So, What’s a Bond Anyway?

Imagine lending money to a friend, and they promise to pay you back with a little extra as a thank-you. That’s kind of what a bond is, but instead of a friend, it’s a government or company borrowing your money.

How Does This Whole Bond Thing Work?

1. Someone Needs Money: A government or company wants to borrow money, so they issue a bond.
2. You Buy the Bond: You decide to lend them the money by buying the bond.
3. They Pay You Interest: They say thanks by paying you interest regularly. Sweet, right?
4. You Get Your Money Back: When the bond “matures,” you get your original money back.

Why Would You Even Want to Own Bonds?

• Steady Money: You get regular interest payments. It’s like a paycheck from your investment.
• Less Risky: Bonds are like the chill friend in your investment group. They’re usually more stable than stocks.
• Mixing It Up: Having bonds in your portfolio is like adding a pinch of salt to a recipe. It just balances things out.

Should Us Millennials Own Bonds? Let’s Break It Down:

The Pros:

• Steady and Reliable: Bonds are like that dependable friend who’s always there when you need them.
• Thinking Long-term: If you’re dreaming of a house or planning for retirement, bonds can be part of the plan.

The Cons:

• Not So Flashy: Bonds aren’t the life of the party. They usually offer lower returns compared to stocks.
• Interest Rate Drama: If interest rates change, bond prices can get a bit wobbly. It’s something to keep an eye on.

Wrapping It Up

So, bonds might not be the most exciting topic at the dinner table, but they’re worth knowing about. They can be a steady, reliable part of your investment mix, especially if you’re thinking long-term.

If all this bond talk has you curious, don’t hesitate to reach out to us at Millennial Wealth Management. We’re here to chat about your unique goals and how bonds might fit into your financial picture. Happy investing!

As high-income earners, you’ve likely encountered the term “Restricted Stock Units” or RSUs, especially if you’re working in the tech industry. These are increasingly common in employee compensation packages and can play a vital role in enhancing your wealth. So, let’s explore what RSUs are, how they work, and how you can effectively manage them to mitigate tax implications.

Decoding Restricted Stock Units

Restricted Stock Units (RSUs) are a type of employee compensation that businesses utilize to reward and retain their workforce. Unlike conventional stocks, RSUs do not represent immediate ownership in the company when granted. Instead, they’re a promise that you’ll receive shares or their cash equivalent upon meeting certain conditions – often a specific tenure (known as a vesting period) or performance milestones.

When these conditions are fulfilled, the RSUs “vest,” transforming into actual shares that you can sell or hold, or they become cash credited to your account. The moment of vesting is crucial as it’s then that RSUs become taxable.

RSUs and Tax Implications

RSUs, when they vest, are considered taxable income. In contrast to stock options, which are taxed only when you decide to exercise them, RSUs are taxed at vesting. The total market value of the shares at vesting is considered ordinary income and is taxed at your regular income tax rate. This can notably increase your income for that tax year, potentially moving you into a higher tax bracket.

Effective Strategies for Managing RSUs and Reducing Taxes

While taxes on RSUs are unavoidable, strategic planning can help minimize your tax liability.

Here are some strategies:

1. Consider Your Vesting Schedule: Stay informed about when your RSUs are set to vest, and plan your taxable income accordingly. If a significant vesting event is coming up, you might want to limit other taxable income that year to avoid propelling yourself into a higher tax bracket.

2. Hold onto Your Shares: If you hold onto your shares after they vest, any gain from the time of vesting to sale is considered capital gains and might be subject to a lower tax rate compared to regular income.

3. Tax-Loss Harvesting: If you choose to hold your shares and the value goes down, you can sell these shares at a loss to offset other capital gains. This practice is known as tax-loss harvesting.

4. Charitable Donations: Consider donating some of your shares to a non-profit organization. This not only supports causes you care about but also helps you write off the donation as a tax deduction.

