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Five reasons an annual review is crucial

Review your investments, see if you can reduce taxes, and check “housekeeping” items.

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The need for an updated personal financial plan is critical. “The place to start is with an annual financial review,” says John Sweeney, Fidelity executive vice president of retirement income and investment strategies. “Careful planning is essential in all economic climates,” Sweeney notes. “When you’re driving on a winding road, that’s when you need the highest level of certainty that your tires have plenty of tread and your brakes are working.”

An annual financial checkup serves several purposes. It allows you to evaluate and adjust your goals, to ensure that your strategies align with those goals, and to take care of all the “housekeeping” items, such as updating beneficiaries, that aren’t complicated but that can have serious consequences if they’re neglected.

Here are five important considerations:

1. Your investing goals—and your investments—might have changed.

Because you may have multiple savings goals, and an investment portfolio that goes along with them, your annual financial review should revisit each of your priorities. If your situation has changed, make adjustments as necessary.

If you’ve been saving for a new home or your children’s or grandchildren’s college education, for example, you might want to adjust your targets to reflect current real estate conditions and college tuition costs. Also, evaluate your retirement savings and assess whether you’re on track to achieve your retirement savings goals at your desired retirement age.

This is also the time to check your asset mix to ensure that it continues to meet your investment needs and preferences, and to perform any rebalancing that might be necessary in light of the past year’s market performance.

In addition, take some time to look at specific investments and evaluate whether they continue to have a role in your portfolio. If you invest in mutual funds, check to see if any of them has changed its objectives or “style.” If you own stock in individual companies, evaluate the companies’ current status and prospects, and decide whether they justify keeping it.

2. You may be paying more taxes than are necessary.

Tax-efficient strategies could help you reduce the tax hit on your investments and potentially boost your after-tax returns. Analysis of historical performance by the research firm Morningstar has calculated that over the 87-year period ending in 2013, taxes reduced returns by two percentage points annually. Your annual review is a great time to ask your adviser about tax-efficient strategies you might be missing. Such strategies include knowing the types of accounts you invest in, and when to sell or hold your investments. You should also have an asset location strategy.

You might be able to take advantage of some of these strategies by contributing more to tax-advantaged vehicles such as a 401(k) or other company-sponsored retirement plan, an IRA, or a deferred annuity plan; by investing in tax-exempt bonds; or by choosing tax-managed mutual funds for your portfolio.

3. Your estate plan may be out of date.

Neglect is probably the biggest threat to an estate plan. Use your annual review to make sure your plan continues to reflect your current family status and financial situation. Ensure that it helps make the best use of the latest estate and tax laws, and that key individuals know where to find relevant documents and information. Marriage, divorce, birth, and death are the four big events that impact estate plans, but you may also want to consider other factors that could affect your planning.

If you’re concerned about your grandchildren’s education costs, for example, you might want to look into your gifting approach. Consider that grandparents with 10 grandchildren can gift up to $280,000 per year ($14,000 per spouse per child) without using any of their exemptions, gradually removing assets from their taxable estate. Gifts into a 529 plan may additionally take advantage of the potential tax benefits and accelerated gifting afforded in those programs.

You should also consider the impact of changes in the federal estate tax law. As of January 1, 2014, the federal estate tax applicable exclusion increased to $5.34 million per person. Under certain conditions, a surviving spouse may now—through a provision of the federal estate tax law known as portability—use any unused portion of this exclusion “ported” from his or her deceased partner, in order to shield the surviving spouse’s estate from federal estate tax at the time of his or her death. The federal gift tax exclusion has also increased to $5.34 million per person.

4. Your retirement plan might not reflect your latest priorities.

Priorities change. Selling the family home and moving to the beach might not sound as inviting today as it did before you had grandchildren, for instance. And that’s fine. But as your perspective changes, so should your strategies. An important part of your annual review should be to take stock of your retirement plan from the viewpoint of both lifestyle and financial needs.

