Special Report

Annual Financial
Planning Guide

Everything you need to know to get your financial life in order in today's challenging economic climate.

Coming Up Next Week: Q1 Special Report: Your Mid-Career Guide to Retirement Planning

13.
Financial Planning Punch List
Week of December 26

Year-End Wrap-up: Have You Covered All the Financial Planning Bases?

  • Your Annual Financial Planning Checklist
    If you’ve taken on the task of mapping out your annual financial plan, you deserve a pat on the back. Ensuring that you’ve covered all of the bases is important to both your short- and long-term financial health. Keeping track of your progress with an annual financial planning checklist makes it easier to see which tasks have been completed and which ones you still need to tackle. This list is based on the items we've covered over the last 12 weeks in Investopedia's Annual Financial Planning Guide.  Annual Financial Planning Checklist Now that you know what an annual financial plan is and how to make one, let’s recap the most important steps in the process. Check off each step that you've considered, even if your response was, "No, I don't want to refinance my mortgage" Or, "My credit cards are already paid off!" The idea is to make sure you've looked at the issue. But you do need to cover every item in our first section so that you have a full financial inventory. ✔ Create your personal financial inventory Your personal financial inventory is important because it gives you a snapshot of how healthy your bottom line is. (For more, check out The Importance of Making an Annual Financial Plan.) This annual self-check should include:  ☐ A list of assets, including items like your emergency fund, retirement accounts, other investment and savings accounts, real estate equity, education savings, etc. Any valuable jewelry, such as an engagement ring, belongs here, too.  ☐ A list of debts, including your mortgage, student loans, credit cards and other loans  ☐ A calculation of your credit utilization ratio, which is the amount of debt you have versus your total credit limit  ☐ Your credit report and score  ☐ A review of the fees you’re paying to a financial advisor, if any, and the services he or she provides ✔ Set financial goals Once you have a personal financial inventory completed (see the video Why Create a Financial Inventory? for key insights), you can move on to setting goals for the year ahead. Your goals will be short-term, mid-term and long-term. Among your short-term goals might be to:  ☐ Establish a budget.  ☐ Create an emergency fund or increase your emergency fund savings.  ☐ Pay off credit cards. Your mid-term goals might include:  ☐ Get life insurance and disability-income insurance.  ☐ Think about your dreams, such as buying a first home or vacation home, renovating, moving – or saving so that you'll have money to have a family or to send children or grandchildren to college. Then review your long-term goals, including:  ☐ Determine how much of a nest egg you’ll need to save for a comfortable retirement.  ☐ Figure out how to increase your retirement savings.  ✔ Focus on the family If you’re married, there are certain things that you and your spouse should be thinking about on the financial front. These are some of the items that may be on your punch list:  ☐ If you have children, determine how much you’ll need to save for future college expenses.  ☐ Choose the right college savings account (read also: Using 529 Plans to Save for College).  ☐ If you are caring for elderly parents, investigate whether long-term care insurance or life insurance can help.  ☐ Purchase life insurance for yourself and your spouse.  ☐ Start to plan how you and your spouse will time your retirement, including your Social Security claiming strategy. ✔ Review your retirement savings plans Saving for retirement in an individual retirement account (IRA) or 401(k) is a smart way to enjoy some tax advantages. As you put together your annual financial plan, you should consider whether you need to:  ☐ Decide whether a Roth or Traditional IRA is best for you now.  ☐ Consider switching an existing IRA to a different brokerage.  ☐ Convert a traditional IRA to a Roth IRA.  ☐ Do the same for your 401(k), which can also be Roth or regular. (For more, see 401(k) Plans: Roth or Regular?).  ☐ Roll over any old 401(k) accounts from a previous employer.  ☐ Increase or decrease your annual contribution amounts to retirement accounts. ✔ Review your investments It’s important for investors to take stock of where their investments are during the annual financial planning process. This is especially true when the economy undergoes a shift, as is happening now.  ☐ Check your asset allocation. If stocks are taking a dive, for example, you may consider adding real estate investments into your portfolio mix to offset some of the volatility.  ☐ Then figure out which investments will do the best job of meeting your asset allocation goals – and whether your current investments still fit that profile. ✔ Rebalance your portfolio Periodically rebalancing your portfolio ensures that you’re not carrying too much risk or wasting your investment dollars on securities that aren’t generating a decent rate of return. It also makes sure that your current portfolio reflects your investment strategy (changes in the market often cause a shift that needs to be corrected to maintain the diversification you originally planned)  ☐ Look at which asset classes you have in your portfolio and where the gaps are. If necessary, refocus your investments to even things out. ☐ Consider the costs of managing your portfolio and decide whether it’s time to try a robo-advisor or other strategy to cut them. ✔ Tackle end-of-year tax planning for investments While you’re looking over your portfolio and rebalancing, don’t forget to factor in how selling off assets may affect your tax liability. If you’re selling investments at a profit, you’ll be responsible for paying short- or long-term capital gains tax, depending on how long you held the assets. Consider these strategies:  ☐ Harvest tax losses by replacing losing investments with different ones to offset a potentially higher tax bill (see: 3 Tips to Get Started on Tax-Loss Harvesting and Tax-Loss Harvesting: Reduce Investment Losses).  ☐ Look into whether you should offset capital gains and losses.  ☐ Investigate whether it makes sense to use appreciated securities to make charitable donations or support lower-income family members. ✔ Update your financial emergency plan A sizable emergency fund is helpful if you run into a financial rainy day; be sure you have socked away adequate resources. While you’re at it, look at your broader emergency plan as a whole.  ☐ If you don’t have three to six months’ worth of expenses tucked away, building your emergency savings should be a top priority.   ☐ Invest in insurance: Are you covered for a temporary disability, for example?  ☐ Make sure you have a financial and medical power of attorney in place. These are things you should be thinking about as you finalize your annual financial plan. ✔ Look ahead to next year’s savings As you move towards a new year, think about where else you could be saving money to fully fund your emergency savings and put aside more for the future. Consider whether you should:  ☐ Refinance your mortgage.  ☐ Rethink your car insurance. ☐ Lower your food bill. ☐ Utilize Flex Spending or Health Savings Accounts. ☐ Cut the cable TV cord. ☐ Curb your energy bill. ☐ Divert your paycheck to savings, by contributing more to retirement accounts or funneling money directly from your paycheck to an emergency savings account. ✔ Work on building alternative income streams for retirement A 401(k), pension plan or Social Security benefits may all be potential sources of income in retirement, but they’re not your only options. Figure out what else you could build in.  ☐ Investing in a rental property and becoming a landlord can provide regular income.  ☐ Real estate crowdfunding offers some interesting possibilities for investors who don’t want to own property outright (see Real Estate and Crowdfunding: A New Path for Investors) ☐ A part-time job may be the right solution to adding to your income. ☐ If funds are tight and you own your home, investigate whether a reverse mortgage is a good solution for you.   ☐ Think about purchasing dividend stocks, starting a side hustle, creating a website that you can monetize or making investments in peer-to-peer lending. These options require varying degrees of time and money to get started, but they all provide avenues for boosting income in retirement. ✔ Start using or update your financial planning apps Using financial planning apps to track your expenses and income can simplify your financial life, but not all programs are created equal. As you wrap up your annual financial plan, review the financial planning apps or software you’re using to see if it still fits your needs.  ☐ If you’re not putting any apps to work yet, take the time to review the options and how they can help you manage your money. (Check out 5 Best Personal Finance Planning Apps) The Bottom Line An annual financial plan is an exceptionally valuable tool for your life (and peace of mind) today and for your future. Best-case scenario: You've checked off all the items on this punch list by now. If not, don’t hesitate to pencil in time on your calendar to do so before the year is out. You still have a few days left!  
    by Rebecca Lake
  • How To Build A Budget
    Learn the basic steps towards building a system to track your money and control your spending.
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12.
Top Financial Planning Software
Week of December 19

Do You Have the Right Financial Planning Software for Your Needs?

  • 5 Best Personal Finance Apps
    Doing an annual financial plan makes it clear how important how well you're doing now is to your future – and personal finance apps are the tool that can help you actualize your plans. That's because your daily financial decisions and activities – budgeting, spending, saving, investing, retirement planning – affect your financial health, both now and in the future. While it used to be challenging (if not tedious) to keep track of all of your financial activities (think stacks of bills and receipts, plus a calculator), today’s mobile financial planning apps make the process easy and even surprisingly enjoyable.  5 Free Personal Finance Apps Here are five of today’s best financial planning apps to help get you on track, listed in alphabetical order. And there’s good news: They all work with both iOS and Android, and they’re all free. 1) Level Money    Level Money is an award-winning app designed to help you “spend smarter, do more, live better.” Once you link all of your accounts, the app acts as a mobile money meter, so you can track your daily cash flow. On the first day of each month Level Money “fills up” with your estimated income (based on your spending history) and subtracts your recurring bills and a savings rate (such as 7%). Anything left over is your “spendable” money. The app breaks this down on a daily, weekly and monthly basis to help you stay on track. 2) Mint  The Mint app helps you “spend smarter and save more.” Use it to budget and manage your money in one place, so you can see where you’re spending and where you can save. Add your bank, credit, loan and retirement accounts, and Mint automatically categorizes all of your transactions (cash transactions are entered manually). Mint creates a starter budget based on your spending history, which you can add to and customize as you see fit. Bill reminders and alerts help ensure that bills are paid on time. 3) Mint Bills Mint Bills (formerly Check) is an award-winning app that “stays on top of your bills and money for you.” The app helps you keep track of your bills and monitor your bank accounts and credit cards. All of your bills, due dates and other account details are displayed in one place, and you get reminders when bills are due and alerts if funds are low or credit limits are near. You can schedule bill payments or pay them on the spot directly within the app using a credit card or bank account. 4) Personal Capital  The award-winning Personal Capital app is the “modern way to track and manage your net worth.” See all your accounts in one place and view real-time charts of your income, spending and investment performance. You set your spending goal, and the app tells you if you’re on target for the month – or if it’s time to curb your consumption. A 401(k) fee analyzer and mutual fund fee calculator show if you’re paying too much in fees, and the Investment Checkup tool analyzes your portfolio and shows how much you stand to gain with a few changes. 5) Prosper Daily  Prosper Daily (formerly BillGuard) helps you “stay on top of your money, credit and identity.” You can view all your accounts and balances in once place, and all your bank account and credit card transactions appear in your inbox. Spend Analytics let you visualize your spending by category and date to find out where your money is going, and the Recurring Charges Tracker shows exactly what you’re paying for all your subscriptions. Data Breach Alerts notify you if a business you’ve shopped at has been hacked, and the app also tracks your TransUnion credit score. The Bottom Line Financial planning apps help make keeping track of spending, saving, investing and retirement planning easy, and, perhaps most important, they are something you can do anywhere at any time. These apps provide up-to-the-minute details, helping you make better decisions and stay on top of your finances. (For help on using these powerful tools correctly, see The Dangers of Using Personal Finance Apps.)      
    by Jean Folger
  • Adam Dell Launches Clarity Money
    As a successful venture capitalist, Adam Dell knows what it takes to manage money. He sat down with Investopedia to share how Clarity Money, his latest venture, helps customers with everything from opening a savings account to canceling pricey subscriptions. 
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11.
Planning Retirement Income
Week of December 12

