How to Start the New Year Off Right Financially

Edward Goldstein, CFP |
Categories
Financial Planning

As we embark on a new year, it’s the perfect time to reassess your financial health and set yourself up for success. At Financial Life Planning, we believe in empowering our clients with knowledge and actionable strategies. Here’s how you can kickstart your financial journey this year:

1. Strengthen Your Retirement Plan

  • Assess your confidence: How certain are you that you’re on track for retirement? Using interactive software, we can explore multiple retirement scenarios to increase your success. For instance, our models might discover how increasing your savings rate by just 2% could boost your retirement success probability from 75% to 90%. This small change could make a significant difference in your retirement lifestyle.
  • Consider a comprehensive financial plan: We can help you create a roadmap to your financial goals. This plan will take into account all aspects of your financial life, from cash flow management to estate planning.
  • Maximize Social Security: Develop a strategy based on your unique circumstances. For example, delaying benefits until age 70 could increase your monthly benefit by up to 32% compared to starting at full retirement age.
  • Boost contributions:
    o    Increase your retirement plan contributions: Try to increase your contribution percentage by 1% each year.
    o    Take full advantage of employer matches: For example, if you're currently contributing 4% of your $60,000 salary to your 401(k) and your employer matches 50% up to 6%, you're leaving $600 of free money on the table each year ($60,000 x 1%)

2. Prioritize Saving

  • Pay yourself first: Automate transfers to savings accounts before spending on discretionary items. Set up automatic transfers on payday to your savings account.
  • Set specific savings goals:
    o    Emergency fund (3-6 months of expenses): Start with a goal of $1,000, then build up to cover several months of expenses. This way, you're saving before you have a chance to spend the money.
    o    Short-term goals (vacations, significant purchases): If planning a $3,000 vacation in 12 months, aim to save $250 per month. Break it down further - skip one restaurant meal a week (saving $100) and reduce entertainment expenses (saving $150) to reach your goal.
    o    Long-term goals (retirement, children’s education): Consider a 529 plan for education. For retirement, maximize contributions to your 401(k) or IRA.

3. Optimize Your Investment Portfolio

  • Review asset allocation: Ensure your portfolio aligns with your risk tolerance and time horizon. For example, a young professional with a moderate risk tolerance might have 70% in stocks (for growth) and 30% in bonds (for stability). Someone nearing retirement, however, might have a 50/50 split to reduce risk.
  • Diversify across accounts: Consider your Individual, Joint, IRA, and 403(b) accounts as a whole. Ensure you’re not overexposed to any single sector or asset class across all your accounts.
  • Look to Consolidate Multiple Investment Accounts with the Same Title: For instance, if you have multiple IRAs or individual accounts, consider consolidating them. This can simplify your financial management, potentially reduce fees, and make it easier to maintain your desired asset allocation.
  • Rebalance regularly: Adjust your investments to maintain your target allocation. Set a reminder to rebalance quarterly or when your allocation drifts more than 5% from your target.

4. Live Within Your Means

  • Track your spending: Use budgeting apps or spreadsheets to monitor where your money goes. For example, apps like Mint or YNAB can categorize your expenses automatically, giving you a clear picture of your spending habits.
  • Identify areas for cutbacks: Look for subscriptions you don’t use or excessive dining out expenses. You might be surprised to find forgotten gym memberships or streaming services you rarely use.
  • Create a realistic budget: Ensure your expenses don’t exceed your income. Try the 50/30/20 rule: 50% for needs, 30% for wants, and 20% for savings and debt repayment. For instance, if your monthly take-home pay is $5,000, your budget might look like this:
    o    Needs (50%): $2,500 for rent, utilities, groceries, and minimum debt payments
    o    Wants (30%): $1,500 for dining out, entertainment, and hobbies
    o    Savings and debt repayment (20%): $1,000 split between your emergency fund and extra debt payments

5. Manage Old Retirement Accounts

  • Consolidate 401(k) or 403(b) plans: Consider rolling over accounts from former employers. This can simplify your financial life and potentially reduce fees.
  • Explore IRA options: We can help you understand the pros and cons of different IRA types. For instance, a Roth IRA might be beneficial if you expect to be in a higher tax bracket in retirement.

