Getting your financial house in order can be one of the most empowering and positive things you can do at the beginning of the year.
It may not seem as compelling as losing weight, better fitness or decluttering your home, but getting financially focused as a New Year’s resolution can pay off—for this year and beyond. Also, achieving financial health and organization is actually a lot more manageable than many of those other perennially made then broken New Year’s resolutions. We often don’t want to think about it, but once decisions are made and set in motion, you don’t have to keep at it daily, the way you do with diets or exercise; yet these decisions can help put you on a path to better financial fitness. Let’s get started.
Consider maxing out your retirement-plan contributions. For 2020, you can generally contribute as much as $19,500 in savings to a workplace retirement plan, such as a 401(k) or 403(b) plan, up from $19,000 in 2019.1 Workers who will be age 50 or older at any point in 2020 may be able to contribute an additional $6,500 in “catch-up” contributions.1 If you can’t save the maximum, be sure to contribute at least enough money to take advantage of any matching funds from your company. Because workplace retirement plans are tax-deferred accounts, you generally don’t pay income taxes on any earnings from your investments until you withdraw funds.
For individual retirement accounts (IRAs), the contribution limit remains unchanged in 2020 at $6,000.1 Individuals who will be age 50 or older at any point in 2020 may be able to make an additional $1,000 in “catch-up” contributions to an IRA. You have until April 15, 2020, to make contributions for 2019. Keep in mind that if you have maxed out your contributions to your 401(k) or 403(b) plan, you may also have the option to make deductible contributions to an IRA.2
With the costs of college tuition and housing both rising, you may resolve to help family members with those or other large expenses. For 2020, the annual gift tax exclusion is $15,000.3 A 529 education savings plan is a tax-advantaged way to save for education expenses and allows you to gift savings to your children, grandchildren and other family members. With a 529, you can gift a lump sum—up to $75,000 in one year ($150,000 for married couples electing to split gifts)—and then treat the gift as if it were given evenly over a five-year period. Consult your tax advisor for more information.
Consider revisiting your asset allocation, or how your investments are divided amongst equities vs. fixed income vs. cash. Your asset allocation should reflect your savings goals and your stage in life. For example, as you get closer to retirement age, you might consider moving some savings to a more conservative asset allocation, with a greater percentage of your assets invested in fixed income.
“No one ever wants to see their assets dissipate. However as you get closer to retirement, you truly cannot afford any asset erosion,” says Marilyn Booker, Managing Director and Head of Morgan Stanley's Urban Markets Group.
Also, the multiyear bull market in stocks may mean that more of your money might be invested in stocks than you would ordinarily be comfortable with. There is never any guarantee that a bull market will continue. Therefore, as you age, you have less time to absorb the volatility in stock markets. You must be clear on your retirement goals and comfort level in stocks vs. more conservative investments.
It is important to spend time with your Financial Advisor who can help you determine how your assets should be allocated and how your overall financial plan should be aligned with your goals.
The start of the year is a good time to make sure that you have updated all of the information for the beneficiaries named in your various estate planning and insurance documents, such as wills, retirement plans and life insurance policies.
If you don’t have an estate plan, with a will, durable power of attorney or health care proxy in place, you may want to make this the year to do so.
Ensure that you have sufficient insurance coverage for your family. If your employer doesn’t offer disability insurance, you may want to consider buying a policy. Also, about half of us will need some type of long-term care services in our lifetime.4 If you tend to procrastinate, remember that the older you get, the more expensive the cost of some insurance premiums will be.
Don’t forget to create a plan for your digital assets as well. Do your estate planning documents authorize your family member to access your online accounts?
If you have aging parents, consider having a conversation with them about their estate planning so you’re prepared if they become ill or incapacitated.
Determine how much of your income and time you want to devote to charitable efforts in 2020. If you have a more substantial amount of money to donate, consider a donor-advisor fund (DAF). A DAF is a charitable-giving instrument that provides a simple and effective way for you to direct gifts, year-round, to your favorite charity from a single account.
For many of us, resolutions are a distant memory by February 1st. To ensure that doesn’t happen to you, consider checking in with yourself regularly to see the progress of your goals. Booker suggests writing your goals down and putting them in a place you look at often—such as on your desk, your smartphone, or a sticky note on your mirror. There are also digital tools available online to help you monitor your finances and share your financial picture with your advisor.
Talk with your Morgan Stanley Financial Advisor to discuss your plans for 2020.