Our topic on this episode of the Ready for Retirement podcast is part two of the financial tune-up series where I discuss what to look for when reviewing your investments.
Questions answered: How do I know if I’m invested appropriately for my goals? What should I invest in? What is the best approach for my individual situation?
Are you ready to start focusing on the things that truly matter when it comes to your financial future?
Checklist: What Issues Should I Consider When Reviewing My Investments
Key Points
- Ensure your investments are allocated in alignment with your goals.
- 2020 was a tough year for many individuals & couples and if your goals changed, you want to make sure your investments reflect that.
- Review your risk tolerance
- At the beginning of 2020, many individuals felt they were a growth investor.
- We saw the fastest ever bear-market in 2020, how did that make you feel?
- Is an experience like 2020 something you are okay with because of your time horizon or do you need to review your investments for your comfort level?
- We saw the fastest ever bear-market in 2020, how did that make you feel?
- At the beginning of 2020, many individuals felt they were a growth investor.
- Are you on track to reach your goals?
- Are you saving enough? Are you receiving a return that allows you to be on track to reach your goals?
- Reassess your future goals to ensure you’re on track or where updates are needed.
- Are you saving enough? Are you receiving a return that allows you to be on track to reach your goals?
- How much can you take from your portfolio without outliving your money?
- Resource: Episode 27 – How Much Can I Safely Spend in Retirement?
- Is how much you’re currently spending in alignment with your goals? Are you living well within your means and have extra funds you would like to make work for you?
- Are you able to do all of the things you want to do?
- Review Pensions, Social Security, Annuities
- Determine when you want to collect Social Security, how to maximize your Pension (from a financial standpoint and emotional standpoint), how you should best utilize any annuities.
- Ensure you’re not working because you have to, but because you want to, if you’re in a position financially to be on track for your goals.
- Determine when you want to collect Social Security, how to maximize your Pension (from a financial standpoint and emotional standpoint), how you should best utilize any annuities.
- Does your asset allocation need to be reviewed?
- Review your portfolio and determine if it’s allocated appropriately to meet your goals.
- Should you shift to a more aggressive or conservative allocation?
- Has one investment significantly outperformed or underperformed?
- It may make sense to rebalance.
- Have your growth investments outperformed your value investments?
- Review your portfolio and determine if it’s allocated appropriately to meet your goals.
- Consider using asset location to maximize your after-tax return
- Asset Location – where are you owning your different types of investments?
- Examples that aren’t tax efficient: Bonds with interest and non-qualified dividends.
- Examples that are tax efficient: Capital Gains, qualified interest, etc.
- Consider putting tax inefficient investments in your IRA / Roth IRA
- Consider putting tax efficient investments in your Taxable/Individual account
- Are you planning to take distributions from any of your accounts?
- If so, you may want to consider putting a small amount in cash.
- As you near your retirement goal, home purchase goal, etc. it may be worth taking investments you have and selling to make sure you have the desired amount on hand.
- If so, you may want to consider putting a small amount in cash.
- Do you have any significant investments/positions that represent a large portion of your portfolio?
- If you have stock options and your company stock has performed very well, you may realize a significant portion of your overall portfolio is concentrated in that one position.
- If you invested in an individual stock and it’s increased drastically, you may realize a significant portion of your overall portfolio is concentrated in that one position.
- There’s a risk to having a significant amount of your net worth in one stock and this is when you would want to monitor your concentration risk to ensure you are on track to reach your goals.
- Are you invested in ESG (Environmental, Social, Governance) investments?
- Are you invested alongside what you believe in? Are you able to invest in a way that allows you to reach your goals while investing in companies that align with your values?
- Investing accounts for your objectives
- Education Planning: 529 Plan
- HealthCare Costs: HSA (Health Savings Accounts)
- Retirement: 401(k) / IRA / Roth IRA
- Ensuring your invested in the right account for your goals can save significant amounts of money over time.
- Investing tax-efficiently
- If you’re in a high tax bracket owning bonds, does it make sense to own Municipal bonds?
- If you’re in a high tax bracket focusing on dividend strategies, does it make sense to use dividends in an IRA / Roth IRA with other investments that aren’t as subject to taxes?
- Do you have investments that have significantly appreciated over time?