Plan Ahead for Multiple Revenue Streams for When Your Retire

  • Managing Multiple Revenue Streams in Retirement
    Taking the time to look ahead – maybe far ahead – to retirement should be an important part of your annual financial planning checkup. Most older adults will rely, at least to some degree, on Social Security benefits as a source of income during retirement. Though seeking out and managing other revenue streams in retirement will likely become more and more important for retirees to come. For 2016, the average Social Security benefit for retired workers is $1,341 a month. For couples, it’s $2,212 a month, assuming both receive benefits. If you’re fortunate, you might also have additional revenue streams from stocks, IRAs and employer-sponsored plans: 401(k)s, SIMPLE Plans, pensions and the like. Collectively, the income from Social Security benefits plus any retirement investments and other savings can add up, but it’s not always enough to support your desired lifestyle during retirement. You need to take time to project forward to see what you think you might be able to assemble by the time you're ready to retire. Doing your annual financial plan is a good moment to think about whether you’ll need additional revenue streams later in life and start planning how you'll develop them. Here are three options worth considering now. Except for the reverse mortgage, you don't want to wait until you're just about to retire to get started on them. You'll make more money if you start laying your plans earlier in your life. Real Estate Rental properties are a frequently overlooked alternative that can provide both a steady income stream and the opportunity to build equity. As an added bonus, the property may appreciate in value, and you may be able to enjoy certain tax benefits, including those related to: Depreciation Home office expenses Insurance Management of the rental property Mortgage interest Property repair and maintenance expenses Traveling expenses related to the management of the property Of course, it takes money to make money, and you’ll have to make an initial investment to generate cash flow – typically a down payment of 20% to 30% for rental properties. You’ll also have recurring expenses, including your mortgage, taxes, landlord-specific insurance policies and the costs of maintaining the property. It’s definitely not easy money, but after a few years it’s possible to have a steady income stream from rental properties. For more, see Real Estate Rents Can Fund Your Retirement.  Real estate crowdfunding is another option if you want to make money from property without owning it outright (see Real Estate and Crowdfunding: A New Path for Investors). Reverse Mortgage This is the revenue stream you probably won't tap until you've actually reached retirement. Many people get to that period house-rich and cash-poor. If you own your home and are at least 62 years old, you may be able to convert that home equity into cash using a financial product called a reverse mortgage, which lets you borrow against the equity in your home to get a fixed monthly payment or a line of credit. Interest accrues on the payments you receive, and repayment is postponed until you become delinquent on your taxes and/or property insurance, the house falls into disrepair, you move, sell the house or pass away. A home equity conversion mortgage (HECM) is the most popular type of reverse mortgage. Private banks issue them and they’re insured by the Federal Housing Administration – plus there are no restrictions on how you spend the money. As far as payments go, you can choose to receive one of the following: A lump sum of cash at closing A monthly “term” option –  fixed monthly payments for a set period of time A monthly “tenure” option – fixed monthly payments for as long as you live in your home A line of credit – to make withdrawals on a cash-needed basis A combination of monthly payments and a line of credit In general, you can switch payment options if your needs change as long as you have funds remaining. For more, see The Reverse Mortgage: A Retirement Tool and 5 Signs a Reverse Mortgage Is a Bad Idea. Part-time Work Retirement can be a period filled with relaxation, hobbies and travel. The reality, however, is that millions of Americans 55 and up work on a part- or full-time basis to stay active, challenged and involved in their communities. They also may be employed out of financial necessity – specifically, to create an income stream during retirement and/or to hang on to valuable benefits. Some of the top-paying positions today for the over-65 crowd include: Accounting/bookkeeping Patient advocate Project-based consulting Tutor/instructor Your former job The Top-Paying Jobs for People Over 65 will give you details on each of these options. If it’s an option (and you enjoyed your time there), your former job can be a great place to look. Your employer might be happy to have you – and your years of experience – back at work. And you get to keep doing something you enjoyed, but with more flexibility (and perhaps a little less responsibility). The pay depends on your previous salary, but for many, it’s the best way to maximize earnings potential during retirement. On the other hand, you may want to start developing a consulting practice before you retire. Or even do some additional training to set yourself up for a new field to pursue in your 60s or later. These two options require planning ahead to put them into practice in retirement.  The Bottom Line Other options for creating revenue streams during retirement include starting your own business (see Why to Start Your Own Business During Retirement and Using Retirement Funds to Fund Startups), downsizing and living off the proceeds, and selling some of the things you no longer need that are taking up space in your house and garage. With a little time and effort, for example, it’s possible to make an extra few hundred dollars a month selling used items on auction sites like eBay. You can also consider starting a website that you monetize or investing in peer-to-peer lending (Peer-to-Peer Lending: How Retirees Can Make Money explains how).  No matter which path(s) you choose, it’s important to do your homework – read books, talk to your friends, research online – to find the options that will work best for you and your situation.    
    by Jean Folger
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    Jessica Perez, CEO of Tycoon, shares her favorite way to create a stream of future income. 
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10.
Where to Save Next Year
Week of December 5

Identify and Strategize Where You Could Be Saving Money

  • 7 Ways to Save Money Next Year
    Part of your annual financial planning should always be figuring out if there are any places in your life where you could save more money than you were able to save over the past 12 months. Whether you apply those savings to your retirement fund or use them to pay down debt, when making your plan it’s always worth asking where you can save next year. (For more, see 5 Painless Ways to Save More Money.) 7 Ways to Save Money Next Year When you’re busy focusing on other things (like your life), it’s easy to fall into poor spending habits that could be costing you hundreds – or even thousands – of dollars a year. Here are seven ways you can straighten out your money matters and save a few bucks in 2017.  1. Refinance Your Mortgage The average interest rate on a 30-year fixed home loan recently went up to 3.96% (week ending November 17, 2016), about the same as that time last year, according to mortgage giant Freddie Mac. If that’s less than you’re currently paying on your mortgage, you might want to think about refinancing. Mortgage rates recently started rising sharply (it was 3.57 just a week earlier), so don't delay that re-fi.  The general rule of thumb is that you should redo your loan if you’d save a full percentage point in interest. But that can depend on a number of factors, such as the amount of your closing costs and how long you expect to stay in the home. One way to decide is to run the numbers and find the break-even point – the number of years it will take for the monthly savings to outweigh the closing fees. The sooner you reach the break-even point, the easier the decision to refinance becomes. 2. Rethink Your Car Insurance  When you take out a car loan, the lender will often require you to take out collision insurance, which pays for damage to your car when you’re at fault in an accident, and comprehensive insurance, which covers things such as theft, vandalism and water damage. If you’ve paid off your loan, these two types of coverage are probably no longer needed. Does that mean you should always go with bare-bones insurance? No. But if your car is valued at only a few thousand dollars, you might find all that extra coverage is no longer worth the price. 3. Lower Your Food Bill According to the Bureau of Labor Statistics, food represents the third-biggest expense for a typical American, totaling more than $7,000 a year. Naturally, it’s one of the best places to look when you’re trying to plump up your finances. Some ideas: Since  restaurants generally cost more than cooking at home, give yourself a weekly “eating-out budget.”  Also, when you’re at the grocery store, stock up on items that are on sale, as long as they have a good shelf life.  Stores tend to discount items every few weeks, so take advantage when you can. Buying in bulk (if you have the storage space) and buying store brands are other ways to save money. (For more, see Top 7 Money Saving Tips for Eating Out.) 4. Utilize Flex and Health Savings Accounts If you’re paying medical bills with your normal checking account, you’re likely making a big mistake. That’s because flexible spending accounts (FSAs) and health savings accounts (HSAs) allow you to pay for doctors, hospital visits and certain medical supplies with pretax money. With a dependent-care FSA, you can also save on daycare, preschool tuition and eldercare costs.  The higher your federal tax bracket, the more you stand to save. For example, if you’re in the 25% tax bracket, every bill you pay with pretax money effectively saves you 25%. Not everyone is eligible, however. HSAs are only available through compatible health insurance plans, and you can only use an FSA if your employer offers one. 5. Cut the Cord With more options than ever for watching TV, that cable subscription might be an expense you can live without. One of the more compelling alternatives is Sling TV, which can run on a number of devices, such as Apple TV and Roku. For $20 a month you can get live programming from more than 25 channels, including CNN, ESPN and Comedy Central. The feature you don’t have is the ability to record shows. But if that’s something you don’t really need, it’s a service worth considering. If watching shows right when they air isn’t important to you, Netflix is another great option. A basic subscription only costs $7.99 a month and offers you some of the most popular shows on TV, plus access to its Netflix original programs such as "Grace and Frankie," "House of Cards" and the new look at England’s royal house of Windsor, "The Crown." 6. Curb Your Energy Bill The monthly utility bill can be a shocking experience, especially during the coldest and hottest months. Fortunately, there are several low-cost ways to reduce your energy consumption. A low-flow shower head, for example, can save up to up to 60% on the cost of heating that water. Replacing old weather stripping around your doors and windows is another great way to pad your wallet. Closing off all those drafty openings can cut your heating bill by as much as much as 5% to 10% annually. And if your home has zoned heating and cooling, you don't have to keep every room at the same temperature all day long. 7. Divert Your Paycheck to Savings The personal savings rate in the U.S. is under 6%, making Americans some of the worst savers in the developed world. But there’s a simple way to kick that bad habit: Don't have your full paycheck deposited into your checking account. You may already have a 401(k) or similar plan at work: You are contributing up to the company match, if there is one, right? Decide whether this is the year you're going to contribute an even higher percentage of your pay (see Your 401(k): What's the Ideal Contribution?).  For short-term needs, have your bank automatically withdraw some of each paycheck and put it into a savings account – at least until you have saved enough for an emergency fund. The fact that the money is not in your checking account means you’ll be less tempted to spend it.  The Bottom Line With the new year just around the corner, now’s a great opportunity to reevaluate your financial habits. A few small changes could mean substantial savings down the road. (For more, see 20 Lazy Ways to Save Money.)      
    by Daniel Kurt
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9.
Planning for Emergencies
Week of November 28