5. Diversification via Immediate Sale: One valid strategy to consider, especially from a risk management perspective, is selling your vested RSUs immediately. By doing so, you might avoid substantial additional income tax, as there’s likely to be minimal capital gains given the short period between vesting and selling.

Then, what do you do with the proceeds? The answer is diversification. This is a key principle in financial planning, which involves spreading your investments across various assets or asset classes to reduce risk. By immediately selling your RSUs and investing the proceeds into a diversified portfolio, you’re potentially mitigating the risk associated with holding too much of a single stock.

Let’s say you work for a tech company. If a majority of your wealth is tied up in your company’s stock (including your RSUs), you could face significant financial risk if the tech sector or your company experiences a downturn. By diversifying, you can spread this risk across different sectors and investments.

It’s worth mentioning that you’ll want to consider your overall financial plan, risk tolerance, and investment goals when deciding how to diversify the proceeds from selling your RSUs. This could include a mix of stocks, bonds, mutual funds, ETFs, real estate, or other investment opportunities.

This approach aligns with a prudent principle in investing: not having all your eggs in one basket. It is a strategy that can help you balance potential returns with acceptable risk, which is a cornerstone of sound financial planning.

6. Professional Advice: Given the complexity of tax implications associated with RSUs, working with a certified financial planner or tax advisor is highly recommended. They can help create a tailored plan based on your specific situation.

RSUs can be a potent tool for wealth creation. However, it’s essential to understand their mechanisms and tax implications. With a strategic approach, perhaps supplemented by professional advice, you can optimize your RSUs for maximum benefit while minimizing tax liability. Don’t let your RSUs restrict you, rather, unlock their potential and continue to prosper on your financial journey.

Keep on thriving, Millennials!

So, let’s delve into the realm of inheritance, focusing on the tax implications, rules for withdrawal, key considerations, and other aspects that you should be mindful of.

Tax Implications

Firstly, the silver lining: As of 2023, the vast majority of individuals who inherit money in the United States do not need to pay federal estate tax. This is because the federal estate tax exemption is $12.92 million per individual or $25.84 million for a married couple. Unless the estate you’re inheriting exceeds these amounts, federal estate taxes should not be a concern.

However, there’s something called “income in respect of a decedent” (IRD), which could apply if you inherit certain kinds of assets that have not yet been taxed, such as an IRA or 401(k). If this is your situation, you may owe income tax when you withdraw the money.

Also, remember to check state taxes. Some states levy their own estate or inheritance taxes, with exemption amounts often considerably lower than the federal exemption.

Rules for Withdrawal

Inherited retirement accounts like 401(k)s or IRAs come with their own set of rules. The Secure Act, passed in 2019, reshaped how beneficiaries should withdraw from these accounts.

For non-spouse beneficiaries, there’s a general requirement to drain the account within 10 years of the original owner’s death, known as the “10-year rule”. There are no specific required minimum distributions within those ten years, but the entire balance must be distributed by the end of the 10th year. Strategically planning these withdrawals can help manage potential tax liabilities.

Other Characteristics of Inheritance

Inheritance can come in many forms—cash, real estate, personal items, and more. Each type has different financial implications.

1. Real Estate: If you inherit a property and decide to sell it, be aware of potential capital gains tax. The property’s cost basis is “stepped up” to the current market value at the time of the owner’s death. You may owe capital gains tax on the difference if you sell it for more than this “stepped-up” basis.

2. Stocks: Similarly, inherited stocks follow the “step-up in basis” rule, potentially reducing capital gains tax if the shares have appreciated significantly.

3. Personal Belongings: Items like jewelry, art, and cars are part of your inheritance too. Their value can add up and may have tax implications if sold.

Key Considerations When Inheriting Money

Inheritance is more than just a financial windfall; it’s a legacy that has been entrusted to you. Here are some crucial points to consider:

1. Assess Your Financial Situation: Use this as an opportunity to review your financial situation holistically. Think about how this inheritance can help you reach your financial goals, pay off debts, or invest for the future.

