Wrapping Up the Year’s Finances
The last few months of the year are a good time to devote to cleaning up your finances. You need to adjust for things that happened this year and plan for things you want to happen or that could happen in 2013. Don’t try to take these actions at once. Spread them over a few weeks. It will be manageable, and you’ll be more financially secure at the end of the process.
The insurance review. I know you don’t want to do this, but financial planners say most people have their insurance wrong. That means you’re likely either paying too much for insurance or won’t have coverage when you or your loved ones need it.
Reconsider the amount of life insurance you carry. When you have higher expenses or the family is more dependent on your income, a coverage increase might be in order. But less coverage might make sense when some major expenses, such as a mortgage or college tuition, are behind you. When you’re coverage is too low, check with your employer first. Usually adding to employer group term life coverage is cheaper than adding to or taking out an individual policy.
Talk with your insurance agent when you have a universal life policy or any other flexible premium policy in which the cash value is supposed to pay all the future premiums. The cash value likely isn’t earning as much as was projected a few years ago. In recent years many policyholders received notice that their policies would lapse if they didn’t put thousands of dollars in. Don’t risk being caught by such a surprise. Ask for an “in-force illustration” that updates the status of the policy. Then, discuss the situation and options with your agent or financial planner.
Be sure homeowner’s insurance covers the value of your home and also the cost of reconstructing it in case of a catastrophe. Take a look at any valuable assets you’ve added or that increased in value (jewelry, furs, electronics, antiques, etc.) that aren’t covered by the basic policy and need a rider for coverage.
Spend some time online comparing premiums for auto insurance. If you haven’t changed insurers for a while, you might be overpaying. Also, be sure the insurer is giving you all the discounts you qualify for.
Most people should consider a personal liability umbrella policy. This usually is inexpensive and covers liabilities that exceed the homeowner’s policy limits or coverage. This can be valuable if you’re sued for almost any reason. See the February 201 visit for more information.
Review employer plans. Remember medical flexible spending accounts have a use-it-or-lose-it feature. You lose any money you haven’t spent by Dec. 31 or next March 15, depending on the terms of your plan. Consider incurring by the deadline medical expenses that won’t be covered by insurance, such as dental care, prescription eyeglasses, buying supplies, and elective medical care.
The contribution limit for medical flexible spending accounts will be reduced to $2,500 in 2013. You might want to incur expenses in 2012 when you can because of next year’s limit.
In the future, the medical expense itemized deduction will be allowed only for expenses that exceed 10% of adjusted gross income, instead of the current 7.5% of AGI. But this change will be delayed until 2017 for those 65 and older.
Review the amounts you’re contributing to a 401(k) plan or other employer plan. Is it adequate to fund your retirement? When you received a salary increase, consider increasing your 401(k) contribution accordingly. When you’re 50 or older, you’re allowed a higher “catch-up contribution” of $5,500 in addition to the regular $17,000 regular contribution limit.
Before maximizing contributions to 401(k) and other tax-deferred plans, consider whether you really want to do that. In the past, I pointed out that the likelihood of higher future income tax rates means you might be better off paying taxes now instead of later. The traditional advice to defer taxes whenever you can might not be the best advice. I discussed this in more detail in the February 2009 Tax Watch and August 2011 Grandkids’ Watch. These are available in the Archive on the members’ section of the web site.
Check your beneficiaries. People neglect their beneficiary designations. You have them for various employer plans (group term life, 401(k)s, and others), IRAs, annuities, life insurance, and perhaps more. Most people complete these when an account is opened and never review them. Review yours annually.
Review the estate plan. You need the basic documents: a will, perhaps a trust or two, powers of attorney (financial and medical), and an instruction letter and documents for your executor. Be sure these are up-to-date, reflecting your current wishes and anything that’s changed in your life. Also, review your appointments of executor and trustees. Are these still the people you want to handle the jobs? Are they still willing to do the jobs?
As part of this process, consider gifts to loved ones and charity. Charitable giving in particular can be done in ways that boost the bottom lines of you and the charity. But you need to start the wheels in motion before the end of the year. Review our October 2011 and May 2012 visits. In this month’s visit we review gifts to loved ones.
Rebalance investments. A buy-and-hold investment strategy isn’t the same as set-it-and-forget-it. The markets will change the allocation of your portfolio because investments won’t rise and fall at the same rates. You have to reduce some assets and increase others so that your portfolio has the same risk level and potential return you intended. This process is called rebalancing.
You increase returns and reduce risk by rebalancing. The ideal time to rebalance is after a significant market move. You’ll sell some of the investment that recently surged, buy more of something that recently tumbled, or a combination of the two. Many people are too busy for that. If that’s you, be sure to look at your portfolio’s allocation at least once a year and rebalance if it’s strayed from where you want it.
Plan your income taxes. Of course, you want to try to plan your income taxes for this year and next. Year-end tax planning is more difficult and complicated this year because of the number of tax rules that are scheduled to expire at year-end but could be extended either close to the end of the year or early next year. If you’re age 70½ or older, plan required minimum distributions from retirement accounts.
We discussed the options and plans to consider in the August and September 2012 visits. These also are available in the Archive on the members’ web site.
Simplify your finances. Too many people don’t make financial moves because they procrastinate. Their finances are too complicated or not well organized. Accounts are spread among different firms. Other documents and numbers are hard to bring together.
That’s why my first advice to everyone is to simplify your finances. Put as many of your investment accounts as feasible with one broker or mutual fund company. Another good strategy is to use either software (such as Quicken) or web sites that can aggregate the details of all your accounts in one place. You can deal with the financial firms you want but have many of the benefits of a single provider. Details are in the December 2011 visit.
Another way to simplify is to automate your finances. Set up automatic bill payments or pay as many of your bills as possible through one debit or credit card. Or use different cards for different types of expenses.
Some investment moves can be automated. You can schedule automatic transfers from your checking account to investment accounts. Many financial service firms and web sites let you set up alerts so you’ll be notified when an investment hits your sell signal. Details of automating your finances are in our May 2012 visit.
RW October 2012.
