With 2020 being a year of considerable uncertainty and challenges, 2021 brought with it some sense of recovery and optimism. Throughout the year, the economy has strengthened, market performance has been strong, borders are opening – things are slowly starting to feel a bit more normal. Yes, the pandemic is not completely behind us, and there certainly could be more twists and turns. While your work routine, family routine, and travel routine may have been affected by this pandemic, one routine you should keep would be your year-end checklist. Here are some items we recommend doing with the help of your financial advisor.
1. Reflect on your priorities, your progress (and your budget)
The first step to any financial checklist is to figure out where you want to go, so take some time to reflect on what is most important to you and where you are on your journey. Has anything changed that could cause you to adjust your goals. As you are doing this, take a look at your spending as well – is where you are spending your money aligned with your priorities and helping you make progress toward your goals? If you can free up some money in your budget, you may be able to make quicker progress toward your goals, such as retirement or education.
2. Prepare for emergencies
If the pandemic taught us anything, it is to expect the unexpected. Our recommendation is to have three to six months of living expenses for emergencies. If you are not there yet, don't worry – the key is to start building this important foundation. Start with at least one month of living expenses and build from there. In addition, we recommend reviewing your insurance with your financial advisor to ensure your coverage meets your needs, as well as contacting your lawyer to create or update your estate plan to ensure it aligns with your goals as well.
3. Maximize contributions
If you haven’t maxed out your contributions to your Registered Retirement Savings Plans (RRSPs), consider making additional contributions for 2021 if you can. While the deadline for 2021 contributions is March 1, 2022, making the contribution now helps maximize the period for tax-deferred growth. The new year will also mean new Tax-Free Savings Account (TFSA) contribution room, so be sure to plan to take advantage of the additional tax-free growth opportunity as early in the year as possible. And if you have not maximized you Registered Education Saving Plan (RESP) contributions in past years, you can make catch-up contributions as well.
4. Don't forget RRIF minimum withdrawal (if applicable)
While required withdrawals from Registered Retirement Income Funds (RRIFs) were reduced by 25% in 2020, required withdrawals are back to their usual rates for 2021. Consequently, it is important you take at least the required amount to avoid any penalties.
5. Talk taxes with your tax professional
Depending on your tax situation, harvesting losses or gains from your investments may make sense. In addition, the 2021 Budget included some new taxes on items such as luxury good purchases (vehicles, boats, aircraft) beginning on January 1, 2022, unproductive housing for non-residents and taxes on the transfer of small businesses, family farms and fishing corporations to children. Thus, it's important to discuss these strategies with your tax professional to determine if any steps should be taken before the end of the year.
Perform a portfolio check-up:
Equities have risen sharply this year while interest rates and market volatility have remained low. So even if nothing changed with your goals in the past year, your portfolio could still need some adjustments to help keep your portfolio aligned with your financial goals over time. This would include:
- A self-assessment: Your investment portfolio should be designed for your specific goals and your comfort with risk. So if your goals have changed, perhaps your portfolio needs to as well. Review your comfort with risk, as it can be easy to take on more risk when markets are calm (like this year) and shy away from risk when stocks fluctuation or decline (like early 2020). Aligning your goals and comfort with risk can ensure you have the appropriate allocation that is necessary to achieve your long-term goals, without taking so much risk that you are uncomfortable with your strategy when volatility increases.
- Regain your balance: Fluctuations in the market can cause your portfolio to drift from your intended allocations. Remember, your portfolio was designed with your goals in mind, and rebalancing back to your target mix can help in two ways:
1) Keeping your portfolio on track with your long-term strategy, and
2) Adding to the investments that have lagged and may be more attractively priced while trimming back on the areas that have outperformed.
- Reinforce your portfolio's foundation: We think 2022is likely to bring more market volatility than we experienced in 2021, so enhancing your diversification can help position you for shifting conditions ahead. This would include exposure to a broad range of asset classes in both equites and fixed income
Entering 2022 with confidence:
Importantly, you don't need to perform the above checklist alone. Discuss this checklist with your financial advisor to help ensure you are ready to ring in the new year.