2. Take Your Time: You don’t need to make immediate decisions about what to do with the inheritance. It’s often best to park the funds in a safe, accessible account until you have a clear plan.

3. Consider Professional Help: A financial planner or tax professional can provide invaluable assistance in navigating the complex world of inheritance.

Inheritance can be a complex world to navigate. It intertwines our emotional responses with the need for pragmatic decision-making. Remember, while an inheritance can provide financial security, it’s also a testament to the legacy of the person who left it behind. By handling it wisely, you can honor their memory while also ensuring their legacy benefits your life and potentially, the lives of future generations.

Please note: This blog post is intended for informational purposes only and does not constitute financial or tax advice. Tax laws are intricate and subject to change. Always consult with a certified financial planner or tax professional about your specific circumstances.

Why Estate Planning Matters for Millennials

As a financial planner, I often encounter young clients who assume that estate planning is unnecessary because they don’t have significant assets. However, estate planning is about more than just wealth preservation. It’s about taking control of your future and ensuring your wishes are respected in various circumstances.

Here are some reasons why estate planning is important for millennials:

Peace of Mind: An estate plan offers security and clarity in the event of unforeseen circumstances. It ensures that your assets are distributed according to your wishes and that your loved ones are cared for after you’re gone.

Avoiding Legal Disputes: Without proper estate planning, your family may face lengthy and expensive legal battles over your assets, leading to emotional distress.

Control Over Healthcare Decisions: Estate planning allows you to make decisions about your healthcare in advance, ensuring that your wishes are followed if you become incapacitated.

Reducing Tax Burden: A well-crafted estate plan can help minimize the tax burden on your heirs, allowing them to inherit more of your hard-earned assets.

Essential Estate Planning Documents

There are several types of documents involved in estate planning, but every individual should have at least a basic estate plan in place. This plan should include:

Will: A will is a legal document that outlines how you want your assets distributed after your death. It also allows you to name a guardian for your minor children and an executor who will manage your estate.

Durable Power of Attorney: This document grants authority to a trusted individual to manage your financial affairs if you become incapacitated. It ensures that your bills are paid, investments are managed, and other financial decisions are made on your behalf.

Healthcare Directives: These documents express your medical care preferences if you’re unable to communicate them yourself. They typically include a living will and a durable power of attorney for healthcare.

Other documents that you may consider, depending on your needs and circumstances, include:

Trusts: These legal arrangements allow you to transfer assets to a trustee who will manage them for the benefit of your chosen beneficiaries.

Beneficiary Designations: Ensure that your beneficiaries are up to date on your retirement accounts, life insurance policies, and other financial assets.

Letter of Intent: This non-legal document provides guidance to your executor or trustee regarding your personal preferences and desires for the distribution of your assets.

Digital Asset Inventory: A list of your digital assets (such as social media accounts, online banking, and email) and instructions for their management after your death.

Estate planning is an essential financial task that millennials should not overlook. By creating a basic estate plan that includes a will, power of attorney, and healthcare directives, you can secure your future, protect your loved ones, and ensure that your wishes are followed. Consult with a financial planner or an estate planning attorney to help you create an estate plan tailored to your needs and circumstances. Remember, it’s never too early to take control of your financial future.

Reasons to consider a 401(k) rollover:

1. Job change or termination: One of the most common reasons to rollover a 401(k) is when you change jobs or your employment is terminated. Leaving your retirement account with a previous employer may result in higher fees or limited investment options. Rolling over your 401(k) to an IRA or your new employer’s plan can provide more control and better investment options.

2. Consolidation: If you have multiple 401(k) accounts from different employers, rolling them over into one IRA can make managing your retirement savings much easier. This simplification can help you keep better track of your investments and potentially reduce fees.

3. Improved investment options: Your current 401(k) may have limited investment choices, high fees, or underperforming funds. By rolling over your 401(k) to an IRA, you can access a wider range of investment options, often with lower fees.

