I am always invigorated by the promise of a new year. It’s one of the best and most motivating opportunities to start fresh and think big about what you want to accomplish in the coming year — especially when it comes to your financial situation.
It’s easy to settle on a few common favorite financial resolutions: pay off debt, save more, buy that dream home. However, those goals often miss the little details of how you will get to that significant accomplishment. In my role as a financial advisor, it’s my job to help clients ask the right questions to help them reach their 2019 financial goals.
The following are the most impactful questions to ask.
Can I live on less?
Every time someone asks about financial goals, saving is part of the conversation. People want to know if they’re saving enough for retirement or putting the right percentage of their income away in general. Should it be 10 percent? Twenty percent?
The real question to ask is: Can you live on 70 percent of your income?
Living well below your means accomplishes two things. One, it helps you achieve your savings goals efficiently. Two, being accustomed to a less costly standard of living makes it easier to get by on less money if your income does, indeed, drop for some reason in the future.
What might happen if you or your loved one were to become ill or be injured in an accident? What if you could no longer provide for yourself or others, or you couldn’t take care of yourself or the ones you love? The time to consider how you might get by on less is when you have good cash flow and can afford to set aside a significant portion of your income.
If you prioritize tithing or other charitable giving, set aside the first 10 percent of your income for that. The rest should be distributed to your various short- and long-term savings accounts (emergency fund, retirement accounts, investment accounts, and so on).
Have I considered what happens if I become unable to work?
It can be hard to imagine a time when you cannot work. But the reality is that many of us will experience a temporary or permanent disability at some point in life. According to the Census Bureau, each year about one in five of us has some kind of disability.
Disability income insurance is a policy that pays a benefit to replace a portion of your salary if you become too sick or injured to work for an extended period of time. Policies typically cover between 45 and 65 percent of your income for the length of time specified in the policy (for example, five years, ten years or until retirement). Some policies provide a benefit if you become unable to work in your own occupation, without regard for whether you can work in another field. Other policies only provide a benefit if you become unable to work in any job.
Long-term disability insurance benefits generally don’t kick in until after an elimination period. That’s a length of time for which you have to be considered disabled before long-term disability benefits can be paid, and it is typically 90 days or longer, depending on the policy. So even if you have a policy in place, you may need to tap emergency savings to cover expenses for a period of weeks or months.
Do I have a plan for paying long-term care expenses?
The future holds the real potential for loss of income for many families. What would you do if you had to work less or stop working altogether so you could help take care of a loved one? It’s worth having a conversation with those you care about and may be responsible for. Consider talking about your options for planning for long-term care needs. Fifty-two percent of people turning 65 will need paid long-term care in their lifetimes, so it’s important to think about what might happen and how it will be paid for.
Long-term care is costly, and there are a number of ways to pay for it, some offering more coverage than others. It’s a good idea to speak with a financial advisor about different options and determine which is best suited to your situation and needs.
In addition to considering affordability and the financial side of long-term care, consider also discussing expectations about who might be responsible for taking on caregiving duties in the future, for others and for yourself.
Do I have loved ones who financially rely on me?
My plan is to live to a ripe old age, but I know I have little say in the matter. The reality is that many of us have people who rely on us financially. You might have a spouse and children. You might have aging parents who need help now and in the future. You might be an animal lover who financially supports your local humane society. Whatever the situation is, do you have a backup plan in place if you were no longer here to provide for them?
This is where life insurance comes in. In exchange for monthly or yearly premium payments, it provides a financial safety net for your loved ones.
Nearly a third of Americans report that they are underinsured, and more than half of consumers say they would have immediate financial trouble if the primary earner died.
With the low cost of term life insurance today, there is really no reason to be underinsured. A healthy 35-year-old man can buy a 20-year, $500,000 Haven term life insurance policy issued by MassMutual or $21.05 per month.
Who needs life insurance?
Life insurance is a smart move when you have people in your life who depend on you financially.
Read moreAm I maximizing the value of charitable donations?
It is the season of giving. Almost a third of charitable giving happens in December. The holiday season is also a great time to ask yourself, your financial advisor and your CPA a few tax-related questions.
