Many people start the New Year with a list of resolutions that, let’s be honest, they probably aren’t going to keep.  As you may have guessed, I am not here to talk to you about going to the gym more or picking up a new hobby. Instead, I would like to present some financial tips that are easy to turn into good habits and get you off to the right start in 2021. Having a well thought out plan can pay dividends (pun intended) in 2021 and beyond.

1. Set Short-Term Financial Goals for the New Year

• Many of us have longer-term goals (like retirement or buying a vacation home), but it is also important to set shorter-term goals. These goals can include accelerating payments on a mortgage, paying down student debt, saving for a house down payment, funding a vacation, or even paying for private pilot lessons (yes, I’m considering it!).

2. Set Automatic 401(k) Contributions from Each Paycheck

• If you recently received a raise, it might be a good idea to increase your contribution rate and save at least a part of your pay increase while following the IRS’s maximum contribution limits.
• Revisit whether your contributions are made on a pre-tax (traditional 401(k)) or after-tax (Roth 401(k)) basis and consult with your advisor to see what is best for you.
• Make sure your investment election aligns with your overall portfolio strategy. While it may make sense to sometimes think of your 401(k) as a stand-alone “silo,” often it’s important to think of it in conjunction with your other accounts.

3. Maximize Your Roth IRA Contributions Before Tax Filing

• For some people (depending on income level – see point b below), a Roth IRA contribution can be made in addition to a work 401(k). These contributions are made with after-tax money and will grow permanently tax-free as long as you meet certain rules. Note that you have until April 15^th of 2021 to make your 2020 contributions.
• If your income is over a certain threshold ($124,000 if you’re single and $196,000 if you’re married and file jointly), you cannot contribute directly to your Roth IRA. However, there are workarounds to maximize tax-free growth, and you should consult your SWP advisor and/or CPA for the best solutions.

4. Review Your Portfolio Asset Allocation

• 2020 has been a surprisingly strong year for equities, and you may find that you have more stock market exposure than you intended. One of the hardest things to do when investing is to sell equities while the market is rising. But if your allocation strategy was intentional (our clients’ plans certainly are), you should generally maintain the discipline of sticking with the plan. In years like this, that may mean taking chips off the table and reallocating investment gains towards more conservative assets.
• The most common resistance we see to selling stocks is that clients don’t want to pay capital gains tax. This makes sense, but we also don’t want to “let the tax tail wag the dog.” After all, any tax you pay is just a fraction of the gains that you’ve earned.

5. Make Sure Your Beneficiaries are Set Up Properly on Your Retirement Accounts

• In most cases, naming your spouse as the primary beneficiary makes the most sense.
• If you aren’t married, we typically recommend naming beneficiaries (children, siblings, etc.) outright to ensure that they can take the inherited distributions over an extended period of time. But it’s a complicated topic; my colleague, Jill Kaz, wrote the article It’s Time to Review Your Beneficiary Designations that may be helpful.

6. Adjust Automatic Savings to Align with Salary Changes

• While you can (and should) celebrate any salary increases and/or year-end bonuses, it’s also smart to increase your savings rates (set a goal to do so, as discussed in number one above). Failure to do so results in not making progress towards increasing your savings and portfolio.

7. Create (or Revisit) a Net Worth Statement

• Keeping your net worth statement updated is key. If you don’t have one, it is time to create one. A net worth statement is a “financial snapshot” that lists your current assets (what you own) and your current liabilities (what you owe). You then deduct your liabilities from your assets to determine your net worth.
• Revisiting your net worth statement at the beginning of each year can help monitor forward progress over time. If the results aren’t what you hoped for, it may be time to sit down and develop a plan for future growth.

8. Review Your Estate Planning and Documents

• Make sure all of your accounts are correctly titled. Are they named in your trust? If you don’t have a trust, do you have a TOD (Transfer on Death) designation applied to your account(s)? These easy adjustments can help your loved ones avoid probate court in the event of your death.
• If it’s been more than a few years since you reviewed your estate plan, consider calling your attorney to confirm your plan is up to date with any new laws and regulations.
• If you don’t have an estate plan, there’s no better time to start than now. While working with an attorney to draft documents may not be “fun,” it’s an excellent way to ensure that all of your assets will be distributed according to your wishes and that someone can step into your shoes if you are unable to manage your affairs.

Taking the time to review these eight items is the best way to start your year off right financially. Please contact your team at SWP if you would like to discuss any of the items above.  On behalf of the entire SWP team, we wish you a happy, healthy, and prosperous new year.