Published January 27, 2021
If you find yourself unexpectedly in a lower tax bracket than usual…that’s actually a great tax planning opportunity.
If you find yourself unexpectedly in a lower tax bracket than usual…that’s actually a great tax planning opportunity.
Putting together a comprehensive plan to manage your financial future can seem overwhelming—but it doesn’t have to be. In this edition of The Adviser You Can Talk To Podcast, our team offers some quick tips and tasks that will help you take control of your finances, including action items for:
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Rome wasn’t built in the day and the same goes for your financial plan. But by following these simple action items in this episode every year, you can create a solid foundation for your financial future.
Hello, this is Andrew Busa and I’m a financial planner here at Adviser Investments. We’re here with another Adviser You Can Talk To Podcast. And today I’m joined by my colleagues, Kari Wolfson, Ryan Christensen, and Matt Shumaker. Kari and Ryan are both portfolio executives at Adviser. And Matt is an account manager and you also all work on the same team. So, it’s a pleasure to have you all here.
Thanks Andrew, good to be here.
All right. Let’s get into this. So today’s episode, it’s all about starting the year off right by giving you some year round smart money moves to make. This is about setting up your financial plan for success by following some simple, actionable items that we think you should be taking year round.
So, to set the table a little bit, in a previous episode, titled The Five Conversations You Should Be Having with Your Adviser, we divided up that discussion into five different sections. We talked about goal identification, cashflow planning, risk management and estate planning, debt management, and company benefit maximization. Weaving through all of those was a discussion about income taxes. So today we’re going to use those same categories and give you action items within each of them. And we believe if you’re knocking these items out consistently, your financial plan will be much stronger for it.
And think of this as a lightning round, we’re not going to linger too long on any one thing. We’ll keep this high level. And each category is going to have three or four actionable checklist items for you to follow year-round. And we will provide you with that checklist as a companion piece to this podcast to help you out. So let’s not waste any more time. I’m going to dive right in. Kari, when it comes to goal planning, what do you see as being the most important things to get done every year to make sure that those goals are still on track?
Thanks, Andrew. I really think identifying your goals is about what you want to achieve, and there’s short and long-term. It’s really important for everyone to identify and write your goals down, regardless of your life phase. It’s not just for people that are approaching retirement. There are short-term goals—like an emergency fund being the most common—but everyone has these short, intermediate and long-term buckets that we kind of like to group your goals into. Different timeframes for different buckets, and ultimately there will be different investment strategies.
So writing your goals down at least annually and making sure you’re maximizing your savings in the most tax efficient manner, it really does make sense and it’s important to do. Ryan talks a lot about this with his clients, and I know it’s really important for him, so they’re more focused on the specific goals and the best way to fund them.
Yeah, Kari, that’s a great point. We had a client that did some financial planning for and through the goal identification process we were able to help him when he had this large sale of a business. It was a very large liquidity event and he was unsure whether or not he was going to be staying on the East Coast or the West Coast at the time. So we were able to help him identify a goal of buying a home and setting aside some money that if he decided to stay on the West Coast and buy a home, that he had a tax efficient way of funding that goal. And he ended up making that decision and we were able to help him purchase that condo in San Francisco.
Perfect. So jumping back to what Andrew mentioned before about the checklist items to review, there’s really four of them. Funding your retirement accounts, fund your health savings plan if your company offers one, fund 529 plans and write your goals down. But really, we don’t all have unlimited cash flow and savings capability. So what type of account makes the most sense to fund first? And I think fund retirement account, at least up to your company’s match is really the most important or first in line, but really it comes down to reviewing your financial plan, what specific goals are you trying to save for and making sure that those align with where you’re putting your, your extra savings.
