John D. Dovich & Associates Making Sure You Are Prepared for a New Year of Financial Wellness
Dean Johns, CPA, CFP Dean, a principal with John D. Dovich & Associates, LLC, can be reached at 513.579.9400 or firstname.lastname@example.org
Photo by Catie Viox
While many Americans will rightfully focus their new year resolutions on physical wellness, we believe you should also focus on your financial wellness. This is especially true as we wrap up a year of significant volatility within the markets and some uncertainty heading into 2019. While focusing on your investment portfolio is critical, it’s also a great time to think through other areas of your financial lives.
Rebalance your portfolio
Given the strong market performance of 2017 and the significant volatility we encountered in 2018, one key resolution should be a review of your portfolio’s allocation. Even small improvements in your portfolio return over a long period of time can have a substantial impact. For example, $100,000 invested and earning 7% annually results in $387,000 20 years from now. The same $100,000 invested and earning just 6% annually results in $321,000 20 years from now. That’s a $66,000 difference on a $100,000 original portfolio with only a 1% difference in returns.
While everyone appreciates the double digit returns of 2017, you should be just as concerned about managing downside risk. Historically, the upside has taken care of itself. However, as the Great Recession showed, it can be a painful ride if you haven’t reviewed your targeted asset allocation and just how aggressive your portfolio is structured. Don’t become complacent, as many did just before the Great Recession, as there is simply too much at stake. A new year is a great time to review your portfolio’s allocation, including your 401(k) allocation.
Health Savings Accounts (HSAs)
HSAs are the most powerful financial planning vehicles around. No other savings vehicle allows a tax deduction upfront for the contribution, tax deferred earnings, and tax-free withdrawals (if made for qualified medical expenses). If they are able, we encourage many of our younger clients to simply cash flow any out-of-pocket medical expenses (vs. taking withdrawals from the HSA) during their working years and treating their HSAs like an IRA. Given medical costs we’re all likely to encounter during retirement, there is little doubt HSA assets will eventually be needed. After maximizing your employer’s 401(k) match (free money), this should be your next highest priority. For 2019, the new contribution limits are $7,000 for families and $3,500 for singles. For those 55 or older, an additional $1,000 contribution is allowed (though there are some tricky rules around contributions for a couple who are both 55 or older, so please make sure you’re following the “rules”).
Qualified Retirement Plans
The beginning of the year is always a good time to reset your 401(k) retirement plan elections. Obviously, ensure you are taking full advantage of any company match as your employer’s contribution is “free” money. If you recently received a salary increase, consider applying a similar percentage increase to your 401(k) deferrals. For those that are able, you might consider increasing your deferrals to the new 2019 limits of $19,000 (the limit for 2018 was $18,500). For those of you that will be at least age 50 on 12/31/19, take full advantage of the additional $6,000 catch-up contribution that brings your maximum employee contribution up to $25,000.
And don’t forget to check your investment allocation and rebalance as necessary. Many plans now offer easy-to-use online tools to automatically rebalance accounts. Additionally, many plans offer target date funds that will “self-manage” the allocation for you based on your projected retirement age. While these funds are helpful to many, they can also result in the complacency we mentioned earlier. Educate yourself about your plan and its investment options or seek out a financial advisor to assist you.
The typical mantra we hear in the media is to defer income and save immediately on your taxes by participating in your 401(k) plan on a pre-tax basis. For many, especially younger people or those who are not currently in the higher tax brackets, a Roth 401(k) is a much better option. While you will pay tax upfront on any Roth contributions, the earnings over the years are tax-deferred while all withdrawals will be tax-free (if taken during retirement). For people with 10, 20 or even 30 years left until retirement, the vast majority of your retirement account assets (upon retirement) will be the earnings associated with your contributions over the years. Allowing for tax-free withdrawals during retirement provides tremendous tax planning flexibility.
Many people believe they earn too much to make Roth IRA contributions. That may well be true for direct contributions to a Roth IRA, however, if you do not have other traditional IRAs, another opportunity might exist. A common planning technique to build additional Roth assets entails making a non-deductible IRA contribution to a traditional IRA (which anyone with earned income can do regardless of employer retirement plan participation) and subsequently converting that amount to a Roth IRA. There are no income limitations on Roth conversions. For 2019, this provides an additional $6,000/year per person (or $7,000 if age 50 or older) to be added to a Roth IRA to build that pot of assets and provide greater retirement account withdrawal flexibility during retirement. This is a particularly nice planning idea for non-working spouses as they can rely on the earned income of the working spouse to make these IRA contributions.
When is the last time you dug out those wills and trusts and reviewed them? Similar to your retirement plan, your estate plan should be reviewed periodically with a particular focus on these key areas:
• Are the guardians for any minor children still appropriate?
• Are the executors and trustees still the people you want to handle your financial affairs?
• Should your healthcare appointees be updated?
• Do you have the correct person(s) named in your financial powers of attorney?
• Has any life event occurred that could impact the structure of your overall estate plan?
• Is your plan still appropriate given the change in tax laws?
• If you have adult children, do they at least have financial and healthcare powers of attorney?
While there are obviously many other things to consider as part of your estate plan, these basic items are a great starting point in your periodic review, and may very well warrant another conversation with your estate planning attorney.
Perhaps the most important new year’s resolution is to simply have a financial plan. One of the most important components of any financial plan is the development of a realistic budget that allows (and requires) you and your family to live within your means. Once your budget is established, you’ll have an important tool in place to help you save not only for your retirement years, but also for important family needs, such as education for your children and/or grandchildren. As your savings grow, it will also put you in a better position to maximize any employer benefits offered to you throughout your career. If you need help in creating a plan, find a trusted financial advisor who has a fiduciary responsibility to act in your best interests. We believe creating that plan will provide on-going peace of mind and long-term financial freedom well beyond 2019.
John D. Dovich & Associates, LLC is located at 625 Eden Park Drive, Suite 310, Cincinnati, OH 45202. For more information, call 513.579.9400 or visit www.jdovich.com. John D. Dovich & Associates is a Federally Registered Investment Adviser. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Information within this material is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance is not indicative of future results.