Year-End Financial Planning: To-Dos For ‘22

Jeff DeMaso:

Hello, this is Jeff DeMaso and I’m a portfolio manager at Adviser Investments. We’re here with another The Adviser You Can Talk To Podcast. Today, I’m joined by my colleague Andrew Busa. Andrew, welcome.

Andrew Busa:

It is good to be back together in the studio, Jeff. Well, virtual studio anyway.

Jeff DeMaso:

All right, so today we want to talk through some year-end financial planning actions that investors should be thinking about. We’re a little bit early. Most of the time you see these year-end planning things come out in December, but we wanted to make sure that everybody had time to actually work through these checklists, so we’re here in November talking about year-end planning.

Now, if you have not done any financial planning, the best time to do it is now. I don’t mean year-end, I just mean now, whether that’s June or December, just get started on a plan. Of course, a plan is not a one-and-done exercise. When we work with people on their financial plans, we often talk about reviewing things at least annually. That doesn’t mean you need to revisit every single piece of the plan, but there certainly are aspects that you should be reviewing and revisiting regularly.

Today, as we approach year-end, we want to talk what a year-end review looks like, and specifically talk about some of the nuts and bolts of what we want to check when we’re doing that annual review. We split them up into two categories: The first one is going to be more time-sensitive things. These are things that have a deadline that you need to do by a certain date.

The second set fall under the general good financial behavior category. With that, let’s not waste anymore time and get into those time-sensitive things. Andrew, what are the things on your year-end checklist that have some urgency, some approaching deadline to them that people should have in mind?

Andrew Busa:

Well, I like how you’ve teed this up and it’s a really good conversation kind of thinking about what does that annual review look like? Of course, it’s going to look different to everyone because everyone’s financial plan is a little bit different, but when we think about things that are time sensitive, that are deadline driven, the common ones that we think about, for example, we’re talking about funding retirement accounts. There’s a deadline associated with that, if you’re thinking about getting money into your IRA before tax filing time in the following year.

But along with that, your health savings account, funding 529 plans, basically all of these accounts on your balance sheet that is not a taxable brokerage account, most of the time you’re up against a deadline of a tax year to make sure that you’re funding it to its appropriate level.

We’ll get into in the next section when we’re talking about ongoing assessment, how making sure funding the accounts that align with your overall goals. But that first category, think about the overall funding level, that’s the first place my mind goes when it comes to time sensitivity.

Jeff DeMaso:

I think I sometimes jump to almost the flip side of it. I mean, yes, there’s the funding retirement accounts, but for those people that are already in retirement, you need to be thinking about your required minimum distribution, your RMD, and you want to make sure you take those before year-end so you don’t get hit with any penalties and I would suggest not leaving it to the last business day of the year just so you don’t run into any tech or website hiccups to avoid. Making sure that’s in order makes sense.

Andrew Busa:

The RMD is an important one. It’s one of the nastiest penalties in the tax code, it’s 50% of the amount that you should have taken is going to be penalized. You want to avoid that at all costs. Obviously, that has a deadline associated with it. Make sure you take your RMD and work with your adviser on that. That can be one that can get a little bit confusing potentially if you’ve got multiple accounts spread out across multiple advisers, so just coordinate as best you can.

The other ones that are time sensitive, one that we’ll spend a couple minutes talking about, is this idea of tax-loss harvesting this year. We’re talking more about losses, but just overall being efficient with how you’re recognizing gains or losses in your portfolio for the current tax year.

Jeff DeMaso:

We’re talking about tax-loss harvesting and think about taxes at year-end, so it’s often when people do mutual funds, ETFs pay out, distributions at year-end, so it’s usually when people have it top of mind. We always say that at Adviser Investments that we’re paying attention to taxes year-round, not just at the end of the year, so we’ll look to manage portfolios efficiently from a tax standpoint really throughout the year, but now is a chance or last chance to go into portfolio and say, okay, I have a loss in this fund. I can sell it and realize that loss, roll into a sewer, but not identical exposure, so I maintain exposure to the market, I stay invested, I continue to spend time in the market, but I get to reduce my tax bill. This is your last chance to do that before the end of the year.