Review and Update Your Emergency Plan for Next Year

  • Why You Should Have an Emergency Fund
    Let’s talk about planning for emergencies – specifically, financial emergencies. Do you know how you’d pay the bill if you lost your job, had a health crisis or even just needed a major car repair? Do you have the insurance and the savings you need to get you through tough times? Do you have an emergency fund? Creating your annual financial plan is a good time to check on your savings for emergencies. Many people fall short, and you don’t want to be one of them. Planning for Financial Emergencies: America’s Shortfall According to a report published in May by the Federal Reserve that asked about Americans’ economic well-being in 2015, 18% of Americans experienced a financial hardship last year, and nearly half of that group didn’t have the financial resources to handle it. As a result, people skipped medical treatments they needed, went into debt or tapped retirement funds if they didn’t have the emergency savings to cover their bad luck. Only about half of Americans have enough emergency savings to cover three months’ worth of expenses, which would help to compensate for a brief period of unemployment, disability or serious illness; the other half might have to sell assets or borrow from friends or family to make ends meet. Even worse, only 54% of Americans could handle a $400 emergency expense with cash or the money in their checking or savings account. Not surprisingly, households with higher incomes are more likely to be able to manage such an expense, but 38% of households earning $40,000 to $100,000 and 19% of households earning more than $100,000 said they didn’t have that $400 on hand.  According to a November 2015 publication by the Pew Charitable Trusts on the resources families have to handle financial emergencies, a third of American families have no savings, and 10% of households earning $100,000 or more a year also lack them. Additionally, Pew found that the typical household doesn’t have enough liquid savings to cover one month of lost income, and just over a quarter of households could replace a week of income. Even households earning more than $85,000 could only replace 40 days of lost income.  If most of us don’t have the financial cushion we need, what can we do to increase our financial security? Two safety nets that can help us be more self-sufficient, even in the face of misfortune, are building an emergency fund and getting disability income insurance. Emergency Fund: How Much Should You Save? You’ve probably heard the common advice that you should save three to six months’ worth of expenses in case of an emergency. But how much do you really need and why? What is enough depends on each individual’s or family’s situation, according to Kevin Gallegos, vice president of sales and Phoenix operations with Freedom Financial Network, an online financial service for consumer debt settlement, mortgage shopping and personal loans. “Think about the level of expense that causes you to rush to a credit card,” he says. “Is it a car repair bill for $250? A medical bill for $500? That is the amount to start with. Have at least that available and build gradually toward six or more months’ living expenses.” Six months of living expenses might be a more attainable goal than you think. It’s not six months’ worth of your salary, or even six months’ worth of the amount you normally live on, Gallegos explains: “It is the amount to cover essentials only.” You only need to be able cover key expenses such as housing, food, insurance, health care, utilities, transportation and minimum payments on your debt, not luxuries like vacations, new clothes or restaurant meals. You might want to have more or less in your emergency fund depending on how stable your income is. If you and your spouse both work for different companies in different industries, you’re less likely to lose your entire household income at once, though it can happen. Also, one spouse could be laid off and the other could fall ill. If you’re a freelancer with an irregular income, you might want a larger emergency fund to help ride out the ups and downs, or you might feel comfortable with a smaller emergency fund because you have multiple clients and are likely to always have some income coming in, unless, again, you get hit with a serious illness or injury and can’t work at all. If you work in a volatile industry with frequent layoffs, that’s another reason to have a larger emergency fund. Emergency savings are about what you can realistically save, what amount makes you feel secure and what other financial goals you have. You might want to stop at three months’ worth of savings if you have high-interest debt to pay off, then create a larger emergency fund once you’re debt free. You also don’t want to have so much money in emergency savings that you’re taking away from goals such as saving for retirement. As emergency savings need to be highly liquid, you have to keep that money in a savings account, where it’s probably not even earning enough interest to keep up with inflation. If you have two years’ worth of living expenses in a savings account, you might be better off cutting that amount to one year’s worth and putting the half in a tax-advantaged retirement account, such as a Roth IRA, where you can invest it in exchange-traded funds or index funds and earn enough returns to grow your money over time. Even if you have an emergency that lasts longer than 12 months, you are unlikely to need that much cash all at once. If you have a 12-month emergency fund and find that you’re still unemployed after nine months, you can start making plans to tap other assets if you can’t find a new job soon, such as withdrawing contributions from your Roth IRA. (For more, see Why You Absolutely Need an Emergency Fund and How to Use Your Roth IRA as an Emergency Fund.) Disability Income Insurance: What It Covers and How to Get It Why would you need disability insurance if you’re perfectly healthy and able-bodied? The Social Security Administration (SSA) estimates that more than a quarter of 20-year-olds will become disabled before they reach retirement age. Because of the high risk of becoming disabled and the devastating consequences of being without an income for months if not years on end, disability insurance is a smart purchase. Short-term disability insurance is designed to cover a disability that lasts six months or less, while long-term disability insurance is designed to cover one that lasts for as long as you’re disabled, until you reach retirement age. This insurance will replace a percentage of your income until you’re able to work again. Some policies cover you if you can’t work in your own occupation, while others only cover you if you can’t work in any line of work.  Many people have disability income insurance through their employers; others have individual policies. It’s also possible to have both. In 2014, 39% of workers had short-term disability insurance, while 33% had the long-term variety, according to the U.S. Bureau of Labor Statistics. Most workers who have access to disability insurance through work participate in it because their employer pays for it.  Another source of disability income is the SSA. To qualify, you must have paid Social Security taxes through work. The SSA uses a strict definition of disability: “A person is disabled...if he or she can’t work due to a severe medical condition that has lasted, or is expected to last, at least one year or result in death. The person’s medical condition must prevent him or her from doing work that he or she did in the past, and it must prevent the person from adjusting to other work.” If you do qualify for Social Security Disability Income (SSDI), the amount you receive probably won’t be enough to cover your expenses, especially given that if you’re disabled, you likely have higher medical expenses than someone who isn’t. The average monthly disability benefit payment at the beginning of 2016 was just $1,166, which the SSA admits is barely enough to stay above the 2015 poverty level. Besides the fact that SSDI benefits would probably be insufficient to maintain the standard of living you’re used to and are difficult to qualify for, there are other reasons why you might want to carry your own disability income insurance, even if you have an employer-sponsored plan or would qualify for SSDI. “If you purchase your own individual disability insurance, then it is yours, and you own and get to keep it. If you leave your employer, then you lose your DI policy, unless there is some provision to convert it, and it normally costs more,” says Richard P. Sabo, a financial planner with RPS Financial Solutions in Gibsonia, Pa. “Also, if you buy your own and pay the premiums, then the benefits are tax free when you receive them. If your employer pays your premiums for you, then [the benefits] are taxable when you receive them.” You should apply for disability insurance as soon as possible if you don’t already have this essential coverage (see Choosing the Best Disability Insurance). You never know when you could become disabled, and premiums are cheaper the younger and healthier you are. If you’re in a high-risk line of work, disability insurance is extra important, as you have an above-average chance of becoming disabled. To buy disability insurance, you’ll need to look beyond the insurance companies you may be familiar with from your auto or homeowner policies; these companies usually don’t sell it. Instead, you’ll find it offered by the same companies that sell life insurance, such as MassMutual, MetLife, Mutual of Omaha and Northwestern Mutual. (For more, see The Disability Insurance Policy: Now in English and Intro to Insurance: Disability Insurance.) The Bottom Line To protect against some of life’s major financial emergencies – getting laid off or being unable to work – you need an emergency fund and disability income insurance. An emergency fund is also a great source of protection against minor financial emergencies, such as unforeseen bills; it will help keep you out of debt and keep you from spending money on interest that you’d rather put toward other financial goals. Annual planning is also a good time to make sure you have a financial and medical power of attorney in place. Power of Attorney: Do You Need One? explains the details. If you’re exceedingly lucky, you’ll make it through your working years without ever losing your job or becoming disabled. However, most people will likely experience one of these events at least once. An emergency fund and disability insurance will help you make ends meet and keep your stress levels in check, even when misfortune strikes.    
    by Amy Fontinelle
  • Do You Have Emergency Savings?
    Saving for retirement isn't always enough.
    Video
8.
End-of-year Tax Planning
Week of November 21