4. Greater flexibility: IRAs offer more flexibility in terms of withdrawal options, particularly if you plan to retire early or need access to your funds for certain financial emergencies. With a 401(k), you may face more restrictions and penalties for early withdrawals.

When not to consider a 401(k) rollover:

1. If you’re happy with your current plan: If your existing 401(k) offers low fees, a diverse range of investment options, and you’re satisfied with the performance, there may be no need to move your assets.

2. Age considerations: If you are between the ages of 55 and 59 ½, you may be able to take penalty-free withdrawals from your 401(k) if you leave your job. Rolling over to an IRA would mean that you’d have to wait until 59 ½ to avoid the 10% early withdrawal penalty.

3. Outstanding loans: If you have an outstanding 401(k) loan, rolling over your account may trigger a taxable event if you’re unable to repay the loan before completing the rollover.

4. NUA (Net Unrealized Appreciation) benefits: If you hold employer stock in your 401(k), it may be advantageous to keep the stock in the account to take advantage of the NUA tax treatment, which could lower your overall tax liability.

5. Legal protection: In some cases, 401(k) accounts have stronger protection from creditors than IRAs. If you’re concerned about potential legal claims, it may be best to keep your funds in your 401(k).

Deciding whether to roll over your 401(k) is a personal decision based on your unique financial situation and goals. Consider the advantages and drawbacks mentioned in this post, and consult with a financial planner to help determine the best course of action. Your retirement is important, so take the time to explore your options and make informed decisions that will set you up for financial success in the years to come.

What is Modern Portfolio Theory?

Modern Portfolio Theory (MPT) is an investment framework that aims to maximize returns for a given level of risk by diversifying your investments across different assets. Introduced by Harry Markowitz in 1952, MPT emphasizes the importance of constructing a balanced, diversified portfolio to achieve long-term financial goals.

The Dangers of Active Trading and Market Timing

Actively trading stocks and attempting to time the market can be an alluring prospect, but it’s riddled with pitfalls. Timing the market means attempting to buy low and sell high, predicting when stock prices will rise or fall. Sounds great, right? Unfortunately, even experienced professionals often fail at consistently predicting market movements. Here’s why:

• Stock prices are influenced by numerous unpredictable factors.
• Emotions like fear and greed often cloud decision-making.
• Transaction fees and taxes can erode potential gains.

Benefits of Modern Portfolio Theory and Long-term Investing

Now that we’ve addressed the drawbacks of active trading and market timing, let’s explore why MPT and long-term investing offer a superior approach:

a. Diversification Reduces Risk:

MPT focuses on diversifying your investments across various asset classes (e.g., stocks, bonds, real estate), thus spreading the risk. If one asset performs poorly, it is balanced out by other investments that perform well. Diversification reduces overall risk, ensuring a more stable return on your investments.

b. Long-term Investing Encourages Discipline:

When you adopt a long-term investing strategy, you’re less likely to make impulsive decisions based on short-term market fluctuations. This disciplined approach helps you stay focused on your financial goals, fostering a more rational investment strategy.

c. Cost-effective and Time-efficient:

With long-term investing, you’re not constantly buying and selling assets, which translates into lower transaction fees and taxes. Additionally, MPT saves time and effort compared to the constant monitoring required by active trading.

d. Compounding Growth:

Long-term investing allows you to take advantage of compounding, which means your earnings are reinvested to generate additional returns. This snowball effect helps your wealth grow exponentially over time, significantly boosting your overall returns.

A Better Strategy for Young Professionals

As a young professional, time is on your side when it comes to investing. By choosing modern portfolio theory and long-term investing, you can benefit from the power of compounding, reduce risk through diversification, and foster a disciplined, cost-effective approach to managing your finances.

Remember, the key to successful investing is consistency and patience. Adopting MPT and focusing on long-term financial goals will help you secure a prosperous financial future.

If you’re eager to learn more about MPT and how to build a personalized investment plan, consider seeking guidance from a professional financial planner. They can help you design a tailored strategy that aligns with your unique goals and risk tolerance. So, embrace the wisdom of modern portfolio theory and embark on the journey to financial freedom!

