Creating a Financial Plan
Exercise more. Be kinder to loved ones. Save more for retirement.
As the current year draws to a close, it’s time to think of all the ways we can improve our lives in the year ahead. But what should our financial resolutions be and how do we make them stick?
We might want to take some lessons from mutual fund investors who participated in a survey conducted by American Funds. When members of American Funds’ “Voice of the Investor” survey panel were asked about their most important financial resolution, the majority pointed to saving for retirement.
One survey respondent resolved to “build wealth by saving and adding to my various retirement accounts.” Another is determined to “eliminate all long-term debt and keep credit card balances current” while saving “as much as possible for retirement.”
“It’s not surprising,” observed Sarah Lidschin, senior market research specialist at American Funds, who manages the Voice of the Investor panel. “When we ask people, generally, what their goals are for their investments, saving for retirement is very high.”
How do members of this group plan to keep their financial resolutions? Once again, there were some interesting takeaways.
“It is easy. I am simply putting more money aside on a systematic basis in my savings accounts and in my various retirement accounts,” a member of American Funds’ Voice of the Investor panel said.
Another strategy for staying on the right track: “Not being rash,” a panel member said. “Taking time to think things through before acting.”
Paul Golden, a spokesman for the National Endowment for Financial Education, recommends setting small, achievable financial resolutions to avoid growing discouraged and abandoning your plan.
Whether you’ve already made your list, or are still thinking it through, here are some financial resolutions to consider:
Regardless of your net worth, you might not be saving enough to achieve the lifestyle you want in retirement.
How much of your paycheck should be going toward savings? That depends on your life stage and how much you’ve already accumulated. A general rule of thumb is to set aside 10% to 15% of your salary per year for retirement, starting in your 20s. If you’re late in the game, you might need to save more.
Even a small increase in your savings rate can be worthwhile. You might start by going up by just 1% and then gradually go higher over time.
When you save money in a 401(k), your contributions are made pre-tax, thereby reducing your current taxable income. Your money grows tax-free until withdrawal.
Contribute at least enough to get any available match from your employer. The contribution limit for a 401(k) for 2018 is $18,500, with an additional catch-up for those age 50 and above of $6,000.
There may be other tax-advantaged accounts available at your workplace, such as health savings accounts. Health savings accounts (HSAs) are medical savings accounts that can only be used in conjunction with high-deductible health insurance plans.
Like a 401(k), with an HSA your money is deducted from your paycheck pre-tax and grows tax-free. Your employer might make contributions as well. Here’s the kicker: Withdrawals from an HSA are not taxed so long as the money is used for qualified medical expenses.
It’s one thing to save and invest. It’s another to have a comprehensive financial plan that gives you a detailed analysis and game plan for all parts of your financial life. This comprehensive plan would include such things as budgets, cash flow analysis, retirement planning, tax guidance and estate planning.
“People who plan end up with more wealth,” Jamie Hopkins, co-director of the New York Life Center for Retirement Income at the American College of Financial Services, said in an interview.
If you don’t already have a financial advisor, you might consider finding one in the coming year.
Many financial professionals recommend having three to six months’ worth of living expenses in liquid assets to be tapped in the event of an unforeseen setback.
While having all of that money in a savings account is one option, you might consider putting a portion of your emergency dollars in a Roth IRA, Hopkins said.
With a Roth IRA your contributions are made after taxes, but at retirement you can withdraw your principal and earnings tax-free.
Contributions to a Roth IRA can be withdrawn at any time without triggering any penalty or income tax. Think of it as a two-for-one. Your Roth IRA has the potential to grow tax-free, while still serving as your rainy day fund.
Planning to check in with your doctor in the new year? How about scheduling a meeting with your financial advisor to go over your investments?
It’s important to regularly review and rebalance your portfolio. You want to ensure your investments are still aligned with your goals, time frame and risk tolerance. Just as your health changes, so might your personal situation. That could mean your portfolio needs to be tweaked accordingly.
Most of us would rather think of anything other than the time that we’ll no longer be here. In fact, more than half of Americans (64%) do not have a will, according to a Harris poll conducted for Rocket Lawyer.
“We usually don’t see people going to an estate planning attorney until they have an extraordinary event,” Hopkins said. “It’s something we need to keep pushing.”
If you die without a will, you might leave behind uncertainty and battles over who gets what. Estate planning will allow you to dictate how you want your assets divided after you’re gone and possibly minimize the taxes your family members might have to pay.
If you’ve pledged to be kinder to your loved ones in the coming year, this is one resolution you may want to keep.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.