Most people would agree that they should get a physical checkup every year just to make sure everything is medically okay. Everyone seems to know someone who was glad they did because they caught a life-threatening illness early enough to treat it. Most folks also know someone whose outcome would have been much better if they had taken the time to get their recommended checkup.
It’s not any different with your financial situation. Circumstances change, laws change, tax codes change, interest rates change and the overall economic condition seems to change so frequently nowadays. Unfortunately, any one of these changes may have significant impact on your portfolio—and you may not even be aware of it!
Although I believe that everyone should have their situation reviewed once a year, I have listed twenty special circumstances that make an annual review even more critical. If any of the following events or life situations have changed for you, please take the time to have your financial situation reviewed by a financial planner who is certified.
1. A spouse has deceased.
Have you changed your will or living trust? Have you removed your deceased spouse as beneficiary from pension plans, life insurance policies and other investments such as IRAs? Not doing so could be disastrous.
2. A beneficiary has deceased.
Have you changed your will or living trust? Have you removed him/her as beneficiary from pensions plans, life insurance policies and other investments such as IRAs? Not doing so could be disastrous.
3. You have recently retired.
Do you know how much income you can draw from your portfolio so you never run out of money? What is the break-even interest rate your portfolio must make to sustain your lifestyle? Should you take income from your IRA or from one of your other accounts?
4. You will retire this year.
Have you analyzed your lifestyle to determine how much income you’ll need to sustain it? What options does your pension offer and which is the best choice? Should you take Social Security now or delay it for a larger payment?
5. You’ve recently separated or divorced.
Can this affect your future Social Security income? Do you know how much extra tax you may owe since your filing status has changed? Have you removed your spouse as beneficiary from your will, living trust, pension, life insurance and other investment accounts that you most likely don’t want him/her to be on? Remember, if he/she is alive and also the beneficiary of your life insurance, the death benefit will go to him/her.
6. You are temporarily laid off.
What impact will living off your savings have on your future retirement income? Can you afford to retire? Should you take Social Security to supplement? Can you still contribute to your IRA or Roth IRA?
7. You have a 401K.
If you’re retired, should you roll your 401K into an IRA? Do you have company stock in your 401K? If so, are you aware that you may be able to liquidate a portion of your 401K and only pay the lower capital gains tax and not the full income tax?
If you’re still working, are you aware that you may be able to do an in-service withdrawal and roll your 401K into an IRA while still contributing to it? What are the advantages and disadvantages?
8. You are considering converting to a Roth IRA.
Are you aware that if you convert in 2010 ONLY, you may be able to spread the taxes between 2011 and 2012? Have you analyzed whether converting makes sense? Since most folks believe that taxes are only going to increase, might it make sense to pay the lower tax now for a tax-free income forever?
9. You have recently turned 59-1/2, 62, 65, 67 or 70-1/2.
If you’ve recently turned 59 1/2: Is it a good idea to begin withdrawing from your IRA now that you can or should you continue to defer?
If you’ve recently turned 62: Should you begin taking Social Security? Are you aware of the Social Security buy-back program in which you can always upgrade your payments at a later date?
If you’ve recently turned 65: How does Medicare work? Should you choose a Medigap plan or a Medicare Advantage plan? What is Medicare Part D?
If you’ve recently turned 67: You are now of full retirement age according to Social Security (if you haven’t reached full retirement at an earlier date); therefore, regardless of your income, you can begin receiving your full Social Security income without being penalized.
If you’ve recently turned 70 1/2: You must begin taking required minimum distributions from your IRA. What is the amount? Should you wait until April 1, 2011 to take it, and what are the tax ramifications? Moreover, if you’ve been holding off on taking your Social Security, age 70 is the time to start since there is no benefit in waiting any longer.
10. You recently sold a property or some of your portfolio holdings.
How much capital gains tax will you have to pay? Do you qualify for the $250,000 ($500,000 if married) capital gains tax exemption? Does a 1031 Exchange make sense? How does this affect the rest of your income and taxes?
11. Your portfolio has recently gained back some or most of its losses.
Should you sell? How much should you sell? Where would you invest the money if you did sell? Where is the stock market likely to go from here?
12. You have money in the bank not earning anything.
What are some other investment options that pay more interest but are still guaranteed and insured? How much buying power are you losing to inflation every year?
13. You have a beneficiary who recently got married, separated or divorced.
How does this affect your living trust? Is your ex-spouse’s new spouse a beneficiary of your estate by marriage?
14. Your estate planning documents (living trust, will, powers of attorney etc.) have not been reviewed for several years.
Laws that affect these documents change every so often so it is vital to keep them up-to-date. When HIPAA (Health Insurance Portability and Accountability Act) was enacted in 2004, it caused many of these documents to require updating to keep them valid. HIPAA is just one example of many such critical law changes.
15. Your auto, homeowners, long term care, life and other insurance policies have not been reviewed recently.
Is your coverage still adequate? Have your beneficiaries changed? Do you really understand your coverage or have you just kept it because you’ve had it for so long? Might you be able to lower your premiums?
16. You’ve received an inheritance.
Do you have to pay tax? What is the best way to save or invest the money? Does your spouse have claim to the money when you pass away even if that’s not what you want? How do you protect it from creditors?
17. Your estate is valued at over $3.5 Million.
How does the estate inheritance tax work? Does the temporary repeal of the estate tax for 2010 affect you? What can you do to reduce or eliminate it?
18. You have an IRA.
Do you have to take a required minimum distribution for 2010? Are your beneficiaries listed appropriately? Do you have contingent beneficiaries listed and why may this be important? Can your beneficiaries take distributions over their lifetime and will your IRA allow this?
19. You haven’t established a living trust.
Do you want your beneficiaries to have to deal with probate? Do you want the courts determining who inherits your estate? Are there certain beneficiaries whom you don’t want to receive anything? Do you incorrectly believe that your will helps your beneficiaries avoid probate?
20. You’ve never had your portfolio reviewed by a professional.
Whether you have created a large estate or just have enough to squeeze by every month, having a friendship with a financial professional should be as important as having a medical doctor.
Unfortunately, I’ve seen mistakes that have been very costly for some folks because they made some decisions on their own without proper knowledge. I’ve even seen decisions that have been so poor that it cost people the comfortable retirement they had dreamed of. The heartbreaking part is, that could have been avoided!
When you are sick, your body lets you know that you need to see a doctor. When your portfolio is sick or some other aspect of your financial life is not in order, there may be no warning signs until it’s too late. Sometimes, the situation may not even be uncovered until after you’re gone and there is nothing that can be done about it anymore.
I would highly encourage you to have your financial professional review your situation even if you believe everything is alright. If you live in California and don’t have a financial professional or simply want a second opinion, please see my offer for a Free Financial Physical to learn how you can have your financial situation reviewed for no cost to you.