Financial discipline is largely about organization and that begins with a proper set of goals to achieve over time. The end of the year is an ideal time to start planning for the year ahead and make sure you’re on target to achieve those goals.

Asset and Liability Matching.

Good financial planning is all about asset and liability matching across time. That means you need to make sure you understand how your income and assets relate to your expenses and liabilities. A financial plan with an asset liability mismatch is likely to fail over time. Year end is the perfect time to touch up on record keeping and start getting better organized so you can increase your probability of meeting goals and do so in a more behaviorally comfortable way.

  1. Calculate your 2023 after tax income and expected after tax 2024 income.
  2. Compare this to your 2023 expenses and expected 2024 expenses.
  3. Are you saving or contributing 10-20% of your income to a dedicated savings plan?
  4. If you’re not meeting a specific savings goal now is a good time to trim the fat on the liability side of the equation. Look at those discretionary expenses that might not be necessary (cable TV, that Hulu account you never watch, the Pandora music you don’t listen to, etc).
  5. Kill high interest rate debts. Nothing will nuke your financial plan like high credit card debts and other high rate liabilities. As a general rule, you won’t earn much more than 4-5% on investment accounts so any liabilities with rates much higher than that should be paid down BEFORE you contribute to savings. Manage your liabilities well and the assets can start to take care of themselves.
  6. Speaking of credit cards – review those bills and make sure there’s no fraud or miscellaneous charges you overlooked.
  7. If you don’t have a dedicated emergency fund consider diverting all savings to that until you have a fortress of solitude to keep you sane when the world inevitably goes insane again.

Asset Allocation and Goals.

We are big advocates of time based asset allocation. This means you should try to create specific buckets for your portfolio where you’re matching future expenses and liabilities to specific corresponding assets. Most people just build a big messy homogeneous basket of assets (don’t worry, we did that too and everyone on Wall St is trained to do it). We believe this traditional asset management approach is broken and creates too much uncertainty relative to someone’s financial plans because it’s designed to build the “efficient” collection of assets to try to generate optimal returns instead of building the temporally efficient collection of assets that correspond to someone’s specific financial plan and needs.

  1. Start with your short-term expenses/liabilities and make sure you have a proper bucket to help you manage emergencies as well as short-term monthly and 1-2 year spending needs. The corresponding assets here should be short-term by nature, things like T-Bills, money market funds, savings accounts, etc. We prefer customized T-Bill ladders in an environment like this. I love building out a specific bucket for things like vacations and other discretionary spending that should be a goal for you to enjoy some of the money you’ve made, but also structuring it across a specific instrument like a 6 month T-Bill where your bill matures in a corresponding manner relative to that goal (such as a July trip to Europe, for example). Matching your liabilities to specific time based assets is not only good financial planning, but improves your behavior by helping you better understand why you own certain assets and for how long.
  2. Quantify your 2-5 year expenses and liabilities so they can be properly matched to a corresponding asset such as a 2-5 year Treasury Note. This might include things like a wedding, house downpayment, tuition or other temporally uncertain expenses that fall into an intermediate time horizon.
  3. Once you’ve got your shorter-term expenses calculated you can begin to focus on more long-term goals like retirement and unknowns. Your short-term buckets should free up a ton of behavioral bandwidth for you to think long-term and take some risk. These should be more aggressive allocations that adhere to a long-term plan across a multi-year and multi-decade time period. I prefer building out a 5-15 and 15+ year bucket for these instruments. That way we’ve got most of our time horizons covered in a specifically structured financial plan and asset allocation.
  4. Prune the fat in your portfolio. Now is a good time to harvest some losses and trim those high fee mutual funds or individual stocks. We always like to keep things simple so your default should be low cost ETFs. If you’ve got 20+ positions giving you brain damage then set a goal to trim that down to 5 or so funds. There’s really no need for so much complexity in a portfolio and if your portfolio has an excessive number of positions you might want to reconsider your allocation.
  5. 2023 was a great year for risk assets. Make sure it didn’t skew your risk profile too much. If your 60/40 stock/bond target allocation grew into 75/25 then consider rebalancing back to 60% stocks so you reduce the volatility contribution from that single component. Avoid chasing performance. 2023 was a good year for high risk instruments and no one, I mean no one, knows what 2024 will entail. Don’t chase performance when you might just be chasing more risk.
  6. Nuke those I-Bond and “high yield savings” accounts. Consider consolidating your savings accounts into a TBill ladder or simple government money market fund to reduce brain damage and take advantage of the current high interest rate environment.

Retirement Planning

  1. Review your retirement goals and objectives. Are you on track to retire when you want to?
  2. If you’re nearing or early in retirement consider building a bond tent to help you navigate this big emotional and financial shift. A bond tent is a short-term boost in your bond allocation to help you create more certainty over a specific short-term time horizon. Your income and job is like a bond allocation that pays you a fixed income. When you retire that asset and its income stream shrink or go away. Filling that void with another fixed income source can help you better navigate this period of uncertainty.
  3. Make sure you’re maxing out 401ks (especially up to the match) as well as other retirement plan options like T-IRAs and Roth IRAs.
  4. If you have old 401Ks roll them over and take advantage of the enhanced flexibility and lower fees in a Rollover IRA.
  5. If you are over 73 you should be starting to take requirement minimum distributions. Do so before year-end and plan for next year’s RMD now. Make sure you have some liquidity to meet RMDs in case your portfolio is in a drawdown when you need to take your distribution.

Tax Planning

  1. Talk to your CPA now about your 2023 taxes and whether there’s anything you can do before year-end to help your tax bill.
  2. Harvest losses in taxable accounts.
  3. Contribute to charity if you can.
  4. You can gift up to $17K in 2023 ($34k per couple). Also consider that the lifetime estate tax exemption is $13MM+ so very few people will have to adhere to the $17K per year rule. Consider giving more to loved ones while they’re alive (and while you’re alive) so you can all enjoy the savings you’ve worked so hard for. Talk to your CPA to make sure this is appropriate for you.
  5. If you have large gains from single stock exposure in 2023 then consider a direct indexing program or other tax efficient approach to offsetting some of this single entity tax and investment risk.

Estate Planning

  1. Do you have a trust and will? Now’s a good time to get your ducks in a row to make sure your beneficiaries don’t have to deal with the courts during a time when they’re already in mourning.
  2. Double check your retirement plan and insurance beneficiaries. You can also add beneficiaries to many checking accounts if you don’t already. For taxable accounts that don’t have a corresponding estate plan consider changing the account to a “transfer on death” account to create the functional equivalent of a beneficiary.
  3. If you have dependents then consider term life insurance. Again, match the assets and liabilities here. There’s no need to be overly insured and your term should cover a period in which you’re earning income and dependents would be meaningfully harmed by the loss of that income. For example, if you are 45 years old with a retirement age of 65 then don’t buy whole life insurance. You don’t need it! Buy a 20 year term policy from a reputable insurer and invest the difference.
  4. If you have old trust and will documents now is a good time to review and change them as needed.

And of course, if you want help with any of the following you can contact us here. We’d love to help you build more discipline into your financial plan.