need to update your contingent beneficiaries?
Are you still comfortable with the person(s) you
have designated to be your durable power-of-attorney, and/or health care surrogate? Even if you are, when is the last time you have had a discussion with them to make clear your current wishes? Are you certain those current wishes are reflected in your legal documents? Are the documents in a place where they are accessible for those who would need to act on them?
If you have multiple adult children, I have always found transparency to be extremely important. Make sure all your kids know which one is the executor of your estate, and what your general plans are in terms of passing on your assets to your heirs. This can prevent a lot of headaches down the road.
By no means is this a comprehensive financial health checklist, but hopefully serves as a good starting point as we get ready for 2018.