New Year, New Me?

In my world, success is ultimately defined by how close you are to achieving the outcomes you desire in the long term. Often however, we hear success being defined as last year’s performance in the market.  This strategy is great in short bursts, but rarely leads to long-term financial success, because the risk associated with those short-term emotional desires can have lasting impact on the trajectory of your ultimate outcomes.  

As we approach the new year, I thought it would be helpful to spend a little time highlighting the year end areas of focus to help make the new year a new you!

Taxes

As the year closes, it is imperative to run a tax projection for 2020 to make sure you and your tax planner are thinking through all the possible taxes owed and tax reduction strategies available to you. Have you maximized your 401(k)? How is all that 1099 income going to be taxed, and are you using efficient vehicles to off-set some of that? Also, have you thought through tax diversification strategies for when you retire?  Should you or have you made non-deductible IRA contributions that you can convert to ROTH IRAs? Has your income changed?

Also, do you expect to earn significantly more next year because COVID reduced your income this year? If so, do you know about Safe-Harbor Withholding and are you already planning on utilizing that strategy?

In most areas of life, the saying holds true “control what you can control.” Year end tax planning is definitely something that you can control.

Investments

This is generally the time of year where the average Broker will recommend it is time to Tax-Loss Harvest your portfolio. Unfortunately, if you do that, you and every other investor will be doing the same thing. Ever wondered why there is so much volatility at the end of the year? This is a strategy that should take into account the impact it will have on your taxes both now and in the future. Then it should be part of the discipline year-round to properly manage your portfolio.

Year-end is a great time to review your asset allocation. Often this is tied generically towards your retirement goal. Has that goal changed? Has your risk profile changed? Has your timing changed?

One of the comments I hear most is “I want to retire when I have ‘X’ amount of money in my account.” This is a scary proposition. Have you considered the future inflation ramifications? Have you considered what that number will ultimately mean to you after taxes in retirement?  

At AWM, we challenge our clients with this simple puzzle:

If I were to say to you in 15 years, you are going camping. You want the very best spot - as close to the lake as possible. You want to make sure you have the best view on the lake. You want the most isolated access to make sure it’s as quiet as possible… And you must set up that campsite today!

What all would go into that decision? Would you consider future rainfall expectations? Would you look at historical data for what kind of human impact you could expect around the other campsites?  

If you are a risk-taker, you might set up that campsite right by the water’s edge and hope that you get the view you want.

If you are risk averse, you might set up that campsite 200 yards away from the water’s edge, but now trees might grow in front of your view.

In the financial world, the traditional method used to give you a probability of success is called Monte Carlo. But I bet nobody reading this wants to see anything less than 100% probability of success, especially if that is your retirement.

The solution above is simple: instead of setting up a campsite, you build and anchor a boat. In finance, it is the same way.  

Diversifying your portfolio to make sure you have a bunch of colors on the pie chart does not get you any closer to having that boat.

Insurance

This is also a great time to review your insurance needs. Now, if you read my last post on insurance, you are probably thinking I am talking out of both sides of my mouth. Let me explain.

Yes, you should review your term policies to make sure they accurately reflect (based on your financial plan) how much coverage you need and for how long because your income may have changed, your net worth may have changed, your liabilities may have changed, and your desired outcomes may have changed.

You should also be reviewing your disability policies for the same reasons. Did you know that you are only able to get $20k per month as a max in the open market? How many of you spend/save more than that monthly? If you were only receiving $240k per year, how would that impact your desired retirement outcomes? How would it impact your current lifestyle? There are ways to increase this on the private side very creatively to give you and your family the desired financial security you want/need.

You should also be reviewing your liability protection, especially if your net worth increased. This is done through a combination of proper insurance coverage; umbrella, auto, home, etc.… but should also be reviewed with your estate planning attorney and CFP® Professional.

Financial Planning

This is an optimal time to do a review of expected cash flows, which ties back to tax planning.  How, when, and where do you expect to earn income? Will it all be in your resident state? How will that income be taxed. Again, are there tax efficient ways that you should be planning for now to receive that income?

What expenses do you expect?  Are you planning on making any large purchases that need to be saved for now so you do not have to pull assets out of the market at a possibly bad time?

Estate Planning

And last but certainly not least, this is one of the areas I see most overlooked. At the very basic level, is your will up to date?  Do you even have a will? If you own anything and you care about how your loved ones/beneficiaries receive that thing, you need a will. You do not want to leave it up to your state to determine who receives what.  

But outside of that, has your estate grown? Do you project that it could possibly grow into a taxable estate? Right now, the limit is high to be considered a taxable estate at $11.58 million per individual. There is speculation that number could be reduced back to basically half that under the next administration. If so, is your estate prepared to plan around those future taxes?

This is also a great time to do an inventory on the current assets you have and how they are being held. Again, taxes are a huge part of this, both now and future, but liability planning is also important! You may have purchased something and inadvertently placed it in an unsheltered ownership.  

At AWM Capital, we want to unlock the full potential of your wealth for maximum impact in all areas of your life. Certainly, the above is not a comprehensive list, but hopefully it is thought provoking.  

We always say you only get to keep, spend, or give your after-tax money, so your focus should always be on net returns. Buying the right types of investments, putting them in the right types of accounts, and following the most tax efficient draw down strategy in retirement is the key to maximizing your desired outcomes.

By reviewing the above, you truly are taking the steps required to “OWN YOUR WEALTH!”

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