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Time to Examine Your Financial Situation

By Rick Imhoff, CFP ®

Now that we are into a new year, our thoughts turn to paying off the debt we incurred before Christmas and gathering all the information we need to prepare our income tax returns.  It is also a good time to evaluate our financial situation.

Income Taxes
You will soon receive your W-2’s and 1099’s that tell you all the taxable income you made for 2018.  Check the federal and state income tax withholdings or your quarterly estimated payments to see if they match up closely with the amount you actually owe on your Form 1040.  If you get a big refund, you should back off on the amount withheld or paid in quarterly to give you the additional cash flow during the year for spending, saving, or investing.

If you are still working and have a 401(k) plan through your employer, you should consider increasing your contributions, especially if you are not getting the full match provided by your employer.  If your employer does not have a retirement plan, you can contribute to a Traditional IRA.  (You have until April 15, 2019 to make your 2018 contribution).  Keep in mind that any contribution made to a qualified retirement plan or a Traditional IRA actually costs you less than the contribution because of the income tax deduction.

Investments
Stocks in general took a huge nose dive late in 2018 due to the Fed’s increase in interest rates, the on-going tariff issues with China, the government shut down, and the growing concerns about a possible global slow down or even a recession in the next year or two.  Interest rates also fell as investors sought the safety of Treasury securities.  Another concern by some is the large amount of corporate debt rated BBB, the lowest level to still be considered investment grade.  The concern is that if the economy does slow down, the ratings on some of these bonds may drop below investment grade.

The stock market has rebounded some since the end of the year and interest rates have stabilized as the Fed may have paused on further rate increases for now.  This may be a time to be more defensive by selecting stocks in companies with strong balance sheets and a history of increasing dividends over time.  As for bonds, stick with high quality issues by purchasing high quality corporate bonds, Treasury securities, and FDIC insured Certificates of Deposit maturing over the next 1-5 years.

Estate Plan
If it has been 5 or more years since you have reviewed or updated your estate plan, you should do so now.  As you are gathering the tax information to give to your tax preparer, you should also prepare a net worth statement.  If your net worth is less than $11,400,000, you do not have to worry about federal estate taxes.  For Illinois residents with less than $4,000,000, you don’t have to worry about state inheritance taxes.  However, you may be concerned about avoiding probate at your death and at incapacity.  You may consider a revocable living trust or a variety of will substitutes that can keep you out of probate.

If your assets total more than $11,400,000 or the $4,000,000 limit in Illinois, your estate could be hit with a large estate tax bill at your death!  To reduce or possibly eliminate this tax, you need to be certain that you have the appropriate language in your will or trust to take advantage of certain estate tax savings.

Insurance
This is also a good time to review your insurance coverage.  Usually, our need for life insurance decreases as we approach retirement.  You should examine how much life insurance you need in light of your current situation and adjust the coverage accordingly.  If you have too much life insurance, you may consider donating a policy to a charitable organization that can give you an income tax deduction and fulfill your charitable desires.

Despite the recent increase in the standard deduction, it is still beneficial to purchase long term care insurance.  This type of coverage can provide needed benefits to cover the high cost of home health care or a nursing home. When designing the proper coverage, there are a variety of policy options to consider.

You should also check the deductibles on your homeowners and automobiles policies.  By increasing the deductible, say from $100 to $250, or even $500, you can substantially reduce your premiums.  However, you need to keep in mind that if you have a claim, you will also have to pay more out of your pocket.

This is a long list of items to evaluate, but as you prepare your income tax returns, plan for this year’s vacation, or realize you are another year closer to retirement, there is no better time than now to review your financial situation.  I encourage you to meet with your financial advisors on these matter so that you can have the peace of mind knowing you have done everything you can to get the most out of your money.