Capital Gains, Tax-Loss Harvesting and Other Year-End Tax Strategies

  • Year-End Tax Planning for Your Investments
    The total you earn from your investments in 2016 will depend not only on their performance but also on how much tax you pay on them. Here are five steps you can take when you're doing your year-end tax planning to maximize your after-tax investment returns this year and heading into 2017 as well. Five Steps to Maximize Your After-Tax Returns 1. Harvest a smart investment loss. The tax code allows a net capital loss of up to $3,000 annually to be deducted against ordinary income such as salary. So by realizing before year-end what up to now has only been a “paper” investment loss, you can pay less to the IRS without reducing your investment holdings. Say you own shares in a mutual fund that are now worth $60,000 after having declined in value by $10,000 since you bought them. Instead of simply holding the shares into 2017, you can sell enough by year-end to realize a $3,000 capital loss. You will still own the same $60,000 in investment assets (in shares plus cash proceeds from the sale) while also cutting your tax bill. And you can keep your investment position largely unchanged. The IRS “wash sale” rule bars you from repurchasing the same securities within 30 days or the tax loss will be disallowed. But you can use the sale proceeds immediately to purchase similar securities, such as shares in a similar mutual fund.              2. Offset capital gains and losses. If your portfolio is more complex, you may already have taken gains and losses on taxable investments sold during 2016, while still owning other investments that have gone up and down in value. Realizing a gain or loss on these in an opportune amount by year-end may slash your total tax bill on investments. If you’ve taken net gains to date, the tax due on them may be reduced or converted into a deduction worth up to $3,000 by harvesting losses before year-end.  Conversely, if you’ve already taken a net loss of more than $3,000, you can realize gains to reduce the net loss to $3,000, with the gains being sheltered from tax. For instance, if you’ve taken a net $10,000 capital loss to date, you can take a tax-sheltered gain of $7,000 now while keeping $3,000 in losses to deduct. And again, you can probably keep your investment position intact. As noted above, when you sell securities to realize a loss you can buy back the same securities after 30 days or similar securities immediately. When you generate a gain by selling securities you can repurchase the same securities immediately. Generally it’s best to plan to offset short-term gains, which are taxable at top tax rates, with short-term losses, and long term gains, which receive a favored tax rate, with long-term losses. To learn more about the technical rules that apply to capital gains, and the order in which realized gains are offset on your tax return, see the free IRS Publication 544, Sales and Other Dispositions of Assets.  (See also Tax-Loss Harvesting: Reduce Investment Losses and Pros and Cons of Annual Tax-Loss Harvesting.) 3. Rebalance your portfolio. Remember the need to maintain proper diversification when reviewing your investment results for the year. Say that your desired diversification is 50% stocks and 50% bonds. Unless your stock and bond investments have produced the same return since the last time you allocated your holdings, your portfolio has moved away from your desired balance. Reallocating your holdings back to the desired balance will require the sale of some investments – and by doing it just before year-end, you can identify for sale those investments that will produce the most tax benefit for the year. Also maintain the best diversification between taxable investments and tax-deferred retirement accounts such as traditional IRAs and 401(k)s. Taxable investments qualify for favorable long-term capital gains tax rates, while distributions from tax-deferred accounts are taxed at higher regular rates. So as you reallocate, it can make sense to move interest-paying investments into tax-deferred accounts to obtain tax-free compounding, and appreciating investments into taxable accounts to obtain capital gains tax treatment.               4. Consider a Roth IRA conversion. Distributions from traditional IRAs are taxed at ordinary rates while those from Roth IRAs can qualify to be tax free. In addition, Roth IRAs are not subject to minimum annual distribution requirements, so they can hold retirement funds longer and may be better used to provide funds for heirs. When a traditional IRA is converted into a Roth IRA its value is taxed. But if you expect to be in a higher tax bracket in the future or the other Roth benefits are valuable to you, a conversion may be a good idea for these savings. If you have second thoughts later, you can reverse the conversion as late as October 15 of next year.  5. Pay donations to charity and to support lower-income family members with appreciated securities. When you donate appreciated securities to charity by year-end you get a deduction for their full market value on this year’s tax return, while also escaping ever having to pay capital gains tax on them in the future. Similarly, if you support family members who are in a lower capital gains tax bracket than you by giving them appreciated long-term gain securities instead of cash, you will reduce the tax on the securities and lower the family’s tax bill. In each case you come out ahead by avoiding a future capital gains tax bill. The Bottom Line    You can boost your hard-earned investment returns by taking steps before year-end to protect them from the IRS. These five strategies all can be customized to provide the most benefit in your specific situation. Since they are subject to various technical rules, consider consulting with a professional tax advisor about them before acting.
    by Jim Glass
  • Tips To Make Next Year’s Taxes Less Stressful
    A bit of preparation can make next year’s taxes easier to handle.  
    Video
7.
Your Annual Rebalancing Plan
Week of November 14

Review Which Portfolio Investments You May Need to Rebalance for Your Goals

  • How to Make a Solid Annual Rebalancing Plan
    What is –and why do you need – an annual portfolio rebalancing plan? Well, when you first construct a portfolio, the assets are allocated in balanced accordance with your investment objectives, risk tolerance and time horizon. However, that balance, known as "weighting," will likely change over time, depending on how each segment performs. If one segment grows at a faster rate than the others, then your portfolio will eventually become overweighted in that area and may no longer fit your objectives. This can be avoided by rebalancing the portfolio, which will ensure that its original weighting is preserved over time. When you do your annual financial plan, one important step is to examine your portfolio – by yourself or with your financial advisor – to  see what, if anything, needs to be rebalanced going forward into next year. As we’ll see, in a volatile market you may need to rebalance more often. (For more, see Rebalance Your Portfolio to Stay on Track.) How an Annual Portfolio Rebalancing Plan Works In its simplest form, a rebalancing strategy will maintain the portfolio’s original asset allocation by selling off a portion of any segment that is growing faster than the rest of it and using the proceeds to buy additional portions of the portfolio’s other parts. For example, assume that you create a portfolio composed of 50% stocks, 40% bonds and 10% cash. If the stocks grow at a rate of 10% per year and the bonds at a rate of 5%, stocks will soon account for more than 50% of the portfolio. A rebalancing strategy would dictate that the excess growth in the stock portfolio be sold off, and the proceeds directed into the bond and cash segments, so that the original ratio of assets is preserved. This also provides the advantage of selling off the better-performing segments when their prices are high and buying others when their prices are lower, which improves your overall return over time. Rebalancing can be most effective when markets are volatile, as it can help the portfolio cash in on big winners and pick up under-priced holdings at a discount. Some rebalancing strategies are tighter than others: One might rebalance if the portfolio becomes 5% overweighted in one sector, while another may allow for up to a 10% overweighting.  Consider the Costs Rebalancing can also be done at more frequent periodic intervals, such as every quarter or six months, regardless of market conditions. However, remember that the more often the portfolio is rebalanced, the higher the commissions or transaction costs will be. Also, some investment custodians may limit shifting money from one fund or asset class to another to a certain number of times per year. One way you can cut fees is by using one of the new robo-advisors that have recently appeared. These automated services perform basic money-management chores – such as portfolio rebalancing – at a fraction of the cost of a human advisor. There are several now available to consumers, and their asset base is growing rapidly. (For more, see Do Robo-Advisors Really Act in Your Best Interest?) Numerous studies have shown that periodically rebalanced portfolios outperform those that are left alone. Forbes magazine recently published a comparison of two $10,000 portfolios that were invested 60% in stocks and 40% in bonds over a 25-year period. The rebalanced one ended up at $97,000, while the other came in at only $89,000. The Bottom Line Portfolio rebalancing can help you to preserve your original asset allocation and reduce your amount of risk. It can also improve the overall return of your portfolio over time with less volatility. Most money-management services, mutual fund companies and variable annuity carriers offer this service, sometimes for free. For more information on how rebalancing can help your portfolio, consult your financial advisor.        
    by Mark P. Cussen, CFP®, CMFC, AFC
  • Strategic Asset Allocation to Rebalance Portfolios
    Strategic asset allocation is a portfolio strategy that involves setting target allocations for various asset classes, then yearly rebalancing the portfolio to maintain these original allocations. Allocations can deviate due to differing returns from various assets. Balanced diversification can reduce risk and improve portfolio returns. Strategic asset allocation is an investment strategy focused on the needs of the investor rather than the constant tracking of the markets, and is thought to remove the influence of emotion from investment strategies.  
    Video
6.
Best Investments for This Economy
Week of November 7

