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Outside the Box: Do your finances need a reality check?

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As you think about resolutions, habits and goals you want to set for 2022, ‘wellness’ in some form is likely on your list. Whether it is physical, mental or financial health, enduring the pandemic for nearly two years has everyone focused on taking better care of themselves and those they love.

One way to define wellness is the act of practicing healthy habits on a daily basis to attain better physical, mental and financial outcomes.

In order to make healthy choices, you first must assess your current situation. From a financial health standpoint, that means taking a look at your full financial picture and checking to see if you are tracking to your goals. What are your saving and spending rates? And where do your equity and credit levels sit? Once you have taken the pulse on these key financial vital signs, you can perform a more comprehensive exam guided by the following four pillars of good financial health. This will help you focus on what needs your attention in the new year.

1. Accumulate and grow your wealth

From having an emergency fund to developing various ways to save for the future, it’s important to focus on achieving long-term financial health. Just like good exercise and diet, saving early and often, definitely has long-term advantages, tax-advantaged accounts, such as 401(k)s, Roth IRAs/401(k)s and Health Spending Accounts are smart savings tools for almost everyone.

As you step through life’s stages, there will be opportunities to accelerate wealth building through events such as homeownership, inheritance, liquidation events and income spikes. But, just like fitness experts recommend a mix of cardio and strength training, remember that diversifying your sources of wealth and being smart about market risk will build financial resilience. Investing with greater purpose might be a new financial wellness goal for 2022.

Taking a values based approach to your finances including your investments will help you stay more connected with the purpose and meaning of your wealth. Evaluating the health of the companies you invest in through an environmental, social and governance lens will help you make investment decisions you can not only feel good about but also are likely to perform better long term.   

2. Fund your lifestyle today and tomorrow

Again, just like getting regular exercise and maintaining a healthy diet, spending within your means and staying away from bad debt are two important daily habits to adopt in 2022 and beyond. That’s because how you think about your spending needs today plays into future lifestyle choices. Focus on essential versus discretionary spending and, if possible, save for big-ticket purchases like a car or vacation. Planning ahead to ensure that your essential needs are always covered should be a top priority. For many, the pandemic has resulted in a pay increase thanks to a reprieve in work-related costs. That provided many of us the opportunity to catch-up, pay down debt or save more. Still, it is important to be thoughtful about those expenses re-emerging sometime in the future. Keeping an eye on your credit score and using credit wisely are also two important financial routines.

Once you are near retirement, examine the sources of secure income available to fund your essential expenses — this should be a part of your routine wellness check. It requires a view into the future and an understanding of the impact of the market, inflation, taxes, interest rates and other risks that might impact your plan, and how the impact changes as you age.

Understanding how taxes will impact your nest egg is important. Your financial adviser can help you understand what your retirement paycheck will look like including estimated taxes. They can also help you understand your Social Security options and help you evaluate if a Roth conversion or an annuity might be a helpful strategy to consider.    

3. Protect what is important to you

Protecting your family and your wealth during your working years is foundational to sustaining that wealth throughout your lifetime. Having an appropriate level of insurance, including property and casualty insurance, should be at the top of the list of financial preventive care, but life insurance is another important protective measure to take. Many employer benefit plans provide basic coverage which is helpful in the short term. However, once you have a family and your income and estate grow, you will likely want more portable and permanent insurance. In addition, as you age and your wealth grows, it is important to revisit the purpose and amount of coverage for your insurance, as well as explore other important considerations, including preserving your wealth for the next generation. Baby boomers, in particular, would benefit from an insurance review in 2022 as the level of wealth and life circumstances at play when they first signed up for their insurance likely have changed in the years — or decades — since.

4. Create a lasting legacy

Tackling estate essentials is another financial health “to-do” that everyone should prioritize, regardless of age or wealth. Establishing key estate documents, including a current healthcare directive, will and power of attorney, are important first steps. Ensuring your assets are properly titled and beneficiary designations are also critical.

The threat of a lower federal estate tax exemption has put many investors on high alert. Regardless of what happens with the legislative agenda, we do know the current high federal estate and gift tax exemption of $12.06 million per individual for 2022 is set to sunset on Dec. 31, 2025 and likely to revert to an inflation adjusted level of $6 million per individual. With the growing wealth of the baby boomer cohort, many more families will find themselves with a taxable estate. Not to mention, there are many states that have estate and gift tax provisions with quite low exemptions. Getting ahead of this timeline with a confident estate plan should be a priority for 2022.   

Gifting is often part of our legacy plans and is more rewarding to do while you are alive so you can witness the impact you are making. Whether you are gifting to your kids to help them get their first house, starting a college fund for the grandchildren or a providing a meaningful gift to an important cause, gifting should be part of your wellness checkup. Research tells us that being generous and spending money on others makes us happier and brings purpose to our wealth. It also has the added benefit of the next generation seeing generosity in action. What better healthy habit is there?

Happy, healthy, wealthy and wise

Use the new year as an opportunity to feel more in control of your financial wellness. This should include a wellness checkup, routine healthy habits, wise decisions, preventive measures and important life stage adjustments as you age and grow your wealth. Being generous in giving and mindful about your investments will add to your happy factor. While this may seem daunting, you certainly don’t have to tackle everything at once or do it alone. Work with your financial adviser to help get focused on what is most important to you and what will be most effective in 2022.  

Angie O’Leary is head of wealth planning at RBC Wealth Management-U.S. RBC Wealth Management is not a tax adviser. All decisions regarding the tax implications of your investments should be made in consultation with your independent tax adviser. RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member FINRA/NYSE/SIPC.

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