Financial planning guide: What to review annually | Fidelity (2024)

Plan for your family's future as you review your savings and investment strategies.

5 key questions to ask at annual review time

• Is your investment strategy on track?
• Are you saving tax-efficiently?
• Are you protecting your income?
• Are you preserving your assets?
• How does your plan affect your family?

When are you most likely to do a reality check on your overall financial health? Is it when your investments are doing well? Or is it when the markets are down and you're nervous? Chances are, it's the latter, which may not be the optimal time to make investment decisions, particularly if emotions are high. That's why taking the time to do a prescheduled annual review of your investments and other financial matters makes sense.

"Careful planning is essential in all economic climates, but it's particularly valuable for times of market turmoil," says Ann Dowd, CFP^®, vice president at Fidelity. "Think of it as if you're planning for a road trip. That's not the time to check your brakes and tires. You do that before, so you know they are in good shape."

An annual financial checkup can take place at any time during the year and can help you better understand the "big picture" of your overall financial planning efforts. You can stop and think about your family's financial goals, such as saving for retirement, a house, or a child's education. You can consider reducing taxes on your investments, adjusting how much risk you're willing to take on, or building a financial cushion.

Once you're clear on your goals, you can then work on ensuring that you're saving and investing appropriately for those goals. And while you're looking at your accounts and holdings, take care of "housekeeping" items too, like checking beneficiaries and completing a health care proxy, which are not complicated but can have serious consequences if neglected.

Here are 5 questions to ask when you do a financial review.

1. Is my investment strategy on track?

You probably have several savings goals and accounts. Your annual financial review should revisit each of your priorities and your saving and investing strategies for reaching them. If your situation has changed, make adjustments as necessary. At least once a year, check your target asset mix to ensure that it continues to reflect your time frame, risk tolerance, needs, and preferences, and perform any rebalancing that might be necessary in light of the past year's market performance.

On your own or with your financial professional, look at specific investments and evaluate whether they continue to have a role in your portfolio. It's important to match your investments to certain time frames or specific goals. Some may be long term, such as saving for a child's education or your retirement. Others may be short term, such as saving for a new car, a vacation home, or travel.

For example, you may take on more risk saving for a retirement that is decades away, or you may want more conservative investment options to buy a home in 3 years.

As part of your annual review, give your portfolio a regular checkup with an eye to diversification. The goal of diversification is not necessarily to boost performance—it won't ensure gains or guarantee against losses—but once you target a level of risk based on your goals, time horizon, and tolerance for volatility, diversification may provide the potential to improve returns for that level of risk.

If you participate in your employer's stock plan benefit, remember that your diversification strategy needs to be addressed every year as a result of regular vesting in stock awards. Individual securities held over time can adversely impact the diversification of your portfolio.

Tip: To build a diversified portfolio, consider diversifying within each asset class that you invest in and look for investments—stocks, bonds, cash, or others—whose returns haven't historically moved in the same direction and to the same degree. This way, even if a portion of your portfolio is declining, the rest of your portfolio has an opportunity to grow, or potentially not decline as much. Bear in mind that all investments have the potential to go either up or down in value or performance, which is why rebalancing can be important.

2. Am I saving tax-efficiently?

Beyond applying diversification strategies broadly to your overall portfolio, what approaches are you exploring to help defer, reduce, or more efficiently manage taxes on your investments? Investing tax-efficiently doesn't have to be complicated, but it does take some planning. While taxes should never be the primary driver of an investment strategy, better tax awareness does have the potential to improve your returns.

Although you cannot control market returns or tax law, you can control the type of account where your assets are placed by choosing how you use accounts that offer certain tax advantages. This type of approach is often referred to as asset location. Employing this strategy allows you to choose which assets to keep in your tax-advantaged accounts and which to leave in your taxable accounts. In general, the more tax-inefficient an investment is, the more tax you pay on it, and the better off you may be placing it into a tax-advantaged account

Fidelity's general guideline is this: Consider putting certain investments which generate taxable income—for example, taxable bonds and real estate investment trusts—in tax-deferred accounts like 401(k)s and IRAs. For those investments that are more "tax-efficient"—such as municipal bonds and securities held for more than a year—consider placing them in taxable accounts.

Tip: Asset and account location should be considered within the context of tax efficiency and maintaining an appropriate asset mix. Asset location is the strategic matching of asset type and account type based on the asset's tax efficiency and the tax treatment of different account registration types. Account location is the strategic ordering of money flows to potentially help minimize taxes and help determine where to invest or where to withdraw from next, depending on your situation.

