A Financial Review in Early 2023 Can Optimize Your Strategy

January is always a good time to do a financial review, but after last year’s tumult, it’s especially valuable.

In 2022, a year like no other, the stock market bounced up and down like a yo-yo and ended the year well below where it started. Inflation and interest rates shot up dramatically — good news for savers, but bad news for people who already owned bonds and bond funds, whose prices plummeted.

While the financial and economic landscape has changed dramatically in a year, you can find new opportunities and reduce your risk. Here are some tips.

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Review Your Budget.

Review your income and expenses to make sure you're on track to meet your financial goals. Now is a good time to make any necessary adjustments to your spending or saving habits.

Review IRA, 401(k) and Other Retirement Plan Contributions.

If you haven’t fully funded your retirement plan(s) this year, consider what you can afford to salt away. Contributions to 401(k) and 403(b) plans reduce your taxable wages. It’s too late for 2022 contributions, as the deadline was Dec. 31, but you should look at your 2023 contribution levels. If you’re not contributing at all, consider starting. If you’re already contributing, consider increasing your contributions up to the IRS limit. This year, you can place up to $22,500 into your 401(k) or 403(b), up from the $20,500 limit in 2022. If you’re 50 or older, you can contribute an additional $7,500.

People who are eligible to make deductible contributions to an IRA can save on 2022 taxes by contributing by April 18, 2023. If you’re not eligible, consider saving in a Roth IRA, which has more liberal income limits.

Review Rates on CDs and Bonds.

When reinvesting money from maturing CDs or bonds, don’t automatically re-up. You may get a better rate elsewhere. Money market accounts, bank certificates of deposit and bonds now pay decent rates for the first time in years. But you may be able to do better.

Many people who choose CDs by default can get a higher rate with a fixed-rate annuity, which is especially suited for people in their 50s and older. The reason: If you withdraw money from an annuity before age 59½, you’ll normally owe the IRS a 10% penalty on the interest earnings you received.

Also known as a multiyear guarantee annuity or a CD-type annuity (opens in new tab), this type of annuity behaves much like a bank certificate of deposit. Like a CD, it pays a guaranteed interest rate for a set period, usually two to 10 years. Unlike CD interest, annuity interest is tax-deferred until withdrawn.

While the top three-year CD paid 4.44% as of mid-January, you can find a three-year fixed annuity that pays 5.53%, and there are also higher rates on two- and five-year annuities. While annuities are not FDIC-insured, they are backed by well-regulated life insurance companies. Backup protection is provided by state guaranty associations. Check the insurer’s AM Best (opens in new tab) rating before you buy.

Review Your Asset Allocation and Rebalance if Necessary.

Before 2022, the stock market boomed for years, and you may find that your desired asset allocation is still off track. Suppose you had set your allocation as 50% in equities (stocks and stock funds) and 50% in fixed-income (bonds, CDs, fixed annuities, money markets and similar instruments). Even after last year’s decline, you’re now 65% in equities and 35% in fixed income.

Now it’s time to start reallocating to get back to 50-50. Reallocating money in tax-deferred retirement plans and annuities and life insurance policies takes a bit less planning because gains are not taxed until withdrawn. Some people have enough money in their retirement plans so that they can accomplish their overall rebalancing using only them. Remember, it’s your overall asset allocation that counts, not the allocation in any one account.

If you do need to rebalance your taxable investments, be aware of tax strategy. For instance, if you have unrealized losses, you can sell off losing investments to offset gains from selling your winners. If you’re rebalancing a lot of taxable money, you may want to consult a financial planner or tax expert.

If You’re in Your 50s or Older, Consider a Deferred Income Annuity.

Also called a longevity annuity, a deferred income annuity (opens in new tab) converts a lump sum deposit into a stream of payments that will start at a future date you choose. Most people chose the lifetime-income option. This will provide uninterrupted income as long as you live.

Make Sure Your Beneficiaries Are Up to Date.

The listed beneficiaries on annuities, life insurance policies and retirement plans will receive the proceeds on your death. Life changes such as marriage, divorce, the birth of children or grandchildren and the death of a loved one may require updating your beneficiaries.

If you’re married, your spouse is normally your primary beneficiary, and your child or children are contingent. If you’ve been divorced and remarried and your ex-spouse is still listed as the beneficiary, your intended heirs will get a rude shock when you pass.

Annuity expert Ken Nuss (opens in new tab) is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and immediate-income annuities. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. One of America’s top experts on annuities, he writes on retirement income and annuities regularly.

A free quote comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com (opens in new tab) or by calling (800) 239-0356.