The Multiple Reasons to Have an Emergency Fund

1. Job Loss: Losing your job can be a massive blow to your financial stability. An emergency fund can provide you with a financial cushion to cover your expenses while you search for new employment, relieving stress and giving you time to find the right opportunity.

2. Medical Emergencies: Health issues can arise suddenly, and having an emergency fund in place can help cover out-of-pocket medical expenses or lost wages due to illness or injury. This can alleviate the financial burden and allow you to focus on recovery.

3. Car Repairs: Vehicle breakdowns are a common, yet costly, occurrence. An emergency fund can help you cover unexpected repair costs without resorting to high-interest debt.

4. Home Repairs: Unanticipated home repairs, such as a leaky roof or a broken furnace, can be expensive. An emergency fund ensures that you can address these issues promptly without compromising your financial stability.

5. Family Emergencies: Life events like the death of a loved one or the need to care for a sick family member can require travel or time off from work. An emergency fund can help you manage these expenses without derailing your financial plan.

What to Do with Extra Cash After the Emergency Fund is Fully Funded

Once you have successfully built an emergency fund that covers three to six months of living expenses, it’s time to start allocating any extra cash to achieve your other financial goals. However, it’s essential to be mindful of cash drag, the negative impact of holding too much cash on your overall financial plan.

Cash drag occurs when cash holdings earn little to no return, while inflation erodes its purchasing power over time. This can be detrimental to your long-term financial success. To avoid cash-drag and maximize your financial plan, consider the following steps:

1. Pay Off High-Interest Debt: If you have any outstanding high-interest debt, such as credit card balances, use your extra cash to pay them down. This can save you money on interest payments and improve your overall financial health.

2. Invest in Retirement Accounts: Contribute to tax-advantaged retirement accounts like a 401(k) or an IRA. These accounts not only provide long-term growth potential but also offer tax benefits that can help you save for retirement more efficiently.

3. Save for Other Goals: Allocate your extra cash towards other financial goals, such as saving for a down payment on a home, funding your child’s education, or starting a business. Determine your priorities and set up separate savings accounts for each goal to stay organized and focused.

4. Invest in a Diversified Portfolio: Consult with a financial planner to build a diversified investment portfolio tailored to your risk tolerance and financial goals. Investing in a mix of stocks, bonds, and other assets can help you grow your wealth over time while mitigating risk.

Conclusion

Having an emergency fund is an essential component of a sound financial plan. It provides a safety net during life’s unexpected events, offering financial stability and peace of mind. Once your emergency fund is fully funded, be proactive in allocating extra cash towards your financial goals and avoiding cash-drag to ensure the long-term success of your financial plan.

1. Expertise and Knowledge

Financial planners have a deep understanding of investment strategies, tax laws, and the financial landscape. They stay up-to-date with changes in regulations, trends, and market conditions, ensuring your financial plan remains relevant. A financial planner can help you avoid common pitfalls and make informed decisions based on your unique situation.

2. Comprehensive Financial Planning

A financial planner will look at your entire financial picture, considering your assets, liabilities, income, expenses, and goals. They can help you develop a holistic financial plan that aligns with your short- and long-term objectives. By identifying and prioritizing your goals, a financial planner can help you allocate your resources more effectively.

3. Personalized Investment Strategies

A financial planner can tailor an investment strategy based on your risk tolerance, time horizon, and goals. They can help you diversify your investments and maintain a well-balanced portfolio. A financial planner can monitor and adjust your investments as needed, ensuring they stay on track with your objectives.

4. Accountability and Motivation

A financial planner can serve as a coach, providing guidance, support, and encouragement to help you stay on track with your financial goals. They can help you establish and maintain a budget, prioritize saving and investing, and make informed decisions about your finances. Regular check-ins with your financial planner can help you assess your progress and make necessary adjustments.

