How to set up a financial game plan for 2018
Get your house in order, especially in light of changes to the federal tax code
It’s 2018, and now’s the time to get your finances in order.
To help you and your family make all the right money moves this year, here’s a financial game plan that could help you grow your 401( k), avoid financial ruin and adjust to the new tax rules signed into law by President Trump.
Just as a New Year’s resolution to get fit can fail if you don’t hit the gym, getting ahead financially is tough if you don’t set up a plan and stick to it, said Dana Anspach, founder and CEO of Sensible Money, awealth management firm in Scottsdale, Ariz.
Doing an annual financial checkup, she stresses, is onlyworthwhile if you use it as a jumping- off point to “build good habits.”
“It’s figuring out the baby steps you can take thatmoves you and your money in the right direction,” Anspach said. “Every family should put together a playbook for the year.”
Here are steps to take to get you on the road to financial success. Start with the basics
Insurance isn’t sexy. In fact, it’s boring. It’s viewed by many Americans as just another bill, not an investment.
But insurance is the foundation of any financial plan, as it protects people from catastrophic losses that can wipe them out. Jan. 1 is the time to make sure your family has enough life insurance to pay for the kids’ college, keep current on the mortgage, and fund other living costs in the event you or another breadwinner in the family dies.
“Check all of your insurance coverage,” especially if your life has undergone changes, such as having a child, advises Carla Dearing, CEOand founder of Sum180, an online financial wellness company in Louisville, Ky.
Other basics not to overlook are making sure your will and estate plan are updated and all your financial accounts have the proper beneficiaries, said Steve Janachowski, CEO of Brouwer & Janachowski, a wealth management firm in MillValley, Calif. Tax plan tune- up
The new tax law means most Americans’ tax bills will change. Some will pay more, and many will pay less. Many long- standing deductions, such as home mortgage interest and state and local taxes, have been cut or eliminated.
“It’s important to understand what the new tax bill means to you,” said Paul Jacobs, chief investment officer at Palisades Hudson Financial Group in Stamford, Conn.
Taxpayers should analyze how to best take advantage of any benefits they receive. Perhaps more important, figure out how to minimize financial damage caused by changes to the tax code that reduce take- home pay ormake owning a homemore expensive.
For example, homeowners in coastal states where housing is expensive and taxes are high might need to rethink their real estate holdings after losing key deductions. Under the newtax law, the deduction for mortgage interest has been capped at $ 750,000, down from $ 1 million, and deductions for state and local taxes have been capped at $ 10,000. These changes could mean owning a home in 2018 and beyond will be more expensive.
While moving from your current home is a big decision that should not be taken lightly, “it may make sense to revisit where you live,” Jacobs said.
People living in high- cost states who are approaching retirement, in line for a new job in another state or not happy where they’re living now “might want to consider moving to a low- tax state, such as Florida,” he said.
Simpler moves include reducing the money withheld from your paycheck for taxes if you’re getting a cut or boosting your withholding if you expect to pay more.
It also makes financial sense to direct some or all of your tax windfall to your retirement account or 529 college savings account, which can now be used to pay for private school from elementary school onward, said Peter Mallouk, chief investment officer at
Creative Planning in Kansas City, Kan.
“Save the extra money before you get used to spending it,” Mallouk said.
401( k) check- up
With employer- paid pensions no longer the major source of retirement income, personal savings accounts such as 401( k) s and IRAs need annual tune- ups to ensure they’re building wealth efficiently.
And given that many Americans have some of their retirement savings invested in the stock market— which has been going up for nearly nine years and posted a 19.4% gain in 2017 — now’s a good time to review these accounts to make sure they are properly diversified and not too risky, said Scott Kubie, chief investment officer at Carson Group, an Omaha- based investment firm.
To reduce risk, investors should rebalance their portfolios by rearranging its assets to get back to an initial asset mix of, say, 60% stocks and 40% bonds, he said.
One way to do that is to sell assets that have performedwell and redirect the money into investments that haven’t done as well.
If investors don’t want to sell what they currently own, they can direct future contributions into the shrinking part of their portfolio.
And now that the government has reduced the number of deductions available, the 401( k) is emerging as a key vehicle to shelter income from taxes.
A dual- income family that earns $ 100,000 and takes advantage of the pre- tax 401( k) contribution limit of $ 18,500 could slash taxable income by $ 37,000.
“People should try to max out their 401( k),” Janachowski said. “It’s a no brainer.”