Yeah, I agree with you, Kari, and as a listener, if you want to go deeper in any of these topics, we actually have podcasts that reference all of these. We have one on health savings accounts. We have an education planning episode, and we also have one on Roth IRAs and different retirement accounts. And I also just want to underline the idea of writing your goals down, it sounds simple, it sounds basic, but it actually might be even a little harder than you think. And that’s where we can come in to help facilitate that conversation and actually figure out what your goals are because it’s not always clear what they are and how much money you’ll need to fund them.
So speaking of funding your goals, that leads us into the second category that we’ll tackle today, and that’s cashflow planning and savings. Savings feeds your goals. Without savings, you’ll never be able to accomplish them. So that’s why we talk about goals first, but then we need to plan out your cashflow. So Matt, I’m going to kick it over to you. What do you see as the most important action items to get done here every year?
Thanks Andrew. There’s an old adage that I like that comes into play here, where it says a goal without a plan is just a wish. And your planning aspect all really ties in your cashflow and savings. And most importantly, there’s two ways that you can think about your cashflow. Most people look at it as savings in terms of whatever’s left over after all your bills are paid, your financial obligations, everything like that. We like to instead look at savings as an expense to make sure you get it done. So it’s really about prioritizing your savings, making sure that you’re addressing that first and you can also automate your savings so it’s out of sight out of mind, and you know you’re saving for retirement and you know you’re saving for those short and long-term goals that Kari discussed.
Again, when we think about budgeting, there’s many different methods out there, some of them work, some of them don’t, but it’s important to stick with a discipline. And I think that’s the biggest part of it. And again, making sure that you’re saving and taking that as part of your budget, as opposed to just focusing on expenses when budgeting. And then lastly, one thing that we like to focus on is that asset location is just as important as asset allocation. So know where your money’s going and have a plan for it instead of just focusing on how the money is invested. You need to know what type of taxable accounts you have, what type of retirement accounts you have, what type of bank accounts you have and know where all your money is and have a plan for it.
Yeah, certainly the devil’s in the details with this category here, this is getting organized is definitely half the battle. You know you mentioned tracking your expenses. That’s really the first step in creating a budget is to know what your expenses are. If you’re a client of ours, hopefully you’re using eMoney. You can use the spending tool on there. It’s robust, it’s very easy to use, so we recommend that. If that’s not available to you can use something like Mint.
Well, and Andrew, that reminds me of the plan we did recently for one of our clients where she was really struggling with the best way to set up a budget. And I think to your point, it’s not necessarily tracking line item by line item, but there’s so many tools like the portal that allow you to link your accounts and see everything. So it’s a lot easier. It’s just awareness, I think is really what it comes down to.
Yeah, absolutely. And we actually do have a previous episode on that dives deeper into creating a budget and how to actually go about that. So we encourage you to listen to that. So really the four here, Matt, that you mentioned, revisit that budget, track your spending there, plan for upcoming large expenses, review your savings allocation, and automate your savings if you can. So very, very good. Ryan, I’m going to shift gears with this next category and kick it over to you to risk management and estate planning. Now, when we were prepping for this episode, you said that this is the most important set of action items we’ll cover today. Why do you feel that way?
Well, thanks, Andrew. I feel that way because it’s probably the most overlooked and probably the most impactful if something negative happens to your overall financial plan, and that’s estate planning and risk management. So really, everyone that’s listening, it’s important to remember that time is your greatest asset. You need to protect the possibility of loss of income through proper insurance. Otherwise your plan could be truly taken off of course if something were to happen.
We were doing a plan for a recent couple and their plan was in great shape, but they didn’t have the proper disability, and if something happened to one of them and they lost income for even a moderate period of time, it would derail the plan and stop those clients from reaching their financial goals. So we really put a lot of emphasis on looking at your insurance and your estate planning and your risk needs as we go through those types of plans.
We don’t personally sell insurance here at Adviser Investments, but we will help you analyze your situation, make recommendations about what type of policy and term and what’s the amount of coverage that you should be considering. And then we’re happy to work with your estate planning attorney, as well as your insurance agents to make sure that they get executed. So for us, the three most important checklist items is to review your will, healthcare documents, and your powers of attorneys. Those are the key estate planning documents that put together any estate plan.
