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The beginning of the year presents an opportunity to review your financial situation and evaluate what changes you should consider making in the new year. Year-end statements for 2021 also are becoming available, so reviewing your financial situation is especially timely.

Following are some of the major categories and tasks we are recommending for clients to get their financial houses in order.

Budgeting and Cybersecurity

Monitor credit card spending.

Most of us do not go through the formal process of preparing a budget, but you can do a few things to monitor your spending. Most credit card companies produce an annual report of amounts you spent on their cards. This report provides an opportunity to review expenses incurred during the year and identify some that may be eliminated, like streaming services or monthly app fees you no longer need.

Request and monitor your credit report.

Also, it is more important than ever to protect yourself from identity theft by checking your credit report regularly to ensure that you catch and correct inaccuracies and identify any activity by which someone is trying to obtain credit using your name. The three major reporting agencies — Experian, Equifax, and Transunion — are all required to provide consumers, upon request, a free copy of their credit report once every year. You can request your information by visiting annualcreditreport.com.

Audit and change your account passwords.

You can further reduce the possibility of identity theft by changing passwords regularly and using effective passwords (upper and lowercase letters, numbers, and symbols). Also, consider using multifactor authentication, at least for your financial accounts, as an extra layer of security. With multifactor authentication, you will enter a one-time security code sent to your mobile or other devices after entering your password.

You may also want to consider enrolling in an identity theft protection plan. Typically these plans charge a small monthly fee, but they will notify you of suspicious activity and may reimburse you for losses.

Investments

Monitor performance and reassess your risk tolerance — rebalance as needed. Avoid utilizing emergency funds in this move.

Most of the returns on your investments are based on how they are allocated between various asset classes such as stocks (equities), bonds, cash, etc. Rebalancing your portfolio regularly is essential to keep the allocation in line with your target portfolio (see example below).

Rebalancing Act

Let’s say you decided on a 70% equity/30% bond split. With the performance of the stock market last year (using the S&P 500, which returned 28.71%) and the bond market (using the Bloomberg U.S. Aggregate Bond Index, which had a 1.54% return), your allocation at the end of the year would be approximately 75.3% equities and 24.7% bonds, indicating you should rebalance some of the equities into bonds to get back to your target 70/30 split.

Regular rebalancing has the added benefit of selling asset classes at a higher price and buying others at a lower price.

Certain assets like your emergency fund for times when the primary earner might be between jobs or unexpected expenses should not be part of the rebalancing process. Typically that fund has three to six months of your expenses, which should be in savings accounts.

Emergency Funds

Individuals tend to save three months of expenses if they:

  • Have a stable job
  • Have a newer vehicle
  • Rent
  • Have few or no children
  • Don’t have a lot of debt

Individuals tend to save six months of expenses if they:

  • Cannot easily find a job if they lose their current one
  • Have several dependents
  • Own a home
  • Have a lot of debt

Retirement Planning

Leverage salary increases or year-end bonuses to make a retirement contribution.

If you received a salary increase or year-end bonus, it’s an excellent time to determine if you can use some of the additional income to contribute to your retirement. If you have a 401(k), look at how much your employer matches and bring your contribution level up to that point to ensure you are not leaving money on the table. For example, suppose your employer matches the first 6% of your contributions, and you are contributing only 2%. In that case, you are missing out on 4% of your pay going into a retirement account tax-deferred.

Consider opening Roth IRAs.

But what if you have contributed the maximum amount to your 401(k) and would like to contribute more to a retirement account? Funding a Roth IRA does not provide a current tax benefit, but earnings build tax-free, so they are not taxed when distributions are made in retirement.

Unfortunately, in 2022, the amount a single taxpayer can contribute to a Roth IRA begins getting phased out when adjusted gross income exceeds $129,000 and is fully phased out at $144,000. The range is $204,000 to $214,000 for those married filing jointly.

Explore using a Backdoor Roth IRA strategy.

