June’s Financial To-Dos

Based on Morningstar’s Financial To-Do List, we’re offering a few tasks each month for tackling what can seem like an overwhelming task: getting or keeping your financial house in order.

A seemingly impossible battle can be won by focusing on just a few items at a time. If your financial life seems daunting, begin by choosing only one of the items below to focus on. Which of the following will help you make the most progress or relieve the most stress?

Create or update an Investment Policy Statement

An investor’s Investment Policy Statement (IPS) is the blueprint for how and why their investments are managed. Building an IPS helps you think through your investment philosophy and strategy intentionally. It’s a significant document, yet most people never actually create one. Without one, you may not notice if you drift into emotionally-based decisions that are often poor in the long-term. An IPS ensures that you invest in a way that’s thoughtful and intentional.

An IPS does not need to be long or complicated. It should include:

• Your purpose for investing (what you’re hoping to accomplish)
• Your target portfolio to meet those goals
• How you’ll evaluate investment options within that portfolio

If you have an IPS already, now would be a good time to re-evaluate. Have your long-term goals changed at all? Has your investment approach shifted, and can you clearly explain any changes to your approach?

Review retirement withdrawals

If you are a retiree partially living off your investments, now is also a good time to evaluate your withdrawal plan. Replacing your paycheck during retirement can be challenging for some, especially as fewer companies use traditional pensions. Instead of receiving a monthly pension check, many of today’s retirees heavily live off their investment assets, which may need to sustain them for 20, 30 or even 40 years.

Deciding how much to take out each year is an important part of a broader retirement plan. But June is a good month to measure your actual distributions for the last year or so. Reference account histories to get an accurate number for all withdrawals (and associated taxes) — don’t assume you can remember them all. At a basic level, is your withdrawal amount sustainable? Can the withdrawal pattern continue throughout your realistic retirement timeframe? Is it within the parameters that your financial planner deemed reasonable?

If your retirement withdrawals are too high, it may be time to make some lifestyle changes. These can be difficult. But earlier course corrections may help you avoid more drastic adjustments further down the road.

Update your net worth statement

Once or twice a year it is a good idea to update your net worth statement. This simple document should include all your assets and all your liabilities. Don’t forget important details like how much interest you’re earning in bank accounts or how much interest you’re paying on your debts.

Once you have the overview updated, are there any changes that need to be made? Any accounts that can be consolidated? Any headaches that you would like to get rid of? Are you trending in the direction that you want to based on your long-term goals?

Evaluate refinancing debt

The best debt management plan is an elimination plan, but paying down debts, especially large liabilities like a long-term mortgage, may take some time. June can be a good time to re-evaluate what you owe to see if you can save on interest costs through refinancing. Reducing an interest rate often saves thousands of dollars over the course of a mortgage. Other homeowners may refinance to also shorten the term of their loan (from a 30-year to a 10- or 15-year term).

But proceed cautiously: there can be pitfalls in refinancing. Review the closing costs carefully to make sure they don’t eliminate the refinancing benefits. Resetting the term of a loan also resets your amortization schedule, the timing that determines how much of each payment goes toward interest. Earlier into a mortgage, much more of the payment goes to interest than at the end. Resetting can actually cost you more sometimes, even with significantly lower interest rates.

IMPORTANT DATE this month:

June 15 is the deadline for tax payments for taxpayers who send in quarterly estimates.

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