January is always a good time to take stock, but after last year’s tumult, it’s especially valuable.
In 2022, a year like no other, the stock market rebounded like a yo-yo and ended the year well below where it started. Inflation and interest rate soared – good news for savers, but bad news for people who already owned bonds and bond funds, the prices of which fell.
As the financial and economic landscape has changed dramatically in a year, you can find new opportunities and reduce your risk. Here are a few tips.
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Review your budget.
Review your income and expenses to make sure you’re on track to meet your financial goals. Now is a good time to make any necessary adjustments to your spending or saving habits.
Review IRA, 401(k), and other retirement plan contributions.
If you haven’t fully funded your retirement plan(s) this year, think about what you can afford to pay. Contributions to 401(k) and 403(b) plans reduce your taxable wages. It’s too late for 2022 contributions, as the deadline was December 31, but you should look at your 2023 contribution levels. If you’re not contributing at all, consider starting. If you are already contributing, consider increasing your contributions up to the IRS limit. This year, you can put up to $22,500 in your 401(k) or 403(b), up from the $20,500 limit in 2022. If you’re 50 or older, you can contribute an additional $7,500.
People eligible to make deductible contributions to an IRA can save on 2022 taxes by contributing before April 18, 2023. If you’re not eligible, consider saving in a Roth IRAwhich has more liberal income limits.
See rates on CDs and bonds.
When you reinvest money from maturing CDs or bonds, don’t automatically reinvest. You can get a better rate elsewhere. Money market accounts, bank certificates of deposit and bonds are now paying decent rates for the first time in years. But maybe you can do better.
Many people who choose CDs by default can get a higher rate with a fixed rate annuity, which is especially suitable for people in their 50s and older. The reason: If you withdraw money from an annuity before age 59½, you will normally owe the IRS a 10% penalty on the interest income you received.
Also known as a multi-year guaranteed annuity or CD type annuity (opens in a new tab), this type of annuity behaves much like a bank certificate of deposit. Like a CD, it pays a guaranteed interest rate for a fixed period, usually two to 10 years. Unlike CD interest, annuity interest is tax-deferred until withdrawn.
While the best three-year CD paid 4.44% in mid-January, you can find a three-year fixed annuity paying 5.53%, and there are also higher rates on two- and five-year annuities. years. While annuities are not FDIC insured, they are backed by well-regulated life insurance companies. Backup protection is provided by state guarantee associations. Check with the insurer AM Best (opens in a new tab) evaluation before buying.
Review your asset allocation and rebalance if necessary.
Prior to 2022, the stock market boomed for years and you may find that your desired asset allocation is still not on track. Suppose you have set your allocation at 50% in equities (stocks and equity funds) and 50% in fixed income securities (bonds, CDs, fixed annuities, money markets and similar instruments). Even after last year’s drop, you’re now 65% in stocks and 35% in fixed income.
Now is the time to start reallocating back to 50-50. Reallocating money into tax-deferred retirement plans, annuities, and life insurance policies requires a little less planning because the gains aren’t taxed until they’re withdrawn. Some people have enough money in their retirement plans to be able to accomplish their overall rebalancing using just them. Remember, it’s your globally the asset allocation that matters, not the allocation in a single account.
If you need to rebalance your taxable investments, be aware of the tax strategy. For example, if you have unrealized losses, you can sell losing investments to offset the gains from selling your winners. If you are rebalancing a lot of taxable money, you may want to consult a financial planner or tax specialist.
If you’re in your 50s or older, consider a deferred income annuity.
Also called a longevity annuity, a deferred annuity (opens in a new tab) converts a lump sum deposit into a stream of payments that will begin on a future date you choose. Most people chose the lifetime income option. This will provide you with uninterrupted income for as long as you live.
Make sure your beneficiaries are up to date.
Enrolled beneficiaries on annuities, life insurance policies and retirement plans will receive the proceeds upon your death. Life changes such as marriage, divorce, birth of children or grandchildren, and death of a loved one may require updating your beneficiaries.
If you are married, your spouse is normally your primary beneficiary and your child or children are possible. If you’ve been divorced and remarried and your ex-spouse is still listed as a beneficiary, your future heirs will get a brutal shock when you pass.
Annuity Expert Ken Nuss (opens in a new tab) is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed rate, indexed and immediate income annuities. He started the AnnuityAdvantage website in 1999 to help people looking for their best protected annuity options. One of America’s top annuity experts, he writes regularly on retirement income and annuities.
A free quote comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com (opens in a new tab) or by calling (800) 239-0356.