January 6, 2025 – In our first show for 2025, Jim Puplava of Financial Sense Wealth Management outlines essential steps to achieve and maintain financial health in the new year with a comprehensive financial planning checklist, especially for those nearing or in retirement. Key topics include performing a portfolio review to evaluate income, tax efficiency, diversification, and inflation-proofing of investments; tackling tax strategies such as understanding marginal tax brackets, Roth conversions, and required minimum distributions (RMDs); and implementing effective estate planning with wills, trusts, and powers of attorney to avoid probate and conservatorships. The discussion also highlights emergency preparedness, including insurance, cash reserves, and cybersecurity, along with the importance of a mid-year review to stay aligned with financial goals.
Checklist presented below or click here for a printable pdf version
To share your feedback on today's show or to learn more about our money management services, give us a call at 888.486.3939 or visit us at www.financialsensewealth.com.
Financial Planning for 2025 Checklist
1. New Year Portfolio Review:
- Assess if your portfolio is meeting your income needs.
- Check the tax efficiency of your investments.
- Evaluate if your investments are keeping pace with inflation.
- Look for diversification and avoid over-concentration.
- Consider predictability of income from investments like individual bonds and/or dividend stocks.
2. Tax Considerations:
- Review your Adjusted Gross Income from the previous tax year.
- Determine your marginal tax bracket.
- Plan tax-efficient strategies (e.g., shifting income to dividends).
- Prepare for Required Minimum Distributions (RMDs) if you are 73 or older:
- Ensure you have enough income to cover RMDs without selling assets.
- Consolidate multiple IRA accounts to simplify RMDs.
- Maximize contributions to retirement accounts (e.g., 401k, especially with catch-up provisions if over 50).
- Explore backdoor Roth contributions if income limits apply to direct Roth contributions.
- Consider Roth conversions if in a lower tax bracket or before reaching RMD age.
3. Estate Planning:
- Ensure you have a will, trust, and powers of attorney in place.
- Plan for long-term care needs.
- Discuss investment management with your spouse to avoid "widow's penalty."
- Consider the impact of losing one Social Security check upon the death of a spouse.
4. Emergency Preparation:
- Secure adequate life insurance to cover mortgages and other debts.
- Consider long-term care insurance if there's a family history of conditions requiring care.
- Maintain an emergency fund of 3-6 months of expenses.
- Store important documents securely (safe, portable hard drive, or USB).
- Create a video inventory of valuable items and keep appraisals up to date.
- Strengthen cyber security:
- Use strong, unique passwords.
- Be cautious with unsolicited emails or texts.
5. Mid-Year Review and Course Correction:
- Reevaluate your portfolio's performance mid-year.
- Adjust tax withholdings if necessary to avoid penalties.
- Monitor income and capital gains to plan for taxes.
- Review financial goals to ensure you are on track.
- Consider Roth conversions based on income projections for the year.
Additional Steps:
- Visit FinancialSense.com for daily and weekly updates.
- Contact Financial Sense Wealth Management for personalized advice at 888-486-3939 or via FinancialSenseWealth.com.
Transcript
Cris Sheridan:
Well, happy New Year everyone. This is our first show for 2025, and as such, we're going to discuss some of the most important things that you can do to both get in and stay in financial shape, especially if you're nearing or already in retirement. Joining us on today's show is our president here at Financial Sense Wealth Management, Jim Puplava. And we're going to be providing quite a bit of information that you'll want to consider and review. So if you're already on financialsense.com, we will have a list of these items that we're discussing today in the show notes section, or if you want to review these items with us directly, you can reach out to us at 888-486-3939. So, Jim, what is at the top of the list for our listeners today that you think is the most important item for the new year to stay in financial shape?
