A Financial To-Do List for January

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. If improving your financial well-being is on your to-do list for 2021, you're in luck. Morningstar's director of personal finance Christine Benz has developed a month-by-month financial to-do calendar for the year, and she's here today to talk with us about what should be on our to-do lists in January.

Hi, Christine. Thanks for being here today.

Christine Benz: Hi, Susan. It's great to be here.

Dziubinski: Now, you've been assembling these calendars for the past several years. What's the thinking behind them?

Benz: The thinking is that many people do have improving their financial well-being as a goal, and the idea is that if you break it into more manageable steps that makes it more doable. And it's really like any goal that we might set for ourselves or a work project where if it's a big project or a big goal, it can be really daunting when you look at it as this big hill that you've got to climb. But if you break it into smaller goals along the way, you can really get it done. So, that was the idea behind this financial calendar by plotting these various financial jobs month by month can really help people tackle them and get them done and check them off their lists.

Dziubinski: In January, one of the first things you suggest that investors do is conduct a financial wellness check. How you go about doing that check, though, depends on your life stage. So, let's start with those of us who are still working. How would we go about conducting a financial wellness check?

Benz: I think you're looking for just a big picture read on how you're doing. Here I would suggest that people refer to some type of a calculator. Assuming that retirement savings is your main financial goal, as it is for many of us, you would want to turn to a T. Rowe Price Retirement Income Calculator or Vanguard has its Nest Egg Calculator. A lot of investors have their favorites that they might use. But look for a calculator that is holistic, that takes into account your proximity to retirement, takes into account how much you and your spouse have saved, that really takes an encompassing look at how you're doing. But plug in your variables. The good news is that 2020 was a really good year for the market. So, many investors, assuming that they stayed put during that period of volatility in the first quarter, had a pretty good experience and have come out of 2020 in better shape than they went in. But plug in your numbers, see how you're doing toward your goal and see how you're doing toward your contributions. If you haven't revisited your contribution rate, check to see how you're doing. Maybe you've gotten a raise in the past year. Perhaps you can bump up your contributions. That's one of the easiest ways to improve how you're doing toward your goals.

Dziubinski: What other things might retirees be thinking about when doing their wellness checks?

Benz: For retirees, really the main number that tells them how they're doing is their withdrawal rate. So, retirees should look at their withdrawal rates, make sure that they pass the sniff test of sustainability. And so, I think, there are a couple of things to say about withdrawal rates right now. One is that we have had a strong-performing stock market. We've had a really strong-performing bond market as well. So, retirees are apt to see that their portfolios have grown nicely over the past year really no matter what they invested in. On the downside, though, we have higher valuations on stocks. Bond returns aren't likely to be great going forward, in part because starting yields are so low. So, even though you have a higher portfolio balance right now, you might want to think about reducing your portfolio withdrawal rate, and that's especially important for new retirees. Look at that withdrawal rate. Make sure that it's on track. If you aren't sure where to start, we've certainly got lots of articles on this topic on Morningstar.com, or maybe check in with a financial advisor to get another opinion on your withdrawal rate.

Dziubinski: Also in January, you suggest that households take a look at their capital-allocation choices. What do you mean by that?

Benz: I mean that you want to think holistically about how you're putting your money to work. So, most households have multiple opportunities that they could use to direct their money towards. So, you don't just have your retirement portfolio. You might have shorter-term goals that you're trying to reach, or you might have a mortgage, or student loans, or high-interest-rate credit cards. I think you want to think about the return on investment from each of these capital deployments and try to be putting your money toward the one that has the highest return on investment. So, if you have credit card debt, for example, you're going to be really hard-pressed to outearn the interest rate on those credit cards by investing in the market. Paying down credit cards would be the obvious way to deploy your capital.

For a lot of us, it's more gray. So, we might have mortgages, but the interest rates are really low. We might think we can outearn our mortgage interest by investing in the market. But take a step back and think about all of those different opportunities where you might deploy your investment and try to use ROI, return on investment, to guide the way and determine where you put your money.

Dziubinski: Now, let's talk a little bit about retirement plan contributions. The new year seems like a good time to be looking at those as well. Is there anything we should be thinking about in particular with that for 2021?

Benz: The baseline contribution rates are staying the same for 2021 as they were in 2020. So, for 401(k)s, it's still $19,500 for people under age 50, it's $26,000 for people who are 50-plus; it's still $6,000 for IRAs, $7,000 for people who are 50-plus. Health savings account contributions are going up just a little bit in 2021. So, people who are covered by self-only coverage in a high-deductible healthcare plan can put away $3,600 in a health savings account. It's double that amount for people who have family coverage. So, revisit those contributions. Certainly, not everyone is in a position to contribute the max. But if you have gotten a raise or if you have just found it a little easier to save over the past year as has been the case with many of us, you may find that you can in fact bump up your contributions. So, revisit those if you haven't done so.

Dziubinski: And let's talk specifically about IRAs, the idea of a traditional IRA versus a Roth IRA. Is there any advantage of one over the other in 2021?

Benz: Well, it's a good question, Susan. And many people also have a fork in the road in their 401(k) or company retirement plans where they could make traditional or Roth contributions. And there are a few different ways to look at this. One general sentiment, I would say, is that tax rates today are quite low relative to historic norms. So, if we talk to external experts like Ed Slott, who is a big proponent of Roth contributions, he would say, this is really the time to think about making Roth contributions because you're paying taxes at today's low rates in exchange for tax-free withdrawals down the line. That's sort of the secular case for making Roth contributions.

On the other hand, Roth contributions aren't the right answer for everyone. The key profile I would call out would be someone who is working, but maybe sort of in the tail end of their career and who hasn't saved a lot for retirement. Well, even if tax rates go up secularly, that person may not pay taxes at a higher rate in retirement than they were when they were working. So, it's not necessarily the right answer for everyone to make Roth contributions. But certainly, if you're a young earner on sort of the early stages of your career, you're probably paying taxes at a low rate relative to what will be the case in the future. You may consider making Roth contributions. Roth conversions also look attractive from that standpoint. If you think tax rates will go higher in the future, check with a tax advisor. It may make sense to convert a portion of your traditional IRA balances to Roth.

Dziubinski: Christine, thank you so much for putting together this yearlong, organized program for all of us to follow, and specifically for talking with us today about our January to-dos. We appreciate it.

Benz: Thanks so much, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thank you for tuning in.