Andrew Busa:

There’s a whole episode we could do on gain and loss harvesting. I know we’ve talked about that. We should do that. But again, for now, that’s something to think about working with your adviser on that one to make sure you’re getting the most out of your portfolio.

Jeff DeMaso:

I mean, again, speaking to your adviser, speaking about things that end up being a little bit complicated I think is the Medicare review, right? I think I’ll let you take that one.

Andrew Busa:

Yeah, Medicare, so right now as of this recording, we’re in the middle of Medicare’s annual election period. You also might see it called open enrollment. That runs from Oct. 15 to Dec. 7 every year. This is a window where you have the opportunity to make changes to existing prescription coverage or your Medicare Advantage plan. This is a good annual habit to get into if you’re on Medicare to make sure that you are in the best plan for the coverage that you need.

It might turn out that you’re paying more than what you really need out of your plan and potentially the list of prescriptions that you’re taking might change on an annual basis, so as your health changes, this is a good thing to keep in mind. This comes around every year. Again, that ends on Dec. 7, so that obviously has a deadline that’s approaching here before year-end.

Jeff DeMaso:

The last one that really comes to mind to me, and it maybe starts tying into thinking about good behaviors and goals and involve your portfolio, but is thinking about Roth conversions. I know you’ve worked with a number of clients on thinking through whether that makes sense in a bear market. So, what’s your take on Roth conversions?

Andrew Busa:

Again, deadline driven in the sense of there’s a tax deadline, so this is a decision that is going to affect your 2022 taxes when you make a conversion. Just as a reminder, when you convert money from a traditional IRA to a Roth IRA, you need to pay ordinary income tax on all of that money that was converted in the year that you did the conversion. It’s been a popular topic this year because accounts are down for the most part. The thinking is if you can convert your account at a low to a Roth, then you’re going to ride that growth all the way up, all the way back up and beyond in a tax-free environment inside of that Roth. That’s the thinking and that’s why you might see this topic have a little bit more juice in the headlines than in a typical year.

We’ve talked about this on our last webinar, but the three big questions to really think about to frame this up if you’re considering Roth conversions. It’s what will your future tax rate be? When will you need the money that you just converted? And where will you get the money from to pay the tax on the conversion?

The first one, no one has a crystal ball, you don’t know exactly what your tax rate will be in the future, but the general thinking is you want to be converting at low rates, low tax rates now, and a relative low compared to what they would be in the future. Second one, when will you need the money you just converted? The analyses that we’ve looked at, typically, if you think that you might need that money that you just converted within 10 years, it’s probably not going to make sense to do a conversion. You need time for this strategy to work because remember, you are going to write a check to the IRS to make this strategy happen. You need time to hit that break even in a sense.

Then finally, where will you get the money from to pay the tax on the conversion? The ideal here is cash. If you have cash on the sidelines to write that check, that’s the best. You don’t want to pay tax out of the IRA. That’s sort of shooting yourself in the foot. Taxable brokerage account, that’s an option, but still not ideal if you need to sell securities to pay the tax. But you can do it’s not a deal breaker.

Jeff DeMaso:

Great. I think we can pivot that to think about good behavior. Just to quickly run through, we covered a lot of ground there and just quick recap on the time sensitive items. There’s a few that are retirement account related, so that could be funding your retirement accounts before the end of the year and then that would include a health savings account, a 529 plan. There’s also the other side of pulling money from the account, so that might be taking your RMD before the end of the year to avoid that big penalty. Then also thinking about if you want to convert from an IRA to a Roth IRA, changing your retirement account. Then there’s on the taxable side, and so in your brokerage accounts, thinking about realizing losses to try and reduce your tax bill. Then the last one would’ve been the Medicare review and taking advantage of the open access window here for the next couple weeks.

Andrew Busa:

Yep. That’s a solid list and I’m sure it’s not exhaustive. When we hang up from this recording, I’m sure we’ll think of one that should have been on there, but I think that’s a pretty solid list if you’re doing those things every year.