You should audit your beneficiaries and you should review your insurance coverages, disability, home, umbrella coverage, to ensure that you have sufficient coverage for your overall needs. Kari, when we talk to clients about this, we talk about life events triggering some of these changes. What are some of the triggers that possibly could lead a client to giving us a call when something happens to them?
Yeah, that’s a good point. Risk management and estate planning, it’s all about monitoring changes in your life, whether it’s recently getting married, having children, changing jobs, buying a house, moving states, a change in health. These are all things that are kind of triggers, and a lot of times you might not be sure whether it makes sense to discuss with us or the planning team, but I think just letting us know we can help you identify whether there’s any changes that that should happen, depending on what’s going on in the current situation.
Yeah, absolutely. This is a good category that highlights that financial planning is a process. It’s not a one-time event, and then you’re done. Those triggers, I bet our listeners, most of those have happened to a lot of the people that are listening. So that means that your insurance needs could change and your estate planning needs could change. So definitely get in touch with us to review your financial plan, if that’s the case with you.
So transitioning away from insurance, let’s get into income taxes a little bit, everybody’s favorite, Kari, this is a huge topic. We could spend an entire episode just on action items in the income tax category, but if you had to boil it down and distill it, what do you think makes sense for most people listening today?
Yeah, well, when it comes to tax planning, it really is a year by year discussion and it is never ending. And you’re always reviewing what you could do better or differently depending on the year’s situation. So I love that we have the tax planning team here at Adviser Investments and along with financial planning to really help us and our clients with more complex items. But it depends, you could have a higher or lower income one year a specific capital gain, so there’s really three categories or three different types of tax brackets. Andrew, I know you like to share that three different clusters of low, middle and high. So if you’re making a decision like Roth conversions or defining opportunities to maybe realize some losses or gains, depending on the investments, it’s just about identifying where you are currently and making sure that you don’t jump too much on that tax bracket scale.
Right. You know, depending on where you fall, like you said, in those income tax brackets, you have opportunities for example, if you find yourself unexpectedly in a lower income tax bracket than usual, maybe you got laid off or you went back to school and took some time off from work, something like that, that’s actually a tax planning opportunity. Now years like that hopefully don’t come around too often in your financial plan. So it’s good to be opportunistic here and take advantage. Kari, this is where like you said, you could take advantage of maybe a Roth conversion, harvesting capital gains. It just makes good financial sense to do that. And you can talk to your CPA about that, or we can point you in the right direction.
Definitely. And I think there’s two important things to focus on when you’re talking about tax planning, you can tax plan for the present year, and also for future years down the road. So when you look at present year, one major thing that I like to think about is for charitable giving. And that’s an opportunity for you to save on your current year taxes. So something to think about is maybe a charitable gift fund. And this is something that we set up for one client, I just did a week ago, actually, where a charitable giving fund, once you donate to it, you get the deduction in that current tax year, but then you can donate those funds in any year after that. So it gives you an opportunity if you don’t have a charity in mind that you’d like to donate [to] currently, it gives you that opportunity to take that deduction in the current year.
And then when you’re thinking about future taxes down the road, one big thing that we like to focus on are a required minimum distributions. And these kick in once you turn 72, and if you have a large IRA balance like Kari and Andrew both mentioned, it’s something to think about, maybe starting to do some Roth conversions and pay close attention to your tax bracket to make sure you’re not making any big jumps on your tax bracket. And also there’s the potential for backdoor Roth conversions, as opposed to doing just direct IRA contributions. So both things to think about. And again, anytime you can get money in a Roth where you’re not required to take out minimum distributions when you turn 72, we find that as a huge benefit.
Yes. And a great legacy planning tool as well. So going back to the checklist, there’s really four items. It’s bracket management, weigh Roth conversions, ensure appropriate income tax withholding and recognizing any gains or losses depending on the year situation.