Fit Your Investment Portfolio to Next Year's Changing Economic Outlook

  • The Best Investment Strategies for a Low-Yield Environment
    It is important for investors to take stock of their investments at least once a year as part of their annual financial planning review process. The answer to the question “Which investments make the most sense now?” is those investments that fit your time horizon and risk tolerance. That said, our current environment is challenging, so ensuring that you have the best mix of investments for your situation is critical. We face a newly elected president, the prospect of rising interest rates and the ongoing threat of terrorism. Here are a few thoughts on finding the best investment strategies for you. Your Asset Allocation While some may disagree, your asset allocation will be the single most important factor in your investing success. Asset allocation is how your portfolio is divided among stocks, bonds, cash and perhaps alternative investments. Beyond these broad categories, your allocation will likely include sub-asset classes, such as large-cap, small-cap, mid-cap and international stocks. These may be further divided into growth and value within these asset classes. Bonds and alternatives may also be broken out into various sub-asset classes. A properly allocated portfolio is one that combines the potential for the return you need with the proper level of risk for your time horizon and comfort level. Your asset allocation should ideally be an outgrowth of your financial plan. The first step in your annual review of your investments is to ensure that your asset allocation is still the right one for your situation. You may decide to adjust the allocation, or at least you might need to rebalance it to get your holdings back in line with your target allocation. (For more, see Strategic Asset Allocation.) Which Investments? Once you have your asset allocation established, the next step is to decide which investments are the best ones to use in implementing it. Are individual stocks and bonds right for you? Maybe, but unless you have the knowledge and experience to analyze these individual holdings, you may be better off with managed vehicles, such as mutual funds and exchange-traded funds (ETFs). In addition, it takes a large sum of money to build a properly diversified portfolio using individual stocks and bonds. In looking at mutual funds and ETFs, you need to decide whether you will use passive index funds, actively managed funds or a combination of the two. Index products have been all the rage in recent years, and they have a lot going for them. They stick to their investment style, are generally low in cost and in many cases outperform a high percentage of their active peers. (For more, see 5 Things You Need to Know About Index Funds.) Some active managers do an exemplary job, however. The key is to be able to find these managers and understand how to monitor and evaluate their performance. Regardless of which route you take, it is important to be sure that you are in low-cost investments. It has been proved that lower-cost investments give an investor an advantage over higher-cost alternatives. What Should You Do in This Economy? Our current economic environment presents challenges, especially for investors nearing retirement. Earning what used to be “bond-like” returns in this low-rate environment is difficult. Interest rates on money market funds, certificates of deposit (CDs), bonds and other fixed-income and depository accounts are at historically low levels. Earning enough off the interest to meet your needs is difficult, if not impossible. Chasing yield is generally not a good idea, as this involves taking on more risk than you might be comfortable with. For example, while high-yield bonds are indeed bonds, junk bonds tend to track the performance of stocks more closely than bonds. These bonds are generally at or below investment grade. In this type of low-interest-rate environment, a total-return approach may be a better answer. This entails using a combination of distributions from investments as well as taking some gains on appreciated investments along the way. This approach takes planning and monitoring, but the results can be worth it. Dividend-paying stocks are often touted as an income-producing strategy, and this has merit. However, these are still stocks and carry the risks that are inherent with investing in stocks (see The Risks of Chasing High Dividend Stocks). While some publications might try to pigeonhole investors in set percentages for their stock holdings, in reality everyone's situation is different. If you work with a financial advisor, this is something on which you should get advice. If not, you should find two or three good asset-allocation calculators online, enter your data and compare the results. Overlay your own comfort level on top of these results. Factors that may vary the approach that makes the most sense for you include the amount you receive from a pension and/or Social Security. (For more, see Do You Need a Financial Advisor?) The biggest thing to keep in mind in this or any economic situation is to focus on your long-term situation and don’t succumb to the “financial noise” that we all see in the media each day. This doesn’t mean that you should ignore current events or trends; rather, take them into account in forming and refining your ongoing long-term investing plan. The Bottom Line It is important for investors to review their investments at least annually. Review your asset allocation and rebalance or adjust as appropriate. You should also review your individual holdings and ask yourself the question, “Would I buy this investment today?”
    by Roger Wohlner
  • Investor's Guide to Post-Golden Age Returns
    Investopedia asked Dr. Mohamed El-Erian to share his tips for investing in a low-return future. 
    Video
5.
Roth Vs. Traditional Ira & 401(K)
Week of October 31

Do You Have the Best Mix of IRAs and 401(k)s for Your Financial Situation?

  • IRAs vs. 401(k)s: Differences Between Roth and Traditional
    Retirements savers today have many options to choose from when it comes to opening a retirement savings account or participating in a company-sponsored plan. But it can be difficult to know which type of plan is right for you, especially if you have access to an employer-sponsored retirement plan. This breakdown of the major types of retirement plans and accounts can help you to determine the path that you should take on your journey to a secure retirement. Use it to review whether you have the right mix of IRAs and 401(k)s in your portfolio going forward. Decide whether this is the year you should be thinking about opening a different type of account. For each type of account, whether IRA or 401(k), you also need to decide whether you need a Roth or regular version. Your tax status and other issues will determine which of these are open to you. You also need to think about whether you want to take the tax deduction now (a traditional account, opened with pre-tax employment income) or be able to withdraw your money tax-free in retirement (a Roth account, opened with after-tax income). Traditional vs. Roth IRAs: Which Is Best for You Now? There are two types of individual retirement accounts (IRAs), traditional and Roth. In 2016, the total amount you can contribute to an IRA (Roth and/or traditional) is $5,500, plus an additional $1,000 if you are age 50 or above. Traditional IRAs allow you to make tax-deductible contributions each year that then grow tax-deferred until retirement. All income that you draw from them once you have retired is then taxed as ordinary income. There is an income phaseout schedule for this deduction if you participate in an employer-sponsored retirement plan and your income is above a certain level; your filing status is a determinant, too. (Read the specifics here.) However, this limitation only applies to traditional IRAs. With a Roth IRA you make nondeductible contributions and then take out tax-free distributions at retirement. Roth IRAs don’t have the income threshold limit because their contributions are nondeductible. However, there is an income phaseout schedule for their use that prevents high-income taxpayers from investing in them directly. (Check here for the specifics.) Fortunately, those with incomes above the phaseout schedule can make a nondeductible contribution to a traditional IRA and then convert this amount to a Roth IRA, because no income limit is applied to conversions (see the discussion of backdoor conversions, below). As you undertake a financial planning review, the choice you have to make is whether you need the tax deduction that you get with traditional IRA contributions – or you prefer to receive the tax-free distributions at retirement that a Roth IRA provides. You may want to speak with a tax advisor to find out which choice is best for your current situation. If you are in your peak earning years, for example, it may be better for you to make deductible contributions to a traditional IRA now. You can always convert it to a Roth IRA at retirement when you are likely to be in a lower tax bracket. Another consideration is that traditional IRAs mandate that you take required minimum distributions after age 70½ (see below); Roth IRAs do not.  If your income is too high for you to make a direct contribution to a Roth IRA, you have another option to fund your account: a backdoor conversion. This can be done in any year when your income is too high to make a direct contribution. If you have been contributing to a Roth IRA for the past few years and get a raise at your job that makes you ineligible to make further direct contributions, you can continue to fund your Roth using this strategy. Two Types of 401(k) Plans If your employer offers it, a 401(k) plan is another excellent way to save for retirement. The contribution limits are much higher than for IRAs; in 2016, you can contribute the lesser of 100% of your earned income or $18,000 to a 401(k) plan, and those age 50 and above can contribute up to $24,000. Both traditional and Roth 401(k)s are available with tax treatment similar to traditional and Roth IRAs. (Contributions to a traditional 401(k) are in pre-tax dollars; those made to a Roth 401(k) are in after-tax dollars). However, there are no income limits of any kind for plan participants. You can make the maximum possible contribution to these plans regardless of how much you make. Therefore, if your income is too high for you to make direct Roth IRA contributions and your employer offers a Roth option in its 401(k) plan, you can simply make contributions to that instead. (For more, see 401(k) Plans: Roth or Regular?) Another 401(k) advantage: Your employer may make matching contributions that you can receive as long as you satisfy the plan’s vesting requirements. (These typically require that you work for the employer for a set number of years before you can take all of the matching contributions with you when you leave.) Even if you have IRAs, it makes sense to contribute to a 401(k) to get the full employer match. Just be aware that matching contributions are usually traditional contributions, even if you are participating in a Roth plan. That means when you take distributions, a portion of each will count as taxable income in accordance with the amount of matching contributions in the plan. If the number of investment options in your 401(k) is limited, you may want to discuss diversifying your retirement portfolio with your financial advisor. IRAs, for instance, typically offer a wider range of choices. Looking Ahead: Considering RMDs Traditional IRAs – and both traditional and Roth 401(k)s – also require account owners to begin taking required minimum distributions (RMDs) on April 1 of the year after the year in which they turn 70½. RMDs from traditional IRAs and 401(k)s are taxed as regular income; an RMD from a Roth 401(k) is not taxed.  If you don’t want to take these distributions, consider converting those accounts into a Roth IRA, which doesn’t have RMDs (and allows your money to keep growing for the rest of your life). However, keep in mind that you will likely pay tax on the entire conversion balance in the year that it is made. You may be wise to convert your other retirement plan balances into a Roth IRA over a two- or three-year period in order to keep from going into a higher tax bracket. Again, it’s probably a good idea to consult a tax or financial advisor on this issue so that you can clarify the tax hit and maximize your tax savings. The Bottom Line The right type of retirement plan or account for you will depend upon several factors, including your current and projected future income and tax bracket, your retirement goals and objectives and your time horizon. Setting aside time annually to look at your accounts and their performance will allow you to change course, if necessary, and keep your retirement savings on track. For more information on retirement plans and accounts, visit the IRS website and download Publications 590 and 575. You may also be interested in Roth 401k vs. Roth IRA: Is One Better? and Traditional and Roth IRAs: Which Is Better for Taxes?      
    by Mark P. Cussen, CFP®, CMFC, AFC
4.
Factoring in Family
Week of October 24

What Kinds of Provisions Will You Need to Make for Your Family?