Jeff DeMaso:

Those are the time sensitive things. Let’s talk a little bit about the bigger picture, kind of good behavior things that we think about. I know one you and I always talk about is just assessing your goals and where you are on your financial journey and if you’re still on track. That is something that again, should be done regularly. I mean, definitely annually in terms of, all right, market is down, we’re in a bear market. How has that impacted my long term goals and where I am on the progress towards those? We’ve talked about really doing that is just very powerful at this time because you might be surprised to see that you’re still on track. The financial plans we run for clients take into account the fact that bear markets happen and are inevitable. But also, if something is off track, having the knowledge and time to be able to change and make adjustments is better than simply ignoring the problem and hoping for the best.

Andrew Busa:

Yeah, agreed. This is the most important thing to do annually is to frame up your goals and assess whether they’ve changed. A lot can happen in a year. You can have all these different life events, you might move, get married, start a family, retire. These are all events that are probably going to change the course, that will definitely change the course of your financial plan.

To your point, Jeff, doing this, it puts context around what your portfolio is doing. In a year like this, when your portfolio is probably down X percent, it gives context to that number. What does that really mean in the greater scheme of your financial plan? Or in a year when the market’s doing really well and you’re up whatever percent? It sort of gives you something to measure against rather than, I know we’ve talked about this many times, rather than just an index.

Jeff DeMaso:

Yeah, you don’t want to be measuring yourself against the index, the talking heads on TV, the flashing numbers on screen. Again, they’re not there to help you achieve your long-term goals. So, you’ve done this assessment and you’ve made the changes you need to, what are some of the other good behaviors you want to be thinking about as the year approaches an end and you’re starting to glance your eyes towards 2023?

Andrew Busa:

Yeah, well what you said in the introduction, perked my ears up a bit. Thinking about what does a solid annual review really cover? Because a financial plan hits on so many different topics ranging from your portfolio and cash flow, your insurance plans that you’ve got, your legacy. Not all of those things need to necessarily be touched every single year because certain things just don’t move as frequently as other things.

For example, your estate plan. The rule of thumb that we typically talk about there, every four to five years unless you have a major life event, then that needs to get assessed. But as a general rule of thumb, every four to five years check in on that. Going back to your question, what should you be doing annually? Let’s start thinking about from a cash-flow best-practice standpoint. Things you should be thinking about every year, just your overall cash-flow strategy. Rolling back up to funding your retirement accounts, your health savings accounts, things like that. You should be assessing not only what you’re spending approximately every year, just kind of taking stock of that, but also sort of assessing where that money is going, how are you saving, where are you saving? We always recommend automating if you can, so as soon as money flows into your checking account, that’s getting sort of allocated in accordance with your goals. That’s something that should be happening annually.

You should be planning for upcoming large expenses every year as part of your cash flow. Then another one here that also goes with cash flow is always make sure that you are withholding the appropriate amount of income tax from your paycheck. I think this goes sort of under the radar a little bit, but the IRS estimates that a large percentage of Americans are over withholding on their taxes on an annual basis, meaning it might feel nice to get that big refund in the following year, but that money was probably better served with you on a biweekly or monthly basis when you’re getting paid.

Jeff DeMaso:

Yeah, I agree. There’s that aspect, we all love getting the check back from the government as opposed to owing them more, but it does mean that you gave the government a free loan and I’m a huge fan of the automating. I mean, we know that budgeting can be effective in tracking your spending is really effective, but they’re also time-consuming and a lot of people struggle to do it consistently and through time. If you can kind of shortcut that and just money comes in and automatically a portion of it goes to savings, boom, you know you’re taking care of that right off the bat.

Andrew Busa:

Yeah, and I know budgeting it gets a bad rap and in a certain sense, for good reason, I think it’s for many of us, it’s not a sustainable exercise to really track every dollar, but what it can do, or what I think we should do is just more monitoring. Just be aware of what you’re spending. Different credit card providers are effective at this. You might be able to get a year-end statement of what your spending breakdown is on a particular card and just have an awareness of, okay, I’m spending 20% in this category, 30% in this. I mean you might be surprised and you might find some places to be more efficient, but I think generally, Jeff, I think most people’s spending is pretty static. I think once you reach a level of spending, you’re sort of there for the most part. There’s not many places most people can cut that’s really going to move the needle all that much, so I think it’s more about just having a general awareness and really a purpose for your savings.

