The key to naviating uncertain economic times is to maintain a well-defined, current financial plan and investment process. Consider these financial fundamentals as we prepare for less volatile times ahead.
Liquidity & Budgeting – Most financial advisers suggest you should have cash to cover 6- to-12 months of expenses in the event of an emergency. Evaluate your checking, savings and money market fund balances. Do you have liquidity to cover near-term spending?
Quarantine leaves us with the opportunity to track expenses, consider spending patterns and develop a budget. Mastering your spending can help you forecast your needs and better manage withdrawals from long-term savings during a crisis. This can also help to minimize liquidations during market contractions and makes it easier to rebuild your nest egg as investments begin to recover.
Investment Planning – Review your investment mix with your adviser to estimate whether it offers a reasonable probability of achieving long-term goals. You might find you can trim risk and adjust your allocation to better suit your temperament.
With emergency funds available and your risks understood, consider putting excess cash to work in your investment portfolio. Strategic additions to long-term investments can improve the prospect of achieving your financial goals.
Tax Planning – The recent CARES Act allows the suspension of Required Minimum Distributions (RMDs) from qualified retirement plans and inherited IRAs. You can forgo a withdrawal or take less than your RMD. Alternatively, Qualified Charitable Distributions to humanitarian organizations is a tax-efficient way to support your community in times of need, for those aged at least 70½ by December 31, 2019. Consult your tax adviser and adjust any estimated quarterly tax payments to account for RMD changes.
Discuss converting qualified retirement investments that have lost value to Roth IRA status. This could lower tax liability in conversion and allow for tax-free growth in the future.
With taxable investments, it can be helpful to use losses to offset gains, and in some instances carry forward losses to offset income (up to $3,000 per year) or future gains. Review the potential to harvest losses now to offset capital gains when rebalancing and to lower concentrated positions in your portfolio.
Estate Planning Documents . Prepare these basic documents: a Health Care Power of Attorney authorizing an agent to make medical decisions if you are incapable; a Living Will specifying end-of-life treatment if terminally ill or unconscious; a HIPPA Waiver to nominate someone to have access to your medical information and speak freely with your healthcare provider; and a Last Will and Testament outlining the final distribution of property at death.
About the Author
Richard S. Kraemer is managing director, financial services, at Valley Bank.
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