Crucial Financial Check-Ins Before Summer Ends

Unfortunately, summer is coming to a close which means we are more than halfway through 2023. While you take the last moments to soak up the sun, now is also a great time to do a quick financial check-in. We all know how fast time goes by so don’t wait until the end of the year to try and turn your financial picture around. 

Retirement Savings Rate

Your retirement savings rate is going to be one of the largest drivers of your financial independence journey. I like to think of your retirement savings rate as monthly contributions divided by gross household income.

The most important piece here is that those monthly contributions are truly going into a dedicated retirement account and being invested. It’s important to distinguish retirement savings and savings to your bank account. In my experience, when people save to their bank accounts this ends up being spent.

Let’s say a couple makes $200,000 a year and they each save $6,000 per year to their 401(k)s and save $18,000 annually to their savings account. Their retirement savings rate would be ($6,000 + $6,000) / $200,000 = 6%.

A general rule of thumb is that you should target at least a retirement savings rate between 15% - 20%. This is going to depend on when you want to retire and what you want your retirement to look like. 

Tax Advantaged Accounts

Some accounts have tax advantages to them and because of this they have limitations on the amount of money you can add each year. Now is a great time to check if you are on pace to maximize these accounts or to have a plan in place to take advantage of these tax savings.

Below is a summary of common tax advantaged accounts and the 2023 maximum contribution. Additionally, some of these accounts do have income limitations.  

Required Minimum Distributions

Required Minimum Distributions are mandatory withdrawals that must be taken from pre-tax retirement accounts like Traditional IRAs or 401(k)s. Required Minimum Distributions generally must be taken by December 31^st.

If you do not take a Required Minimum Distribution by year end, the penalty is 25% of the shortfall. This is a significant penalty so it’s very important that you have a plan in place to distribute the correct amount.

There are two times when you must take an RMD. The first is if you are age 73 or older. The second is from an inherited IRA or inherited Roth IRA.

Inherited RMDs are the ones I commonly see people forgetting about or not taking. The rules around when and how much to take from Inherited accounts are fairly complex, so I would recommend working with your Financial Planner or Tax Preparer to determine how much to take.

The above penalty also applies to Inherited accounts so take some time this summer to ensure this doesn’t wait until it’s too late.  

Tax Withholding

Now is a great time to look at your federal and state tax withholding to see where you will end up come tax time.

The best way to do this is to find your most recent paystub. You’ll want to find your federal, state, and local withholding. Multiply each per pay withholding by the number of pays you have left remaining in the year then add those to your year-to-date withheld on the current paystub.

This will result in an estimated year end withheld for each of your federal, state, and local. You can compare these estimated totals to your taxes owed on your 2022 return, line 16 on your federal return and line 11 on state. This will give you a decent idea of if you’ll receive a refund or owe some additional.

With this information, you can make changes to your withholding through your online payroll system or payroll department. 

Investments

We are officially more than halfway through the year, which is a great time to look at your investment portfolio. I’m a believer that when it comes to investing less is more. This applies both to the complexity of your portfolio and how often you are checking/trading.

However, it is important to check-in a couple times throughout the year to ensure you are aligned with your overall investment strategy.

The first thing I would check is to ensure all your various investment accounts are truly invested. There have been many times where I have seen individuals contributing to their 401(k) or Roth IRA and believing they are “investing” when in fact those contributions are sitting in a cash position.

Make sure you are allocating your contributions to either an equity or fixed income security. This includes your Health Savings Account! Health Savings Accounts can and should be invested if you are not using the funds in the near term.

The next thing I would look at is your overall equity to fixed income to ensure this is aligned with your risk tolerance. Markets move over time so your equity to fixed income allocation may be out of tolerance. 

Taking time to follow up on these items mid-year can help avoid unwanted stress and panic later. Market Street is always here to help, especially with many of these time sensitive matters where proactivity is crucial.