Jeff DeMaso:

I almost tie back to the same idea of running a financial plan, it’s just having some knowledge. Having knowledge of where you are on your plan, having some knowledge of where your spending is and without that knowledge you don’t know if you need to try and make any adjustments.

Okay, so you talked a little bit about cash flow. The other way we kind of frame things is thinking a bit about balance sheet and balance of accounts, so how do you think about that related to year-end and good financial behavior?

Andrew Busa:

Within the balance sheet category, so here we’re thinking about a list of your accounts and things that you should be thinking about as part of your annual best practice financial plan review. First one, monitor your portfolio allocation. This is something that I know there’s, and you speak to this here, a lot of different rules of thumb on rebalancing and what’s the best way to go about that, but for me, I think overall knowing what your portfolio allocation is, making sure that it’s still appropriate for you from a risk tolerance risk capacity standpoint.

Jeff DeMaso:

That ties back into the goal assessment purpose of your financial plan and portfolio and making sure they’re aligned. This year, given it’s a bear market in the equity market, usually it’d be a time to do a lot of rebalancing just given the pain in the bond market as well this year there’s probably a little bit less opportunity than you might expect, but yes, absolutely always want to make sure that your portfolio is aligned with your goals and at an appropriate risk level.

Andrew Busa:

You can see annually why that’s important. Again, a lot has happened in the market in the last 12 months and if you don’t have an ongoing review of that, if two, three years go by, your allocation could be totally different than what it was originally set out to be. That is also where I think the value of working with a good adviser is huge to keep you on track, to give you that check of where you should be.

Jeff DeMaso:

That’s the role of your adviser as a partner helping you keep track of all of your financial situation from investments to all the plans and estates that come with it. For example, one place to that you might want to check in on is just on your 401(k). We often all start at a new job, see the 401(k) plan, make one decision and never look at it again, which has some benefits in terms of generally it actually is good investor behavior of just regularly contributing money and letting it spend time in the market. But still, again, you want to check in occasionally, see if there’s been changes to the options, make sure again that the allocation still makes sense for what you’re trying to achieve in your time horizon and your risk level.

Andrew Busa:

Yeah, I think the common one that I’ve seen there is the selection of a target-date fund. When you first start that new job, it’s been 15 years, you never changed it, the account’s done fine. I think there’s nothing wrong with those allocations, but sometimes there are some better options out there over that long period of time. That’s just one example that comes to mind.

The other ones here, I think there are just a couple more that we can roll through quickly. One, consolidate where it makes sense. Jeff, you and I did an entire podcast about this topic a month ago, so we won’t rehash that too much, but make your balance sheet more efficient by working with one adviser is the idea there.

Jeff DeMaso:

I think maybe the last one just to mention just again, and that thing that probably it’s not going to change very often, but just reviewing your beneficiaries on your accounts and making sure, again, those are who you want them to be and aligned with your purpose and what you’re trying to achieve. Again, probably not going to change often, but always good just to check and make sure that they’re where you want them to be

Andrew Busa:

Important.

Jeff DeMaso:

All right, Andrew, this has been as always, a great conversation with you and I know it’s something that’s on the minds of many people that we’re talking with right now as we approach year-end. We’ll wrap up on some of your biggest takeaways.

Andrew Busa:

Preparing for this episode and sort of speaking out loud, I sort have come to that realization myself that an annual review does mean sort of different things to different clients and where you are in your financial journey, but there are some things that from a best practice standpoint make sense to be looked at every year, I think no matter where you are. Hopefully, we made that clear in this episode and I sort of enjoyed thinking about what those things are that sort of comprised that sort of best practice review.

Jeff DeMaso:

Absolutely. I hope that our way of trying to split it up between a checklist of things that have got some time sensitivity to it, as well as then kind of, all right, what are some good behaviors to keep in mind and think about help people get started on their review and follow through on it.

Andrew Busa:

Love it.

Jeff DeMaso:

This has been Jeff DeMaso and Andrew Busa from Adviser Investments, thanking you for listening to The Adviser You Can Talk To Podcast. If you’ve enjoyed this conversation, please subscribe and review our show.

You can also check us out at www.adviserinvestments.com/podcasts. Your feedback is always welcome and if you have any questions or topics you’d like us to explore, please email us at info@adviserinvestments.com.