A good financial plan is essential to long-term success, and creating that plan will involve making decisions about a wide variety of topics.
Investments, taxes, retirement accounts, goals, risk and insurance, and even your estate are all components of your plan — whether you deliberately incorporate them or not!
Those decisions need to be documented and tracked. Some items are less formal than others and may not have a standard document that they’re recorded on. The amount of income you plan to withdraw from your savings each year, for example. Others, like beneficiary designations, are.
You also may need to update your plan occasionally as things change. With that in mind, it’s important to review key information each year so that you can make sure that your current plan is still right for you, and that you are still making the best moves to ensure you stay on track with your goals.
Here are the five key documents you must review each year.
1. Retirement Plan
Perhaps the most important thing to review each year are your retirement goals. That’s because you want to make sure that you (and your planner if you work with one) are aiming for the right target. The rest of the data that informs the actions you’ll take is far less useful without correctly defined goals.
That may seem obvious, but the reality is that goals often change. Those changes can get overlooked fairly easily when a financial plan isn’t something most of us think about on a day-to-day basis.
As it relates to retirement, for example, the age at which you plan to retire has to be considered. It’s not uncommon to hear people in their 30s say things like “I plan to work until I can’t,” or “I don’t think I’ll live long enough to worry about it.” But I’ve never heard someone in their 60s talk like that. Is this a generational difference? Maybe. But I think it does a good job of illustrating the point that goals change over time.
What you want in your 30s or 40s isn’t always what you want in your 50s or 60s. Big surprise, right? The takeaway here is that it’s important to simply review your retirement goals each year so you can update your plan accordingly.
In addition to the age at which you plan to retire, review things like where you plan to live, how much you’ll need to spend, and what you plan to do with your time. Most things won’t change each year, but it only takes a few minutes to check.
2. Work 401(k)
This is a big one that could potentially cause you to miss out on a lot of tax-advantaged savings.
Each year, the IRS sets limits on how much you can contribute to your retirement plan. For 2023, the 401(k) limit increased to $22,500 from the $20,500 limit for 2022. That’s an additional $2,000 you can contribute for the year.
This is particularly important to know if you are contributing the maximum to your plan each year. That’s because your contribution won’t automatically adjust to meet the new limit. Instead, you’ll need to log in to your account and update your salary deferral to make sure you reach the new maximum.
Likewise, if you receive a significant raise, you may find that your current salary deferral percentage causes you to exceed the limit. Rather than finding out at some point during the year that you’re no longer allowed to contribute to your workplace retirement plan, it would be better to know beforehand and have a strategy in place for what to do with the additional savings.
3. Estate Plan
There are many reasons an estate plan may change. Birth, death, divorce, and marriage are all reasons that you may need to update your documents.
Documents that you’ll want to look at include:
- Your will
- Trusts, if you have them
- Life insurance policies
- Financial and medical power of attorney
Again, it’s not necessarily the case that something will change, but the consequences for not updating your estate plan when you should have could be significant. For example, suppose you have a retirement plan or life insurance policy with your spouse named as the beneficiary. That’s very common. But when did you fill out the paperwork? Was it when you were married to someone other than the person you are married to today? Clearly, this is the kind of thing you want to catch before something happens and you can’t.
4. Tax Deadlines
There is so much more value to be gained from a tax plan when you are proactive. Unfortunately, a lot of people don’t look beyond the current year and only consider taxes when it’s time to file. Instead, consider where you are before the end of each calendar year. There may be some moves that could help you out considerably over the long term that won’t be available on January 1.
For example, Roth conversions. Unlike a Roth contribution, which can be made up until the tax filing deadline, a conversion needs to occur by December 31 of the year for which it applies.
The same is true of 401(k) contributions. These must be made by December 31st. If you haven’t contributed as much as you would have liked to your company plan you need to get that fixed by the end of the year.
5. Health Insurance Coverage
Nearly half of all Americans get their health insurance coverage from an employer-provided plan. This is a very important part of your total benefits package, and it’s important to make sure you choose the best plan for you from the options available.
Although each employer differs, it’s common for employers to have a specified open enrollment period around November of each year during which employees are allowed to add, update, or cancel their coverage. Because you only have this window to make changes to your coverage elections for the next year, you’ll want to have a plan before open enrollment begins.
In addition to changes in your own circumstances, such as health issues and family composition that may warrant updating your benefit election, plan coverages may change also.
It’s important to look at the benefits summary, and closely review any key components of coverage that you have specifically relied on in the past or think may be important to you in the future.
Whether it’s your life circumstances, your personal preferences, or the tax laws that affect you, things change. Take time each year to review your plan to make sure you account for the changes that will directly impact you.
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