5 Year-End Financial Planning Tips

I relish the sensory delights of the year's end. Cinnamon scents, roasts, and freshly baked cookies. Colored lights cavorting in the dark night. Festive meals. Communing with family and friends. Toasting the new year and cursing the old.

I balance this feast of the senses with a more mundane need: the need to organize my family's financial affairs. This perfunctory work not only helps us through tax time, but it also gives us a solid idea of where we stand heading into the new year.

Getting your financial house in order at year's end is a win-win proposition for every family. Here are five things to focus on.

Organize Your Receipts and Statements You probably have receipts from all sorts of things: medical expenses, business write-offs, securities trades. I always like to my receipts in separate files, depending on the type of expense.

For business expenses, I look at my checking and credit card statements. The credit-card statements, in particular, are usually neatly categorized: meals/entertainment, transportation, office, etc., but I often have to ferret out expenses that don't easily fit into one of their expense categories.

For personal expenses, collect anything to do with miscellaneous expenses that you can itemize. These include costs associated with moving, a job search, medical matters, and unreimbursed business expenses. Just keep in mind that when you add up all of these items, they need to exceed 2% of your adjusted gross income to qualify for a deduction on Schedule A. A note of caution, though: Keep an eye on Congress and possible tax reform before year end. Some deductions that apply today may vanish.

Make Charitable Donations When it comes to charity, there's a wide range of things you can deduct. That said, the IRS has quite a few rules on what you can take a write-off for; you can't write off everything, and how you value your donation matters.

For example, you can donate clothes and vehicles, but to do so you'll need a reasonable estimate of their fair market values. The IRS outlines the specifics on determining fair market value and donations in Publication 526. You'll need to document your donations carefully, particularly if something you're donating is worth more than $250. Write-offs that are off-limits as deductions include donations to 501(c)4 nonprofits (which engage in lobbying), political candidates/organizations, gifts to individuals, and donations directly from IRAs. But the door is open to writing off certain kinds of donated property, stocks and bonds.

Are you older than 70 1/2 and want to make a charitable donation? Consider donating some or all of your required minimum distributions. These payouts are not taxable if donated directly to charity from your account. You can't take a charitable write-off on the contributions, though.

Consult with your tax adviser before making a donation, because the rules of how to value donated assets get complicated.

Monitor Fund Distributions Funds are required to pay out dividends and capital gains to their shareholders during the year in which they occur. They must do so whether or not the fund overall made money in a given year. And these lump sums of dividends and capital gains can be a curse for buy-and-hold investors. After all, you're not actively selling something, but your portfolio manager is. And as a result, you have to foot the tax bill associated with those sales.

If you own your funds within retirement vehicles, you don't have to worry about taxes for now. But outside of tax-deferred accounts such as IRAs, you need to be careful. Richard Gotterer, a certified financial planner and senior wealth advisor for Calamos Wealth Management, says you need to pay special attention to what your funds will pay in terms of year-end distributions in taxable accounts. He suggests that investors delay the purchase of new funds until after a fund's distribution date, because purchasing before a distribution could result in getting socked with a capital gains distribution.

Morningstar is keeping tabs on the distributions from some of the largest fund families. You can access that information here.

Prune Your Portfolio The final weeks of the year are a great time to check up on your holdings. For starters, should you sell some of your losers (if you have them) for a tax benefit?

"You can sell losing securities--up to $3,000 worth in a single year--which can be used to offset ordinary income," says Gotterer. Moreover, you can use capital losses to offset realized gains elsewhere in your portfolio.

What if you wanted to hold onto these securities even though they've incurred losses, because you think they have long-term potential?

"You can buy them back, but you'll have to wait 31 days due to the IRS's wash-sale rule," Gotterer advises.

Year-end is also a good time to rebalance your portfolio. Morningstar's Christine Benz has written extensively about how to effectively rebalance; access her latest column on the subject here.

Check Your Savings Rate Are you saving enough? This can be a difficult and vexing question for most.

One area of undersaving involves emergency funds. A durable benchmark has been to sock away at least three months' worth of salary--but again, you need to customize this number. Are you planning to remain in your home and facing significant repairs, such as replacing your roof, furnace/air conditioning, or major appliances? Unless you want to go into debt for those items, they should be included in your short-term savings. I'd also tally out-of-pocket expenses for health, auto, and homeowner's policies as part of your short-term kitty.

Then, of course, there's saving for longer-term goals, like retirement. Most families, according to the Economic Policy Institute, have little or no retirement savings. Millions of households got clobbered by the 2008 stock and housing crash and haven't yet recovered. For savers in the 56- to 61-year-old group, median retirement savings are around $17,000, down from nearly $36,000 in 2007.

While many families may have a general sense they're not saving enough, there are some useful rules of thumb to help get on track. One standard guideline is that you should be saving at least 15% of your annual income.

In reality, though, how much you'll need to save depends on any guaranteed sources of income you'll have during retirement. Will you have a guaranteed "defined benefit" pension? If you do, you'll need to save less.

You'll also want to consider your Social Security benefits, which depend upon how much you've earned over your working life and when you plan to retire. Your retirement age--and that of your spouse--can make a huge difference in how much Uncle Sam owes you. The maximum Social Security benefit for someone retiring at 66 is about $2,700 per month. But you can boost that benefit by deferring benefits until age 70, when Social Security will pay you a bonus: some $3,500 a month.

After you've figured out what your guaranteed sources of income will be, you need to take a detailed look at your expected retirement expenses. If you've paid off your mortgage, for instance, you'll need less to retire. How much you'll need to save will also depend on what you anticipate your everyday living expenses to look like. For more about how to determine how much you'll spend in retirement, watch this video with Benz and Vanguard's Maria Bruno.

Once you have an idea of your guaranteed income and anticipated assets (including home equity and things like inheritances) and an estimate of your retirement spending, you’ll have a sense of how much of the heavy lifting savings will need to do.

Then run some numbers on one of the many retirement calculators online to find a savings rate that will help you get where you need to be. You may be doing better than you think.

John F. Wasik is a freelance columnist for Morningstar.com and author of 16 books, including Lightning Strikes: Timeless Lessons in Creativity from the Life and Work of Nikola Tesla. The views expressed in this article do not necessarily reflect the views of Morningstar.com.