As Jon Snow (and your advisor) would say, “winter is coming.”
Last week, the temperature where I live suddenly dropped to 30 degrees and it was pitch dark outside by 4:45. Even if I wasn’t a binge-watching Games of Thrones fan, I knew what this meant:
“Winter is coming.”
Living in cold weather states my entire life – Michigan, New Hampshire, New York and now New Jersey – I’ve got the change-of-seasons prep down: I have a four-wheel drive, an emergency kit and blanket in my trunk, LL Bean all-weather boots, a long down ‘sleeping bag-like’ coat perfect for dog-walking, and a space heater under my desk. I’ve had my chimney inspected, windows re-caulked, sprinklers drained, and just scheduled an appointment to have my furnace checked later this week.
Now that my home and personal belongings are thoroughly “winterized,” it’s time to move on to an often overlooked area: finances.
Just like you need to winterize your home, you may need to winterize your finances.
As we approach the end of the year and beginning of another, here are a few items you may want to add to your “financial winterization checklist”:
1) Asset Allocation: The end of the year is a good time to check your allocation. If you don’t know what that is, it’s the general mix you have in your investment portfolio of different types of securities.
On a high level, it’s your mix of stocks, vs. bonds vs. cash, but it can also be broken down more granularly. Your break-out of stocks, for example, could include large cap stocks, growth stocks, small cap stocks, international vs. US stocks, developed vs. emerging stocks, etc. Your bond allocation could include municipal bonds, investment grade bonds, high-yield bonds, etc.
Having a diverse mix of theses components in your investment portfolio is important because it determines your return as well as the risk you are taking to achieve that return.
Finding an appropriate allocation for you depends, therefore, on what kind of return you’d like to achieve based on the goals and time-horizon you have for those funds and the level of risk you are willing to take.
Once you have determined your asset allocation (e.g. 60% stock mix, 39% bond mix, 1% cash), “winterizing” involves checking to see if you are still at those original percentages. If they have changed significantly because the market has changed (e.g. if the stock market has had a good few months as we have had recently, your allocation may look closer to 66% stock mix, 33% bond mix, 1% cash), it may signal that it’s time to buy and sell certain holdings to get the percent back to your desired original allocation…
[Interestingly, one might have assumed when I led with the statement “winter is comng” that it implied doom was about the descend on the markets. While it’s quite possible a market “correction” might be forthcoming, the truth is that, after over ten years in the personal finance industry, I am still NOT A FORTUNE-TELLER and cannot predict when the market will go up… or down. The good news is that if you have the right allocation, appropriate for your goals and time horizon and risk, you should not concern yourself with trying to “time” the market; instead, rebalance back to your appropriate allocation, as suggested above.]
2) Tax Loss Harvesting: …but wait, there’s more! In any accounts that are taxable (therefore, NOT retirement accounts such as IRAs or 401(k)s, but other individual or jointly held investments subject to capital gains taxes), “winterizing” your investment portfolio also may mean finding a way to minimize capital gains taxes. One common practice for doing this is called “tax loss harvesting.”
Generally speaking, capital gains taxes are calculated on a “net basis”, so this strategy involves selling investments that are down from your original purchase price at a “loss” to offset any gains that you may have realized earlier in the year.
For example, say you sold a few shares of Apple stock earlier this year for a $5000 gain, and based on your income tax bracket, any realized gain would be taxed at 20%, or $1000. To avoid this, you see that you hold Bed, Bath and Beyond stock that is down by $3000 and sell it to take the loss. If these are your only two transactions, your net gain would now be $2000 instead of $5000 ($5000-$3000), reducing your capital gains tax to $400 (.20*$2000).
And it bears repeating that, while a great strategy, make sure any tax loss harvesting you do still takes into account your asset allocation and general goals as per winterizing tip #1.
3) FSA Elections: This is an easy one. Although most deadlines for submitting health and dependent care claims for flexible spending accounts (FSAs) have been extended through March of 2018, it’s a good idea to check your status to see how much you have remaining and submit claims as needed.
As a side note, if you are a salaried employee and receive benefits, benefit elections are likely due very soon if the deadline hasn’t already passed. I highly recommend that you review your elections carefully, setting a dedicated amount of time aside to read the literature given and choose your elections based on your needs in 2018, not simply select them based on what you did the following year. Needs change, and employee benefits — from what health care plan you choose to your retirement elections — are some of the most impactful when it comes to your financial plan and therefore, should not be done without careful consideration.
4) Health Care Deadlines: If you are seeking health care insurance and haven’t yet enrolled, now’s the time to get the ball rolling. Remember that the deadline for open enrollment ends December 15, 2017.
5) Holiday Spending: A great “winterizing” habit is to plan for holiday spending well before the holidays (and certainly before Black Friday, Cyber Monday, etc.!). If you are not traveling this weekend, it’s a perfect time to schedule an hour or so with your morning cup of coffee to review your cash flow and create a budget for the holidays.
6) Tax Planning: I saved the hardest one until the end, on purpose.
No doubt you have read about the different House and Senate proposals to revamp the tax code. I suspect that if one of these or a combination passes, there will be much “winterizing” many of us will need to do to try to minimize our tax liability in the upcoming year.
However, the key word here is “if.” Rather than comb through all the potential, hypothetical scenarios and strategies you should or should not be doing, my advice at this point is to take a wait and see approach because there’s a good chance Congress will not be able to reach an agreement and the tax code will remain the same.
Still, there are some small steps you can do while waiting, including:
a) Keep educating yourself and staying informed on what is being proposed by reading or watching the news regularly.
b) If you are not organized, now is a good time to gather some basic information. That way, if a proposal is passed before year end, you can quickly find the information that you may need to implement a new strategy (e.g have an idea of how much you currently pay in state income and property taxes; know if you are subject to AMT or on the borderline, consider if you might be able to pre-pay certain currently deductible taxes earlier (and therefore have cash readily available) in the event that those deductions are not available in 2018, etc.)
c) Consider seeking a tax professional, but hold off contacting him/her. There’s no need to make an appointment now, when things are too uncertain. However, if you believe there’s a change you may be impacted significantly, have the names of one or two professionals on which you have already done your due diligence. Again, there’s no need to make the appointment now, but be ready to contact them when/if the need arises.
While by no means an exhaustive list, this winterizing checklist for your finances is a good place to start preparing yourself for the end of one season and beginning of another. If you have questions about any of the above, please feel free to contact me at jennifer@financialwealthbeing.com.