Whether you love New Year’s resolutions or not, the passing of the calendar to a new year is a great time to reflect on a few key aspects of your finances. It is also when a number of tax and financial items reset as well. If you are looking to get 2022 off to a great financial start, here are three planning strategies to reflect on:
1) Review Savings Goals – After the spending spree of the holidays, it is normal for families to feel a need to “spend less” in the new year. However, beginning with a focus on spending can be complex, emotional, and ultimately lead to stopping before you even get started. A better approach is start with the finish line in mind and create annual savings objectives. Savings after all is just the inverse of spending.
A good rule of thumb is to capture between 10% - 20% of your income in savings each year. Depending on your age and how much you have saved for your retirement already, you may need to be higher or lower on this range (or even above it). This can then be broken down into monthly savings goals that interact with your spending and other cash-flow needs.
Planning note: With inflation on the rise this year it may be harder for families to save more without taking a more disciplined approach.
2) Select appropriate tax-planning strategies – Selecting where to save your money can often be almost as valuable as your overall savings amounts. The new year is a great time to review your contributions to your work retirement plan such as a 401(K) or 403(b). Consider if anything has changed in your life or tax situation that makes it more advantageous to select a pre-tax contribution or a post-tax Roth.
With a variety of changing tax rules and provisions over the past years, the decision for what type of contribution you make should be reviewed each year. Selecting the most advantageous contribution type can potentially lead to thousands of dollars of value each year.
Pro tip: The annual contribution limit to retirement plans for workers under age 50 has been increased to $20,500 for 2022. This is an additional $1,000 per year. Depending on your income and contribution amounts, you may wish to consider making adjustments to your withholdings.
3. Review investment risk levels – Stock markets and risk assets have exploded in value over the past three years. Many of the stimulus efforts over this time are now coming to a close. Minutes from the Federal Reserves latest meeting show considerations of removing stimulus efforts at a quicker pace than previously thought due to higher inflation. This could potentially lead to a bumpier road ahead in 2022 and beyond.
Reviewing your portfolio and your comfort with how much risk you have is critical to do at times like these. If you have not re-balanced your portfolio over this time, it most likely due for some adjustments. If you also have loaded up on more aggressive investments that have recently performed well, you may also want to review why you are holding them and your comfort with their potential risk and downside levels.
GuidePoint Financial Planning - Reston Financial Planning
Ryan Phillips, CFA, CFP® is the founder of GuidePoint Financial Planning. He is passionate about helping busy families plan, save, and invest for their financial future. Contact him today if you are interested in learning more about the benefits of working with a fee-only (no-commission) financial planner.