5. Long-term Return on Investment

The upfront cost of working with a financial planner is often outweighed by the long-term benefits, such as a more secure financial future and higher investment returns. A financial planner can help you maximize your tax savings, take advantage of available tax credits and deductions, and make tax-efficient investment decisions. The peace of mind that comes from knowing your finances are in good hands can be invaluable.

6. Time Savings and Convenience

A financial planner can help you navigate complex financial decisions and simplify the process, saving you time and effort. They can take care of tasks such as portfolio management, investment research, and monitoring market trends, freeing up your time to focus on other important aspects of your life. Financial planners stay up-to-date on the latest financial tools and technologies, helping you make efficient and informed decisions.

7. Minimizing Emotional Decision-Making

A financial planner provides an objective perspective on your financial situation, helping you avoid making decisions based on emotions. They can help you stay disciplined during market fluctuations, preventing panic selling or impulsive buying. By working with a professional, you’re more likely to make rational, long-term financial decisions that align with your goals.

8. Enhanced Collaboration with Other Professionals

A financial planner can work closely with other professionals, such as accountants, attorneys, or insurance agents, to ensure your overall financial plan is well-coordinated. This collaboration can help you maximize the benefits of different financial services and create a comprehensive strategy. By having a single point of contact, you can streamline communication and ensure everyone is working toward the same objectives.

9. Financial Education and Empowerment

A financial planner can educate you on various financial topics, helping you become more financially literate and confident in making decisions. This education can lead to a deeper understanding of your financial situation and empower you to take control of your financial future. By learning from a professional, you can develop good financial habits that can benefit you throughout your life.

Conclusion

As a high-income millennial, you have the opportunity to build a strong financial foundation and achieve your goals. By working with a financial planning professional, you can harness their expertise and guidance to make informed decisions, maximize your return on investment, and secure your financial future. From personalized investment strategies and comprehensive planning to minimizing emotional decision-making and enhancing collaboration with other professionals, the benefits of professional financial planning are numerous. By investing in the services of a financial planner, you’re not only investing in your financial success but also empowering yourself with knowledge and confidence to navigate the complexities of the financial world.

1. Start early and automate your savings

One of the most effective ways to save for college is to start early. The sooner you begin, the more time your money has to grow. Even if your child is still in diapers, consider opening a 529 College Savings Plan account. These tax-advantaged investment vehicles allow your savings to grow tax-free, and withdrawals for qualified higher education expenses are also tax-free.

To make the process easier, automate your contributions by setting up a monthly transfer from your bank account or paycheck. This way, you’ll save consistently, while hardly even noticing the dent in your budget.

2. Take advantage of 529 plans and other tax-advantaged savings vehicles

High-income earners should be mindful of the tax implications of their savings strategies. In addition to 529 plans, consider other tax-advantaged options like a Coverdell Education Savings Account (ESA). While contributions to an ESA are limited to $2,000 per year, the earnings grow tax-free, and the funds can be used for K-12 expenses in addition to college costs.

3. Invest in low-cost, diversified portfolios

When investing your college savings, focus on low-cost, diversified investments like index funds and ETFs. As a high-income earner, you likely have a higher risk tolerance, but remember that college savings should be more conservative than your retirement investments. Consider working with a financial planner to create a portfolio that balances risk and return, while keeping investment costs low.

4. Explore merit-based scholarships and financial aid

Even if you have significant resources, don’t overlook merit-based scholarships and financial aid. Encourage your child to apply for scholarships throughout high school, as well as during their college years. Colleges and universities often provide generous financial aid packages based on merit, so be sure to research these opportunities.

5. Encourage your child to contribute

Instilling a sense of responsibility and ownership in your child can be invaluable. Encourage them to contribute to their college savings by working part-time or summer jobs, applying for scholarships, or even participating in entrepreneurial ventures. This not only helps cover costs but also teaches valuable life lessons about the importance of hard work and financial planning.

