With the end of the year just a few months away, autumn is a great time to review your finances. Year-end is close enough that you feel a deadline approaching (essential for us procrastinators), but you still have enough time to review your current situation, make some decisions, and get things done.
While it’s tempting to try to maximize your investment returns for the final quarter, and you’ll see lots of articles urging you to do this through stock and commodity speculation, taking this kind of action is often just an attempt at market timing. However, there are ways to potentially increase the efficiency of your investing without abandoning your long-term plan.
Three Things To Look At
Shaving a few percentage points off your taxes owed has an even greater effect than gaining the same amount through chasing additional investment returns. A dollar gained through tax savings is a whole dollar. While a dollar gained through investing may be subject to capital gains.
Talk with your tax professional now to make sure you’re taking advantage of every legitimate deduction. The rules are complex and change every year, so it’s worth checking in. For example, if you are a business owner, work as an independent contractor, or have a small side business, you may have a wide array of deductions about which you’re not completely clear.
Fully funding your retirement accounts can (depending on the account type) lower your current income tax liability as well as get you further ahead in your long-term saving plan. We can help you determine which IRA or 401(k) options are best for your situation. If you are a Health Savings Account (HSA) owner, you may be able to increase your tax-free HSA contributions for tax year 2018.
Writing for Money, Paul J. Lim recommends that if you’ve had a cost of living adjustment or a merit pay raise this year, you should also be giving your retirement contribution a raise. (And do it before you get used to spending the extra money from the raise that’s hitting your bank account now.)
Lim gives the example of a 30 year old making $50,000 per year who increases his retirement savings rate from 8% to 10%. 2% may not sound like much and he probably wouldn’t notice much difference in current cash flow. But assuming a hypothetical 6% annual return, by age 65, the additional $83.33/month could provide as much as additional $152,000 in retirement savings.
Plan for Uncertainty
No one knows what the New Year will bring. So being prepared for potential continued growth as well as expected investment volatility is a healthy mindset to maintain. A truly diverse asset allocation across thousands of global companies’ stocks can help reduce the risk of having all your eggs in one basket. You want to be in the market so you don’t miss any of the all-important big days. But you also want to be positioned to withstand the inevitable downturns that are inevitable for a disciplined, long-term stock investor.
Just as important as your financial preparations are your mental preparations. Think through what you will do ahead of time in the event of a significant stock market decline. Last week the US Stock market posted another set of new highs across the major indices.
As measured by the broadly tracked S&P 500 Index, a 10% decline from the recent high would return us to what was a new record high less than a year ago, 11/30/2017. But if that happens, you can imagine the headlines and TV pundits will be whipping up all sorts of concern and fear. Being mentally prepared in advance can help you avoid the temptation react emotionally and take impulsive actions in the short term that are contrary to your long-term goals.
We can help you plan for both.
If you do some planning and preparation early this fall, you won’t need to be making a lot of important decisions at the calendar year-end last minute. Take time now to review your finances and get ready for the New Year.