The end of the year presents an excellent opportunity to step back and take a holistic look at your overall financial situation. While most year-end planning focuses on tax projections and potential changes to tax laws, there are many other areas of your finances you should be thinking about right now. Weaving together income and estate tax planning with retirement planning, risk management, investments and cash flow is an important aspect of the work we do for our clients. In this letter we’ll look at each of these various aspects of financial planning and address some of the questions you should be considering in the coming months.
Income Tax Planning – Income tax reform is at the top of Washington’s policy agenda right now. The proposals we have seen thus far have been short on details, but they do contain significant changes to tax law. There is still a long way to go before we know if Congress will pass a tax reform bill and how it might impact you, so it’s far too early to try to implement any tax planning strategies. You can, however, plan based on the current law and get a handle on where you stand for your 2017 tax situation. It is always wise to run a current year tax projection based on your income and deductions year to date. This could be even more important this year as it would enable you to make any decisions more efficiently once we know what changes might take place and when they would be effective.
Estate Planning – Another aspect of the tax reform proposals being floated by the GOP are potential significant changes to estate tax law. It is possible their proposal would eliminate the estate and GST (Generation Skipping Tax) but possibly keep the gift tax in place. It is not clear what would happen to cost basis rules under a revised tax code. It has always been important to think through both the tax and non-tax considerations of what will happen to your assets after you are gone, but now is the perfect time to step back and revisit those plans. You might consider preparing a flowchart of your current estate plan to help you visualize what would happen to each of your assets and how the current estate tax law might impact you. You should also make sure your estate planning documents are up to date – not just your will, but also your power of attorney, health care documents, and any trust agreements. Another important item to check is the beneficiary designation on any of your retirement accounts to be sure they are in line with your desires. If you have recently been through a significant life event such as marriage, divorce or the death of a spouse, this is especially important right now.
Investment Strategy– Virtually all areas of the stock market have seen impressive performance this year, continuing a trend of positive returns that has persisted since the market bottom in March of 2009. The markets have also been remarkably calm this year as volatility has reached some of the lowest levels seen in years. This has led many to fear we might be in the calm before the storm, but nobody can tell you how long that calm might last. We know it can’t last forever, so are you prepared for the ultimate drop? While it might be impossible to fully prepare yourself for the emotional impact of a bear market, the more often you remind yourself they are a natural part of investing, the easier it will be to live through the next one. Strong stock market returns also might have driven your asset allocation out of line with what is appropriate given your risk tolerance, return requirements and time horizon. It’s important to regularly rebalance your portfolio to maintain the appropriate risk profile in your portfolio. If you are retired and living off your portfolio, this rebalancing should include maintaining an appropriate cash reserve to cover at least 2-3 years of living expenses.
Fixed income has not performed as well as equities this year, but they have still seen positive returns. We are in an environment of rising interest rates, so while there could be short term volatility, the higher yields in the long run will be good for investors. For borrowers, rising interest rates will ultimately mean the end of inexpensive borrowing. Have you done everything you can to lock in low rates in the current environment? While we are on the issue of credit, with the magnitude of the Equifax credit breach, have you taken steps to protect your credit? It is also a good idea to check your credit history periodically.
Charitable Giving – We always see an uptick in client interest in charitable giving at the end of the year, but for many of our clients, charitable giving plays a key role in their lives year-round. There are many ways to be more tax efficient in your charitable giving. If you own appreciated stock it might make sense to use this for your charitable gifts to avoid paying substantial capital gains taxes. If you are in a higher tax bracket this year than you might be next year, it could make sense to accelerate next year’s gifts into this year to maximize their tax benefit. If the numbers are large enough, you might even consider a private foundation or donor advised fund for your charitable giving. You should also consider your charitable giving goals in conjunction with your estate planning.
Retirement Planning – The concept of retirement is changing, and different people define it in different ways. The first step in planning for retirement is to think through what you envision for your own future. Whether you expect a typical full retirement or a career change into a more fulfilling field, you need to determine an appropriate balance between spending and saving, both now and in the future. There are many options available for saving for retirement and your specific circumstances must be considered before coming up with an appropriate plan. Maximizing a 401(k), setting up a SEP IRA, choosing between Roth and regular tax deferred savings accounts; these are just some of the many decisions to consider when saving for retirement.
Cash Flow Planning – Whether you are retired or not, it is important to closely monitor your spending habits and the end of the year presents a fantastic opportunity to review the current year’s spending and plan for next year. If you are retired, it is particularly important to come up with a tax efficient withdrawal strategy to cover your spending needs. If you have not yet reached age 70.5 you should determine if it makes sense to take taxable distributions from your retirement accounts before you are required to do so. If you are over age 70.5 you need to make sure you calculate the correct required minimum distributions because the penalties for not doing so are high. If you have not yet claimed social security you should think through the various claiming strategies available to you.
Risk Management – The recent hurricanes in Texas, Florida, and Puerto Rico, along with the wildfires in California provide a powerful reminder to make sure your insurance coverage is appropriate and up to date. You should review your property and casualty coverage to make sure they cover the risks you face. If you are in one of these disaster areas, make sure you take all steps necessary to recover what you can and take advantage of the tax treatment of casualty losses. Other areas of risk management that you want to regularly update and evaluate would include life insurance and disability insurance. We often find clients who have not reviewed their policies in these areas in recent years and they find they are not appropriately covered considering their current financial situation.
Education Funding – An important goal for many people is funding education costs for their children or grandchildren. While the increase in college costs have slowed some lately, this is still a major expense for most families. You should be looking at the many ways you can save for education to determine the optimal strategy given your situation. Keep in mind there could be a state tax benefit to funding a 529 plan so you might want to maximize those contributions before the end of the year.
Elder Planning – There are many financial planning elements to consider as you age and it is important to consider these things before it’s too late and you are unable to make rational decisions. You need to have a plan in place for who will handle your financial affairs should you suffer cognitive decline. Housing decisions are an important part of this process and you should discuss your future housing plans with your spouse and/or your family sooner rather than later. Effective communication among family members is important and will help reduce future family conflicts.
While a lot of attention has been focused on potential tax law changes, we think it is also important to look more broadly at your financial situation. Many of the topics discussed above can have serious ramifications on your personal finances. We would be glad to help you think through any of these areas and their impact on you.
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
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