Taking Your Annual Financial Pulse

Is it time for your annual financial checkup? Our expert shows you why you need one and what you should be looking for.
4 min read
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An annual financial checkup is the most important part of the financial planning process. Yet many people downplay its significance.

This annual review is an opportunity for you and your financial planner to examine your financial planning action steps, or "to do" list, and measure the progress you're making toward your goals. It's also a time to incorporate any new life changes that have occurred during the past year--the birth of a child, the death of a loved one, a new marriage, a business startup or expansion, or even a major purchase--into your financial plan to help you chart a new course, if needed, or to further affirm that you're on the right track. Remember, your life is dynamic, not static, and your financial plan should be as well.

During your annual review, you and your planner will want to revisit the building blocks of your financial plan and review your resources, goals and priorities to see what's changed. This act of monitoring and benchmarking is beneficial because you'll get an opportunity to step back from your busy life, review your goals, and confirm that your priorities remain the same. And you and your planners get the chance to reconnect to affirm that you--and your planner--are taking the right steps toward goal achievement or to refocus so that you don't get too far off track.

In most cases, your first step will be to examine your short-term goals. Here, your planner can recommend strategies that should be considered for time-sensitive objectives. For instance, if you plan to purchase a home sooner rather than later, your planner might suggest putting more aside for the down payment and decreasing what you're putting into your children's college fund just until you buy the house. Or the birth of a child may be the catalyst for your planner to recommend purchasing additional life insurance.

Your planner may also use this time to educate you about new research that either confirms the rationale behind your current financial plan or provides a basis to alter your short-term or long-term strategies. For instance, new research that shows the costs of nursing homes or health care during your retirement years will escalate wouldn't change your goal of "secure, long term retirement," but it could change the strategy necessary to achieve that goal.

Your planners should also discuss regulatory and other changes that could either adversely or positively affect your financial plan. The new Medicare Part D plan, for instance, could prove useful to some clients. If recent changes will negatively affect you, such as recent changes in the federal estate tax laws, then you and your planner can devise possible plans of actions to get you on a better path.

You and your financial planners may also want to measure the performance of your investment portfolio as part of the annual review. Typically, performance should be measured against several benchmarks, the most important of which is your own personal goals. For instance, if you and your planner had established that your portfolio should grow by 5 percent annually before taxes, then your portfolio performance should be measured against that yardstick. It's also important that your portfolio be measured against standard benchmarks as a point of reference. Meeting personal investment goals is far more important than over- or under-performing the Standard & Poor's 500 Index.

Much like your annual medical exam, an annual financial review isn't something to put off. You need to take the time to examine your financial and life goals in order to determine that you're on course to attain these goals. It's also a chance to review changes that have occurred and begin to anticipate changes that may occur in the future. And it provides the opportunity to implement any new plan of action that's been developed in light of changing situations or goals. Don't put off your review any longer--your financial health could suffer because of your neglect.

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