Begin This Summer with a Mid-Year Financial Review

Summer’s here and the living is easy . . . and that makes it a terrific time for a mid-year financial review. Sometime between your summer vacation and enjoying the great outdoors, here are a few questions to ponder:

  • Have my goals changed since the last time I reviewed my portfolio?  When your goals change, we need to reassess whether your current asset allocation strategy is appropriate. Also, we should evaluate whether your current portfolio is within acceptable risk tolerances of your asset allocation strategy.  Anything outside your range should be considered for rebalancing.
  • Has my tax situation changed since last year? Your answer will determine whether there are new opportunities for Roth conversions or to harvest portfolio gains or losses. Also, if needed, there’s still plenty of time to adjust your withholdings so you can avoid a tax surprise next April. 
  • Am I over-concentrated in one stock?  Diversification is a long-term investor’s best friend. Accordingly, concentrated positions should be reduced and the proceeds invested in your diversified portfolio. With capital gains rates set at 15% for all but the top tax bracket, now may be a good time to sell any concentrated low-basis stock position. You might also trim any over-exposure to company stock. While the sales themselves will diversify your portfolio and reduce overall risk, you can enhance those benefits by re-investing your proceeds in a diversified and properly allocated portfolio.
  • Can I save more?Saving more means you have to spend less, of course, so sit down and review your budget to determine if you can cut any of your fixed expenses. Start with the extras, such as fancy morning coffees and dinners out. Evaluate the best plans for your cell phone and cable/internet and determine whether you can save by switching providers for household cleaning, lawn maintenance, and dry cleaning. And, once you have additional cash ready to invest, don’t fall into the trap of waiting for the “right time” to buy. If you stay on the sidelines too long, you could miss significant returns. The best time to invest cash is when you have it and not when you are comfortable investing. If you are uncomfortable investing cash, you are allowing emotions to override a sound investment plan.
  • Can I save smarter? Begin by reviewing your 401(k) to ensure you are contributing enough to get the company match. And if your company offers a high deductible health plan with a Health Savings Account (HSA) option, explore how you might be able to pay for medical expenses with pre-tax dollars. Also, the new 3.8% surtax on investment income makes the non-deductible IRA more attractive. Although you don’t get a tax deduction for your contributions, the IRA is a tax-advantaged account, so you benefit from tax deferral and compound growth. Additionally, if you are a single filer earning more than $200,000 or a joint filer earning more than $250,000, you avoid the 3.8% surtax on investment income levied on taxable accounts. A non-deductible IRA can be especially effective during your peak income years when your earnings prevent you from opening a Roth IRA.
  • Do I have unrealized losses?  Another way to increase the tax efficiency of your portfolio and enhance returns is to harvest losses periodically. Tax-loss harvesting is the practice of selling investments that have lost value to offset current and future-year capital gains. On your tax return, you can deduct up to $3,000 of net capital losses from your ordinary income for the current year. And, net losses above that $3,000 can be carried over to future years until they’ve been used up by future portfolio gains.Tax-loss harvesting is particularly beneficial if you are in a high current tax bracket and have significant losses and gains that can be offset with those losses. Conversely, if you are in one of the two lowest tax brackets where the capital gains rate is 0%, the strategy is different. If you have significant gains and have an upcoming expense like college tuition, it makes sense to take your gains at 0% instead of harvesting losses, because in future years you may be in a higher tax bracket and owe capital gains.
  • Am I investing enough in my health? Your health is your most important financial asset! If you have failed to keep your New Year’s resolution to work out on a routine basis, now is a good time to start. Also, fruits and vegetables are plentiful, so load up on healthful choices. The warm weather makes it inviting to walk or bike to your destinations. Finally, your health plan might offer discounts on gym memberships or weight-loss programs, so investigate your benefits package.
  • Is there a tax deduction hiding in my closet? Donating clothes you have not worn in years to a charity helps those in need and gives you a valuable tax deduction. Just be sure to get a receipt and keep careful records of what you donate. You also can find places to donate other unused items, such as sporting equipment, swing sets, lawnmowers, and snow blowers.

Once your mid-year financial work is complete, enjoy your vacation! Hopefully, you’ve planned in advance to take advantage of travel discounts, but whatever you spend, vacationing can be a solid investment. Why? Simply, it could be that vacationing regularly gives you a needed break that enables you to work longer. And that means you will have longer to save in your 401(k), additional years to take advantage of the catch-up provision for those over 50, more company-match dollars, and a longer time on the company’s health plan.

Perhaps most significantly, working longer might also enable you to delay filing for Social Security. Many people don’t realize that the Social Security benefit grows approximately 8 percent a year from age 62, when you are first eligible to collect, to age 70–all with zero risk! That’s an important piece of information I hope you’ll share with the friends and family you may see on your vacation. Enjoy!

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