Jim Puplava:
I would say right at the top of the list is a portfolio review. So taking a look at your portfolio and what it's done for you over the last year, is it meeting your needs for income? Is your portfolio tax efficient? Because taxes will be due here April 15th. So take a look at: did you get the growth you wanted? Is it producing the income you wanted? So a portfolio review should be done at least several times a year. Secondly, we've seen inflation pick up in this decade. It began to pick up in 2021, got up to 9%. It's come down, but we've seen food costs go up, utility costs go up, insurance costs go up, medical costs go up, just about everything. And is your portfolio keeping up to meet those increased needs that you have to pay those bills? So is it inflation-proof? And then, since we're in the middle of tax season, how tax-efficient are your holdings? For example, the taxes on dividends could be zero all the way up to 23.8% versus taxes on interest that can go up to 40.8%. So tax efficiency, it's not just how much income you get, it's how much income you actually have after tax. The other thing is, is your portfolio diversified and is it over-concentrated? A lot of times you'll see people that maybe worked for a company and they accumulated company stock in the bulk of their portfolio is in one company stock. So they're not very well diversified. The other thing is predictability. And what I mean by that are your investments, like if you're in a mutual fund, whether it's a bond fund or a stock fund or an ETF. Those investments aren't predictable because the portfolio changes. If you're in mutual funds, you get those year-end surprises because a mutual fund has to report all capital gains sales made during the year. And so you could get walloped in the month of November. All of a sudden, you get a huge capital gain distribution from your mutual fund company, which reduces the net asset value of the mutual fund when they distribute that. So we prefer individual bonds where it's predictable. For example, if I buy, I don't know, a five-year corporate bond or a three-year Treasury, I know exactly what it's going to be when it matures. I know exactly what my income is going to be every six months. And the same thing with dividend-paying stocks. If I own, let's say Coca-Cola or Exxon, I know exactly what the dividend is. And I have a good idea what the dividend is going to be the following year because of the track record of paying dividends over a long extended period of time. So what you're looking for here, and especially if you're nearing retirement or in retirement, is predictability of income, diversification, and then more importantly, inflation-proofing. You have something in your portfolio that is increasing income each year. So you're going to have the income you need to pay those bills as your expenses go up.
Cris Sheridan:
And of course, we've discussed many times on the program our outlook, even starting as early as 2020, for our own clients and investors out there tuning into Financial Sense to be prepared for a higher-than-average inflation decade. Of course, that has proven to be true with the trillions of dollars that we're seeing spent by the US Government each and every year. We do believe that that is going to continue for structural reasons. And so there are some long-term considerations, of course, when it comes to your portfolio and how it's structured for the long term in the years ahead. If we do see higher-than-average inflation, as we have seen so far, let's move on to the taxes section because, of course, when we are doing New Year portfolio reviews with our clients, taxes is a key subject. As you said, that is going to be coming up in just a few months. People are going to be thinking about that. What are some of the main considerations in this area?
Jim Puplava:
Probably at the top, if you can go back to, let's say, your 2023 tax return, look at the bottom number on the front page of your tax return. It's called Adjusted Gross Income. Now, why that number is important is because a lot of your itemized deductions, what's left of them, at least right now, things like medical expenses are based on your adjusted gross income. The second thing you want to know is what is your marginal tax bracket? So if you go to the second page of your tax return, when it talks about net taxable income, that number is what you're going to look at to find out what your tax bracket is. That means each additional dollar of income you get is going to be taxed at that bracket. And then more importantly, once you know what that marginal tax bracket is, you can start doing some tax planning. So let's say you are in a 24%, 32% tax bracket. You may want to take a look at shifting some of your portfolio income to dividends, which are taxed at a much lower rate. They're at zero, depending on what your alternative income is, then it goes up to 15% and maybe you can add 3.8% if you make over $200,000 if you're single and over $250 if you're married, you have to pay the additional 3.8% Obamacare tax. So if you're single, you can make up to $47,025 and pay no tax. Now, you have to include other sources of income. You can pay up to $94,000 if you're married or $47,000 if you're filing separately. So what that means is if your total income