This year, there has been plenty of political, financial, and economic activity — from rising interest rates to elevated inflation to ongoing market turmoil.
What impact will the past year have on the annual performance of our investment portfolios? Markets often deliver their best returns just when we’re most discouraged. While we wait to find out, here are six action items worth tending to before the end of 2022.
Revisit Your Cash Reserves
It’s a good time to revisit your cash reserves. After years of offering zero to low interest in money markets, savings accounts, and similar platforms, some banks now offer higher interest rates to savers. Others are not. Plus, some money market funds may have quietly resumed charging underlying management fees they had waived during low-rate times. It might pay to shop around and watch FDIC limits.
If you have significant cash reserves, you may want to compare rates and fees among local institutions, virtual banks, or online services that shift your money around depending on the best available offers. Double check fees as they can quickly add up. Make sure your money remains FDIC-insured, and remember, if it sounds too amazing to be true, it probably is.
Put Your Money to Work
If you’re sitting on excess cash, you may be able to put it to even better use under current conditions. Here are three possibilities:
Rebalance: You can use cash reserves to top off smaller investments in your portfolio. Many stock market prices have been depressed as well, so this may be an opportune time to “buy low” if it makes sense within your investment plans.
Lighten your debt load: Carrying high-interest debt threatens your financial well-being, especially with rising rates. Consider paying off credit card balances or avoid adding to them during the holiday season.
Consider I bonds: For cash you won’t need for a year or more, Treasury Series I bonds may still be a good deal, as described in this Humble Dollar post.
Replenish Your Cash Reserves
Many people don’t have extra money sitting around in their savings accounts. Here are a couple of ways to rebuild your reserves.
Earn more? Save more: Social Security recipients are set to receive among the biggest Cost-of-Living Adjustments (COLAs) ever — 8.7 percent beginning with January payments — to help deal with inflation. Some employers are providing staff with a raise or bonus for similar reasons.
Rather than simply spending the increase, consider feeding a percentage to savings or investments. If you allocate extra money before you spend it, it’s less likely to be missed.
Make Some Smooth Tax-Planning Moves
Another way to save more money is to pay less tax. Here are a few ideas for year-end.
Rethink RMD distributions: Rather than take the required minimum distribution (RMD) from your retirement account this year, consider gifting the distribution directly to your favorite nonprofit organization. Qualified charitable distributions (QCDs) are an excellent way to utilize your RMDs while helping a charity whose mission you support. And, when you make a QCD, it is excluded from your taxable income.
It’s still harvest season: Market downturns often present opportunities to engage in tax-loss harvesting by selling taxable shares at a loss and promptly reinvesting the proceeds in a similar (but not identical) fund. You can then use the losses to offset taxable gains without significantly altering your investment mix. There still may be opportunities before year-end, especially if you’ve not yet harvested losses year to date. We encourage you to consult with a tax professional first. Tax-loss harvesting isn’t for everyone and should be carefully managed.
Watch out for dividend distributions: Whether a fund’s share price has gone up, down, or sideways, its managers typically make capital gain distributions in early December based on the fund’s underlying year-to-date trading activities through October. In your taxable accounts, if you don’t have compelling reasons to buy into a fund just before its distribution date, you may want to wait until after distributions. On the flip side, if you are planning to sell a taxable fund anyway — or you were planning to donate a highly appreciated fund to a charity — doing so before its distribution date might spare you some taxable gains.
Check Up on Your Healthcare Coverage
As year-end approaches, make sure that you and your family have made the most of your healthcare coverage.
Examine all of your benefits: For example, if you have a Health Savings Account (HSA), have you funded it for the year? If you have a Flexible Spending Account (FSA), have you spent any balance you cannot carry forward? If you’ve already met your annual deductible, are there additional covered expenses worth incurring before 2023 re-sets the meter? If you’re eligible for free annual wellness exams or other benefits, have you used them?
Get Set for 2023
Why wait for 2023 to reevaluate your finances? The end of the year can be a great time to look at your financial picture and what you’d like to achieve in the year ahead.
Audit your household interests: What’s changed, and what hasn’t? Have you welcomed new family members or bid others farewell? Changed careers or decided to retire? Received financial windfalls or incurred capital losses? Added new hobbies or encountered personal setbacks?
How might these and other significant life events alter your ideal investment allocations, cash-flow requirements, insurance coverage, estate plans, and more? Take some time to consider key updates in your life so you can make the most of 2023.
How Can We Help?
How can we help you finish 2022 and position you and your loved ones for the year ahead? Whether it’s helping you manage your investment portfolio, optimize your tax planning, consider your cash reserves, weigh insurance offerings, or assess any other components that contribute to your financial well-being, we stand ready to assist — today and throughout the years ahead.
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