However, those above the phaseout limits can make a Roth IRA contribution using a technique called a Backdoor Roth IRA, which has no income limits because it is technically a Roth conversion. To accomplish the conversion, you first make a nondeductible IRA contribution (limits are $6,000 per person, which increases to $7,000 if you are age 50 or older) and immediately convert it to a Roth. Generally, there are no taxes due on the conversion. If you have other IRA assets, the rules will not allow you to treat the conversion as coming solely from the nondeductible IRA contribution.

Take advantage of health savings accounts.

A health savings account (HSA) can also be used as a retirement savings vehicle because of its triple tax advantage. Contributions go into an HSA pre-tax, which reduces your taxable income, grows earnings tax-free, and allows tax-free distributions for qualified medical expenses. Since HSAs have no limit on carryovers or when the funds can be used, they are excellent savings vehicles for medical expenses in retirement. Many employers also allow the HSA to be invested in vehicles such as mutual funds, producing a sizable sum for medical expenses in retirement.

Risk Management

Conduct an annual review of your insurance policies.

An adequately designed risk-management program can protect you and your family from financial catastrophes. Reviewing your insurance policies annually helps ensure that coverages are appropriate.

Ensure your homeowner’s policy covers collectibles, jewelry, and other valuables.

A typical homeowners insurance policy should provide replacement costs if something happens to your residence. You should also make sure that additional coverage is obtained under the homeowner’s policy to cover items such as collectibles and jewelry. It is difficult to remember everything in your home, so it is invaluable to document all your possessions. This can be as easy as taking pictures of every room in your house, saving them to the cloud. Never keep them in your home, as it may not be possible to retrieve them should there be a total loss.

You should also review the deductibles on your homeowners and vehicle policies and consider increasing them if they are low (below $500) as the insurance savings typically offset the higher deductible in just a few years. Don’t forget to review your umbrella (comprehensive liability) policy limits so they keep up with your total net worth. Typically, you should maintain coverage for your net worth exclusive of retirement assets.

Review life insurance policy coverage.

The amount of life insurance you have should be reviewed periodically, especially if there has been a significant change in your family, such as the birth of a child or children moving out on their own.

Insurance Needs

Typically, a 50% to 80% income replacement level is used as a guideline for a family and increased if funds are needed for education expenses or to pay off the mortgage. As income and costs increase, a policy calculated to cover 80% of the family’s living expenses may now only cover 60%, leading to financial stress for the surviving family if the primary breadwinner dies.

Also, as you get closer to retirement and accumulate financial assets, the amount of insurance the family needs may be substantially less, especially after children leave home. This provides the opportunity to redeploy those premium dollars, perhaps to a long-term care policy or additional retirement savings.

Understand your employer’s disability policy coverage and consider additional coverage.

Disability income insurance will replace your income needs should you become unable to work because of an accident or illness. Often in the case of a disability, expenses may increase due to the cost of providing care. Review the amount of your coverage provided by your employer and, if it’s not sufficient, investigate the possibility of obtaining additional coverage. If you contribute premiums on a pre-tax basis, benefits would be subject to income taxes when they are received, so electing to contribute premiums on a post-tax basis is recommended in most situations, so the benefits are not taxable.

Estate Planning

Perform an annual review of your estate documents.

This is never an easy subject to think about, but having the proper documents in place and reviewing them regularly is critical to ensuring your estate goes where you want it to in a tax-efficient manner. There are a few documents that everyone should have in place, including a will, which is the centerpiece of your estate plan. It is good to review the various provisions in the will, especially if there have been significant changes in the family such as marriage, divorce, remarriage, children, death, etc. Hence, you know exactly who will receive which assets and if the distribution still matches your desires. If you have young children or a child with special needs, setting up a trust for their benefit may make sense.

Consider the fiduciaries of the estate and that they can still perform the duties required.

