It's time for your annual fiscal physical

Question: What are some personal financial issues that I should be thinking about and addressing as this new year begins?

Answer: Kicking off the new year on the right foot is important to your personal financial well-being. Just as you may recommend that your patients should get an annual physical, doctors should conduct an annual fiscal physical on their personal finances. Following are five financial areas you should review every year.

First, reassess your financial goals.

Think about short-term goals that you would like to accomplish in the next year, such as reducing debt, increasing charitable giving, making home improvements, buying a new car, etc. Then develop an action plan to achieve these goals, such as increasing your savings or the amount you allocate to debt repayment.

Then review your long-term goals, such as retirement planning and education funding for your children. Are you still on track to reach these goals? If not, you may have to consider adjusting short-term goals to accommodate the long-term goals -- such as delaying the purchase of that new car.

Second, determine where you stand today.

In order for you to assess the feasibility of your short- and long-term goals, it is important for you to develop an accurate picture of where you are now. This can be accomplished with a cash flow and net worth statement.

Further, it is important to review your debt structure periodically. For example, can you pay off high-interest debt or restructure your debt by shopping around for cheaper rates?

Third, review your investments.

Is your current asset allocation in line with your target allocation? If not, consider rebalancing your portfolio. For example, if your target asset allocation is 30% fixed income (bonds) and 70% equity (stocks), but your December 2004 statements showed 25% fixed income and 75% equity, then you may want to consider selling 5% of your equity investments and buying 5% of your fixed income investments to bring your allocations back in line.

For those of you who have not developed a target asset allocation, or who know that you probably will not be disciplined enough to rebalance on an annual basis, it may be appropriate to use "lifestyle" or "target retirement date" funds. Within these types of investments, the manager is responsible for maintaining a certain risk profile and asset allocation.

Also, assess the performance of your investments. How did your investments perform relative to an appropriate benchmark and to their peers? Place more importance on the longer-term track record than on performance within the last 12 months.

Fourth, reassess your retirement goals.

It may not be necessary to revise your retirement projection annually. However, you should revisit the plan every three years.

You can use many tools to run the numbers. Providers of 401(k) plans typically have planning tools on their Web sites, or you can buy software. Be sure your assumptions are reasonable. We typically use inflation rates of 3% to 5% and rates of return of 6% to 8%.

Fifth, review your estate plan. You may need to reassess your estate documents or review the beneficiary designations on your retirement plans and life insurance policies. This is particularly important if you have experienced a life-changing event (divorce, death in the family, etc).