  • How to Factor Family into Your Retirement Plan
    Factoring family into your retirement plan – and other aspects of annual financial planning – often calls for significant change. Your retirement plan when you’re married will look completely different from planning for one person’s retirement when you’re single. You not only have to consider your own needs and retirement dreams; you also have to consider your spouse’s. If you have kids or parents who rely on you for support, financial or otherwise, that further complicates your planning. When you make an annual financial plan – or update the plans you've already made – you need to review these needs and see what might require adjustments. Here’s a look at how your family might factor into your retirement plans and how to manage the challenges that come with considering multiple people’s priorities. Saving for Kids to Attend College Many parents want to pay for their kids to attend college, but feel the pull of competing financial demands. “College saving can be a daunting task, especially with multiple children,” says Michael Briggs, an investment adviser representative with NEXT Financial Group at Horizon Investment Management Group in Springfield, Mass. “The advice I give my clients is, when having to choose between college saving and your own retirement, always choose your own retirement first.” Parents’ contributions to their own individual retirement accounts (IRAs) can be used for their children’s educational expenses, but money placed in a 529 plan can’t be used for non-educational purposes without paying taxes and penalties. “Just think of being on a plane – they tell you to put your own mask on first and then help the other person. The same applies when choosing where to put your funds,” Briggs says. Another benefit to prioritizing retirement savings over education savings is that money in qualified retirement accounts isn’t counted as an asset on the Free Application for Federal Student Aid (FAFSA). That means they don’t count toward your family’s expected financial contribution. Money in 529 plans in parents’ or students’ names is counted toward your family’s expected financial contribution and can reduce financial aid by as much as 5.64%.  Sharon Marchisello, author of the personal finance e-book Live Cheaply, Be Happy, Grow Wealthy, agrees that funding retirement should be higher on your list than sending the kids to college. Your kids have other options for paying for college – including scholarships, part-time work and student loans – but you won't be able to borrow your way through retirement. “You help your children more by being self-sufficient, so you don't have to ask for their support in your old age,” she says. So first plan what you'll be saving for retirement; then see what you might be able to put aside to help with college for your children. Caregiving for Elderly Parents Speaking of caring for parents who aren’t financially self-sufficient in their old age, review whether this burden is likely to fall on your family. If the answer is yes, there are proactive steps you can take to defray how caregiving for elderly parents could derail your current and future financial plans. ♦ Long-term care insurance The U.S. Department of Health and Human Services estimates that about half of Americans who turned 65 in 2015 will need long-term care services. (See Your Complete Guide to Long-Term Care Insurance.) Long-term care can be financially devastating. According to Genworth’s 2016 Cost of Care Survey, a month in a private room in a nursing home costs nearly $7,700. Imagine paying that expense for months or even years. It's  best to start planning for this before your parents are actually elderly. “If your parents are approaching age 60 and you can afford long-term care Insurance, paying the premium now may save you much more later if a parent needs to go into a nursing home,” says Oscar Vives Ortiz, a CPA financial planner with First Home Investment Services in the Tampa Bay–St. Petersburg area of Florida. Ask yourself whether this is the year you need to buy long-term care insurance for any of your parents – or make sure that those parents have purchased it for themselves. For every year that you postpone buying this insurance, you face higher rates based on the insured’s increased age; rates can increase even further if health problems develop, or it might become impossible to get insurance at all. If your parents are paying, be sure that they keep up with the premiums – sometimes you can sign up to be alerted if an older person hasn't been paying the bills. Either life insurance or an annuity with a long-term care component offers an alternative to long-term care insurance that may be more practical for some families. (See How Long-Term Care Riders on Life Insurance Work and LTC Annuities: 2 Safety Nets in 1.) While you and your spouse are planning for your parents’ long-term care needs, you should be thinking about your own as well. “In many situations, it’s almost better financially for your spouse to die than to go into a long-term care facility,” says Richard Reyes, a certified financial planner based in Orlando, Fla.  He adds that planning for long-term care can also give you more flexibility in that you won’t have to depend on the government, your children or your neighbors to take care of you; you’ll be able to call the shots. (See The 4 Best Alternatives to Long-Term Care Insurance, Medicaid vs. Long-Term Care Insurance and The Crippling Cost of Self-Insuring Long-Term Care.) “If you have no care insurance or have not planned adequately for care, then obviously the only flexibility you have is what others have planned for you,” Reyes says. “If you go on Medicaid, your care will be what the government prescribes it is, and who takes care of you is based on where and when there is space available for you – not a great solution,” he adds. (See How to Pick the Right Nursing Home and Things Nursing Homes Are Not Allowed to Do.) There are also many problems with depending on family. Your kids may not live nearby or may have their own issues, concerns and families to take care of. A spouse you depend on will likely be close to your age and have diminished physical capacities. “When someone gives me lip about having long-term care, I tell one of the spouses to lie down on the floor and ask the other to pick them up and carry them all around the house and in and out of their vehicle,” Reyes says. (For further reading, see How to Choose a Residential Care Home and The Pros and Cons of Smaller Long-Term Care Facilities.) ♦ Life insurance Life insurance with a living benefit or long-term care rider can help pay for long-term care as it’s needed. But life insurance can also be a tool for reimbursing family members who help with long-term care after the loved one who needed that care passes away. “If you feel that you have to spend some of your money taking care of your elderly parents, then try to make sure that any life insurance policies that they have list you as beneficiary to repay you and replenish your investments upon their death,” says Rick Sabo, a financial planner with RPS Financial Solutions in Gibsonia, Pa. If your parents don’t have life insurance, can’t afford it and are likely to rely on you for help when they’re older, talk to them about purchasing a guaranteed universal life insurance policy that you and your spouse will pay the premiums on. Unlike term life insurance, which your parents could outlive, you can purchase guaranteed universal life insurance that lasts until age 121, making it essentially a permanent policy, but at a much lower cost than whole life insurance. You and your spouse may also want to carry your own life insurance policies. The younger you are when you purchase it, the less expensive it will be. The policy’s death benefit could be a godsend if a breadwinner or homemaker passes away prematurely. (See Insuring Against the Loss of a Homemaker and Is Your Employer-Provided Life Insurance Enough?) Retirement Timing People of any age can start establishing retirement goals by thinking about how they want to live during retirement. Saving will be much easier when you know what you’re saving for, says Kevin Gallegos, vice president of Phoenix sales and operations with Freedom Financial Network, an online financial service for consumer debt settlement, mortgage shopping and personal loans. Think about where you will live, if you will move to a smaller home, whether you plan on traveling and whether you will want to work part-time. Plan to live on 80% to 85% of your current income once you retire. To fully understand what your retirement income will be, make sure you understand any pension you’re entitled to, review all your investments and estimate your Social Security income, Gallegos says. Planning retirement with a spouse is more complicated than planning retirement for just yourself. You’ll need to create a shared vision for what your retirement will look like. You’ll also need to agree on whether you’ll both stop working at the same time or whether it makes sense for one spouse to retire first. (See What’s the Best Retirement Drawdown Strategy for You? and Could Your Retirement Portfolio Handle Another Financial Crisis?) Age differences between spouses are common, and these can create issues in retirement planning. At retirement, if you are 66 and your spouse is 62, for example, you will be able to get health insurance through Medicare, but your spouse won’t until age 65. That’s an expense of potentially $600 to $700 a month for premiums that you must plan for, Reyes says. Other issues to sort out include when to claim Social Security, how one spouse’s claiming decision could affect the other’s benefits and how to claim pension benefits in the way that will be most beneficial to the spouse. (Learn more in How to Help Clients Navigate Pension Payments and How to Navigate Spousal Benefits Under New Social Security Rules.) The Bottom Line Annual financial planning for a family requires considering the needs and desires of everyone involved. You need to make strategic decisions about funding your retirement, helping children with their college expenses, caring for elderly parents, purchasing long-term care insurance and life insurance, and timing your retirement and that of your spouse. If you plan ahead for each of these items and learn about your different options and the consequences of each choice, you’re less likely to face unpleasant surprises and financial struggles that could prevent you from retiring when and how you want to. Once you have a basic plan, review these decisions and expenditures each year to see whether any adjustments need to be made.  
    by Amy Fontinelle
  • How Your Spouse Affects Retirement Planning
    Make your spouse's income count when it comes to retirement planning. 
    Video
3.
Setting Your Financial Goals
Week of October 17

