As 2016 comes to a close, it is a good time to reflect on the past while embracing the opportunity of the New Year ahead. For those making resolutions, finances are often an important component of their check-list for 2017. While many statistics suggest that few Americans follow through on their resolutions, a new survey from Fidelity highlights the power of making resolutions and sticking to them. While only 43 percent of survey respondents stuck with to their resolutions, those that did achieved as much as 80 percent of their financial goals for the year. In fact, Americans that stick to their financial resolutions tend to be more optimistic, have lower levels of debt, are more likely to increase retirement savings and are generally, more financially secure. Consider establishing personal goals for the New Year that include addressing the following key areas.
Rebalance your portfolio
With the Shiller price to earnings (PE) ratio at elevated levels (over 28 times earnings), now may be a good time for investors to review their portfolios to ensure that they are still properly allocated. The primary goal of rebalancing is to bring the different investments that make up an investor’s portfolio back into proper alignment. As the markets fluctuate over time, the original target mix changes, altering the amount of risk in the portfolio. Unfortunately, many investors fail to properly rebalance over time. From rebalancing annually or semi-annually to reallocating when any piece of the portfolio deviates from the target by 5 percent or more, there are many approaches to rebalancing.
When determining your rebalancing strategy, be careful to review transaction fees and taxes. Keep in mind that capital gains or losses will be realized in nonretirement accounts, so speak to your tax advisor prior to making any adjustments. Remember, investing involves risk and rebalancing does not prevent investment losses. Instead, it is a means to keeping your portfolio balanced between the various asset classes selected.
Review your estate plan
Estate planning is another commonly overlooked aspect of financial planning. With many states adjusting their estate and inheritance taxes, it is important to review your estate plan for 2017. For example, the state of New Jersey is repealing their estate tax over the next two years as part of their gas tax hike. (The NJ estate tax threshold is increasing to $2 million in 2017 and then phasing out completely in 2018. The inheritance tax remains in place.) Consider meeting with your attorney to review your current estate planning documents including your will, living will, power of attorney and trusts. This may help ensure your documents are in alignment with updated tax laws and your wishes for how your estate is distributed.
Review your tax withholdings
While nothing has been implemented yet, the incoming administration has noted that they would like to adjust income tax rates for individuals and businesses, making 2017 an important year for monitoring tax law changes and adjusting your tax planning accordingly. This is especially important for tax withholdings rates.
IRS data suggests that the average taxpayer receives a tax return in excess of $3,000 for tax year 2015. While many taxpayers prefer the forced savings a tax return offers, a tax return is simply the IRS returning extra money withheld for taxes that wasn’t necessary. If you are expected to over withhold, carefully adjusting your withholdings can increase your cash flow each month. If you could use the additional cash flow to apply toward other financial goals, consider speaking to your tax adviser to adjust your W4. However, be careful not to under-withhold – you don’t want to end up owing the IRS money next April.
Review your liabilities
The federal reserve hiked interest rates again in December and many analysts believe interest rates will continue their march upward this year. From mortgage rates and home equity lines of credit to student loan interest and credit card debt, the new year is an important time to review any liabilities you have. It may not be realistic to expect the ultra-low interest rate environment to continue and a careful review of any fixed and variable interest debt may be necessary. Remember, if interest rates rise, the ‘I’ll refinance later approach” to dealing with debt may not be feasible. Consider developing a game-plan to address your debt in the New Year before rates jump any higher.
Review cash strategy
While the low interest rate environment may have helped those relying on debt, it hurt savers holding cash that have been earning next to 0 percent interest. In fact, rates have been so low for so long that many investors have made the mistake of investing cash reserves in risky assets to earn higher rates of return. With interest rates creeping higher, the New Year is also a good time to re-visit the size of your emergency fund and how your cash reserves are invested. FDIC insured direct banks such as Ally Bank may offer higher rates of interest that may increase as the Fed raises rates over time. Consider visiting bankrate.com to see a list of options to make the most of your cash reserve investments should interest rates increase in the future.
Developing financial resolutions based upon your unique goals can be a powerful exercise. Consider addressing the Smart Money Moves noted above and consider speaking to your tax, legal and financial adviser to determine the most appropriate approach for your unique circumstances.