You should spend some time reviewing the fiduciaries you have chosen (executor and trustees). Are they still able to perform the duties required? Perhaps you named a parent as the executor of your will, which may have made sense 20 years ago but may not now. The fiduciaries should know that they have been named and know where a copy of the actual will is located. That should not be kept in a safe deposit box, which is sealed once the person renting the box passes away. They should also know the contact information for your attorney, accountant, and insurance agent. In addition, they should know where to obtain information on your financial accounts, the deeds of your property, and the passwords of your online accounts.

Name beneficiaries and successor beneficiaries for insurance policies.

Be sure to review both the beneficiaries and successor beneficiaries of your retirement accounts and life insurance policies. These types of assets are distributed according to who is named as a beneficiary, not the provisions of your will. Perhaps you named your spouse the primary beneficiary of your retirement account and your two children as successor beneficiaries, but now you have four children. Should you and your spouse both die, just the two named children would receive the retirement account.

Double-check the titling of assets in your estate.

The same is true for the titling of certain assets. For example, a mother stipulates in her will to leave her estate to her four daughters equally. She is renting an apartment, and her estate has a checking account with a $100,000 balance and a savings account with $100,000. The savings account is solely in the mother’s name, but she held the checking account jointly with the one daughter who still lives in the same city so the daughter could pay mom’s bills should she become incapacitated. When mom passes away, the daughter whose name is on the checking account receives that $100,000 plus 25% of the savings account for a total of $125,000. The other three sisters receive only $25,000 each, which was not mom’s intention.

Revisit your advance medical directive and Durable Power of Attorney.

Another important document is an advance medical directive, which allows you to direct your doctors to refrain from using life-sustaining procedures to keep you alive in situations where death is imminent and the procedures only prolong the dying process. You may also name a person to make decisions and take actions related to your health care if you cannot do so on your own. Review who you named in the document to determine if it still makes sense to have that person act. For example, if the designee has moved across the country, consider changing to someone local.

You may also have a Durable Power of Attorney to name a person to make decisions or take actions for you related to business and financial matters in the event you cannot do so on your own. Reviewing who you named in this document is vital for the same reasons listed above.

For more thoughts on ways to get your financial house in order, or to work with us on a review of these items, contact your advisor.

About Paul B. Kieffer


As a Regional Planning Strategist for Key Private Bank, Paul proactively advises clients on the development of a personalized, comprehensive financial plan that creates a financial road map so they can make more informed, confident decisions.

Paul is a highly experienced professional who works closely with the relationship team to understand a client’s personal situation and goals and develop an integrated, customized set of strategies to help them reach their objectives. He is also well-versed in sophisticated planning strategies to help clients address complex issues. Paul is a member of Key Private Bank’s Wealth Institute which provides commentary and advice on current topics and issues that impact our clients’ wealth management planning.

Prior to joining Key, Paul was the director of Wealth Planning at Wilmington Trust and was responsible for the delivery of planning services and the planning platform, including scalable advice-oriented solutions, thought leadership, and direct planning where appropriate. Paul contributed to thought leadership and solutions to the Corporate Executive Practice Group, including direct planning for Corporate Executives.

Paul holds an MBA from SUNY Buffalo and completed his Graduate Tax program. Paul is a Certified Public Accountant and a Chartered Global Management Accountant and has the Certified Financial Planner,™ Personal Financial Specialist, Certified Life Underwriter, Retirement Income Certified Professional,® Certified Advisor in Philanthropy, Chartered Advisor in Senior Living, Chartered Financial Consultant, and Certified Retirement Counselor designations.

The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities including Key Private Bank, KeyBank Institutional Advisors, and Key Investment Services.

Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice.

Bank and trust products are provided by KeyBank National Association (KeyBank), Member FDIC and Equal Housing Lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage and investment advisory services are offered through Key Investment Services LLC (KIS), member FINRA/SIPC and SEC-registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA, Inc. (KIA). KIS and KIA are affiliated with KeyBank.

Investment products are:

NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE NOT A DEPOSIT NOT INSURED BY ANY FEDERAL OR STATE GOVERNMENT AGENCY

KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions.