Moving from “tax” prep to “life” prep

At this time of year, everyone becomes a master at document gathering.  There is a shoe box or a filing system or a folder on your laptop to hold all the tax-related documents which are needed to complete your income tax returns.  It requires a diligent attitude to ensure nothing has been neglected or omitted which is important to the outcome of the bottom line.  Once the taxes have been submitted for the year, there is always a sigh of relief in getting to completion.

Before you pack everything up and put it away for another year, take a step beyond tax prep and begin your life prep.  What does life prep really mean?  Like tax preparation, the devil is in the details and it is critical to your financial success that you take the time to examine and shore up the other areas of your financial life.

You can start with that recently completed tax return.  Did you save to your employer plan and thereby reduce your current income?  If eligible, did you contribute to a Roth or regular IRA to increase savings for the future?  Did you contribute to your children’s 529 Plan?  Did you receive a large tax refund and change your exemptions to more accurately reflect appropriate withholding going forward?

Cash Flow Prep

Do you know where your money goes each month?  For some, there is a tendency to get to the end of the money before getting to the end of the month.  Resolve to identify leaky areas in your cash flow and plug those holes to more easily fill your savings buckets.

Protection Prep

Do you have a clear understanding of the benefits you already have through your employer?  Are they sufficient for your situation?  Although you may have disability coverage through your employer, will it provide adequate income to your family if you were unable to work?  If you experienced an early death, will your family be adequately protected?

These events can have a major impact on your family’s ability to survive and thrive, especially if you are the sole or primary breadwinner in the family.

Investing Prep

Do you understand how much risk you are taking in your investments?  While it is nice to see your savings growing substantially in increasing market environments, are you protected if the markets turn? You should not ratchet up your risk, just because you are behind in saving for the future.  Work with an advisor who understands your goals and ability to save to ensure that your asset allocation is appropriately tailored to your risk profile.

Savings Prep

Do you know how much you will need to secure your retirement?  Retirement can last for decades and you will have a difficult time if relying solely on Social Security to provide for you.

If you are saving, is it taking place only in your employer 401(k)?  You can significantly improve your retirement situation by expanding where you save so that in retirement some of your savings will be taxed as ordinary income, some as capital gains and some may be entirely tax-free.  This can be accomplished by saving not only to your employer 401k plan, but building up savings in a taxable brokerage account, or by making Roth IRA contributions or conversions.  This gives you more flexibility in retirement to enable lower overall taxation during that time.

End of Life Decision Prep

Have you completed legal documents to specify who you prefer speak on your behalf regarding health care and financial decisions?  For health care decisions, this can be accomplished through your Health Care Power of Attorney form (HCPOA) or Living Will/Advance Directives.  For financial decisions you need a General or Durable Power of Attorney.  Will the person selected honor your wishes when faced with a decision?  These are important considerations to help ensure your wishes are followed for later life decisions and end-of-life care.

While this is not an exhaustive list of “life” prep areas, it does illustrate that there is much beyond “tax” prep each year which should be examined to better prepare you for a more successful financial journey.