That Awesome Midyear Checkup! Here’s What to Review

I have spent the pandemic learning that measurement is useful when cooking. I started using a scale more often for cooking, brewing coffee (I can make a mean pour-over), and baking. I found that the precision of a scale changed the taste of what I was making because weight is more accurate than a measuring cup or spoon.

Measurement in our financial lives is a bit more imprecise. But precision should not be the enemy of good. It is time for a midyear checkup to make sure you are on track and all is good, not precise.

Midyear Look Back

Sometimes, benchmarks are important to know where you fall in comparison to others. I have written about markers you can use to get a feel for how your savings, savings rate, and debt ratios can help you make decisions in life. While benchmarks and markers have their place, a midyear review should be more specific to your personal situation. It should be a look back at what you have accomplished in the past six months to verify you are on track for what is to come in the next six months. Grab your tax return, retirement projections, and investment statements (portal nowadays) and come along for the journey of a midyear review.

Tax Return

A tax return is a compliance document. As such, you should review it now that the frenzy of tax season is over to verify that what you wanted to happen on it happened. In many years, this may seem redundant since you just filed the return a few months before, but our Bloomington, MN fiduciary financial planning firm sometimes finds errors on our clients’ returns.

Errors can include (this is not an exhaustive list):

Missing deductions

Verify that the numbers match up with what you did for charitable contributions or retirement plan contributions. Keep in mind that if you gave to charity using your IRA (i.e., a qualified charitable distribution—QCD), it is not deductible (but you also do not have it on your return as a taxable distribution).

Health savings accounts (HSAs)

Verify that any HSA contribution amounts match what you contributed and that any spending from them was listed properly on the return to not be taxable (assuming you spent the money on qualified medical expenses).

Required minimum distribution (RMD) reversal

In 2020, due to COVID-19, the IRS allowed RMDs to not be taken and, if they had been taken, to be put back into the accounts. The issue is that when you put it back (assuming you replaced the entire amount and didn’t need any for spending), you must have returned the total distribution—including the withholding for taxes, which you would get back on your tax return. Verify that those numbers match up and you are getting that withholding as a refund.

Roth conversions

Verify that any Roth conversions are accounted for. The assumption last year, as I mentioned in #3, is that people would just put their RMD back and be done with it. But one strategy used last year was to do Roth conversions in lower tax brackets since there was no RMD.

These are just some of the errors that can occur. But these are also opportunities to consider whether any of these strategies could work for this year. The fall is a good time to consider tax planning on a look-forward basis.

Investments and Retirement Spending/Projections

With the above information in hand, it is good to review spending and return assumptions. The COVID pandemic has changed spending for many. At first, people spent less as they went into hibernation, but now it seems that people are spending normally, if not more. Thus, it is a good idea to look at spending and rerun retirement projections to verify that your spending and longevity assumptions still work. Inherent in this exercise is a rate-of-return assumption. The rate of return on a portfolio means little if it is not viewed considering a goal. It is fun to sit around a summer cabin campfire and talk about investing, but it is more comforting to know if that return gets you through retirement.

In running retirement projections, it is important to stress-test them by running different rates of return. Then, with those return numbers in mind, go look at your investment portal and see if your returns are holding up against those assumptions. The last year is going to generally look good. Ignore that. Look at the “Since Inception” number since that rate of return is longer term (assuming you have history there; longer term is 10 years or more in my mind). If your “Since Inception” return is holding up against projections, and those projections show you can live until 90 or 100 without running out of money, you can move on. But if your “Since Inception” return isn’t holding up against projections, you should dig deeper to understand why it isn’t (portfolio costs, the timing of trades, the economy we are in, etc.) or if you need to change your spending.

Spending is the one parameter you can control directly, and often we find that spending is an issue over a longer period—but that doesn’t mean you have to stop having fun immediately.

Grab Bag

If you want to be more ambitious with your midyear checkup, here are a few other things to consider looking at:

1. Property/casualty insurance: With home prices escalating this past year, reviewing whether you have enough insurance to cover replacement costs is a great question to ask.
2. Interest rates: Should you consider refinancing your mortgage or any other debt with rates as low as they are?
3. Estate plans: While everyone should have wills/trusts/powers of attorney/health care directives, the health care directive has taken on more importance with COVID. Review yours to make sure it does what you want it to since there is always the chance that incapacity will not allow you to express your wishes.
4. Power of attorney/health care directive, Part 2: If you have college-age kids heading off to school, have your attorney set them up with these documents so you can step in and help them should something happen to them. They are 18 now, so they get to make their own decisions!
5. Life/disability insurance: Review your levels and premiums. Again, the pandemic has changed how we view our health and insurance.
6. Credit scores: Check credit scores, and lock your credit (don’t lose those passwords, though, since you may have to unlock your credit when you apply for more). 7. Lost money: Check your state website for unclaimed property (link for Minnesota). If a company can’t find you to return the money they owe you (rebate, refund, demutualization of insurance, etc.), they deposit it with the state. It’s up to you to find it.

It’s Personal

A midyear checkup is personal. My list above is not all-encompassing since each of us has unique issues that should be reviewed. This is where a financial planner can be of great help, as they should be doing all of this for you and proactively reaching out when something needs to change on any of these issues.

If you have questions or would like to learn more, contact Jon Meyer at jmeyer@bgmwealth.com.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.