Robert Warner

Annual Fiscal Physical Key to Your Financial Health

Reviewing and maintaining your financial health has parallels to your physical health, especially for pilots, who are required to get physical examinations in order to keep flying throughout their careers. Failure to maintain your medical certifications at the prescribed intervals could result in significant financial loss if you are prohibited from flying for even a short time.

The same applies to your actual finances – failure to conduct regular reviews could lead to lost opportunities or actual losses. Approaching your finances as you would your medical certifications, by doing at least an annual “fiscal physical”, is a smart way to help ensure you are on a path to financial health and a comfortable retirement.

Consider your financial plan as the baseline. But if you, like many others, don’t yet have a financial plan, talk with your financial advisor to get started.  The 2015 Planning and Progress Study by Northwestern Mutual found that just 40 percent of adults in the U.S. have set financial goals and only 20 percent have a written financial plan. The study also found that just 26 percent had consulted with a financial advisor.

Instead of making financial planning a New Years resolution, many find this time of year a good time to take stock of their finances after completing their tax returns each year.

What’s Involved in a Fiscal Physical?

Here are some elements to consider as you evaluate your financial health.

Analyze cash flow and savings

Start off by listing your income from all sources and compare that to your expenses – ideally, you’ll have available savings. If you don’t already have a budget, consider making one. That will make it easier going forward to track your regular expenses such as mortgage, food, clothing, insurance, healthcare and education, along with discretionary spending for such items as travel and entertainment.

Once you know your monthly and annual expenses, take a hard look at your spending. Determine whether you are saving enough to achieve your financial goals, both short- and long-term, and whether you need to scale back on spending. Some financial advisors recommend saving 10% or more of gross earnings, but you will need to decide what’s best for you. Make sure you have a source of emergency funds. Be sure to consider potential future expenses such as college tuition or healthcare in retirement. Increasing savings by as little as one percent can yield significant results over time, as shown in the New York Times 1% More Savings Calculator.

Maximizing your savings also applies to your 401(k) and other retirement plans. Generally, you should contribute at least the amount of your employer match. But if you can, save as much as possible, up to the maximum of $18,000 per year, with an additional $6,000 allowed for those over age 50. Additional savings can go into IRAs, Roth IRAs or other retirement accounts.

 Review your portfolio

 Work with your advisor to review your portfolio’s basics: asset allocation performance, and fees.  You might need to rebalance if your asset allocation has changed significantly. For example, a baseline allocation of 60 percent stocks and 40 percent bonds could end up at 65 percent stocks and 35 percent bonds if equities had strong gains since your last review. Or perhaps you wish to revise your allocation as you near retirement or if your financial situation has changed.  You also should consider whether your risk tolerance has changed since your last portfolio review. As with your asset allocation, you might want to reduce risk as you approach retirement because you have less time to recover from losses.

 Reduce debt

 Summarize and evaluate all of your debt and make sure you are taking steps to reduce it over time. Avoid or minimize credit card use and make every effort to pay the balance in full each month. An annual review also is a great time to review your interest rates and consider refinancing mortgage and vehicle loans and other debt. If you refinance your mortgage, try not to extend the maturity.

Evaluate insurance coverage

 Determine whether your current coverage is appropriate and adequate. Be sure to evaluate your life, medical, umbrella/liability and disability coverage as well as auto and home. You’ll also want to evaluate whether you need greater or lower levels of coverage, depending on your circumstances. For example, you might need less life insurance if you have paid off your mortgage and your children have completed college. Make sure your liability limits are high enough to cover your assets and that your home insurance has provisions to replace your possessions as well as the home itself.

 Optimize your tax position

 Review all available tax deductions and credits for retirement and education savings, dependent care, medical expenses and charitable contributions to make sure you are taking advantage of those for which you are eligible.  If you received a large tax return this year, consider adjusting your withholding. If you have high-deductible medical insurance, contribute as much as you can in pre-tax dollars to your Health Savings Account (HSA) to maximize your benefits.

Estate planning

 Life changes such as marriage, divorce, death and changes in financial status all can trigger the need to revise your estate plan. But an annual review of estate documents can allow you to make needed changes without the emotion that comes with life’s events. Your evaluation should include making sure all of your beneficiaries are correct and up to date for retirement plans, life insurance and trusts. It’s also a good time to review your will and health directives to make sure they reflect your wishes and your current financial situation.

The Diagnosis

 Once you’ve completed your fiscal physical, ask yourself whether your assumptions are still on target to achieve your financial goals.  The main challenge in financial planning is determining whether you are meeting your financial goals as you near retirement. A basic element of financial planning is to identify assumptions such as how much income you’ll need, how long your next egg will last, where and how you’d like to live, whether you’ll need money for travel or other interests, and whether you might need long-term care. Your financial plan should identify these goals that, if achieved, will allow you to retire comfortably.

You may find in the process of an annual review that your assumptions are off and you need to revise your saving or spending to get back on track. It’s also possible that your goals and assumptions could change over time due to circumstances such as illness, divorce or other unexpected occurrences. Our ClearWealth® Pre-Retirement Program uses sophisticated planning software to help predict the success of your financial plan, and we offer free one-on-one financial analysis for pilots.

The knowledge you gain from conducting an annual fiscal physical can provide reassurance you are on track and help guide your financial decisions so you ultimately achieve your goals and head toward retirement with comfort and confidence.

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Views and comments expressed in this blog are those of the author and do not necessarily represent the positions of Cleary Gull or fellow Cleary Gull associates.