As the year comes to a close, a critical step that investors should take is an annual review of all of their finances. This will give you an opportunity to assess how your investments have performed, reduce unwanted risk, eliminate hidden fees and, most importantly, make certain your investment strategy is completely aligned with your financial goals. Why is this so important? In order to live the life you choose to live, your investment returns need to perform at a level that easily allows you to live life on your terms.
Eight Year-End Tips to Meet Your Financial Goals
- Do you have the end in mind?
Begin with the end in mind. How much does it cost to live the life you choose to live? Make sure you really focus on and figure that out. Next, make sure your investment strategy has the best chance at meeting or exceeding that number. If you need help figuring this out, let me know. Focusing on an investment strategy that is aligned with your financial goals is the key to living the life you want. One of the biggest mistakes investors make is trying to find the next hot stock, best performing mutual fund or the highest paying dividend stock. Individual investors are trained to think in terms of these types of tools. It’s in the best interest of the financial industry to perpetuate the importance of having expertise with all of these ‘tools’. However, successful investors know that the key to living the life you want is to establish your life goals first, financial goals second. Once your goals are clear, the investment strategy and the ‘tools’ to help you get there are easily attainable. Identifying the right tools is where most people need help; let me know if you have questions.
- Are you prepared for emergencies?
An emergency fund is just that, having money set aside and available to cover unexpected emergencies. Recently, my friend’s furnace broke and they needed to completely replace the HVAC system. The money to pay for it came out of their emergency fund. Consider the consequences: What if you lose your job or have a major medical expense? If you haven’t already done so, this is the reason you need to build your emergency fund. Most financial experts agree that everyone should have at least six months of living expenses set aside in case of an emergency. This number may vary depending on your particular situation. If you ignore the need for an emergency fund, unfortunately, it will typically put a dent in achieving your financial goals.
- Are you on the wrong end of interest payments?
Credit card debt puts you on the wrong side of interest payments and is a significant obstacle that will keep you from living the life you choose to live. You want to be receiving interest, not paying it. The annual interest percentage on credit cards can range from 18% to 29% which makes it very difficult to keep up with payments, and furthermore keep the interest from increasing your balance.
Here are some quick tips to help eliminate your credit card balances.
- Pay off small balance credit cards
- Pay down the cards with the highest interest rate
- Consider transferring your credit card balance to a 0% promotional offer. If you’re considering transferring your balance, make sure you do your research and find the card that most benefits you. Visit creditcards.com and shop for the best cards.
Again, people who live life on their terms receive interest from those who pay it.
- Are You as Tax Efficient as You Can Be?If you have an investment account, you should look to add investments that have tax-advantage opportunities. Most investors in a high tax bracket focus on returns, but it’s equally important to focus on after-tax returns. The key is the money you keep, not what you make. An investment with a return of 10% but a 30% tax hit will reduce your return to 7%. It’s the after-tax return on investment that matters.
If you’re in a higher tax bracket, look for tax-efficient investment strategies such as tax-free muni bonds. Income from muni bonds is federal tax-free. Most people don’t realize that there are plenty of tax-efficient strategies and investments that offer very attractive returns, if you know what to look for.
- Have you locked in retirement income?
It’s not about how much money you have in your retirement account, it’s about how much income the account generates for you in retirement. Focus on income, that’s the key. During an annual investment review, financial advisors typically focus on the current account value. The typical questions that advisors ask are, “What is the value of your retirement account? How much risk do you want to take? What should the mix of your portfolio be?” These are all the wrong questions because none of them are focused on income.The right way to look at retirement income is to focus on the amount of money you need, and the safety of your income streams. If your goal is to generate a certain amount of income by a certain year, then that’s how you should be measuring your retirement portfolio. If retirement income is important to you, what are you doing to protect your income from another stock market crash? What are you doing to ensure that the amount of income you need is actually going to be there when you retire? The financial industry is not incentivized to help you produce income from your portfolio; instead, they want you to keep contributing more capital to your accounts.
- Do you have an advantageous tax strategy?
If you’re having a low-income year, you may want to use this as an opportunity to convert your traditional IRA to a Roth IRA to take advantage of tax-free growth. This can be beneficial down the road when you withdraw money during your retirement years. While all withdrawals from a traditional IRA are taxed as ordinary income, withdrawals from Roth IRAs are tax-free and penalty-free as long as you’re 59 ½ years old and the account has been open for the past five years.
- Are you utilizing life insurance like Wall Street does?
Most individuals review their health and auto insurance every year, but rarely consider how reviewing their life insurance policy could assist in advancing their financial goals. From years of experience in this business, I’ve seen far too many people who were shocked to realize that their policy was on the verge of expiring. I have also, unfortunately, talked to people who realized too late that their million-dollar+ policy expired, and they were heartbreaking conversations. Be sure you have your life insurance policy reviewed by an independent party once a year. A review may present an opportunity to exchange the old policy for a new policy without tax consequences if done properly. By doing this, you can reduce the cost of your insurance, pull a bunch of cash out of your policy, or convert your life insurance policy into a tax-free income stream. Most people don’t realize that taking advantage of these life insurance opportunities is one of the major strategies that Wall Street firms leverage with their own money.
- Are you making simple yet avoidable annuity mistakes?
If you have an older annuity contract, you may be paying high fees and/or subjecting your account to dangerous stock market exposure. I have talked to far too many people whose existing annuities were underperforming, exposed to significant stock market risk, had very high fees—as much as 3.5%, and simply did not align with their life goals. Be sure to have your annuity reviewed by an independent party once a year to avoid these mistakes.
Financially successful people who are living the life they want know the answers to these tough questions:
- Will my current investment plan achieve the life I want to live regardless of market direction?
- Does my financial advisor have my best interest at the forefront of all of their decisions with my money?
- Am I completely prepared for all tax consequences in my 401K/IRA at retirement?
- Am I clear and comfortable with all of the fees I’m paying? Are there any that are hidden?
- Do I know exactly how much of my money is at risk if the market crashes?
A proper investment review will help you answer all of these questions. If you aren’t living the life you want to live, you’ve got to take a look in the mirror. You either don’t know where to start, or you just aren’t starting. The good news is that there are answers to all of these questions. If you are willing to start, send me an email and I can help.
Hope this is helpful, have a great day.
Sam Seiden – firstname.lastname@example.org