is under $94,000 as a married couple, you pay zero tax on capital gains, and then the next tax bracket is 15%. So for married, you can go up to $583,000 and only pay 15% on capital gains or dividends, plus the 3.8% if you make $250,000. So that's just an example of, you know, if you are in that tax bracket of, let's say, 22, 24%, shifting over to dividends, you can pay either 0 or 15%. So it's another way to lower your taxes. It's one of the things that we do in particular accounts that I manage. It's more based on dividend income and tax efficiency. So fewer capital gains. Majority of the income is produced from dividends that are taxed at either 0 or 15 or let's say 18%. And it's something that we always do when we're doing planning with our clients. We look at tax efficiency because it's not just how much you make, it's how much you make after taxes that's more important to you. The next thing you want to take a look at, especially for those of you that are turning 73, we have to start taking mandatory distributions each year from your retirement accounts. That number on what you're going to have to pay. If you're turning 73 this year, you want to get a pull out your year-end portfolio statement because your RMDs are going to be based on the closing balance in your IRA on December 31st. So are you set up to meet your RMD requirements? In other words, do you have income coming in distributions that you'll be able to meet those mandatory distributions, or are you going to have to end up selling something to meet those? So making sure you're set up for your RMDs is also very important for people that are going to be taking RMDs. Do you have multiple IRA accounts? You've got five or six IRAs at different brokerage firms, a bank, insurance company, etc. One of the mistakes that we see, a lot of people will take RMDs from one account and they forget that they have other accounts and they end up getting penalized. So knowing if you have multiple IRA accounts, you're better off just setting up one IRA. It's easier to manage, it's more tax-efficient to do that, and you don't run into the problems of missing an RMD distribution. Also, if you are in a pre-retirement mode, you're 5, 10 years away over the age 50, are you maximizing your 401k contributions, which are over $30,000 a year with the catch-up provision? And another thing, if you're going to be, if you're in a high tax bracket and could be in a high tax bracket when you retire, some companies allow you to make contributions, we call them backdoor Roths where you're not limited to on your Roth contributions because of your income, because they start phasing out Roth contributions based on income. You know, for a married couple, when you start making over $200,000 and less than that if you're single. So one way that you can get around this and actually put more into a Roth is a backdoor Roth with your employer. So it's something that you should explore because it would be nice. It's going to come in handy by the way, when you retire and especially if you have a large 401k that you're going to roll over to an IRA and then you get to age 73 and you've got this large IRA and you have to start taking mandatory distributions. If you've set up a Roth, you don't have to take mandatory distributions from a Roth. And if you do take them out, if they've been in there five years, you're not going to pay any taxable income on it. And it's another way to earn higher tax-free income. So using backdoor Roths at work. And if you retire and you really go into a lower tax bracket, let's say you were making several hundred thousand dollars a year between you and your partner and then you retire, you're making less income. You may want to consider, if you're years away from taking an RMD, start making Roth conversions up until we, we do Roth conversions up to a 24% tax bracket and hopefully President Trump will extend his tax cuts and keep those lower tax rates because if they don't, the tax rates are going to really go up, which would really hit the economy hard. So I, I know that's a top tax priority for the president. So if retired, consider doing Roth conversions, especially if you're age 65 or younger, all the way up to age 70 before you have to start taking those mandatory distributions. So the important thing is you know what your tax bracket is and with that, start doing some planning, shifting income where it's taxed at a lower bracket, whether it's Roth, Roth conversions, eventually that will produce tax-free income for you or going into dividend stocks that are taxed at a lower bracket.
Cris Sheridan:
So again, all these things are really important topics that you can bring up with your financial planner or money manager when it comes to tax efficiency of your portfolio. And a number of these items that we are discussing, which we will have located again Financialsense.com if you want to print these out and review them. Or of course, give us a call at 888-486-3939 to review them as well. So we've covered the top of the list for the new year is a portfolio review. You gave five key items that everyone listening can look at with their financial planner. Of course, there are a number of tax considerations that you just covered. Let's move to the third section which is estate planning considerations.
