Bob French, CFA

4 Steps To Prepare Your Retirement Portfolio For The New Year

The end of the year is a great time to get your financial house in order. As the market bounces along throughout the year, your portfolio bounces right along with it. Every once in a while, you need to give it a checkup. And it’s not just rebalancing your investment portfolio (though I cover that in step 4) – you need to make sure your entire financial picture is in good working order.

1. Review Your Risk Tolerance and Asset Allocation

Your portfolio should be built around your risk tolerance. You want to make sure your portfolio doesn’t take so much risk that you can’t weather the inevitable ups and downs of the markets.

But over time, the amount of risk that you are comfortable (or capable of) taking changes. The end of the year is a great time to make sure that your portfolio is still targeting the amount of risk that you are comfortable taking.

Don’t get me wrong – this isn’t about trying to guess what the markets are going to do next year and then rejiggering your asset allocation around your hunches. That doesn’t work. You want to stay focused on harvesting long-term returns that you deserve for putting your money at risk in the markets. And the only way you can do that is if your portfolio lines up with your risk tolerance over time.

2. Review Your Financial Plan

Everyone should have a financial plan. It doesn’t need to be elaborate, but you need to know where you are, where you are going, and (roughly) how you are going to get there. If you don’t have a plan, you can’t know if you’re on track for the retirement you’re hoping for.

But even if you do have a plan, you need to check in on it. You can’t set up your plan and then expect it to work on autopilot for a few decades without any oversight.

When you check up on your plan, make sure you check the following:

  • Are you keeping up your end of the bargain? Are you saving as much as you planned to? If not, that’s the first thing that you should address. Was your savings goal too aggressive? Did you pick up an appreciation for fine wine that’s cutting into your savings? Whatever it is, you need to address the issue, and rework the plan based on a more appropriate savings rate.
  • Is the market keeping up its end of the bargain? I’m not asking if the market has gone up every year. It hasn’t and it will continue to act like a temperamental, angry, toddler. You should expect some rough patches and tantrums. But you want to make sure that everything looks like it is still on track and basically moving in the right direction.
  • Are your goals still your goals? What you want out of life changes over time, and your financial plan should change with it. The more precise you can be with this the better.

Overall, you want to make sure your plan reflects what you want to accomplish in your life and gives you a good chance of getting there.

3. Review Your Investment Tax Situation

The tax efficiency of your investment portfolio is easy to overlook. You may think about general tax planning, but people often fail to think about how their investments are impacting Uncle Sam’s cut. There are all sorts of things you can do to minimize the taxes you owe on your investments, but two that can have a big impact are:

  • Asset Location – This is about which accounts you put your investments in. Not only can this impact how much you owe in the coming year, but it can impact your long-term tax situation through retirement. There are a couple of big things to watch out for here, but the most important is that you usually want to try to place all of your bonds in tax-deferred accounts like a traditional IRA or 401(k). This will minimize the taxes you owe on the interest from the bonds, but will also impact your future income taxes and RMDs.
  • Tax Loss Harvesting – If you own securities in your taxable accounts, you may be able to make use of those losses to offset gains in other parts of your portfolio. Tax loss harvesting can be incredibly powerful, but it can also be complex. Before you start harvesting your losses, you want to make sure that it works within the larger strategy of your portfolio.

4. Rebalance Your Portfolio

Only after you are sure you know what your investments should look like do you want to start looking at rebalancing your portfolio. Over time, your portfolio will drift away from your asset allocation, so you want to periodically come in and bring everything back to level. But you want to make sure that you are bringing it back to the right level.

Your investment portfolio and retirement plan are living things. You need to monitor and adjust as you and your circumstances change. If you just rebalance to the asset allocation you set fifteen years ago, you may not be pointing your portfolio in the right direction anymore.

You need to check in with your plan at least once a year. It doesn’t need to be a big elaborate ten-hour process – you just need to make sure that everything still makes sense, and you’re on track. Otherwise you may as well just be throwing money at the markets and hoping for the best.

Next, read our eBook Spending from Investment Portfolios.

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