Prepare for a prosperous 2021: year-end to do’s

The end of the year is a good time to take stock of your finances. Set aside some time with your spouse to review 2020. Did you spend more or less than you had planned? Did unplanned expenses cause you to overspend or incur debt? Did you save more or less than you planned? Did you pay off debt? Are you satisfied with your results or do you need to make changes for 2021?

Review and refocus on your financial goals. Set long-term goals if you don’t have them. If you need to make changes to your goals, do it now. Make sure your goals include how much risk you are willing to take with your investments.

What’s the best way to do that? Think about how you’d feel if your monthly statement showed a 10 percent, 20 percent or 30 percent decline. Think about the decline in dollar terms. If your portfolio was $200,000, at a 10 percent decline that would be a $20,000 loss. Would you rush to sell if you saw that? It’s important to keep your long-term goals in mind so that you don’t make a mistake if the market swoons, because it will happen.

It’s a good practice to rebalance your portfolio yearly because all asset classes do not grow at the same rate. You may have started the year with a balanced portfolio, but it’s quite likely you did not end the year with a balanced portfolio. Have you sold investments this year? If you’ve sold stock or own mutual funds, you will likely have capital gains taxes to pay. Look at your portfolio and see if you have any losses that you can harvest to offset the gains.

Saving on taxes is always a good thing.

Get started on your taxes. What do you estimate your tax bill to be in 2020? Did you have adequate or too much withholding? Is there anything that you can do to reduce your tax bill? Yes, you might consider topping off your deductible retirement plans or, if you are eligible, you might fund a Health Savings Account (HSA), or make charitable contributions.

You might ask, since it’s nearly year’s end: What else should I be doing to improve my financial health? Some suggestions, if appropriate for you, are: 1) open an IRA; 2) open a Health Savings Account (HSA); 3) spend funds still in your Flexible Spending Account (FSA); 4) make charitable contributions; 5) fund a 529 Plan; 6) get a copy of your credit report; 7) review your estate plan.

I can’t stress enough the value of having an estate plan for your overall financial well-being. Start by reviewing your beneficiary designations with your financial advisor and/or attorney to make sure that they reflect your specific situation. This is the most basic and important part of your estate plan. Beneficiary designations dictate who gets your assets and mistakes may direct assets to someone you wouldn’t have designated.

Mistakes can also be expensive. Beneficiaries are on all retirement plans, life insurance, annuities and many financial institutions offer them on non-retirement accounts as well. A beneficiary designation can help skip probate and let your heirs inherit more quickly.

A common mistake is not naming a beneficiary. This will cause the assets to be sent through probate, which can be expensive and time consuming. Another common mistake is naming minor children as beneficiaries. They cannot inherit so the money will be in conservatorship until they are adults. Perhaps there are others who can’t or shouldn’t inherit directly such as special needs individuals who may lose valuable government benefits because of the inheritance or those with creditor issues.

Another mistake is not being specific enough on the beneficiary’s names. For example, there may be a John Smith, John Smith Jr. or John Smith III in the family. If you simply state John Smith, it can be unclear who should inherit. This may delay payout to a beneficiary or be a cause for litigation. Review your beneficiary names periodically and update them as life changes.

Set specific financial goals for 2021. Some examples might be to reduce debt, increase your emergency fund, and make or update your will.

You will be rewarded, as will those you care about.

Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest you discuss your specific situation with a qualified tax or legal advisor.