6. Consider alternative education options

While a traditional four-year college degree may be the right choice for some, it’s important to consider alternative education options that may be more cost-effective and better suited to your child’s career goals. Vocational schools, online degree programs, and community colleges can all provide valuable education at a lower cost. Encourage your child to explore these alternatives and make informed decisions about their future.

As a high-income earning millennial, you have the resources and the know-how to create a successful college savings plan for your child. By starting early, investing smartly, and considering all available options, you can set your child up for a bright future without breaking the bank. Remember, the best investment you can make in your child’s education is a combination of financial planning and providing support and guidance as they navigate their way into adulthood.

Despite all the noise, following a plan has been and always will be your best course of action to move forward and weather events like this. 

This list is by no means exhaustive, but here are some helpful tips and actions you can take to ensure your financial plan stands on a solid foundation throughout the year.

First Quarter of 2022

New Year’s resolutions are great and all, but an even better idea? Financial wellness resolutions! 

The start of the new year is a great time to review your overall financial plan and see if you are still on target to reach your goals, as well as whether or not any of your goals have changed. Part of this exercise is taking stock of your retirement plan contributions. 

For 2022, the maximum amount that can be contributed to a 401k is $20,500. If you are over the age of 50, you can make an additional “catch up” contribution of $6,500, so you can potentially save a total of $27,000. 

You should review how much you contributed in 2021 and decide how much you can do and want to do in 2022. What would it take for you to max out your contributions in 2022? As we head into a most likely choppy stock market in 2022, increasing your 401k or retirement contributions presents a great opportunity to take advantage of the power of dollar cost averaging. You also need to consider whether or not you will make traditional or Roth contributions, or a combination of both (assuming your plan allows for Roth contributions.) 

January in particular is a great opportunity to review your cash flows and budget for 2021 and start creating rules and a plan for cash flow management in 2022. 

Ideally, you will take time to review your total spending, saving, and giving amounts for 2021. Yes, your TOTAL amounts for the entire year as it can be eye opening and set a precedent for spending and saving in 2022. Use a website like mint, personal capital, or you need a budget to track your cash flows, at least at a high level,  if you do not already have a method in place.

You should also review all of your investment portfolios if you did not already do so at the end of 2021. For example, do you have automatic rebalancing set up on your portfolios if you are managing your investments on your own? 

If you are within five to ten years of retirement, do you have appropriate levels of cash and bonds to weather any short term market volatility? Or if you are decades from retirement, do you in fact have too much cash on hand creating drag on your investments in an inflationary environment? 

Take time to review all your investments and assess the risks and opportunities across your portfolio. It may also be an ideal time to employ a financial planner to help you manage your investments. 

Second Quarter of 2022

Tax season is already upon us! And the IRS has already made it clear that they are way behind on tax returns from last year, so the earlier and more accurately you can file, the better. 

How much has your tax situation changed since prior years? If you have more complex tax scenarios, such as dealing with employer stock options, selling a business, or even getting married, you might consider using a tax filing professional this year to ensure your tax returns are airtight.

This is also a good time to review your pay stub and make sure your withholdings are appropriate. For example, if you had a huge tax bill last year, it’s possible you are not withholding enough for taxes. On the other hand, if you received a large tax refund, you are effectively loaning money to the government interest free throughout the year. It’s likely worth reviewing how you can get as close to net zero as possible when it comes to paying your taxes throughout the year. 

Get organized! Use this tax season as an opportunity to purge and organize all your personal household files. You should have a filing system for your important documents, either hard copy, digital, or both. Because you will already be going through different documents to file your taxes, this is a great time to organize the rest of your financial documents. 

It’s especially important that you know where your estate documents are kept as well as important passwords. Although, ideally you are utilizing some type of password manager to keep your accounts secure.  

Third Quarter of 2022

We tend to spend a lot on travel and vacations in the warmer months, but before you start spending, take some time to review your emergency savings. 

Ideally, you should target at least three to six months worth of essential living expenses in your standard savings account. As an example, let’s say your essential monthly expenses accounting for things like rent, utilities, and food totals $6,000 on average per month. This would mean at a minimum, you should aim to have at least $18,000 in a savings account which would be three months worth of expenses. 

