It's 2018 and now’s the time to get your finances in order.
To help you and your family make all the right money moves next year, here’s a financial game plan that could help you grow your 401(k), avoid financial ruin and adjust to the new tax rules signed into law by President Trump.
Just as a New Year’s resolution to get fit can fail if you don’t hit the gym, getting ahead financially is tough if you don’t set up a plan and stick to it, says Dana Anspach, founder and CEO of Sensible Money, a wealth management firm in Scottsdale, Ariz.
Doing an annual financial check-up, she stresses, is only worthwhile if you use it as a jumping off point to “build good habits.”
“It’s figuring out the baby steps you can take that moves you and your money in the right direction,” Anspach says. “Every family should put together a playbook for the year.”
Here are steps to take to get you on the road to financial success.
Start with the Basics
Insurance isn’t sexy. In fact, it’s boring. It’s viewed by many Americans as just another bill, not an investment.
But insurance is the foundation of any financial plan, as it protects people from catastrophic losses that can wipe them out. Jan. 1 is the time to make sure your family has enough life insurance to pay for the kids’ college, keep current on the mortgage and fund other living costs in the event you or another breadwinner in the family dies, causing a loss of income.
“Check all of your insurance coverage,” especially if your life has undergone changes, such as having a child, advises Carla Dearing, CEO and founder of Sum180, an online financial wellness company in Louisville, Kentucky.
That means making sure your house, car, health and life is adequately insured against events that could put your family in financial peril.
Other basics not to overlook are making sure your will and estate plan are updated and all your financial accounts have the proper beneficiaries, adds Steve Janachowski, CEO of Brouwer & Janachowski, a wealth management firm in Mill Valley, California.
Tax Plan Tune-Up
The new tax law means most Americans’ tax bills will change. Some will pay more and many will pay less. Many longstanding deductions, such as home mortgage interest and state and local taxes have been cut or eliminated.
Uncertainty, as a result, is high.
“It’s important to understand what the new tax bill means to you,” says Paul Jacobs, chief investment officer at Palisades Hudson Financial Group in Stamford, Connecticut.
Taxpayers should analyze how to best take advantage of any benefits they receive. Perhaps more important, figure out how to minimize financial damage caused by changes to the tax code that reduce take-home pay or make owning a home more expensive.
For example, homeowners in coastal states where housing is expensive and taxes are high might need to rethink their real estate holdings after losing key deductions. Under the new tax law, the deduction for mortgage interest has been capped at $750,000, down from $1 million, and deductions for state and local taxes have been capped at $10,000. These changes could mean owning a home in 2018 and beyond will be more expensive.
While moving from your current home is a big decision that should not be taken lightly, “it may make sense to revisit where you live,” Jacobs says.
People living in high-cost states that are either approaching retirement, in line for a new job in another state or who aren’t happy where they're living now, “might want to consider moving to a low-tax state, such as Florida,” he says.
Simpler moves include reducing the money withheld from your paycheck for taxes if you’re getting a cut, or boosting your withholding if you expect to pay more in taxes.
It also makes financial sense to direct some or all of your tax windfall to your retirement account, or 529 college savings account, which can now be used to pay for private school from elementary school onward, adds Peter Mallouk, chief investment officer at Creative Planning in Kansas City, Kansas.
“Save the extra money before you get used to spending it,” Mallouk says.
With employer-paid pensions no longer the major source of retirement income, personal savings accounts such as 401(k) s and IRAs need annual tune-ups to ensure they're building wealth efficiently.
And given that many Americans have some of their retirement savings invested in the stock market – which has been going up for nearly nine years and posted a 19.4% gain in 2017 – now’s a good time to review these accounts to make sure they are properly diversified and not too risky, says Scott Kubie, chief investment officer at Carson Group, an Omaha-based investment firm.
Many investors’ portfolios today may be more risky than they think. A portfolio that once had 60% in stocks and 40% in bonds, for example, may now have a stock weighting of 70% or more.
“I encourage people to look at their holdings and make sure they are not overexposed to risk that they are not prepared to handle,” Kubie says.
To reduce risk, investors should rebalance their portfolios, or get back to their initial asset mix of, say, 60% stocks and 40% bonds, he says.
One way to do that is to sell assets that have performed well and redirect the money into investments that haven't done as well. If investors don’t want to sell what they currently own, they can get their portfolio back in whack by directing future contributions into the part of their portfolio that originally represented a bigger slice of their overall investment pie.
Another tactic is to invest some cash in overseas stock markets, rather than focus exclusively on U.S. markets, Kubie adds. “Make sure you have some international exposure,” he says.
And now that the government has reduced the number of deductions available to tax-payers, the 401(k) is emerging as a key vehicle to shelter income from taxes. A dual income family, for example, that earns $100,000 per year and takes advantage of the pre-tax 401(k) contribution limit of $18,500 could slash their taxable income by $37,000.
“People should try to max out their 401(k),” says Janachowski. “It’s a no brainer.”
What investors should not do is try to time the market, or get out just because some pundits say the market is pricey and is due for a fall, he adds. “Start early and save consistently,” says Janachowski, adding that he believes corporate earnings and stocks will benefit from the cut in the corporate tax rate to 21% from 35%.
Home Affordability Check
With fewer deductions, housing isn’t as financially friendly to homeowners, especially in New Jersey and California and other pricey, high-tax states along either coast. Now’s a good time to see if the house you're living in or the new house you're eyeing or the second home you've been dreaming about is still affordable, says Janachowski.
While the reduction in home-related deductions won’t impact most Americans, it could cause financial pain to those it does affect.
“It will be harder to afford housing because the government isn’t subsidizing it as much,” says Janachowski. “Does it mean you shouldn’t own a home or buy a home? No. A house isn’t only an investment; it is a place to live. But it could hit the second-home market and keep people from moving up to bigger homes.”