The beginning of the year is a good time to both look back and plan ahead.  Here are some of the financial issues you may want to check. 

A) January is a good month to review the provisions of your will and other estate plans. You have likely spent time or communicated with family members and friends who you have included in your estate planning. With the memories of your holiday connections fresh in your mind, you can consider if your bequests will truly benefit your beneficiaries. If your estate is complex, I find many good estate planning attorneys will actually diagram the provisions of your estate, which makes understanding it much easier than reading through the documents.

B) Insurance coverages should also be reviewed each year. Why not include those in your annual review?  Property and Casualty agents can quickly give you a summary of what is covered and to what extent.

C) Reviewing your portfolio is best done in January. If you decide to rebalance your portfolio, it may generate some taxes.  By making the changes in January, you (and your accountant) will have all year to plan for how to handle the tax liability.

What Investments Should You Have in Your Retirement Portfolio?

1) Two months’ worth of living expenses in a checking account.
2) Short-term savings that you can liquidate within 12 months, such as:

• Money Market account
• CDs
• S. treasury securities
• Municipal bonds

3) Mid-term maturity accounts that mature between 12 and 60 months:

• CDs
• S. treasury securities
• Municipal bonds
• High quality corporate bonds

4) Actively managed bond funds that invest in U.S. bonds and mortgages.

5) FIXED Annuities that let you know the amount you will receive, the interest rate you will earn, and the duration of the payments before you invest. Social security and pensions are annuities you may already own.

6) Domestic equities index funds (ETFs or mutual funds)

7) International equities actively managed funds. While using index funds for domestic equities is prudent, investing abroad takes knowledge of the unique characteristics of each country.

8) Real Estate rental properties.

9) Emerging markets equities actively managed funds.

10) Domestic equities actively managed funds.

11) Gold funds.

12) Reverse mortgages.

• So many retirees want to stay in their home as long as possible. Just like with all investments, you have good and bad alternatives to choose from when researching reverse mortgages.
• Work hard to understand the features and costs involved. Many people (and their heirs) do not focus on the fact the mortgage balance increases over time.  This is simply because you are making no payments, so the interest accrues and is due whenever the home is sold.

What Did NOT Make the List?

• Variable Annuities: Unless you love paying your insurance agent large commissions, just say NO!
• Hedge Funds: Unless you love paying 20% of your profits to people who don’t care about your retirement security.
• Private Equity: The years of taking on such risk and illiquidity are past you if you are nearing retirement. Let younger folks take those risks.
• Permanent Life Insurance policies: These are NOT for YOUR retirement. They are meant to create an estate — for someone ELSE!
• Partnerships: As you get older your needs are unique. Finding partners that have the same needs and sensitivities as you is impossible.

How Much to Allocate?

The old adage of “you should own your age in bonds” meant that if you were 70 years old, 70% of your portfolio should be invested in secure investments such as bonds and CDs. Since people are living older these days, a slight modification to this plan is appropriate. Consequently, from the above list, Categories 1 – 5 should add up to your age minus 10.  So if you are 70 years old, then the total of these investments should be 60% of your portfolio.

Categories 6 through 11 should be the balance of your portfolio.  At age 60 they should total 50% of your portfolio, at age 70, 40%, at age 80, 30%.

Category 12 is not really part of your retirement “portfolio” although it is being used to fund your ability to stay in your home. In states like California, the value of someone’s equity in their home may be THE primary asset in their entire portfolio. Careful consideration and planning is required to maximize both the enjoyment and the economic value of this asset.

The ultimate financial concern is running out of money.  Given today’s medical advancements, you should plan to live to age 100.