And I think that there’s a really simple one there that I have some experience with recently, we were doing a financial plan for a couple that was newly married, and we noticed that they hadn’t changed the appropriate income tax withholdings, now that they were filing jointly. It’s something as simple as that can really help your overall financial situation on a year to year basis.
I love that one because it’s the classic, no one’s going to tell you that you need to do it, but you just need to speak with your HR department or whoever to make sure that you’re getting the correct income tax withholding. So that’s a good one to highlight. So Ryan, going back to you, I want to cover now debt and credit management. This one really ties in heavily to the cash flow and savings category that we were talking about before.
Sure. I mean, it’s the other side of the coin in terms of money coming out of your financial plan on a month to month basis. And it really is kind of your financial blood pressure when you really think about it. You really need to be considering the kind of debt you are taking on. There’s good debt and bad debt. Taking debt on an appreciating asset like a home with a low interest rate, with where interest rates are historically right now, is probably pretty good debt for you. But taking on high interest rate credit card debt, something along those lines, is probably going to hurt you over the long run. So you need to weigh the costs of taking on debt there. But really it’s important to know your credit score because it’s what the banks base your lending on, what kind of interest rate you can get.
It also affects insurance premiums, other things like that. So here’s a couple of easy steps to take to help your overall credit and debt management financial practices: File a free credit report with Experian, TransUnion, and Equifax. Have an understanding of what is going on on that report, because it allows you to make financial decisions based off of what is actually happening. Freeze your credit. It’s a little bit of paperwork, but a pretty simple process. Don’t lose your pin, but basically allows so that no credit can be taken out in your name without you knowing it. You’ll have to unthaw it to be able to apply for a loan, but it will make sure that nobody applies for credit in your name without you knowing it. And then finally, weigh a refinance. The rule of thumb is a 1% interest rate drop on your loan, but talk to us and we’ll be able to help you weigh out whether or not that that makes.
Yeah, that’s great. I know. And I keep referencing back to old episodes that we’ve done, but on the refinance piece again, if you want to go deeper, we have an entire episode just on the refinancing decision alone. But Ryan like said that that rule of thumb, if you can drop your interest rate by 1%, then a lot of times it does make sense, but you still want to do your due diligence there. So that’s all great stuff, the freezing of the credit too. That’s one where it’s just a simple way also to protect your identity. So it’s beyond even just the financial planning aspect of it. You want to make sure that you’re safe and that you’re keeping your identity safe, right?
So let’s now turn to our last but not least category and that’s company benefit maximization. Now Matt, you’ve really turned into our expert in this area, and I know you’ve done a lot of research and work here. So within that research, what do you think are the most important items that people are knocking out every year?
There’s a ton of good items, just because company benefits are very wide ranging and it’s important to know what your benefits are each year and they do change. So it’s something to focus on. So the first thing that we like to pay attention to are your 401K options. Review those each year, because as I said, those can change year in and year out. And you want to know that you have a good allocation for your 401K and that you’re actively saving for your retirement. And in addition, seek your HR individual at your company and see if there’s a Roth component to that 401K, just an idea to sort of supercharge it and take advantage of the options that are available to you.
And again, something that you want to look at is potentially consolidating old 401Ks. It’s possible that you had an old job and you have a 401K sitting at another company that you haven’t looked at in years. So it’s important to know where that money is, and you can also combine it with the current 401K you have now. And again, combining those 401Ks gives you that ability to have everything in one place, so you know that you’re optimizing your retirement savings. For a lot of younger individuals and even older individuals, a good portion of their income is in equity compensation. So it’s important not to let your stock options expire each year.