Revisit Your Financial Goals and Set New Ones

  • Setting Financial Goals for Your Future
    Setting short-term, mid-term and long-term financial goals is an important step toward becoming financially secure. If you aren’t working toward anything specific, you’re likely to spend more than you should. You’ll then come up short when you need money for unexpected bills, not to mention when you want to retire. You might get stuck in a vicious cycle of credit card debt and feel like you never have enough cash to get properly insured, leaving you more vulnerable than you need to be to some of life’s major risks. Annual financial planning gives you an opportunity to formally review your goals, update them (if necessary) and review your progress since last year. If you’ve never set goals before, this planning period gives you the opportunity to formulate them for the first time so that you can get – or stay – on firm financial footing (see How can I set financial goals for the future for more on this). Here are goals, from near-term to distant, that financial experts recommend setting to help you learn to live comfortably within your means and reduce your money troubles. Setting Short-Term Financial Goals Setting short-term financial goals can give you the confidence boost and foundational knowledge you need to achieve larger goals that will take more time. These first steps are relatively easy to achieve. While you can’t make $2 million appear in your retirement account right now, you can sit down and create a budget in a few hours, and you can probably save a decent emergency fund in a year. Here are some key short-term financial goals that will not only start helping you right away, but will also get you on track to achieving your mid- and long-term financial goals. • Establish a budget. “You can’t know where you are going until you really know where you are right now. That means setting up a budget,” says Lauren Zangardi Haynes, a fee-only financial planner with Evolution Advisers in Midlothian, Va. “You might be shocked at how much money is slipping through the cracks each month.” An easy way to track your spending is to use a free budgeting program like Mint (see Mint.com: Top Free Money-Tracking Tools). It will compile the information from all your accounts into one place and let you label each expense by category. But you can also create a budget the old-fashioned way by going through your bank statements and bills from the last few months and categorizing each expense with a spreadsheet or even on paper. (Also see 6 Best Personal Finance Apps.) You might discover that going out to eat with your coworkers every day is costing you $315 a month, at $15 a meal for 21 workdays. You might learn that you’re spending another $100 per weekend going out to eat with your significant other. Once you see how you are spending your money, you can make better decisions, guided by that information, about where you want your money to go in the future. Are the enjoyment and convenience of eating out worth $715 a month to you? If so, great – as long as you can afford it. If not, you’ve just discovered an easy way to save money every month: You can look for ways to spend less when you dine out, substitute some restaurant meals for homemade ones or do a combination of the two. Creating a budget also allows you to see what your essential expenses are, how your spending compares with your income, where you might be able to cut back and how much you can save each month. (For all the information you need to get started, see our tutorial: Budgeting Basics.) • Create an emergency fund. An emergency fund is money you set aside specifically to pay for unexpected expenses so you don’t have to do things like avoid going to the doctor when you’re sick or drive around with an engine that keeps overheating. To get started, $500 to $1,000 is a good goal. Once you meet that goal, you’ll want to expand it so your emergency fund can cover larger financial difficulties, like unemployment. Ilene Davis, a certified financial planner™ with Financial Independence Services in Cocoa, Fla., recommends saving at least three months’ worth of expenses to cover your financial obligations and basic needs, but preferably six months’ worth, especially if you are married and work for the same company as your spouse or if you work in an area with limited job prospects. She says finding at least one thing in your budget to cut back on can help fund your emergency savings. Another way to build emergency savings is through decluttering and organizing, says Kevin Gallegos, vice president of Phoenix sales and operations with Freedom Financial Network, an online financial service for consumer debt settlement, mortgage shopping and personal loans. You can make extra money by selling unneeded items on eBay or Craigslist or holding a yard sale. Consider turning a hobby into part-time work where you can devote that income to savings. Zangardi Haynes recommends opening a savings account and setting up an automatic transfer for the amount you’ve determined you can save each month (using your budget) until you hit your emergency fund goal. “If you get a bonus, tax refund or even an ‘extra’ monthly paycheck – which happens two months out of the year if you are paid biweekly – save that money as soon as it comes into your checking account. If you wait until the end of the month to transfer that money, the odds are high that it will get spent instead of saved,” she says. While you probably have other savings goals, too, like saving for retirement, creating an emergency fund should be a top priority. It’s the savings account that creates the financial stability you need to achieve your other goals. If you have to charge every unexpected car repair to a credit card and pay it off over time with interest, you’re losing more to the credit card company every month than you can possibly gain with even the most aggressive investments in a retirement account. (See Why You Absolutely Need an Emergency Fund.) • Pay off credit cards. Experts disagree on whether to pay off credit card debt or create an emergency fund first. Some say that you should create an emergency fund even if you still have credit card debt because without an emergency fund, any unexpected expense will send you further into credit card debt. Others say you should pay off credit card debt first because the interest is so costly that it makes achieving any other financial goal much more difficult. Pick the philosophy that makes the most sense to you, or do a little of both at the same time. As a strategy for paying off credit card debt, Davis recommends listing all your debts by interest rate from lowest to highest, then paying only the minimum on all but your highest-rate debt. Use any additional funds you have to make extra payments on your highest-rate card. The method Davis describes is called the debt avalanche. Another method to consider is called the debt snowball. With the snowball method, you pay off your debts in order of smallest to largest, regardless of interest rate. The idea is that the sense of accomplishment you get from paying off the smallest debt will give you the momentum to tackle the next-smallest debt, and so on until you’re debt free. (See Debt Avalanche vs. Debt Snowball: Which Is Best for You?) Zangardi Haynes says you will likely have to cut spending to pay down debt, and the best categories to consider cutting are dining out, clothing, gifts, extracurricular activities for the kids, hobbies and vacations. Gallegos says debt negotiation or settlement is an option for those with $10,000 or more in unsecured debt (such as credit card debt) who can’t afford the required minimum payments. Companies that offer these services are regulated by the Federal Trade Commission and work on the consumer’s behalf to cut debt by as much as 50% in exchange for a fee, typically a percentage of the total debt or a percentage of the amount of debt reduction, which the consumer should only pay after a successful negotiation. Consumers can get out of debt in two to four years this way, Gallegos says. The drawbacks are that debt settlement can hurt your credit score and creditors can take legal action against consumers for unpaid accounts. Still, it can be a better option than bankruptcy, which should be a last resort because it destroys your credit rating for up to 10 years. Setting Mid-Term Financial Goals Once you’ve created a budget, established an emergency fund and paid off your credit card debt – or at least made a good dent in those three short-term goals – it’s time to start working toward mid-term financial goals. These goals will create a bridge between your short- and long-term financial goals. • Get life insurance and disability income insurance. Do you have a spouse or children who depend on your income? If so, you need life insurance to provide for them in case you pass away prematurely. Term life insurance is the least complicated and least expensive type of life insurance and will meet most people’s insurance needs. An insurance broker can help you find the best price on a policy. Most term life insurance requires medical underwriting, and unless you are seriously ill, you can probably find at least one company that will offer you a policy. (See Life Insurance: Putting a Price on Peace of Mind and How Much Life Insurance Should You Carry?) Gallegos also says you should have disability insurance in place to protect your income while you are working (see What is disability-income insurance?). “Most employers provide this coverage,” he says. “If they don’t, individuals can obtain it themselves until retirement age.” (See Group and Individual Disability Insurance: What You Need to Know.) Disability insurance will replace a portion of your income if you become seriously ill or injured to the point where you can’t work. It can provide a larger benefit than Social Security disability income, allowing you (and your family, if you have one) to live more comfortably than you otherwise could if you lose your ability to earn an income. There will be a waiting period between the time you become unable to work and the time your insurance benefits will start to pay out, which is another reason why having an emergency fund is so important. (See Choosing the Best Disability Insurance and The Disability Insurance Policy: Now in English.) • Pay off student loans. Student loans are a major drag on many people’s monthly budgets. Lowering or getting rid of those payments can free up cash that will make it easier to save for retirement and meet your other goals. One strategy that can help you pay off your student loans is refinancing into a new loan with a lower interest rate. But beware: If you refinance federal student loans with a private lender, you may lose some of the benefits associated with federal student loans, such as income-based repayment, deferment and forbearance, which can help if you fall on hard times. (See Student Loan Refinancing: The Pros and Cons and 10 Tips for Managing Your Student Loan Debt.) If you have multiple student loans and won’t stand to benefit from consolidating or refinancing them, the debt avalanche or debt snowball methods can help you pay them off faster. • Think about your dreams. Mid-term goals can also include goals like buying a first home or, later on, a vacation home. Or it could be a boat on which you will take long vacations, now or sometime in the future. Maybe you already have a home and want to upgrade it with a major renovation – or start saving for a larger place. College for your children or grandchildren – or even saving for when you do have children – are other examples of mid-term goals. Once you've set one or more of these goals, start figuring out how much you need to save to make a dent in reaching it. Fantasizing about the type of future you want is the first step toward achieving it. (For help, see How to Buy Your First Home: A Step-by-Step Tutorial and Should Parents Save Toward College or Retirement?) Setting Long-Term Financial Goals The biggest long-term financial goal for most people is saving enough money to retire. The common rule of thumb that you should save 10% to 15% of every paycheck in a tax-advantaged retirement account like a 401(k), 403(b) or Roth IRA is a good first step. But to make sure you’re really saving enough, you need to figure out how much you'll actually need to retire. • Estimate your retirement needs. Oscar Vives Ortiz, a CPA financial planner with First Home Investment Services in the Tampa Bay/St. Petersburg area, says you can do a quick back-of-the-envelope calculation to estimate your retirement readiness. 1. Estimate your desired annual living expenses during retirement. The budget you created when you started on your short-term financial goals will give you an idea of how much you need. You may need to plan for higher healtcare expenses in retirement. 2. Subtract income you (and your spouse) will receive. Include Social Security, retirement plans and pensions. This will leave you with the amount that needs to be funded by your investment portfolio. 3. Estimate how much in retirement assets you will have at your desired retirement date. Base this on what you currently have and are saving on an annual basis. (An online retirement calculator can do the math for you.) If 4% or less of this balance at the time of retirement covers the remaining amount of expenses that your combined Social Security and pensions do not cover, you are on track to retire. Why 4%? “If you look at the safe withdrawal research, 4% was found to be the highest initial withdrawal rate that has survived all historical periods in U.S. market history, assuming a diversified portfolio of stocks and intermediate government bonds,” Vives Ortiz says. For example, if you started with a portfolio of $1,000,000 and withdrew $40,000 in year one (4% of $1 million) then increased the withdrawal by the rate of inflation each subsequent year ($40,000 plus 2% in year two, or $40,8000; $40,8000 plus 2% in year 3, or $41,616, and so on), you would have made it through any 30-year retirement without running out of money. “This is why you often see 4% as a rule of thumb when discussing retirement,” he says. (See The 4% Retirement Withdrawal Rule: What to Know and What’s the Best Retirement Drawdown Strategy for You?) “In most scenarios, you actually end up with more money at the end of 30 years using 4%, but in the worst of the worst, you would have run out of money in year 30,” Vives Ortiz adds. “The only word of caution here is that just because 4% has survived every scenario in history does not guarantee it will continue to do so going forward.” Vives Ortiz provided the following example of how to estimate whether you’re on track to retire: A 56-Year-Old Couple Who Wants to Retire in 10 Years Desired annual living expenses $     65,000   Husband Social Security @66  $   (24,000) $2,000/mo. Wife Social Security @66  $   (24,000) $2,000/mo Remaining needs (to come from investments)  $     17,000   Total investments needed to fund remaining needs,assuming a 4% withdrawal rate ($17,000/.04))  $   425,000   Current 401(k)/IRA balance (combined, both spouses)  $   (250,000)   Additional savings needed over the next 10 years*  $   175,000 ($17,500/year; about $1,460/month) *For simplicity, we have not included rate of return that would be earned over the next 10 years on the current investments. (For further reading, see The 4 Phases of Retirement and How to Budget for Them and 10 Signs You Are Not OK to Retire   • Increase retirement savings with these strategies. For most people who have an employer-sponsored retirement plan, the employer will match a percentage of what you are paid, says certified financial planner™ Vincent Oldre, president of Assured Retirement Group in Minneapolis. They might match 3% or even 7% of your paycheck, he says. You can get a 100% return on your investment if you contribute enough to get your full employer match, and this is the most important step to take to fund your retirement. “What kills me is that people do not put money into their retirement plan because either they ‘can’t afford to’ or they are ‘afraid of the stock market.’ They miss out on what I call a ‘no-brainer’ return,” he says. (If you don’t have access to an employer-sponsored retirement account, see My Employer Doesn’t Offer a 401(k): Should I Care?, The Best Alternatives to a 401(k), Top Retirement Strategies for Freelancers and An Introduction to Roth IRAs.) Michael Cirelli, a financial advisor with SAI Financial in Warrenville, Ill., recommends making IRA contributions at the beginning of the year as opposed to the end, when most people tend to do so, to give the money more time to grow and give yourself a larger amount to retire on. (See For IRAs, Time Is Money.) The Bottom Line You probably won’t make perfect, linear progress toward achieving any of your goals, but the important thing is not to be perfect, but to be consistent. If you get hit with an unexpected car repair or medical bill one month and can’t contribute to your emergency fund but have to take money out of it instead, don’t beat yourself up; that’s what the fund is there for. Just get back on track as soon as you can. The same is true if you lose your job or get sick. You’ll have to create a new plan to get through that difficult period, and you may not be able to pay down debt or save for retirement during that time, but you can resume your original plan – or perhaps a revised version – once you come out on the other side. That’s the beauty of annual financial planning: You can review and update your goals and monitor your progress in reaching them throughout life’s ups and downs. In the process, you will find that both the small things you do on a daily and monthly basis and the large things you do every year and over the decades will help you achieve your financial goals.  
    by Amy Fontinelle
  • How Much Should I Save for Retirement?
    Tom Zgainer shares his tips for pinpointing a retirement goal to help support your intended lifestyle.
    Video
2.
Assessing Your Financial Situation
Week of October 11