This number will certainly vary based on your individual situation. For example, if you are a freelancer and your income is less predictable, it may make sense to have up to a year’s worth of essential savings in a standard savings account. 

This money should be in the highest yielding possible savings account and should not exceed the target you have established based on your individual circumstances.

Having too much cash on hand causes “cash drag” on your overall portfolio and net worth, especially in today’s inflationary market. What this means ultimately, is that when evaluating your total portfolio (all assets), cash that does not earn anything (or very little in a savings account) will bring down the total return on your assets. 

Excess cash in your portfolio should be deployed toward other goals like taxable investment accounts or possibly a Roth IRA to allow for additional tax free growth for retirement. 

Take time to check in on your financial goals as you reach the halfway point in the year. Are you still on track? What were you hoping to accomplish in 2022? You still have plenty of time left to accomplish your short term goals by the end of the year. 

Fourth Quarter of 2022

As you approach the end of the year and the holiday season once again, it’s time to review your estate plan. First of all, ask yourself whether or not you have an estate plan in place.

Having a will in place is one of the most important tools for you and your family to ensure your wishes are carried out according to your desires and preferences. There are different types of wills, but the most common type is a testamentary will. 

The major benefit of having a will is the ability to determine how and what happens to your property in a way that clearly defines your wishes. If you pass away without a will, also known as “intestate”, the state laws in place determine what happens to all of your property and assets, which is something you likely want to avoid if you want to have a say in how your property is passed on.   

Most everyone should have a will in place, especially if there are multiple parties involved in your estate planning picture and the end of the year is a great time to set up your estate plan before life gets busy again. 

You also need to consider setting up a power of attorney (POA) to ensure your affairs will continue to be managed in the event you become incapcited. You should designate a trusted person to act on your behalf in the event you are unable to do so. 

The type of POA can take different forms, such as being restricted to matters of health care or finances, but it’s important to determine your need for a POA. The process is relatively straightforward by completing a legal document and designating the type of POA whether that be conventional, durable, springing, or medical. 

A durable POA stays in force for the lifetime of the individual unless altered or cancelled and is a popular structure given the low cost and ease of being able to manage someone’s affairs.

It’s also time to review your beneficiary designations for all of your accounts and insurance policies. For example, if you got married recently, does your life insurance policy reflect those changes? If you got a divorce, do your beneficiary designations truly reflect your wishes? 

This is something that is all too often overlooked, but making the changes needed to your beneficiary designations are not only simple, but vital to your overall financial plan. 

It’s also important to take an honest look at all of your insurance coverage toward the end of the year. This includes your property and casualty insurances like homeowners and auto insurance. If you are a working adult with dependents, having the “bare minimum” auto insurance coverage is not going to cut it anymore. 

Ask your agent for a couple quotes on increasing your coverage levels. It’s also important to assess your need for disability and life insurance, especially if other people in your household depend on your income. 

Of course, as the year wraps up once again in December, be sure to take advantage of year end deadlines such as contributing to your 401k or employer sponsored retirement plan, selling taxable investments to realize gains or losses, and making any other tax sensitive changers before the 31st. 

Summary

The start of the year is a great opportunity to take an honest inventory of your overall financial situation and start making a plan to fill in any gaps. 

Do not hesitate to put a proper financial plan and investment strategy in place. Plan for the emergency, not during the emergency. 

We are here to guide you through any 2022 planning scenarios and make any needed adjustments to your financial plan. 

Before you take on any investment or retirement strategy, it is vital that you seek out proper investment and tax advice beforehand. Investment performance is never guaranteed and investments may lose some or all of their value. On top of that, there may be severe tax consequences if withdrawals are taken improperly and can have a significant impact on your portfolio and retirement. Although we provide Investment Advice and Personal Financial Planning Services, we at MWM do not provide tax advice and any tax advice should be rendered by a licensed tax professional such as a CPA.