- If your taxable income (Single) is under $40,400, your Long-Term Capital Gains rate is 0%.
- You won’t pay any taxes on any gains up to $40,400.
- Example: If you have a taxable income of $30,400, you would be able to realize $10,000 of unrealized gains that owe no Federal Capital Gains taxes.
- If you’re married, you are eligible to realize gains with a 0% Capital Gains tax at the Federal level for income up to $80,800.
- Consider realizing gains up until the threshold to step up the cost-basis to minimize taxes in the future.
- If you’re single and your income is between $40,400 – $445,850, your Long-Term Capital Gains rate is 15% ($80,800 – $501,600 for MFJ).
- If you are above $445,850 if single and $501,600 if MFJ, your Long-Term Capital Gains rate is 20%.
- If your taxable income (Single) is under $40,400, your Long-Term Capital Gains rate is 0%.
- Taxable Income & Modified Adjusted Gross Income
- Do you have taxable income and is your MAGI in excess of $200,000 (Single) or $250,00 (MFJ)?
- If so, you may be subject to an additional 3.8% tax if you’re not considering strategies to minimize taxes.
- Do you have taxable income and is your MAGI in excess of $200,000 (Single) or $250,00 (MFJ)?
- Losses
- You can write off up to $3,000 of losses to Ordinary Income and any losses above and beyond can be written off in future years.
- Example: If you bought an individual stock on a monthly basis for many years, you have a different tax lot.
- When you choose to sell your stock, you can choose to intentionally sell lots that have the lowest cost basis to maximize your gains or sell lots that have the highest cost basis to minimize tax impact.
- Be aware of the wash-sale rule.
- If you sell an investment to lock in the loss and re-purchase the investment within 30 days, it will be washed away..
- You must sell and wait 31 or more days to re-purchase to lock in the tax benefits.
- If you sell an investment to lock in the loss and re-purchase the investment within 30 days, it will be washed away..
- Example: If you bought an individual stock on a monthly basis for many years, you have a different tax lot.
- You can write off up to $3,000 of losses to Ordinary Income and any losses above and beyond can be written off in future years.
- Are you trying to limit your overall tax liability
- If so, you may likely try to limit the amount of trading in your taxable accounts.
- This determines what gains you realize and increase your total income, trigger AMT (Alternative Minimum Tax), and make you subject to other income adjustments.
- Mutual Funds, REITS, MLPs have unique ways of reporting income to look out for.
- Be aware of gain distributions, depreciation recapture, etc.
- If so, you may likely try to limit the amount of trading in your taxable accounts.
- Do you have a plan in place in case the market declines?
- Ensure you have an emergency fund in place that allows you to continue investing should you lose a job or lose another income source.
- Are you emotionally prepared to see your investment account decrease significantly in value?
- Investment Fees
- Are you aware of wrap fees, sales fees, commissions, 12b-1 fees, advisory fees that are be charged to your account?
- Make sure fees you are paying for are providing value and you’re not paying for any fees that you don’t need.
- Are you aware of wrap fees, sales fees, commissions, 12b-1 fees, advisory fees that are be charged to your account?
- Employer Stock Plan
- Do you have an employer stock plan?
- Understand the rights you have to shares, tax treatment, and the percentage of your overall portfolio that consists of employer stock to ensure you’re not too concentrated in any individual stock (if that is your goal).
- Do you have an employer stock plan?
- Review your resources
- Do you have a tax preparer? Do you have a financial planner? Do you have an estate attorney?
- Ensure all of your resources understand your goals and you have a clear plan to help get you to where you want to go.
- Do you have a tax preparer? Do you have a financial planner? Do you have an estate attorney?
Checklist: What Issues Should I Consider When Reviewing My Investments
Timestamps
1:30 – Introduction
2:25 – Investing For Your Goals
4:36 – Assess Your Expenses
4:50 – How To Ensure You Don’t Outlive Your Money
8:26 – Asset Location v. Asset Allocation
11:30 – Socially Responsible Investing
15:12 – Realizing Capital Gains Tax Efficiently
18:27 – Wash-Sale Rule
21:52 – Employer Stock Purchase Plan (ESPP)
23:06 – Aligning Your Investments With Your Financial Goals
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