If you’re like most people, the expenses that you have today are a far cry from the expenses you had a year ago.
After all, although inflation has been trending downward, prices still were up 7.1% in November, compared to a year earlier. Some costs are up even higher year-over-year—such as food, which was up 10.6%, according to the November Consumer Price Index (CPI). Moreover, depending on where you live, your personal rate of inflation may even be higher than those nationwide figures. In Phoenix, for instance, inflation hit 12.10% year-over year in November, making it the metropolitan area with the highest inflation (among the 23 cities included in the ranking).
Your financial plan needs to take into account these higher prices and other aspects of your life that may have changed versus a year ago, according to experts. And so, as you develop your New Year’s “to-do” list, scheduling an appointment with your financial advisor should be near the top. That’s true any year—but going into 2023 especially, given the level of inflation and the market volatility over the past year.
As you look at your finances and prepare to discuss them with your advisor, here are some things to consider:
How has your spending changed?
“It’s important for individuals to examine their own spending patterns to determine their personal inflation rate. This will help them see how inflation is impacting them personally,” said Kimberly Bridges, director of financial planning at BOK Financial®.
One quick way of calculating your personal inflation rate is to subtract your total monthly spending from a year ago from your current monthly spending, and then to divide that number by your monthly spending from a year ago.
In addition to where you live, factors such as whether you own your home and commute to work may make your personal rate of inflation different from the nationwide average, Bridges noted. “Two categories where inflation has been exceptionally high are gasoline and rent, so an individual who is renting and commuting to the office each day has experienced a greater hit to their wallet than a retiree who owns his home.”
How much are you earning, really?
Employers plan to increase their salary budgets by 4.6% in 2023, which would be the highest expected annual jump in 15 years, according to a recent international survey by Willis Towers Watson.
However, even if you do get a raise, it might not necessarily mean that you can book that trip to Aruba.
“Again, people need to look at their expenses to see how much they have actually been impacted by inflation. They may find that even with the pay increase they are falling behind,” Bridges said.
If after taking into account your personal rate of inflation, you do find that you are taking home more pay, your financial advisor can help you decide how best to use the extra money. “This may include increasing your 401(k) savings, adding to your investment portfolio, or simply building up your emergency fund,” she said.
Does your portfolio need an adjustment?
“At a minimum, even if you're someone who's not really interested in watching the financial markets, you still need to get in front of your advisor on an annual basis to gain an understanding of what's going on in the markets and what's going on with your portfolio specifically,” Bridges said.
Your advisor will review the performance of your portfolio, including a look at the difference between expectations at the beginning of last year versus how the portfolio actually performed and why.
This meeting is also an opportunity for you to review your investment objectives and take a "gut check" of how much risk you are comfortable taking, she added.
“If the market lows from 2022 caused you to lose sleep, you may want to discuss a strategy for reducing your risk exposure in the future”- Kim Bridges, director of financial planning at BOK Financial
Is your insurance coverage adequate and up-to-date?
Each year, you should be reviewing your insurance coverage, including property and casualty, as well as life insurance, Bridges said. Make sure you have adequate coverage and that your designated beneficiaries are up-to-date. Your homeowners’ insurance, for instance, should fully cover the cost of a rebuild in the event of a total loss.
Do you need to create or update your estate plan?
Recipients of a life insurance policy don’t have to pay income tax on what they receive. However, if your estate exceeds the federal applicable exclusion amount, which will increase to $12.92 million per person in 2023, then your estate could be substantially reduced due to estate taxes. That would leave less available for your heirs, especially as the amount over the exclusion will be taxed at 40%.
“This exclusion amount will revert back to roughly $6 million in 2026, so individuals whose estates today fall between those two numbers should work with their advisors to put a plan in place for taking advantage of today’s higher exclusion before it goes away,” Bridges noted.
“This is a big deal for anyone who will be impacted by it, and some of the preferred strategies will take time to implement, so now is a good time to address it,” she explained. “In addition, last year’s downturn in the market has provided an opportunity to engage in certain strategies that would in essence ‘freeze’ current valuations for purposes of transferring assets outside of the taxable estate. In other words, if you fall into this category you should not delay.”
Even if you won’t be impacted by the change, it’s still important to meet with your estate attorney, tax advisor and financial advisor now to put your estate plan in place, if you don’t have one—or to audit your estate plan if you do.
In Bridges’ words: “Assets can be depleted when there’s no estate plan in place.”
. © 2024 BOKF, NA.