With the pandemic winding down for many Americans and another half year of heady market gains, financial pros say now is a good time to check your fiscal health. These periodic analyses, which investors should conduct two to four times a year, should include a deep dive into your income and expenses, a retirement plan reality check, a tax audit, an insurance review and an assessment of fees. Here’s what some experts prescribe and say you should be looking for:
Calculate your income and expenses : If you’re not already doing so, make sure to create a personal cash flow statement to provide a snapshot of what’s coming and going out on a monthly basis, says Brian Walsh Jr., a certified financial planner with Walsh & Nicholson Financial Group in Wayne, Pa. This is especially important since things may have changed due to the pandemic. Careful tracking can help you better understand spending patterns, as well as where cuts and extra savings may be possible.
People who own tangible assets like a home or business should also create a personal balance sheet or review an existing one to make sure it’s up to date. It doesn’t have to be anything fancy; you can use a Microsoft Excel template or another one you find online. But it’s a good thing to update periodically, especially if you have a lot of debt, as a prerequisite for strategizing how to eliminate it, Walsh says.
Do an asset allocation assessment: Look at all your accounts to make sure your asset mix hasn’t gotten out whack due to market appreciation. Many people don’t pay close attention to asset allocation, but experts consider an appropriate allocation even more important than the investments themselves. “Letting your equities ride” has been the right answer for many people, but if you’re getting close to needing that money in retirement, “you’re probably going to want to de-risk some of that,” says Christine Benz, director of personal finance at Morningstar. Her company has a free tool called Instant X-Ray where investors can evaluate their asset allocation and sector weightings.
There’s no one right approach to asset allocation, but generally investors nearing retirement should think about lowering risk within the portion of the portfolio they expect to need in the next five to 10 years, Benz says. “Think about your planned spending [in retirement] and then back into an acceptable asset allocation,” she advises.
Do a retirement checkup: A May survey from MagnifyMoney that found that 1 in 4 Americans plans to retire later because of the pandemic, including 42% who lost income in this period. As such, it’s a good idea to use an online tool—such as this one from Vanguard—to see where you stand. Simply enter data such as your age, your planned retirement age, your income and savings, and the calculator helps illustrate where you are in terms of your retirement goals.
While you’re at it, make sure also to review your estate-planning documents and beneficiary designations to make sure they’re in the shape you want them. These documents include wills, trusts and medical and financial powers of attorney.
Conduct a tax audit: There are many tax-related changes being discussed as a result of the new administration, but even if the status quo remains, people still need to think about their tax situation. Could you be saving more in tax-sheltered options, for instance? And if you’re over 50, are you taking full advantage of catch-up savings options?
Another question investors should ask: Should you contribute some of your earnings to a Roth option within a 401(k), if your company offers one? The contributions are after-tax, but the earnings grow tax-free and distributions are tax-free, a big benefit especially if you believe that taxes are rising and you’re likely to be in top tax brackets after retirement, says Angie O’Leary, head of wealth planning at RBC Wealth Management-U.S. in Minneapolis. For pre-retirees who are in a lower income bracket because of the pandemic, it’s a great time to do it, she adds.
Investors could also consider converting a traditional individual retirement account or rollover IRA to a Roth IRA. You’ll need to have the money on hand to pay the taxes, O’Leary says, but it could be worth it, especially if you believe tax rates are poised to increase.
Do an insurance checkup: Baby boomers, especially, may find they have policies like term-life or disability they no longer need going into retirement. Instead, they might opt to put those dollars into long-term care insurance, perhaps utilizing a hybrid long-term insurance policy with a life insurance component, O’Leary says. Also, if early retirement is in the cards, make sure you have adequate health insurance to cover you before Medicare kicks in, she says.
Review the fees you’re paying: It can be a good time to look at the expense ratios in your mutual funds, exchange-traded funds, and other investments. You may be able to find a comparable investment for a significantly lower cost, says Don Bennyhoff, director of investor education at Portfolio Solutions in Troy, Mich.
He also recommends investors look at advisory fees. While average fees are coming down because of competition, many advisors still charge more than 1%, even though advice is available for less and in some cases, much less. “Any time you’re paying more for something, you should have a very good understanding about what you’re getting that could contribute to that value proposition,” Bennyhoff says.
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