For most investors, a well-conceived retirement plan seeks to establish guaranteed lifetime income sufficient to cover essential expenses, Sweeney says. Consequently, you should periodically reevaluate what you anticipate your retirement expenses will be. Many factors could change the expense side of the equation, ranging from health and marital status to your evolving interests and tastes.

On the income side, use your annual review to check your progress toward establishing your retirement income plan. If you’re nearing retirement, an adviser can help you determine how your current wealth could be structured to provide the income level you need—or identify shortfalls and recommend strategies to address them.

Also, be sure to check your tax assumptions and determine whether they need to be adjusted. For example, if you expect your income tax rate to be lower in retirement than it is currently, you might want to consider maximizing your tax-deferred savings now. On the other hand, if you expect income tax rates to increase for your tax bracket by the time you’re ready to retire, you might consider paying the taxes now by converting to a Roth IRA for the tax-free income in retirement.

If you’re already retired, use your annual review to revisit your investment withdrawal strategy. As a general rule (although everyone’s situation is unique), it may make sense to withdraw money from your taxable accounts first, because long-term capital gains are taxed at significantly lower rates than the ordinary income tax rates you pay on withdrawals from traditional tax-deferred retirement accounts. At the same time, leaving your tax-advantaged assets in place allows them to potentially grow tax deferred or tax free.

Things change if you are looking to use an income annuity to generate income, because of differences in tax treatment. In that case, you may want to consider using any existing tax-deferred annuities first, then tax-deferred savings [401(k), IRA], then taxable savings, and finally any Roth savings [Roth 401(k), Roth IRA].

5. Your insurance needs and beneficiaries might need updating.

Insurance can provide great protection against the unexpected, but it’s wise to evaluate your needs annually to make sure you have the right amount and type of insurance to cover unforeseen circumstances that can significantly derail a financial plan. Life insurance may be a good place to start. If you are just starting out and your family is growing, you might want to increase the amount of your life insurance to protect your loved ones from a devastating loss of income on top of the emotional pain of losing a parent or spouse. On the other hand, most people find that as they get older—and their net worth climbs and their children reach adulthood—they need less life insurance. The considerations surrounding disability insurance are similar.

If you choose to reduce your life or disability insurance, you could apply the savings toward your health insurance, which becomes more critical as you age and continues to increase in cost. You might also benefit from looking into long term care insurance, which may offer a variety of features and options. A final consideration in your annual review is a simple check of your beneficiary designations. It’s easy to do, but it could have a huge negative impact if it’s neglected.

Most people remember to adjust their will in the event of a change in marital status, the birth of a child, or a death in the family, but they sometimes overlook other important contracts and accounts, such as life insurance, 401(k) plans, and IRAs. Remember that assets in your retirement accounts pass directly to the beneficiaries you designate with your account custodian, trustee, or plan administrator. Plus, your beneficiary designations could supersede any accommodation you have made in your will for your retirement account.

While all of this might sound like a lot of ground to cover, an annual review is well worth the effort when you consider the hard work you have invested in building and protecting your wealth, Sweeney says. “It’s important to have a long-term view of your financial strategies,” he says. “By staying focused on your goals and keeping your strategies current, you’ll be better prepared for whatever the economy has in store.”

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Diversification/asset allocation does not ensure a profit or guarantee against loss.

The tax information and estate planning information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Fidelity does not provide legal or tax advice. Fidelity cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws which may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on pre- and/or after-tax investment results. Fidelity makes no warranties with regard to such information or results obtained by its use. Fidelity disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Fidelity Guided Portfolio SummarySM (Fidelity GPSSM) is an enhanced analytical capability provided for educational purposes only.
Morningstar is not affiliated with Fidelity Brokerage Services, member NYSE, SIPC, or its affiliates.
Morningstar is solely responsible for the information and services they provide. Fidelity disclaims any liability arising from your use of this information.
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