Can you believe it? We are almost done with 2018 and in a few days move into the New Year, 2019. There is no better time than now to reflect on how you have been managing your finances, and perhaps begin the New Year with a commitment to do a deep-dive financial analysis.
Do You agree? If you do, here are seven ways to get you on a firm financial footing. Let’s discuss.
1. Organize Your Finances
I was doing financial planning for a new client recently – a couple in their mid forties. Their main concern was that they are disorganized with their financial accounts. Here is their situation:
Each had a 401(K) account with his or her current employer. Husband had three traditional IRA accounts and one ROTH IRA account. Wife had two traditional IRA and one ROTH IRA account. Each had individual taxable accounts, a joint account, and several Bank saving accounts. Finally, they had 529 accounts for the benefit of each of their two children. To top it off, these accounts are scattered across several Brokerage firms.
Does this sound too familiar? Welcome to the world of complexity! So, what to do in such situations? Here is one recommendation.
Keep it simple – Consolidate. Yes, it does demand time and energy for you to do so. However, it is worth it – will make your financial life much easier to manage.
In other words, prefer to keep all your financial accounts at one brokerage firm. Realize that there is little or no benefit at all to hold accounts at various firms. Secondly, consider combining your traditional IRAs into one. Similarly, ROTH IRAs into one ROTH. Lastly, try to keep as few taxable accounts as possible per family.
2. Maximize tax saving/deferring opportunities
If you are a high-income professional, it is likely you are exposed to the hefty tax burden. So, any opportunity that helps you to save or defer taxes is a welcome sign for a bright financial future. Here are some options to consider.
Make sure to maximize your pre-tax Retirement savings – such as your 401(K), 403(b), 457 plans, IRAs. For example, a 55-year old physician client of mine who works for a Government hospital saves $49,000 per year in his 403(b) and 457 plans. Considering his 37% marginal tax bracket, this is a tax savings of more than $18,000 per year for him!
Secondly, look to see if your employer offers a High Deductible Health Plan (a.k.a. HDHP) which in turn allows you to save significant pre-tax dollars in a Healthcare Savings Accounts (a.k.a. HSA). In fact, the advantage of HSA is that unlike IRAs, even the distributions are tax-free when used for medical expenses.
Third, if you are a business owner, consider setting up a Retirement plan for your business – such as a 401(K), a SEP-IRA or a SIMPLE IRA. These business plans provide you an opportunity to save significantly more pre-tax dollars than you could do as an employee.
Finally, familiarize yourself with the Good, Bad, and Ugly of the Tax reform – maybe the new law provides additional opportunities for you.
3. Invest in a low-cost, tax-efficient, globally-diversified ETF portfolio
Investing in Single stocks is inherently risky. On the other hand, if you wanted to diversify and move to mutual funds, you should be concerned about paying a lot in costs (to actively manage the fund). Besides, mutual funds are tax-unfriendly. For example, unlike stocks, you may be subject to capital gains even when you do not sell your mutual fund shares.
Here is an option that combines best of both: Exchange Traded Funds (a.k.a. ETFs)
ETFs trade like stocks providing you the liquidity. They hold a basket of stocks providing you the diversification mutual funds offer. And, in general, ETFs are less costly and more tax-friendly compared to mutual funds. Lastly, there are few thousands of ETFs available with some having exposure to global markets.
So, time is now to do a deep dive of your current Investments and consider reallocating to a low-cost, tax-efficient, globally diversified portfolio.
4. Ensure your Estate Planning documents are in order
Many people assume Estate Planning is all about saving on taxes when we pass assets to heirs. This is a myth. It is, in fact, much more than that. For example, Estate Planning also involves ensuring several other legal documents are in place to help make decisions on your behalf in case of your death or incapacity.
At a minimum, work with your Financial Advisor and attorney to have the following documents.
- A ‘Will” to facilitate your assets are distributed to your heirs per your wishes,
- A financial power of attorney so someone you trust could make financial decisions for you in case you are incapacitated,
- A healthcare power of attorney (a.k.a. Healthcare proxy), so someone else could make healthcare decisions on your behalf in case you are incapacitated.
But, what if you already have estate documents, but they are quite old? Hope the guidance in the article was helpful.
Yes, I understand it is hard to think of these scenarios and plan for them in advance. However, waiting on them does no good for you or your loved ones. So, time to act is now to ensure your Estate Planning documents are all in order.
5. Plan to cover long-term care expenses
According to a U.S. Department of Health and Human Services report, 70% of people turning age 65 can expect to use some form of long-term care during their lives. Moreover, Genworth’s 2017 survey suggests the cost of a semi-private room in a U.S. nursing home is approximately $85,776 a year.
Based on these statistics, a couple planning for retirement, and assuming three years of long-term care for each, would incur more than $500,000 just to cover their long-term care needs. In other words, long-term care expenses could become the most significant Retirement expense for most Americans.
Yet, many of us fail to plan at all for this expense and those of us who do want to plan, fail to do it timely. Start with these basic facts about long-term care. So, planning to cover long-term care expenses, is, in fact, a great way to begin your New year on a strong Financial footing!
6. Save for your kids’ education
Uncle Sam has traditionally been kind to parents saving for their kids’ education – I mean, in the form of tax incentives. For example, when you save post-tax money in a 529 plan, you are allowed to grow the money tax-free, and use the funds for kids’ college education without paying a dime of capital gains on the growth. This is a huge benefit. Here is what all you need to know about 529 Plans.
If you are not taking advantage of this, time to start is Now! Consider beginning the New Year with establishing a 529 plan for your child’s education, and reap significant tax benefits in the process.
On the other hand, if you are already saving in a 529 plan for your kid, there is more good news – the new Tax law, now allows 529 money to be used for K-12 education as well. Yes, tax-free. In other words, you are no longer limited to use these funds only for a college education.
7. Work with a Fee-only Financial Advisor
If you are a busy professional, time is your biggest enemy when it comes to effectively managing your own financial life. If you have spare time, perhaps you would want to spend with your family or take those vacations which have been long overdue.
So, begin your new year looking for a qualified Financial Advisor who could help you achieve your financial goals. After all, finding a trustworthy professional who works in your best interest is more readily available and more affordable now than ever before. Here are some tips.
Start looking for a Certified Financial Planner™ (a.k.a. CFP). These professionals have completed extensive training and experience requirements and are held to rigorous ethical standards by the CFP Board. Then filter out for the CFPs who are Fee-Only. i.e., those who receive no commissions, who have absolutely no conflicts of interest, and who work in your best interest and your best interest only. A great place to start is NAPFA Find An Advisor.
So, what do you think? Are you committed to taking control of your financial future? If so, hope this article provided some food for thought. For a customized advice, please consult with your Financial Advisor. Good luck!
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