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Life's ups, downs make year-end finance review a good idea

A lot can happen in a year.

You tied the knot, lost your job or retrofitted your home to accommodate your aging parents. Perhaps a desire for better work-life balance sent you back to school to pursue a different career.

Whether you planned for them or not, life's little changes have a big impact on your financial future.

Couple working on finaces
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"You're going to want to reevaluate the entirety of your financial plan at any life-changing event to make sure you're still working effectively toward your goals, whether that be complete financial independence or the ability to meet your cash-flow needs and that you're not exposing yourself to unnecessary tax risk," said Rusty Ross, an independent advisor and certified public accountant with Exencial Wealth Advisors.

While some financial decisions must be made before Dec. 31 to yield a current-year tax deduction—including 401(k) plan contributions, tax-loss harvesting and charitable donations—decision-making that impacts long-term goals need not be finalized according to the calendar.

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In fact, Terry Siman, a certified financial planner and managing director at United Capital, urges clients to meet with him after the holiday season, when clearer heads prevail.

"I much prefer to start in the beginning of the year, so people are looking forward to the rest of the year with a broader vision of what they need to do for the whole year, as opposed to the few things they need to do by the end of the month," he said. "In order to have an honest conversation with yourself and your spouse, you need to eliminate as much emotion as possible."


Holiday hangover

To be sure, credit card debt typically climbs during the gift-giving season and generosity is top of mind, which often obscures the big-picture agenda. "That's when most charitable conversations happen and people are making New Year's resolutions, so they're not necessarily making the right hard choices about their financial future," Siman said.

Clients may be less inclined, for example, to increase their retirement-plan contributions when their debt level is artificially high. "It's always a good idea when you're doing a financial audit to examine how much risk you need to take to get where you're trying to go, which is a big-picture conversation," Siman said. "It's strategic and long-term, which is why I think it belongs in January."

Those contemplating a different retirement date and those who experienced a change in their annual income are the leading candidates for a financial makeover, said T. Michelle Jones, a certified financial planner with Bryn Mawr Trust.

Some of her clients inherited wealth, sold a business or exercised stock options this year, enabling them to move their target retirement date closer. Others experienced unemployment or accepted a lower-paying job, which may require them to invest more aggressively to achieve the same returns.

"It's very important to weigh whether you are adequately prepared for retirement," Jones said. "We recommend a complete cash-flow analysis to see what financial position you are in and when we discuss their objectives, we want to ensure that their asset allocation is still appropriate for their time horizon and goals."

In cases where a new goal or life-changing event derails an investor's financial plan, said Ross at Exencial Wealth Advisors, he often counsels clients to contribute more to their tax-favored retirement plan, invest for greater growth or invest more tax-efficiently to boost their portfolio performance. Or all three.

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Indeed, investors with both taxable and tax-deferred accounts should place securities in the type of account that will assure the best after-tax return, a concept known as asset location.

Fixed-income investments, including bonds and real estate investment trusts, for example, should generally be held inside an individual retirement account or 401(k) plan because the interest payments they generate are taxed at the higher ordinary income-tax rate, Ross said.

"Interest rates have been nonexistent for years, but we know they are going up in the near future, so how do you position your portfolio to balance interest-rate risk?" -T. Michelle Jones, certified financial planner with Bryn Mawr Trust

Stocks and equity mutual funds, on the other hand, should be held within a taxable account, since they generate returns from both dividends and capital gains, which are taxed at a lower rate, he said.

Long-term savers who experience a short-term financial hiccup may also be able to meet their financial goals by lowering their fixed expenses, Bryn Mawr Trust's Jones added.

"If the client is considering selling their home and moving into a retirement community, we look at how that will impact their financial condition," she said. "We run 'what if' scenarios."

Such scenarios include projected portfolio performance and economic projections.

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"We look at their future income needs and whether those have changed," Jones said. "Interest rates have been nonexistent for years, but we know they are going up in the near future, so how do you position your portfolio to balance interest-rate risk?"

Regardless of how your income needs and goals may change year to year, said Jones, the purpose of long-term financial planning remains the same: ensuring your money lasts as long as you do.

By reassessing your financial plan after every major life event, you can ensure that you and your loved ones are safely shielded from any curveballs that come your way.