Jim Puplava:
Yeah, one of the most important things to know is do you have your estate planning documents? Do you have a will, do you have a trust, do you have powers of attorney, durable medical powers? These estate documents, you want to have them in place to number one, avoid conservatorships. Number two, tax planning if your estate is large enough, because with a living trust or an AB trust, you can double the tax exemption, which is currently roughly about $14 million, assuming that this gets extended under Trump. But right now for roughly 2025, it's about $14 million. With a living trust, you can multiply that times two if you're married and double that to $28 million. So you want to have those estate planning documents because you don't want to get caught up in a conservatorship and one of you becomes incapacitated mentally because of dementia, stroke, or something of that nature. And then also avoid estate taxes and probate. The other thing you want to take a look at, how will you handle long-term care should something happen to a spouse, either one of you, as you age and get older? Because long-term care is very, very expensive. So how are you set up to handle that? Another thing, we call this a widow's penalty. Is the surviving spouse able to handle investments and investment decisions? As a survivor, a lot of times Cris will get into situations where one spouse a lot of, in most cases it's the husband made all the financial decisions, all of a sudden he passes away and the wife is left with the portfolio and she never got involved with the investment decisions. Is she equipped to handle those kind of things? And the other thing that is also important is when one spouse passes away, you lose one Social Security check. The survivor can either take their spouse's Social Security if that was greater, but if they do that, let's say, let's say the husband passes away, he had the larger Social Security. The wife can take his Social Security, but she foregoes hers. And what difference will that make in your income? Losing one source of income? I can tell you the number of times that we've run into situations with where individuals were surprised at the loss of income of one spouse, that they only get one Social Security check, they get the larger of the two, which is good, but they lose one Social Security check. So are you set up should one spouse pass away? How much will that change your lifestyle? So you need to do some planning there.
Cris Sheridan:
As we get towards the close of today's show, there's two more important areas that we want to touch upon. This is an area that we do periodically bring up on Financial Sense. And that's when it comes to emergency preparation and preparing for the unexpected. So if these are things that you haven't already implemented, after listening to our prior shows today, we're going to cover some of the most important things right at the top of the checklist that you should be doing and thinking about for the new year. So, Jim, what are those?
Jim Puplava:
Well, first of all, if you have, let's say, a lot of property. And those properties have mortgages on them. And you're the main source of income, having enough life insurance to cover those mortgages, so the surviving spouse doesn't have to suffer or have to liquidate property because there's a major loss of income. So having life insurance, long-term care insurance, if there's, let's say dementia or Alzheimer's runs in the family. So you'll be able to handle those needs should something like that come up. Another thing is emergency cash. We always recommend at least 3 to 6 months worth of emergency cash. Something comes up, medical expenses. Just had a client where the spouse had a fall and now that spouse is going to have to get in-home care, is going to have to get physical therapy, and those are additional expenses. So make sure that you have emergency cash. Also, this is something that's overlooked, consider storing important documents in a safe or a portable hard drive. Things like wills, trusts, passports, records of home improvements. I can't tell you how important that is. And you remember this. You lived here in 2007 where basically 600,000 people were evacuated from the city of San Diego. I remember that day distinctly. And we have most of our important documents in a little portable file cabinet. So when we left the house, we had all of our important documents in a file. Today you can even put that on a USB drive, but have that available. Another thing that's very important is a video inventory of valuable household items and possessions, especially appraisals. And let me tell you why this is important. Recently working on a financial plan for a widow, and she lost her husband in 1998. And when they bought their house, they bought it in the early 80s. Back then you paid virtually nothing for a house. I think they paid like a little over $100,000 as a married couple. Well, her husband passed away in 1998. Well, this is a community property state and they had a trust. What happens is she's selling her house now. She's moving from California. Her house is now worth well over a million dollars. And so what I told her, I said, the good news is your house and what you paid for it, which was a little over $100,000 in the 80s, is no longer applicable. Because when your husband passed away, either the date of death or nine months later, you can take the valuation of the house and use that as your new cost basis. It gets a stepped-up basis in cost. And by doing that, Cris, her valuation on her house went from like a little over $100,000 went to almost half a million dollars. We got a realtor who's going to list the house, come up with appraisals of similar sales in that neighborhood, and came up with an average. So that alone, Cris probably saved well over $100,000 in taxes, in capital gains taxes when she sells the house. So having appraisals, those kind of things are very important. And here's something that's becoming really important: cyber security. Make sure you have effective passwords for your email or various websites that you visit. Or maybe you subscribe to things and don't reply to unsolicited emails or texts. I learned this the hard way. My phone got hacked because I got a text from Amazon about a delivery. Amazon does not text you, they email you. That was the way that my phone got hacked. It looked like it came from Amazon. I've had people that have gotten stuff that it looks like it came from Apple on their iTunes account. So be really careful in terms of your passwords and not replying to unsolicited emails or texts. You don't want them getting into your files and having access to your financial information.
