Your Financial To-Do List for January

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. If getting your finances in order is on your 2020 to-do list, you're in luck. Morningstar's Christine Benz has put together a month-by-month to-do list to help make that job more manageable. She's here with me today to discuss that list and take a closer look at the jobs for January.

Christine, thank you for joining us today.

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

Dziubinski: Now, you've been doing these month-by-month calendars for several years. Why?

Benz: Well, I think one of the key reasons I like to do it this way is that some of these tasks--like getting your financial house in order--can seem kind of overwhelming and daunting. And so, what I found, certainly in other aspects of my life is, if you sort of take a look at a task, and if you can break it up into more manageable sub-jobs, that can actually help you get stuff done. So, that's the goal with plotting this on a calendar. And some of these jobs naturally lend themselves to the calendar. So, around February, March, most of us do have our sleeves rolled up. We're working on our taxes. So, we talk about tackling your tax jobs at that season. So, we use the season to dictate some of these to-dos.

Dziubinski: So, let's look at January's to-do list. And topping that is something you call a wellness check. Let's talk about that.

Benz: Right. I think a lot of us come into a new year, we're thinking big picture, about our lives, areas that we want to improve. So, I think it makes sense to think about your financial life in a big-picture way in January as well. So, you just want to ask that basic question--how am I doing?--and try to answer it. So, depending on your life stage, if you are someone who's still saving for retirement, really the key gauge of how you're doing is what your balance looks like and also what your savings rate looks like. So, here I would say, use a good basic retirement calculator just to see whether you're on track with your retirement savings. I've often recommended T. Rowe Price's retirement income calculator. Vanguard has its nest egg calculator. A lot of the big financial firms have very good calculators that allow you to plug in some variables and come out with kind of an estimate about how you're doing. But you do want to look at that savings rate if you're in a position to nudge it up. And since we've been in the midst of a strong economy, some people have gotten raises--look at whether you can in fact contribute more to your accounts for 2020. I think that's kind of a key headline for people who are still in retirement savings mode.

For people who are already retired, really, the key gauge of your portfolio health and your overall financial wellness is just whether whatever withdrawal rate you're using from your portfolio, whether that's sustainable over your retirement time horizon. There are certainly a lot of ways to think about that. Many people have heard about the very basic 4% guideline. But just check and make sure that whatever you've withdrawn from your portfolio over the past year, kind of, passes the sniff test of sustainability. If you are looking at your balance in large, chances are, unless you've been wildly overspending, you've probably been staying in line with a sustainable spending rate. But think about what you would do if the market turned down and your portfolio balance shrunk, make sure that you are not overspending in such a period. So, do a check on that and also think about what you would do if your portfolio took a nosedive.

Dziubinski: Another sort of big-picture January to-do that you talk about is whether you're maximizing the return on your total financial capital. What does that mean?

Benz: This is something that I think is underdiscussed. But we all think about kind of maximizing the return on investment of our investment portfolio. But most of us have other items on our financial ledger. So, maybe you have a home mortgage, or maybe you have student loan debt. You have other things that are bidding for your financial capital. And so I think you want to think really big picture and think about whether you are maximizing your return on investment. So, a really easy example would be if you have high interest rate credit card debt. Well, there's almost nothing you can do at the portfolio level to outearn that interest rate that you would get by paying down your debt. So, it gets a little more complicated when you're looking at more-benign forms of debt. So, maybe you have a home mortgage, where your interest rate is 3.5%. Well, rather than shoveling additional funds into your cash account, maybe there you're better off prepaying that mortgage--assuming you plan to stay in the home and don't need the liquidity and so forth--than shoveling more into your cash account. So, think about your balance sheet, your total financial picture in aggregate rather than thinking about just maximizing ROI on your investment portfolio.

Dziubinski: Yeah, that makes sense. So, for those folks who are contributing to a retirement account, now is a good time to sort of look at their contributions, and those limits have changed for 2020. Is that right?

Benz: They have for company retirement plans. So, if you're under age 50, the contribution limit is going up to $19,500. If you're over age 50, it's $26,000. So, take a look at whether you can adjust your contributions, especially if you're in a position to hit those maximum allowable contributions. One thing to think about though, Susan, if you're also earning matching contributions, and especially if you're a high-income earner who earns a bonus, and this is starting to be bonus season, just make sure that you are not overcontributing to your company retirement plan too early because some companies require you to contribute throughout the calendar year to take full advantage of the match. So, just check that. Make sure that you're not overfunding your 401(k), hitting that limit too early and thereby shutting yourself out from some of those matching dollars.

Dziubinski: Another item that isn't officially on your January to-do list but that you've talked about before as being something that makes sense to do in January is to revisit your asset allocation. Do you feel like that's any more important this year than previous years? And why is it important in general?

Benz: Well, I do think it's important, and I think it is more important in 2020 than it has been in previous years, mainly because we just saw such tremendous equity market performance in 2019. So, people who have been hands-off with their portfolios, who haven't revisited their asset allocations recently, are likely to find that their equity weighting is heavier than they might wish. And this isn't a big deal for people who are still really ramping up their retirement savings, have many years until retirement. I think it's a more important consideration for people who are getting close to retirement, who might retire within the next 10 years or maybe even fewer, or people who are already retired. I think it makes sense to take a look at that portfolio's asset allocation, make sure that you have enough in safe securities, like cash, like bonds, to tide you through a weaker period of performance. And I think it's a way to just kind of take a step back, essentially harvest some of your winnings because it has been such a great market for so long.

Dziubinski: And Christine, are there any changes going on with IRAs for 2020?

Benz: Well, there are big changes related to the SECURE Act, which we'll be covering in various ways on Morningstar.com. But in terms of contribution limits, no, they're staying the same as they were in 2019. So, that's $6,000 if you're under age 50, $7,000 if you're 50 plus. This is a great time to think about spacing out your IRA contributions throughout the year, maybe putting those on autopilot. So, if you're under 50, the math is easy. You've just got to contribute $500 a month to hit that $6,000 annual contribution limit. And I think the virtue of that is, one, you're spacing your contributions throughout the year. And so, you're not necessarily putting all your money to work when the market is high. And the other benefit is just that it's more manageable, that coming up with $6,000 can be kind of a heavy lift around tax season. But if you space those contributions throughout the year, I think it can make it more manageable. So, take a look at that. I like the idea of automating those IRA contributions.

Dziubinski: Christine, thank you for joining us today and for giving us a road map for getting our financial house in order over the course of the year, but specifically in January.

Benz: Susan, thank you so much.

Dziubinski: I'm Susan Dziubinski for Morningstar. Thanks for tuning in.