This post is part of our Financial Fragmentation blog series. To view the first post in the series, please see here.
One of the most important functions of financial planning is to avoid making a big mistake. To continue our Financial Fragmentation blog series, following is a list of many significant areas of financial planning and matters to consider as you make your plans. Planning with these in mind will help you avoid unexpected or unfortunate consequences from a lack of coordination.
Risk Management
While we do not sell life insurance, we do want to make sure it has been considered. Do you have too much or too little life insurance? Depending on the long-term needs for you and your family, it may be wise to carry some life insurance, but you want to have the right amount. Too much can be expensive and divert resources from other purposes. Too little can leave your survivors without the necessary means to thrive. You’ll also need to make a judgment as to whether your needs are better served by term or whole life insurance. Umbrella liability insurance may be a wise investment as it can provide for an unexpected liability claim which might otherwise damage your retirement portfolio.
Investment Planning
Money invested in the wrong places – Sometimes liquidity may be more important than returns. If you have near-term cash needs, it’s likely to be safer to hold the necessary cash aside from the markets to avoid unnecessary risk. Additionally, we see far too many cases of our clients owning annuities, when they are not necessary for their financial well-being. Often times, these and other sorts of investments are much more profitable for the company selling them than the client who purchases them.
Determine an appropriate investment policy and stick with it – This means staying invested instead of jumping in and out of the markets as prices ebb and flow, usually at precisely the wrong time. If you have long term goals to accomplish, you should have a long term perspective on your investment holdings.
Many portfolios suffer from a lack of diversification, particularly for single stocks of employers – If things go wrong with the employers’ stock, something would easily go wrong with your job prospects. In this case, you will be much better off with a diversified and liquid portfolio to tide you over to another job or into retirement.
Rebalancing your portfolio is important to keep a proper risk reward balance – When equity markets rise, your portfolio becomes a bit more risky and occasionally you should sell some of your equity holdings and invest the proceeds in fixed income. Likewise, when equity markets fall, you should consider selling some of your fixed income investments and purchasing stock (which are on sale!)
Income Tax Planning
Taking advantage of tax deferred retirement plans and other arrangements – IRAs and 401Ks are a great way to accumulate tax advantaged retirement savings.
Tax efficient investments – Proper asset location may provide for tax benefits. For example, it may make sense to hold different sorts of investments in tax deferred accounts like IRAs than you hold in accounts that are subject to taxes.
Managing taxes during the transition to retirement – The period shortly after retirement may be a time when distribution planning can provide substantial tax benefits. Your income may be lower after your wages cease and before you begin to receive your social security benefit or required minimum distributions (“RMDs”) from retirement accounts. For example, we’ve had clients with low income during this period withdraw their living expenses from tax-exempt accounts. This income may be taxed at lower tax rates than they will have in the future when social security and RMDs begin. If circumstances permit, they can roll them into a Roth IRA. This effectively converts pre-tax IRA investments to after tax Roth investments and the account continues to grow tax free into the future when withdrawals from the Roth can also be taken on an after tax basis.
Are you being “tax smart” with your charitable contributions? – Recent limits on itemized deductions may affect your tax deduction for charities that you support. It may make sense to consider creating a Donor Advised Fund and timing your contributions for the best tax effects. You might also consider donating appreciated securities rather than cash to your favored charities. This will avoid capital gains taxes on the donated securities.
As shown, there are a number of important considerations to make when planning for your financial future. However, what we’ve discussed thus far is just the start! For the final part of our Financial Fragmentation series, we will be discussing important considerations to make when planning for retirement, your estate or college education expenses. Stay tuned!
If you would like to discuss how financial fragmentation may be affecting your unique financial situation, please feel free to reach out to a member of the Horizon Wealth Advisors team today. We are here as a resource to help you better understand, organize and manage your overall financial circumstances.
In the third and final part of our Financial Fragmentation series, we discuss a few important considerations to make when planning for retirement, your estate and college education expenses specifically. To read part three, click here.
Larry Maddox, CFP®, CPA
Larry founded Horizon Advisors, LLC in Houston, Texas in 1999 with fellow business partner Joe Thomson. He collaborates with our wealth management team and other external advisors to provide comprehensive wealth management services.