In continuing with the series of posts from earlier this year giving insight into personal finance issues I face in my own life, I wanted to share some of the things that I encountered this year and how I dealt with them. Just because I am a financial advisor doesn’t mean my personal life is smooth sailing where everything falls perfectly in place. I run into the same hiccups, curveballs, and challenges that everyone else does and have to make adjustments as a result. Here, I’ll cover some of the highlights using the same categories that I cover with clients.
1. Financial fundamentals
Here is where I look at cash flow, debt management and emergency savings. If you have been reading these posts, you may be aware that my wife and I built a new house in 2023 and moved in just before the end of the year. This past year was our first year in the house and there were certainly some major impacts on our finances as a result. When we made the decision to enter into the contract to build interest rates were sitting slightly above 5%, but by the time it was time to lock in our financing, rates had increased significantly. The result is our new mortgage is quite a bit higher than we had originally planned, which has impacted our free cash flow for discretionary spending.
As a result, we have dialed back on our travel for the past year and put more focus on enjoying our new home. We are still focusing on family related travel, especially to see our aging parents, so we were still able to take several trips this year on that front. While the Fed has been cutting rates, mortgage rates haven’t really moved that much so we will hang tight and wait for an opportunity to refinance to give us a bit more breathing room.
We are in good shape with our emergency savings which we have in an account earning about 4%, which is a good competitive rate. As the Fed continues to lower interest rates, this rate will drop as well, but it is much better than the paltry .2% my bank offers for a regular savings account. My wife’s company did experience a round of layoffs this past year. While she was spared, it certainly reinforces the importance of having that emergency fund of 3-6 months of living expenses set aside to be able to tap into if needed.
The new mortgage has made our overall debt payments higher than I would ideally care. We do plan on addressing this by making extra lump sum payments to get the house paid off early.
2. Insurance
We didn’t really have much on this front this year other than noticing a sharp increase in auto and home insurance rates. This is being felt by everyone across the board as more frequent weather events are causing more damage so the insurance companies are hiking their rates to offset the costs. If you saw a similar hike in rates, it can be worth it to your insurance agent to see if there are any coverage changes you can make that might help your premiums.
3. College planning
Our daughter has entered her senior year of college, so this topic will be off our radar soon. We did have to switch our funding mechanism during the year to pay for school. During the years we were setting aside funds for college, we focused on the 529 plan. Along the way, we had a common concern: What happens if we overfund the account? We only have one child so it wasn’t like we could just earmark that money for a younger sibling, so we decided to start a secondary savings vehicle by putting money into a taxable brokerage account. If the 529 runs out, we have the needed funds for college. If not, then we could use those funds for whatever we wanted.
Well, this fall, the 529 ran dry, and we have started to tap our backup funds. We have enough to get to the finish line with a little left over. We will likely still earmark the remaining funds for our daughter by assisting her when she gets her own living place.
4. Investments
Like many others, our portfolios enjoyed the market performance this year. As with any investor, we had some funds perform better than others, but I’m happy overall with the way the year went. It is time for a rebalance of the portfolio though. As a result of the stock market going up, the equity holdings in our portfolio are a little high, and we should trim this to get back in line with our target allocation. We are probably a little tech heavy in the portfolio as well, which can also be addressed as part of a portfolio rebalance.
We do have a concentrated position from an ESOP program that we didn’t take any action on this year and will be something we need to consider in the near future. This is in a taxable account, so we need to factor in the tax hit from the capital gains when we start to sell.
5. Retirement
We continue to be on track towards our retirement goals. Much like I do periodic reviews with clients, we are due for a thorough review ourselves. Not much has really changed with our goals or plans over the past year, so I don’t expect too many surprises to come out of this exercise.
The focus for us over the next few years will be to chip away at the mortgage. It would be nice to get that off the books before my wife retires so we don’t eat away too much at our retirement savings with a mortgage once her income goes away.
6. Tax Planning
A lot of the planning we have done actually ends up falling in the tax category, either to help save now or to position ourselves to reduce our long term tax liability. Here are some of the things we dealt with this past year.
With the new mortgage, we will have significantly more interest paid than in years past. This will allow us to itemize our deductions instead of taking the standard deduction and should put us in a better position to receive a refund after having to pay in the past few years. Since we will be itemizing, we should be looking for a way to leverage other itemized categories between now and the end of the year so we can maximize our deductions.
We placed all of our retirement savings in a tax deferred style account (401k, IRA, SEP) based on our income and current tax bracket. It makes sense for us to take a pre-tax deduction now and avoid taxes at our current tax rate. We feel confident there will be a time after my wife retires when our income will be lower, and that will present a better opportunity to make Roth contributions or do Roth conversions.
As I mentioned earlier, we didn't sell any of our concentrated ESOP position, so we don’t have to report long term capital gains from that account. We do have additional taxable funds as well, and we managed what we sold in that account, so there is actually a small net loss there that we can use for a deduction.
In the college planning section, I discussed that we are tapping into a taxable account, which could generate some capital gains, but this will be minimal in 2024 as we just started this a couple of months ago.
My wife’s company offers a deferred compensation option, which we have been doing for several years now. This can be a great option for those who might have income pushing into a higher tax bracket that you want to protect from current tax rates and take it later. For instance, there is a big jump between the 24% and 32% brackets. If you are going to cross that threshold and don’t need the funds right now, this is a good way to save on taxes. The funds get placed in a 401k type of account and avoid current taxation. At the time of separation or retirement, the funds are doled out over a chosen period of time. The thought here is that you receive the funds later when you are in a lower tax bracket.
A challenge with this is that you have to make the election a full year in advance on whether you will defer the income and how much to defer, usually a percentage. It may be difficult to know whether you will actually need to shield this income from taxes or not that far in advance. It also may be difficult to know how much income will actually be subject to deferral, especially if a bonus is included in the calculation. This becomes an educated guess on how much income will spill into a higher tax bracket or that you just don’t need at this time.
As you can see, financial planning issues run well beyond picking investments and retirement planning. I hope that providing a glimpse at the things I am looking at in my own life will help you think about the things in your own financial life that require some attention. Look out for the next post, where I will preview the things I expect to be working on in 2025.
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