Safeguard Your Financial Health and Annual Checkup

The start of a new year is an excellent time to take a long look at your financial health. In this yearly financial checkup, consider where you want to go, where you are now and whether the financial decisions you have made are moving you in the right direction, at the right speed.

Where you want to go

A financial plan should start with an understanding of your goals. If you have not made a list of your financial goals yet, it may help you to write your goals down and talk them over with other members of your family.

Be as specific as possible. This will help you with the next step, which is determining how much money you will need to accomplish those goals. With short-term goals, such as buying a car or taking a vacation, figuring the cost can be relatively easy.

But with longer-term goals, such as retirement, it can be harder to figure out what you need. In general, most experts think that you will need 70% to 80% of your pre-retirement income to provide a comfortable retirement. And you may need that income over 20 years or more, depending on when you retire and how long you live.

Where you are

The money and property you own-your assets-may include real estate, jewelry, cars, etc., but most of the assets you will use to reach your goals are probably invested in one of the three main asset classes: stocks, bonds and cash.

How your money is distributed among these asset classes is called your asset allocation. Your asset allocation should reflect how much you need to save and how long you have to save. That’s because, in general, those investments that have the highest risk-such as stocks-also have had the highest return over time. And, risk is reduced over time, because your investment has a chance to recover from any market drops. So, the best asset allocation for you will provide the highest potential return at a level of risk appropriate for the time you have available to invest.

If you have already decided on an asset allocation, check to make sure your actual allocation is in line with your target. If you find that your asset allocation no longer reflects your strategy, you should rebalance your account.

Check direction

Use your annual financial review to ensure that the investment strategy you have chosen still seems most likely to help you meet your goals. If it does, then you can rest easy. But if you are likely to fall short of your goals, you may need to alter either your strategy or your goals.

You may want to save more. The new tax law allows you to put more into your employer-sponsored retirement savings plan–up to $11,000 in 2002-and make an additional catch-up contribution if you are age 50 or over.

You also may decide to invest more aggressively, so that you may get higher potential returns, or you may choose instead to adjust your goals so that they are more likely to be met.

Take this opportunity also to make sure all your paperwork is up to date, especially if you have had a major life change, such as marriage, divorce, a child or grandchild. Do you need to change the beneficiary on your life insurance or other benefits? Do you need to increase or decrease your insurance?

Finally, gather the information you need to file your taxes. In fact, you might want to file your return as soon as possible, especially if you are expecting a refund.