And also to exercise with tax brackets in mind, something we like to pay attention to, especially for the restricted stock units, you want to ensure that you’re taking great care with those as they can be a little bit tricky. So it’s important to make sure that you are selling your shares to cover so you don’t have a tax surprise come to the end of the year. And again, that’s something that we’re happy to help with and we will review with you. And lastly, this is one that often gets overlooked when you’re talking about company benefits and your investments. And this one is taking an open enrollment seriously. So focus on your health care benefits. Any benefits that the company provides you, there’s certain things that your health insurance again, can provide you, whether it be maybe a gym reimbursement or something like that. So definitely focus on that. That could be money to you that you didn’t even think about that could be coming in.
Yeah, those benefits do change every year, just as health plans change. So definitely make sure that you’re up to date on what benefits you have. How all of these tie together that we’ve talked about today, just one example, you mentioned exercising your stock options. We talked about bracket management, Kari, back in the income tax section. So again, just know that all of these are interconnected in some way. We’ve sliced them up into different conversations here, but they all depend on each other. Ryan, I know you have experience with that here.
Yeah. I was going to jump in and say, Andrew, we had a recent example of this with one of our clients. She works at a large company where she gets a lot of compensation via RSU, and she was doing her taxes a couple of years ago on her own and had exercised some stock and wasn’t paying attention to the AMT tax potential hit that was being created. And when we were looking through her taxes, as part of our review, we noticed that she may have dramatically underpaid her taxes for that year. So we were able to get her to file a correction and she wasn’t charged any kind of fee or any kind of penalty for doing that because we caught it for her. But for incentive stock option plans, any kind of equity compensation in any case, you should be definitely following the simple idea of having a team around it. You should have a CPA, an adviser, someone that you can talk to to ensure that you’re maximizing those benefits and making sure you’re not making any tax mistake as you go about doing them.
For sure. You know, these are not easy things to work with. We always need to bring ourselves up to date when we’re working with stock options and making sure that we’re giving the best advice that we possibly can. Kari, I know you’re here working with a bunch of clients on that right now.
Yeah, definitely. I think just to echo Ryan’s point, it’s just really important to be aware of the different tax consequences and really talk it through with someone else. It’s really challenging to take it on by yourself, so I think it’s important to make those decisions with a team and incorporate it into your overall financial plan.
Yeah. And we will be releasing an episode on equity and stock options in the next few months here. So definitely look out for that, where we’ll do a deeper dive on best practices and that category alone. So this has been an excellent conversation. I’m really glad that we were able to get this done. I want to wrap things up here by asking what were your biggest takeaways throughout this conversation?
Yeah, Andrew, I think the easiest and biggest takeaway for me is that if you take 15 or 20 minutes right now to check out some of these items, you can make a big difference on your overall financial health. It’s as simple as talking to your HR department, maybe even talking to your spouse about income for the year. It may be as simple as shooting one or two emails, but it could have a huge difference if you compound these simple, small benefits over time.
Great point. I’ll just jump in next and say awareness is key. I think you can look at this list and think it’s overwhelming, but a lot of items are interconnected and it’s just coming up with a plan, writing things down and tackling one step at a time gets you closer to achieving your goals.
Exactly. And then once you have this framework in place, it’s easy to review each year and we’ll be constantly reaching out. We do our reviews with our clients, and these are items that we discuss, whether it be each time or at least once a year, we try to have an idea of all these things and ensure they are addressed.
For sure. Well, those are great takeaways. And you know, I’ll just round things off just by reminding you all here, what those categories we talked about today were. We talked about goal identification, cashflow planning, risk management and estate planning, income tax management, debt and credit management and company benefit maximization. And as a reminder, we will be accompanying this episode with that checklist, so you can kind of follow along and make sure that you’re knocking those out on an annual basis.
So, thanks all for being here. This has been Andrew Busa, Ryan Christensen, Kari Wolfson, and Matt Shumaker from Adviser Investments, thanking you for listening to The Adviser You Can Talk To Podcast. If you enjoyed this conversation, please subscribe, review our show and you can always check us out at www.adviserinvestments.com/podcasts. Your feedback is always welcome. And if you ever have any ideas for a topic or questions, please email us at firstname.lastname@example.org. Thanks again.
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