A New Year - A New Financial Opportunity

Tis the season of resolutions, and while almost half of Americans make New Year’s resolutions, very few are successful in seeing them through. While many will rightfully focus on physical wellness by eating healthier or working out at the gym, we believe you should also focus on your financial wellness. One major investment firm recently found that 50% of people that set a financial resolution achieved at least 80% of that goal. Below are six areas to consider for your 2018 financial resolutions.

Rebalance your portfolio

Given the strong market performance of 2017, one resolution that could actually pay dividends (yes, pun intended) is a review of your portfolio’s allocation. Assuming you didn’t win the lottery in 2017, even small improvements in your portfolio return over a long period of time can have substantial impact. For example, a $100,000 portfolio invested for 20 years earning 7% annually results in $387,000. If you only get a 6% return, the same portfolio would only accumulate to $321,000. That’s a $66,000 difference on a $100,000 portfolio with only a 1% difference in returns.

Portfolio management has much to do with managing downside risk. The upside usually takes care of itself – just look at 2017. Given the recent run up in equity markets, it’s likely that your targeted asset allocation may now be too aggressive for the risk you are willing to take. For example, if your targeted allocation is 65% equity and 35% fixed income, the success of the equity markets during 2017 may have pushed your equity allocation up close to 70%. Don’t get complacent as many did just before the Great Recession of 2008. Take some profits off the table and rebalance back to your target allocation based on the amount of risk you are willing to take.

Health Savings Accounts (HSAs)

These are the most powerful financial planning vehicles around. No other savings vehicle allows a tax deduction upfront for the contribution, tax deferred earnings, and tax-free withdrawals if made for qualified medical expenses. If they are able, we encourage many of our younger clients to simply cash flow any out of pocket medical expenses (vs. withdrawals from the HSA) during their working years and treat their HSA like an IRA. Given medical costs during retirement, there is little doubt those assets will eventually get used. After maximizing your employers 401k match, this should be your next highest priority. For 2018, the new contribution limits are $6,900 for families and $3,450 for singles. For those 55 or older, an additional $1,000 contribution is allowed.

Retirement Plans

The beginning of the year is always a good time to reset your 401k retirement plan elections. Obviously, ensure you are taking full advantage of any company match, as it’s "free" money – you don’t want to lose out on this opportunity. If you recently received a salary increase, consider adding that increase to your 401k deferrals. For those that are able, the new annual limit for employee contributions increased from $18,000 in 2017 to $18,500 in 2018. For those over age 50 or turning age 50 during 2018, take full advantage of the additional $6,000 catch up contribution that brings you maximum employee contribution up to $24,500.

And don’t forget what we just mentioned! Log into your account and check your investment allocation and rebalance as necessary. Many plans now offer easy-to-use online tools to automatically rebalance accounts. Additionally, many plans offer target date funds that will "self-manage" the allocation for you based on your projected retirement age. While these funds are helpful to many, they can also cause the complacency we mentioned earlier. Educate yourself about your plan and its investment options or seek a financial advisor to assist you.

Roth 401k

The typical mantra we hear in the media is to defer income and save immediately on your taxes by participating in your 401k plan on a pre-tax basis. For many, especially younger people or those not currently in the higher tax brackets, a Roth 401k is a much better option. While you do pay tax upfront for a Roth contribution, the earnings over the years is tax deferred and all withdrawals are tax free if during retirement. For people with 10, 20 or even 30 years left until retirement, the vast majority of your retirement account assets will be the earnings over the years. Having these assets be tax free withdrawals during retirement provides tremendous tax planning flexibility.

Roth IRAs

Many people believe they earn too much to make Roth IRA contributions. That may well be true for direct contributions to a Roth IRA, however, if you do not have other traditional IRAs, a Roth conversion might be possible. A common planning technique to build additional Roth assets is to make a non-deductible IRA contribution to a traditional IRA (which anyone with earned income can do regardless of employer retirement plan participation) and convert that contribution to a Roth IRA. There are no income limitations on Roth conversions. This provides an additional $5,500 per year per person (or $6,500 if over age 50) to be added to a Roth IRA to build that pot of assets and provide greater IRA withdrawal flexibility during retirement. This is a particularly nice planning idea for non-working spouses as they can rely on the earned income of the working spouse to make these IRA contributions.

Financial Plan

Perhaps the most important new year’s resolution is to simply have a financial plan. Based on research from Accounting Today, 38% of Americans have financial goals, but do not have an actual plan. And almost half of American parents have no financial plan in place. For those that do have a plan, a periodic review is to make sure your goals are still aligned with the plan is always a good practice. One of the most important components of any financial plan is developing a realistic budget allowing you and your family to live within your means. Once your budget is established, you’ll have an important tool in place to help you save not only for your retirement years but also for important family needs, such as educational planning for your children and grandchildren. As your savings grow, it will also put you in a better position to maximize any employer benefits offered to you throughout your career. If you need help in creating a plan, find a trusted financial advisor who has a fiduciary responsibility to act in your best interests. We believe creating that plan will provide ongoing peace of mind and long-term financial freedom well beyond 2018. 

Dean Johns, CPA, CFP®

Dean, a principal with John D. Dovich & Associates, LLC, is responsible for creating wealth strategies and financial plans for the firm’s clients as well as developing new client relationships and building our network of centers of influence. You can reach Dean at 513.579.9400 or dean@jdovich.com.

Andy Bruns, CFA®

Andy Bruns is a portfolio analyst with John D. Dovich & Associates, LLC. As a portfolio analyst, Andy provides research on investments and analysis for financial planning, working with a team of financial advisors within our firm. You can reach Andy at 513.579.9400 or andy@jdovich.com.

John D. Dovich & Associates, LLC is located at 625 Eden Park Drive, Suite 310, Cincinnati, OH 45202. For more information, call 513.579.9400 or visit www.jdovich.com. John D. Dovich & Associates is a Federally Registered Investment Adviser. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Information within this material is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.