Steps to consider at the start of the new year
Financial planning is a forward-looking process to get people focused on their long-term goals. While we can learn from the past and use it to inform decisions going forward, dwelling on it doesn’t serve any constructive purpose. We can only plan based on what we know right now with the understanding that the current economic malaise will eventually pass, and better days are ahead.
So, how should you approach planning for 2023? Generally, it should be no different than any other year except for certain adjustments that can make the ride a little less bumpy. You need to set or reaffirm your goals, quantify and establish time horizons, determine where you are today in relation to your goals, and develop strategies for achieving your goals. That’s financial planning 101.
However, in the current environment, you may need to consider certain adjustments to the process to ensure you get back on track, and stay on track, toward your goals.
Assess your current financial situation
Your financial goals may have shifted over the past couple of years. For example, if your 401(k) has lost value, you could be looking at a longer time horizon for retirement. First, assess your financial situation and see where you are in relation to your goals. If your finances have backtracked, you either have to adjust your goals or consider strategies that can help you move forward as planned.
Adjust your spending plan
Inflation is consuming an increasing portion of our pocketbooks. By now, you’ve probably already adjusted your spending. However, in the current environment, it’s essential to maintain or even increase your savings and investments.
Rethink your asset allocation
If you’re invested in stocks and bonds, your target allocation strategy is likely out of whack. You may be overweighted in underperforming assets and underweighted in overperforming assets, which can change your allocation. With the markets down so much, there is less downside risk, so it may be an opportunity to rebalance your portfolio to a more aggressive allocation. For example, if your allocation is 60% stocks and 40% bonds, you may consider adjusting to a more aggressive stance, such as 70% stocks and 30% bonds.
Take advantage of tax-loss harvesting
When stock prices decline, you can make lemonade out of lemons through tax-loss harvesting. By selling some underperforming stocks, you can capture tax losses that can be used to offset current or future capital gains, resulting in a smaller tax liability. If you still like the stocks, you can repurchase them after 31 days to avoid the IRS’s wash sale rule.
Consider a Roth conversion
Converting your 401(k) or traditional IRA into a Roth IRA can help boost your after-tax cash flow in retirement. But many people are hesitant due to the tax consequences. The money taken from a pre-tax account and moved to an after-tax Roth is taxed as ordinary income. However, by transferring money in a down market, your tax liability will be smaller. Also, you don’t have to move the entire amount. You can convert as little as you want over several years.
Review your insurance coverages
Housing prices are declining in some areas of the country. But only after a tremendous price surge that occurred leading up to 2022. Your house may still be valued far above its purchase price and the amount covered by your homeowner’s policy. Make sure to adjust your policy to cover the current market value of your house.
Seek financial guidance
While these are steps anyone can take on their own, they may have implications that can affect your long-term plans. It’s highly recommended that you seek the guidance of an experienced financial advisor who can help you assess your situation and provide objective counsel on getting you back on track toward your goals.
Alpine Bank Wealth Management has knowledgeable, local individuals who help clients with their assets, investments and financial plans.
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