Start by Taking an Inventory of Your Financial Situation

  • Managing Personal Finances: Your Annual Self-Check
      Managing your personal finances responsibly means giving yourself an annual financial self-check, the first step in shaping your annual financial plan. The best way to do this is by taking an inventory of your assets, which will allow you to see at a glance how healthy your bottom line lis. From there you can formulate a list of actionable steps to add to your savings and increase your wealth. (For more, see Here’s How to Build Wealth Like a Multimillionaire.) There are several important elements you’ll need to review when taking an inventory of your personal finances. To get started, it’s helpful to organize some key documents, such as bank and investment statements, credit card statements and copies of your credit reports. Once you’ve done that you can move on to shaping your inventory.  Managing Personal Finances: Start with Your Assets The first item to include on your financial inventory is a list of your assets. This includes such things as: Cash that’s in your checking account Your emergency fund savings Retirement accounts, such as a 401(k) or IRA Investments held in a taxable account Real property, including homes, land or vehicles Insurance policies that have cash value Artwork, jewelry or collectibles Determine what each of them is worth and add up their combined value. For some items, such as artwork, it may be necessary to get a professional appraisal to get an idea of their true market value. Move on to Your Liabilities Once you’ve calculated how much you have in assets, it’s time to turn your attention to your liabilities. A liability is anything that you have an obligation to repay, such as: Credit card debt Personal loans Mortgage loans Vehicle loans Student loans To determine your net worth, simply subtract the value of your liabilities from the value of your assets. Ideally, this list is short and the final tally of your combined liabilities is small. If not, a strategy for paying down your debts is a key item for your financial to-do list. Calculate Your Credit Utilization Ratio Your credit score is the three-digit number that tells lenders how responsible you are when it comes to managing your money. Your credit utilization ratio accounts for 30% of your FICO credit score. This ratio is simply the amount of debt you owe versus your total credit limit. To calculate your utilization ratio, first add up all of your outstanding credit card balances. Then add up your individual credit lines for each card. Finally, divide the total balance by your total credit line and multiply the result by 100. For example, let’s say you have five credit cards with a combined credit limit of $25,000. You owe $2,000 on each card, for a total of $10,000. If you divide $10,000 by $25,000 and multiply by 100, your utilization ratio would come to 40%. Ideally, you should be using 30% or less of your total credit limit for a healthy credit score. (For more, see Improve Your Credit Score by Adding a Credit Card.) Scan Your Credit Report and Score You should regularly check your credit report and score throughout the year. You can do this every day if you like on Credit Karma without knocks to your credit report. In addition, you can get a free official report from each of the three main credit bureaus (Equifax, Experian and TransUnion) every year through AnnualCreditReport. The best way to monitor your score is to ask for a report from a different bureau every four months – by the end of the year, you'll have heard from all three.  Monitoring is important for several reasons. First, it allows you to see how your score is changing over time and what may be increasing or decreasing it. Paying your mortgage 30 days late, for instance, can knock as much as 100 points off your score.  Next, keeping an eye on your credit allows you to spot errors or inaccuracies that could be dragging down your credit score. The Federal Trade Commission (FTC) estimates that one in four consumers has at least one error listed on his or her credit reports. Disputing these errors can positively impact your score – but only if you know they’re there.  Finally, regularly checking your credit report is a smart move if you’re concerned about identity theft. If you see an account on your report that you don’t recognize, that’s a red flag that someone may have gotten access to your personal information. Review Who’s Helping You to Manage Your Money Working with a certified financial planner, an accountant or another financial professional can be helpful, particularly if you’re managing a fairly large base of assets. Making sure that you have a good relationship with the people you’re trusting with your money is a must. At least once per year you should take a look at what it is your various advisors are helping you with, what kinds of fees they’re charging and how satisfied you are with their services. If you find that tracking down your accountant is always a hassle, or if your wealth manager is trying to steer you toward products you don’t want, it may be time to consider taking your business elsewhere. (For more, see Do You Need to Change Your Financial Advisor?) The Bottom Line Your annual personal financial inventory helps you understand how your finances change from year to year. Completing the inventory for the first time may be an eye-opening experience if you have more debt than you anticipated or you’re not saving as much as you thought. Knowing where you stand can put you in a better position to address any potential trouble spots in your annual financial plan moving forward    
    by Rebecca Lake
  • Why Create a Financial Inventory?
    Tom Zgainer of America's Best 401k shares why it's important for investors to take a financial inventory. 
    Video
1.
What is an Annual Financial Plan?
Week of October 1

Why It’s Important to Create an Annual Financial Plan

  • The Importance of Making an Annual Financial Plan
    Taking a strategic approach to managing your finances is a good way to keep tabs on how you’re doing, but even the most organized person doesn’t always take the time to make an annual financial plan. As fall approaches and students head back to school for a new year, it’s an excellent time to begin mapping out what you hope to achieve financially over the next 12 months.  Even if you feel fairly confident about the way you’ve been handling your finances so far, understanding how you can use an annual financial plan to your advantage can help you make smarter decisions with your money going forward. (For more, see Financial Planning: It’s About More Than Money.) What Is an Annual Financial Plan? An annual financial plan is a guidebook of sorts that tells you where you’re at financially right now, what your goals are looking ahead and what areas or issues need to be addressed so that you can meet those goals. The plan covers every aspect of your financial life, from investing to taxes  to your outlook for retirement. While your starting point in developing your plan may be different based on your age, income, debts and assets, the most important components of an annual financial plan are the same. If you’re not sure what’s included, here are the things you need to be thinking about. Life Events Reaching certain milestones, such as getting married or having a baby, are obvious reasons to reshape your financial plan. If, for example, you have younger children, you need to think about how saving for college fits into the picture. When your kids reach their teens, it's paying for college that needs to rise to the top. A twentysomething who’s recently gotten married, on the other hand, may be more focused on saving enough money for a down payment on a first home. Looking at where you’re at in the context of any major life shifts that have happened over the past year – or are in the works – should influence your planning. (For more, see 6 Ways to Fund a College Education.)  Upcoming retirement is another obvious life change. Retirement and Investing Actually, saving for retirement should be a top priority at any age, but it’s unfortunately something that gets pushed to the back burner far too often. A Federal Reserve survey published in 2015 found that 31% of American households have nothing saved toward a nest egg. Of course, those statistics also show that more than two-thirds of Americans have been saving. However, saving isn’t a financial plan; it’s just the raw material for one.           Your financial plan should review your retirement-savings options and determine how to use them to your best advantage. For example, if you have access to a 401(k) plan, ask yourself if you’re making the right level of contribution.  If you’re not able to save in an employer-sponsored retirement account, you should be looking to save in a traditional IRA or a a Roth IRA. If you already have one of these, the question is whether you're in the correct type. Each year, inventory which types of accounts you have, what their balances are and how all your investments are doing. This obviously includes both retirement accounts and other investment accounts you may have. Beyond just looking at where your money is being invested for retirement – and how much you're saving – you should also consider how your assets are allocated and what you’re paying in fees for those investments. A study from the Center for American Progress estimates that high fees can drain away more than $400,000 from the 401(k) of a high-income worker over the course of a lifetime, so it’s important to be mindful of what you’re paying. It may be time to unload expensive mutual funds and substitute something that lets you keep more of your money. In addition, see if it’s necessary to rebalance  your portfolio if your asset allocation has drifted off course.  Taxes are another consideration if you have investments in a taxable account. If you’ve sold any securities in the past year for a profit, you need to be prepared to pay capital gains tax when you file your return in April. Harvesting those losses by selling off holdings that have been on a downward slide can be an effective way to offset the impact of the gains, but you’ll have to make your move before year’s end. (For more, see Tax-Loss Harvesting: Reduce Investment Losses.) Finally, you should be thinking about developing additional income streams for retirement beyond tax-advantaged and taxable investment accounts. For example, could buying a rental property fit into your plan? Would it be possible to boost your income through a side business or through investing in someone else's business? If you’re concerned about not saving enough for your later years, looking for ways now to maximize your income later is a must. Saving for Emergencies While saving for retirement is a big part of financial planning, you can’t overlook your other savings goals. According to another survey from the Federal Reserve, 46% of Americans would have trouble coming up with the cash to handle a $400 emergency. If you don’t have an emergency savings buffer yet – or yours isn’t as big as you’d like it to be – then starting one or beefing it up are items you should to add your financial to-do list moving forward. Financial-Planning Tools The right financial-planning software can make managing your money easier and less stressful. If you’re using a software program now, consider whether it’s still meeting your needs. If you’re just flying by the seat of your pants, look into what the various software options are. Between the scores of free budgeting apps that are out there, and the premium programs for which you’ll have to pay a little more, you’ve got lots of choices for finding the financial planning resources that are going to work best for you.  Next Year’s Savings Goals An annual financial plan takes into account your past and present, but it should also include your outlook for the future. By this point you should be able to identify what you want to accomplish in the next 12 months, with regard to what you want to save and where you should be putting that money. Starting with the total amount you want to save and then breaking it down on a monthly or weekly basis can make it easier to work toward your goal. This is also a good time to look at where you can save in your current life to help you come up with more cash for your future. (For more, see The Best Way to Set Financial Goals for the Future.) The Bottom Line Creating an annual financial plan can be time-consuming and may require you to face up to some financial realities that you’ve been avoiding, but it’s well worth it in the end. Once your plan is completed, you can begin taking specific steps to ensure that your financial house is in order and running smoothly.  
    by Rebecca Lake
  • Why Create a Financial Plan?
    Tom Zgainer, CEO and founder of America's Best 401k, explains why investors should create a financial plan.
    Video

Coming Up Next Week:Q1 Special Report: Your Mid-Career Guide to Retirement Planning

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