Could you (or a retired loved one) benefit from making a donation from your IRA while you’re in retirement? Taxpayers who are 70 ½ or older must take a required minimum distribution (RMD) from their IRA, SEP IRA, SIMPLE IRA, or retirement plan account each year, and that distribution is taxable. However, if you give your RMD directly to a qualifying charity (up to a certain dollar amount), the distribution is not taxed. If you’re not retirement age yet, let an older loved one know about this tax tip.
For those of us who aren’t old enough for RMDs, there were some changes to tax laws in 2018 that might affect your charitable donation decisions. You might want to group multiple donations together in a single year rather than spread them out over time. That’s because the standard deduction is higher for 2018, and if you spread out your donations you may not benefit from itemizing them on your tax return.
Is a Roth IRA a good tax-advantaged option for me?
The start of a new year is a great time to consider tax and retirement questions. Ask your advisor and your tax professional if it makes sense for you to consider converting your IRA to a Roth IRA.
An IRA, or individual retirement account, is a tax-advantaged way to save for retirement. Money that you contribute to your IRA is not taxed. That reduces your tax liability now. When you withdraw money in retirement, you’ll pay income taxes at whatever your rate is at that time. If you expect to earn less in retirement than you earn now, an IRA might save you money.
A Roth IRA, on the other hand, is funded with money that is taxed now and then withdrawn tax-free in retirement. This could be an advantage for someone who expects to be in a higher tax bracket in retirement. You are eligible to contribute to a Roth IRA if you earn $135,000 or less in 2018 ($199,000 or less for married filing jointly).
A traditional IRA can be converted to a Roth IRA. There is a cost, since the balance will be considered a taxable distribution, but some people might benefit from such a conversion. For example, if you expect to spend your retirement in a state where the tax rate is higher, or if you want to leave the account for heirs to inherit tax-free, a Roth conversion might make sense. Also, a Roth IRA is not subject to required minimum distributions at any age. Roth conversions are a great topic to discuss with a financial advisor and tax professional who are familiar with your situation.
If you are not yet 50 years old, you can make total contributions of up to $5,500 to your IRA account(s) in 2018. If you are 50 or older, you can make total contributions of up to $6,500. The contribution limits will be higher in 2019. These contribution limits are separate from the contribution limits on your 401k if you have one.
Is it time to rebalance my investments?
Tax loss harvesting is a sophisticated technique that offsets investment gains with investment losses and has the potential to lower your tax liability. The way that it works is that you sell a security that has experienced a loss, and purchase a similar asset to replace it. The market experienced volatility in 2018 that leaned toward losses overall. In December, the market was at a 14-month low. In other words, there is more of a chance that you may have experienced a loss that you can recognize. Some investors might save money by harvesting losses.
There are a number of factors to consider, so you should discuss this carefully with your financial advisor and your tax professional to determine if this strategy is suited to your situation, and if so, to discuss next steps.
What changes should I make to my budget?
No matter what your financial goals are, you can reach them with a plan. If you don’t follow a budget yet, consider trying one on for size in 2019. A budget doesn’t have to be all about sacrifices and self-denial. It’s a way to make a conscious choice about how you spend every dollar you earn.
If you’ve got a budget, you know that it’s a fluid, living thing that changes over time. By asking yourself deliberate, carefully thought-out budgeting questions, you can learn to make daily decisions that help you reach your specific goals. Here are a few to get you started:
- Did you stick to your budget last year? If not, why not? What changes can you make to your budget to give yourself a better chance of success?
- Did you have enough in your emergency account to cover unexpected expenses?
- Did you save more or less than the prior year?
- Can you reduce spending or increase income in order to make up for any shortfall in your savings goals?
- What’s the cost of the debt you carry? Would it make sense to focus on paying down the most expensive debt first?
A well-constructed budget can help you prioritize the financial steps you need to take in 2019 and start the year with your desired end in mind. Asking and answering important financial questions can be your roadmap to the checkpoints in life that are most important to you.
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Read moreKeith Klein, CFP®, ChFC®, CLU®, CASL®, is a wealth management advisor serving high net worth clients. He helps people manage current financial success, protect and preserve assets long-term, and manage income and assets in retirement. Opinions are his own.
Haven Life Insurance Agency (Haven Life) does not provide tax, legal or investment advice. This material has been prepared for informational/educational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or investment advice. You should consult your own tax, legal, and investment advisors before engaging in any transaction or strategy.
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