How about taking on an important resolution for 2015? Commit to these ten steps and you are on your way to getting your financial house in order:
Step 1 – Prepare a binder with the work you do so that you organize your financial picture once and for all for your benefit and that of other family members. The benefits are many, including constructing a guide to give to your spouse who may be “in the dark” about your family’s finances. Start off by preparing a net worth statement that shows all of your assets and debt. Also, list each insurance policy you have: life, disability, long term care, homeowners, automobile and excess liability.
Step 2 – Prepare a retirement cash flow plan. Determine how much you spend now each month and what that will look like in retirement. You must include in your analysis the savings that must occur by retirement and significant expenditures that will occur in years to come such as for a second home, new cars and other events. This exercise helps determine if your investments and savings will be enough to carry you through retirement.
Step 3 – Determine that you are taking full advantage of tax-free savings opportunities afforded by Roth IRA and Roth 401k plans. Wealth inside such vehicles build up tax-free rather than tax –deferred such as in traditional IRAs and 401k plans.
Step 4 – Look at your estate planning documents for update opportunities. Does your last will and testament or revocable living trust distribute your assets in the manner you desire? Is the size of your estate large enough to warrant planning for estate taxes? For the twenty states that levy death taxes, estate planning documents can play an important role in controlling the impact of such taxes. A power of attorney for property should be considered so that your financial and digital assets can be handled with ease if you are unable to do so. Also, health care directives should be updated so your family or loved ones can help guide your care in critical times without the need for a court-supervised guardianship proceeding.
Step 5 – Check beneficiary designations on IRAs, 401k plans, life insurance, annuities and other similar assets. Naming proper beneficiaries is important for tax and distribution purposes. Also, maybe think about gifting assets to loved ones in order to reduce federal and state estate taxes.
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Step 6 – Maintaining records of all digital assets and giving loved ones the proper authority to access those accounts is a new consideration that most people have not adequately addressed. Do not assume that your family is legally permitted to access your accounts if you are unable to do so. At a minimum, your property power of attorney should give your agent the authority to access your digital assets such as Facebook, Instagram and the many other internet-oriented social and business sites.
Step 7 – Your investment portfolio is a critical element to your family’s future financial success. Consider hiring a trained professional for this task so that a professional, disciplined strategy is maintained and the proper stock-to-bond allocation is implemented for your situation. Also, a professional’s expertise will help you avoid making the behavioral decisions that are most damaging to a portfolio’s performance over the long term. It may feel good to get out of investments when the market is in a downward spiral, but that may not prove to be the best approach.
Step 8 – Check all of your insurance coverages with your financial planning and insurance professionals. For example, excess liability coverage can usually be obtained on your homeowner’s policy to give critical extra coverages in high exposures areas such as automobile driving. Also, you should always take a fresh look at whether you have sufficient life insurance to cover the risk of premature death.
Step 9 – There are significant tax savings opportunities that can be lost without proper planning. For example, Roth IRA and 401k accounts are great, simple techniques for building up tax-free income. Traditional IRA and 401k accounts also present good tax planning opportunities. Some states do not tax retirement income, so they should be considered as places to retire to help stretch retirement income. The new Medicare surcharges – 0.9% on earned income and 3.8% on investment income - on some people may possibly be avoided or minimized with proper planning.
Step 10 – Consider hiring a professional financial planner to help navigate the many areas of the financial planning process. Constructing a well-thought out financial plan requires the collaboration of many professionals trained in their given area of expertise.
Follow a few easy steps and you will start the new year off right and bring much-needed financial organization to your life!
Michael Foltz is a Principal of Balasa Dinverno Foltz LLC, a fee-only, independent wealth management Firm in Itasca, Illinois that currently manages over $2 billion of assets. He is an attorney, CPA and Certified Financial Planner™ with over 25 years of wealth management experience. Michael has been quoted in national publications, including the Wall Street Journal, Financial Advisor and BusinessWeek.