The value of a mid-year financial review

Financial Planning

If you’ve put some time into creating a financial plan, it’s important to keep in mind that change is a constant. Breaking events in the economy or markets can have an impact on your financial health. Similarly, so can changes in your own life.

Given this reality, your own financial plan process needs to be dynamic. A mid-year review gives you a chance to reflect on what’s taken place so far this year – in the economy, with your investments and with your own life and financial goals. “I liken it to maintenance work on your home or car,” says Jason Stamm, wealth management practice leader at U.S. Bank. “You want to insure everything is running smoothly. Good maintenance practices will extend their lives, and this is true of a financial plan as well.”

A look back at the markets and economy

When you look back at the first half of any given year, chances are the economy and markets have changed since the year began. 2021 is no exception.

A new administration, led by Democratic President Joe Biden, took over the White House and Congress came under full Democratic control. That brought a change of the agenda in Washington, D.C., highlighted by a nearly $2 trillion COVID relief package that was enacted into law in March. Currently on the table are potential changes to tax laws and a new infrastructure investment plan. Adjustment to tax policies could have significant investment implications for certain individuals and business owners. The infrastructure plan could potentially provide an additional boost to economic growth. Details of legislation in both areas are not yet finalized.

The U.S. economy continues a solid pace of recovery. In the first quarter of 2021, the nation’s Gross Domestic Product (GDP), which measures economic output in the U.S., grew at an annualized rate of 6.4 percent.1 The jobs market continues to improve from the dramatic recession that cost millions of jobs in early 2020 due to the COVID-19 pandemic, although there’s still room for improvement.

Stock markets continued a general upward trend that began in March of 2020. A notable difference from previous years is that different segments of the market have set the pace, notably value stocks, which underperformed technology-driven growth stocks for many years. Bonds struggled early in the year as interest rates jumped significantly into March. Since that time, bond markets have stabilized.

“A mid-year financial plan review is like maintenance work on your home or car. You want to make sure everything is running smoothly.”

In short, a lot of external factors may have affected your financial plan already in the first half of 2021. This alone may indicate the importance of sitting down for a mid-year financial check-up. But there can be other reasons as well.

Account for recent life events

Just as important as what’s developing in the world around you is what’s happening in your life. It isn’t unusual for changes to occur that may alter your financial picture in at least a modest way. “My experience working with clients is that changes happen all of the time,” says LeAnn Erenberger, Wealth Management Advisor for U.S. Bancorp Investments. “It might be something new with your employment situation, a death in the family or developments that affect your children. There’s a lot to consider.”

Among the typical issues Erenberger considers during a mid-year meeting are:

  • Financial goals review. Your goals are subject to change. Perhaps a child has altered plans for college. Maybe your own retirement date has been affected by changes to your work circumstances. You may even want or need to add a new goal to your list.
  • Investment assessment. Are your investments meeting your expectations and keeping you on track toward achieving your goals? Are you still comfortable with the level of risk you’re taking in your portfolio?
  • Protection strategies. Has anything changed in your life that might require a reassessment of your insurance coverage, including life, health, disability income and home insurance?
  • Taxes. Have you assessed whether you’re keeping up with your tax liability for the year? Assuming you’ve filed your 2020 taxes, are you comfortable with the amount that’s withheld from your paycheck? (See more on taxes below.)
  • Estate plan. Have any relationships changed that might require an alteration in beneficiary designations for retirement accounts or insurance policies? Are you taking full advantage of the current gift and estate tax exemption amount to help reduce potential future estate tax?

These are among the issues that could have an impact on you during a given year. Mid-year financial check-ups provide a forum to explore issues like these and to consider ways to respond to them.

Get ahead of the game on tax planning

Taxes are a constant consideration. The potential for tax law changes in 2021 makes it a particularly important year to have a discussion with your financial professional (and tax specialist) about whether actions should be taken to help manage your tax liability. “It’s important to remember that the best tax planning is not done on April 15th (the usual federal income tax filing deadline), but as an ongoing effort throughout the year,” says Stamm.

According to Erenberger, there are a couple of standard issues to consider.

  • Tax loss harvesting. This involves selling investments (within taxable accounts) at a loss, so those losses can be applied against capital gains that may be realized from the sale of other investments or that are paid out by mutual funds. “You don’t want to wait until the last minute to take advantage of this strategy,” says Erenberger.
  • Roth IRA conversions. Moving existing assets from a traditional IRA to a Roth IRA can bolster your retirement income strategy. Having assets available in a Roth IRA that may qualify for tax-free withdrawals provides a great deal of flexibility in managing your tax liability in retirement. “I focus on helping clients take full advantage of their existing tax bracket by shifting traditional IRA assets to Roth IRAs,” Erenberger says.
    Such a conversion is a tradeoff – the amount you convert will be taxed as ordinary income, but if holding period requirements are met in a Roth IRA, withdrawals are tax-free. “This is a case of managing their tax bracket and only converting an amount that doesn’t exceed the level that would move them into a higher tax bracket,” says Erenberger. Starting that process in the middle of the year allows enough time to develop an income plan for the remainder of the calendar year that properly manages the tax impact of a Roth conversion.

Build confidence in your financial situation

Financial planning now looks a lot different than it might have ten or 20 years ago. “This is no longer an extensive, one-time only process that results in a thick financial planning document that sits on a shelf and collects dust,” says Stamm. “With our ability to aggregate data and the current information that can be at a client’s fingertips, a financial plan today is much more dynamic.”

Stamm says with the technology available to clients today, the review process is much more informative and productive. “We’re dealing with real time information about evolving markets, new tax laws and personal changes,” according to Stamm. With your entire financial picture readily at hand, “it turns into a much more meaningful discussion for all involved.”

A mid-year plan review is like a check-up on your financial health. By accounting for all that may be going on in the markets, the broader economy, or your own life, it can help affirm that you’re doing all you can to steer your financial life in the right direction.

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