Cris Sheridan:
Yeah. If they start asking for any type of personal information, you know, whether or not that is your Social Security number or credit card number or anything else, typically that's a huge red flag. And of course, looking at the email sender, if it's an email, that's a big one too, because a lot of times they'll come from a Gmail address or a Yahoo address. They won't be coming from the actual company. So definitely want to do your due diligence on that one. And the other thing too is scammers are constantly changing their methodology. Once it's been figured out by the broad population that this is a scam and it's no longer working, then they change their tactics and they move to something else. So it's a constant evolution and something that you just always have to be on guard for.
Jim Puplava:
One of my favorites, Cris, is I was recently notified there was an opportunity to have my student loans paid off. You know, that was. That was over 50 years ago.
Cris Sheridan:
You don't have student loans anymore?
Jim Puplava:
No, I don't have any student loans.
Cris Sheridan:
Oh, that's funny. So, yeah, depending on... That's another key tell too, is... Is it applicable? All right, so wrapping up today's show, we've talked about the importance, right at the top of the list, a new year portfolio review. Five key items there, a number of tax considerations, estate planning, preparing for the unexpected. And the fifth section or area that we're going to discuss today as we close out today's show is a mid-year review and the need to course correct. So tell us a little bit about how this fits into how our listeners and clients should be navigating the year ahead.
Jim Puplava:
Well, let's start out with investment. So mid-year you can take a look. How's your portfolio doing? Have you sold anything and taken large capital gains on something? Because you're going to need to up your quarterly estimates in that case, and then also on taxes, how are you doing? Have you set aside money for your quarterly estimates because you don't want to get penalized? There's a way to do this if you're working and you haven't paid in enough to avoid a penalty and those penalties right now are at 8, close to 8%. So you don't want to get a tax penalty for underwithholding or underpayment. There's a way to do this. If you're working, you've taken large capital gains and you haven't paid that, you can increase that through withholding in your paycheck and you'll avoid the penalty. So that's another way to get around that. But always taking a look mid-year, how well are you doing? Are you on track for your financial goals? What are your income? Do you have capital gains? What is going on with your portfolio and meeting your objectives? And of course, once again, taking a look at your taxes because you don't want to wait till the last minute as many people do. They'll wait till, you know, maybe October. Also, if you're doing or considering Roth conversions, as you're getting ready to file your tax returns, taking a look at what your income is going to be this year with estimates so you can know how much you can contribute to a Roth without bumping over the 24% tax bracket.
Cris Sheridan:
And as always, if you're thinking about "I know these things are all important and I probably should be doing them for the new year, but just need some accountability or someone to help you in the process." That's what we're here for at Financial Sense Wealth Management. So you can always give us a call. Our number once again is 888-486-3939. And if you are on our website financialsense.com where all of our podcast material is posted, we will have all of this information in a very nice and easily digestible bullet-point format where you can follow along and use this as a checklist, either with your own financial planner or if you would like to use that with us. So feel free to give us a call again. Or you can go to our money management website, which is financialsensewealth.com. If you'd like to reach out to us directly there by leaving us a message through our Contact Us tab.
Jim Puplava:
In the meantime, on behalf of Cris Sheridan and myself, we'd like to thank you for joining us here on Lifetime Planning. Until we talk again, we hope you have a pleasant week.
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