Financial Steps to Take for a Prosperous New Year

James Di Virgilio, CIMA®, CFP® 

Hoping to enjoy a prosperous New Year? Before you splurge on the champagne, or even if you've already done so, follow these six steps.

1. Save at least 10% of your gross income in retirement accounts

This is a simple rule, with one caveat: if you are retired, spend no more than 4% of your total portfolio value.

2. Utilize the proper retirement accounts given your situation

This will give you the best tax and investment advantage. Generally speaking, if you make more than $35,000 but less than $500,000, choose to invest in the Traditional 401(k) or IRA; otherwise, choose a Roth IRA. If you are an employee of a private company that offers a 401(k), save in your company plan. If you work for a public entity, save in a 403(b), but also check to see if you can contribute to a 457, which will allow you to contribute an additional $18,000 in 2017. If you are an independent contractor or 1099 employee, you have several options––generally, an Individual 401(k) will be best. In all of the above cases, if you are over 50 years of age, you can contribute an additional $6,000 in 2017, giving you a max of $24,000. 

If you are retired, spend from the correct retirement accounts. How you are taxed on your retirement income will make a significant difference during your lifetime. Generally speaking, take income from your Roth accounts first, then your taxable accounts, and finally your IRAs. (For related reading, see: Is the 401(k) the Right Retirement Plan to Use?)

3. View all of your assets as one portfolio, and invest them in multiple asset classes

This rule applies whether you are retired or still working. Modern Portfolio Theory, first created at the University of Chicago and extensively refined over the past 60 years, provides the fundamental basis for creating a sound portfolio––and a sound portfolio will maximize your wealth. Diversify globally and have a variety of asset classes, including real estate and natural resources. *This advice does not apply to short-term investing goals. (Less than 5 years.)

4. Be careful purchasing a home

Homes are not good long-term investments. As a whole, residential real estate has averaged a 0.4% return per year over the past 100 years when you account for inflation. Generally speaking, the less house you the buy, the more money you have to invest in assets that produce a better long-term return. If you are retired, downsizing is an excellent way to increase your liquid portfolio value, thus increasing the amount you can safely withdraw each year. (For related reading, see: REITS: An Alternative to Investing in Real Estate.)

5. Create a will and a living will 

If you already have one, make sure it’s been updated recently. Also, update the beneficiaries on all of your accounts.

6. Stay away from whole life insurance and variable annuities

Unless you have more than the estate tax exclusion amount––$5.49 million per person, or $10.98 million per couple––whole life insurance is generally not worth the money. Insurance and investments are best kept separately, so use term insurance to cover any gaps that you might have, and then use the premium savings to invest in your portfolio. If you are retired and you have whole life insurance or variable annuities, carefully analyze them to ensure that they will provide what you need, without carrying a high annual cost. (For related reading, see: How to Keep Life Insurance Costs Down.)