6. Prepare for the Unexpected

  • Review Life, Disability, and Long-Term Care Insurance coverage:

    o    Life insurance: Ensure you have enough coverage to replace your income and cover your family’s needs. A general rule of thumb is 10-15 times your annual income. The leading causes of death before Retirement Age are accidents, heart disease, cancer, and homicide.   
    o    Disability insurance: Group disability insurance often only covers 60% of your base pay, and the benefits are usually taxable. Consider supplementing with an individual policy to cover any gaps.  You may be surprised to learn that the odds of becoming disabled are more significant than the odds of dying young.  Due to the prevalence of issues that include mobility, shortness of breath, health behaviors, occupation, and Socioeconomic issues, the Social Security   Administration reports that a 40-year-old American has a 20% chance of becoming disabled before normal retirement age and a 9% chance of dying before retirement age.  A 40-year-old American has a 14% chance of becoming disabled before normal retirement age and a 7% chance of dying before retirement age.  
    o    Long-term care insurance: This can help protect your assets from being depleted by long-term care costs. Consider purchasing in your 50s or early 60s when premiums are lower.
    o    Optimize costs: We can help you evaluate proper coverage options and explore opportunities to lower premiums 

  • Review Home and Auto Insurance: 

    o    With rapid increases in home and auto insurance premiums,. There may be opportunities to save by shopping across various insurance providers, evaluating your coverage levels and costs, and possibly bundling home and auto coverage. 
    o    Review whether your current coverage provides adequate coverage or whether you need separate riders or coverage for valuables, such as a wedding ring and collectibles. Evaluate your deductible levels and coverage amounts to ensure they still meet your needs and risk tolerance.  
    o    Explore obtaining a cost-effective “umbrella” policy to increase your liability coverage by $1 million or more in case you're at fault in an accident or someone is injured on your property. 

7. Maximize Tax Efficiency

  • Explore tax-saving strategies:
    o    Charitable giving strategies: Consider donating appreciated securities instead of cash to maximize your tax deduction.
    o    Roth conversion opportunities: Suppose you're temporarily between jobs, putting you in a lower tax bracket this year. Converting $20,000 from your traditional IRA to a Roth IRA provides tax-free growth and better tax management for years to come.
    o    Reposition investments across account types: Evaluate the types of investments held in your pre-tax and post-tax retirement accounts. For example, consider holding high-growth assets in Roth accounts to maximize tax-free growth while keeping income-producing investments in traditional IRAs or 401(k)s.
  • Keep abreast of recent tax law changes: Stay informed about tax law changes that can impact you, including changes to eligible deductions and contribution limits for retirement accounts. This knowledge can help you adjust your financial strategies to maximize tax efficiency.

8. Update Your Estate Plan

  • Prepare or update your documents:
    o    Will: A will isn't just for transferring assets; it can provide for your dependents' support and care and help avoid costs and delays from dying without one. It can also spell out plans to repay debts, so make sure all documents are consistent and reflect your desires. Trust(s): Consider a revocable living trust to avoid probate and provide privacy.
    o    Power of Attorney: Designate someone to make financial decisions if you’re incapacitated.
    o    Healthcare Directive: Specify your wishes for medical treatment if you can’t communicate them yourself.
    o    Coordinate asset titling with the rest of your estate plan. The titling of your property and non-retirement accounts can affect your assets' ultimate disposition and taxation. 
  • Check beneficiary designations:  Keep in mind named beneficiary designations or asset titling for life insurance, retirement accounts, and annuities supersede your will. .For example, if your Will leaves everything to your current spouse, but your 401(k) still lists your ex-spouse as the beneficiary, your ex-spouse would receive those 401(k) funds regardless of what your will states.

Take Action Today!

Remember, financial planning is not a one-time event but an ongoing process. At Financial Life Planning, we're here to help you navigate these decisions and create a personalized plan for your unique situation. Don’t let any more time pass without taking control of your financial future.

Contact us today to schedule a comprehensive financial review and start implementing these SMART (Specific, Measurable, Achievable, Relevant, and Time-bound) financial goals. Together, we can make this your best financial year yet!

Edward C. Goldstein, CFP®, MBA, President
CERTIFIED FINANCIAL PLANNER ™ Practitioner 
Financial Life Planning, LLC
10,000 Lincoln Dr. East, Suite 201
Marlton, NJ  08053
Phone: 856-988-5480
Fax: 908-292-1040