We’ve written before about cultivating good financial habits that can help you ensure long-term financial security. In the current market environment of heightened anxiety (even as stocks continue to outperform), we think it’s more important than ever to translate good intentions into tangible action. We’d highlight four broad areas:
1. Estate and Trust Planning: Changes Ahead?
Review the basics: making sure you have a will, a health-care proxy, and a financial power of attorney, and that your beneficiaries are still who you want them to be. But go further than that.
With the Democrats in control of both Congress and the White House, the likelihood of higher estate taxation has increased. While the unified gift- and estate-tax exemption is currently a high $11.7 million for an individual and $23.4 million for a married couple, President Biden has indicated that he’d like to see exemptions at $3.5 million/$7 million, the marginal estate-tax rate at 45% rather than the current 40%, and elimination of the step-up in cost basis for heirs of estates. But don’t restructure any financial plans yet if you have substantial assets: No one knows which, if any, of Biden’s proposals will find their way into law and what they’ll look like when final. Rather, this is a time to talk with your financial and tax advisors.
2. Retirement: A 401(k) Review Is in Order
Check on your retirement savings, of course. But here’s something that investors sometimes forget: locating all their prior 401(k) plans and deciding what to do with them. You can let them ride, roll them over into an IRA, roll them over into your current 401(k) if you have a new plan that allows for it, or cash them out. But take that last option only if you need the funds desperately and immediately, because the distribution will be taxed as ordinary income, with a 10% penalty attached for good measure unless you’re at least 59½ years old.
For most investors, rolling over into an IRA or a new 401(k) works best. See our article for details.
And remember that when it comes to savings, a little goes a long way. Even an increase of only 1% or 2% each year to your savings can have a large impact, thanks to the miracle of compounding.
3. Insurance: Do You Need More, or Less?
How much life insurance should you buy and should you go for “pure” term insurance or a permanent policy that accrues cash value? Or maybe you don’t need life insurance anymore because you can provide protection for your dependents through other means. If so, you can cancel the policy, or perhaps sell it. Make sure you speak with a life-insurance expert about issues like these, and read our paper on The Meaning of Life Insurance.
Health insurance is as important as life insurance for most of us, and not just basic medical coverage. You might look into long term-care, critical-illness, and disability policies.
4. Investing: Stay in the Market
You’ve heard it before: Investing is highly emotional, often ruled by greed (when the markets are ebullient) and fear (when they’re sliding). If you let these emotions guide your investing, you’ll probably buy near market highs and sell near lows. And emotions may tempt you into market-timing. But to be a successful timer, you’ll need to pinpoint when to sell and when to get back into the market. Doing either one, let alone both, is impossible for most investors. Who, for example, would have called the last market trough on March 23, 2020—or the surge between then and the end of February 2021? A professional advisor can help take the emotional biases out of investing.
Rome Wasn’t Built in a Day
Taking only the best financial actions isn’t something you can expect to do in a day. Rather, it’s an ongoing, evolving process that ideally you’re involved in every day. We’ll help you get a long-term plan together that will chip away at the challenges and position you well to achieve your goals.