Are you already taking full advantage of a 401(k) plan, IRA, or other qualified account that may be available to you? Generally, these accounts are the best place to start a program of active asset location because of their tax advantages, but each comes with contribution and withdrawal restrictions.

If you're entering retirement and transitioning from saving to spending, a tax-savvy withdrawal strategy can help your savings last through retirement. While the traditional withdrawal hierarchy of taxable, tax-deferred, and tax-exempt assets is a good starting point, individual situations and changing circ*mstances may require making adjustments. Aim to withdraw no more than 4%–5% from your savings each year in retirement to help improve the likelihood that your savings will last for 20 to 30 years in retirement.

Tip: Participating in your employer's stock plan benefit may mean that you're generating taxable income. It's important to understand when these taxes are triggered and when tax withholding (if any) applies. Read Equity Compensation: Tax Treatment Guidelines (PDF)

3. Am I protecting my income?

You've worked hard and want to protect your income. So it's wise to evaluate your family's total insurance needs annually to make sure you have the right amount and type of insurance to cover unforeseen circ*mstances that can derail a financial plan.

Life insurance may be a good place to start. If your family is growing, you might want to increase the amount of your life insurance to protect your loved ones. On the other hand, many people find as their net worth climbs and their children reach adulthood, they need less life insurance.

If you choose to reduce your life insurance, you may want to consider increasing savings levels in a health savings account or retirement account to help you better prepare for future health care expenses. You might also benefit from looking into long-term care insurance, which may offer a variety of features and options.

For added protection for your family, there are 2 other kinds of insurance to consider: disability insurance and umbrella insurance. Disability insurance can help keep a paycheck coming in after you incur an illness, injury, or other condition, potentially including COVID-19, that prevents you from being able to do your regular job. Umbrella insurance protects against the potential financial fallout of certain types of unforeseen events that lead to property damage or injury. It supplements other liability policies most people already have in place, such as auto, homeowner's, or renter's insurance. Unlike disability insurance, which is needed only while working, umbrella insurance coverage should be maintained through your career and retirement. Coverage should approximately equal your net worth.

One more thing: Your annual review should also include a simple check of your insurance beneficiary designations to see whether they're up to date.

4. Am I preserving my assets?

Use your annual review to make sure you have an estate plan, and that it continues to reflect your family status and financial situation. Ensure that it helps make the best use of the latest estate and tax laws, and that key individuals know where to find relevant documents and information.

If you do have an estate plan, do the people you care about know about it? Where do you keep the paperwork, and what role should your loved ones play if something happens to you? Marriage, divorce, birth, and death are the 4 big events that affect estate plans, but you may also want to consider other factors, such as longevity and health, that could affect your planning.

Also make sure that all of your accounts have beneficiary designations and transfer on death (TOD) elections that reflect your current wishes.

Thinking about a will, health care proxy, and power of attorney can be uncomfortable, especially during the COVID-19 pandemic. However, without proper planning and having your designates in place, the courts may make some decisions for you. If you don't have any of these key documents, take the time to set them up. If you have them, review not only your paperwork but any life events that have occurred. Changing careers, moving, having children or grandchildren, or losing a loved one can have a big impact on your plan overall.

5. How does my financial plan affect my family?

It's not just your retirement or financial future that you're planning for, especially as you age. You're likely researching and cultivating strategies to provide financial assistance to a number of people that you care deeply for, including parents, children, or even grandchildren. Beyond college, a lot of parents are helping to launch their millennial children into the world of fully independent living. Meanwhile, many have aging parents who can no longer live on their own or manage their own financial and personal affairs. Will caring for others affect your financial goals, priorities, and outcomes?

An annual review can help prioritize financial decisions that you need to make to support your family's goals across the generations—and help tee up long-neglected family money conversations. It can help you bring your family together to sort through vital matters related to such things as college savings, caregiving responsibilities, health care decisions, estate planning, and the tax implications of an inheritance.

Take a long-term view for your family

While all this might sound like a lot of ground to cover, an annual review is well worth the effort when you consider the hard work you've invested in building and protecting your wealth. Says Dowd: "It's important to have a long-term view of your financial strategies. The annual review can be scheduled at any point throughout the year. It represents an opportunity to reassess your investment and financial situation, while also thinking about future milestones and moments that matter for the people you care about the most."