Retired? Here's Your End-Of-Year Financial Checklist

retirement

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It’s Oct. 27, and the Macy’s across the street from our office is already putting up Christmas trees. Of course, they’re rushing things, but you know how the end of the year goes.One day you’re loading your cart with Halloween candy, and in the blink of an eye you find yourself reaching for the wrapping paper and eggnog.

Given how fourth-quarter calendars have a way of filling up, it’s important to put all of your year-end financial to-dos on the calendar now to prevent important tasks from slipping through the cracks.

Here are some of the key ones to tackle if you’re retired. Note that they’re not discrete–some of the tasks, such as bucket maintenance, rebalancing, tax-loss selling, and meeting RMDs–are intertwined with one another.

1. Reshop your Medicare coverage.
Don’t put this one off, because the Medicare open enrollment season is earlier this year than in the past. Through last year, you had until year-end to make decisions about your Medicare coverage, including your prescription drug benefit, but this year the enrollment season will run from Oct. 15 through Dec. 7.

Pay particular attention to your prescription drug coverage; not only do plans change the coverage they provide for various drugs, but your own lineup of prescription drugs may have changed since last year, too. Morningstar contributor Mark Miller provided a Medicare enrollment checklist in this article.

2. Tally up your out-of-pocket health-care costs.
In a related vein, it’s also a good time to gauge your out-of-pocket health-care expenses for the year to date, including health-insurance and Medicare premiums, premiums for long-term care insurance, nursing-home costs, and prescription-drug expenses.

If those expenses exceed 7.5% of your adjusted gross income for 2011, you’ll be able to deduct any additional amount on your tax return for the year. If it appears that you’re close to hitting that threshold heading into 2011’s fourth quarter, it may make sense to incur health-care expenses this year rather than next in situations where you have the leeway to do so. But don’t go too far out of your way–you don’t get to deduct the 7.5% of AGI plus any overage; you can only deduct the amount that exceeds 7.5% of your AGI.

3. Create your 2011 tax file. 
Do you hate that scramble to gather up receipts and financial statements as the dreaded mid-April tax deadline draws near? Me too. Avoid that headache by creating your 2011 tax file now.

You can stash the aforementioned health-care receipts there, as well as receipts for charitable contributions and other deductible expenses. And as your investment-related 1099s begin to roll in early next year, they won’t get lost in the shuffle; you’ll have a place to put them straightaway.

4. Conduct a year-end portfolio review.
End-of-year financial to-do lists often urge you to rebalance, but a better starting point is to conduct a holistic year-end portfolio review. Assessing your asset allocation and withdrawal rates are a huge part of such a checkup, but so is conducting a fundamental review of your holdings. From there, you can decide whether changes are in order. This article provides a five-step blueprint for conducting your portfolio review.

5. Tackle “bucket maintenance.”
If you’re using the bucket approach to manage your income stream during retirement, you have to make time for periodic “bucket maintenance”–the process of topping up the liquid pool of assets that you depleted in the previous year. If you’re conducting bucket maintenance in the waning months of 2011, high-quality bonds are a logical place to look for cash to fill up your liquidity bucket, because they’ve enjoyed particularly robust gains for the year to date.

(If you’ve benefited from holding long-term Treasuries as part of your portfolio this year, my hat’s off to you, but it’s probably a good time to think about lightening up.) This article outlines the basics of a bucketing plan for retirement income, and this one delves into the logistics of bucket maintenance.

6. Tee up your RMDs.
If you’re age 70-1/2 and must take required minimum distributions (RMDs) from your IRAs and/or company retirement plans, you can readily knit those distributions in with any other changes you’d like to make. If you’ve conducted a portfolio checkup (see above) and determined you’d like to make changes to your asset allocation or individual holdings due to security-specific issues, you can use your RMDs to drive those changes.

For example, let’s say you’ve decided to lighten up on a holding that has been too risky for your taste; you could use the sale of that security to address your portfolio goal as well as fulfil your RMDs. The RMD rules allow you to be pretty surgical: If you have multiple IRAs of the same type with various providers (for example, you hold traditional IRAs in your name at both Fidelity and Schwab), you needn’t take proportionate amounts from each provider.

Rather, you can pick and choose specific holdings to liquidate, provided you meet your overall RMD amount for that account type. No matter what you do, avoid that mad scramble to take RMDs before year-end; the penalties for missing the deadline are steep, and you may miss an opportunity to be strategic about your distribution. This article discusses RMDs in-depth.

7. Scout around for tax-loss candidates.
Research into behavioural finance has shown that investors tend to irrationally avoid selling securities in which they have a loss. But dumping losing positions from your taxable accounts can be financially beneficial and may also help address your strategic goals for your portfolio. For example, if you’ve conducted a portfolio checkup and determined you need to lighten up your equity holdings, you may be able to cherry-pick losing holdings from your portfolio, simultaneously gaining a tax benefit and getting your asset allocation back in line with your targets. This article discusses the ins and outs of tax-loss selling.

8. Make charitable contributions and other gifts.
You have until April 18 to make last-minute IRA contributions, but year-end is your deadline to make charitable contributions that you’ll deduct on your 2011 tax return.

And if you’re lucky enough to be able to make large gifts to family members and other loved ones, it can also be worthwhile to space them out over several years rather than making large gifts in a single year (or large bequests after you’re gone).

The annual gift-tax exclusion amount for 2011, as in 2010, is $13,000 per recipient per gift-giver. (That means married couples could gift $52,000 total to their two adult children–$13,000 from each parent to each child–without triggering gift tax.)

This post originally appeared at Morningstar.

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