Last week I discussed my habit of always calculating my net worth at the beginning of each new year. (See Start the Year By Knowing Your Net Worth). This week, I want to discuss how to use that information to tweak your financial plan.

Over the past year, I have had some significant changes that impact my personal finances. I will address this more next week, but these changes had a major impact on my beneficiaries.

Updating Beneficiaries

As a result, this year as I figured up the net worth of each of my accounts, I double-checked the beneficiaries on the accounts. I had to make some major updates. There are two implications.

First — and I think this is critically important — I had to inform the beneficiaries of the changes. Each year after calculating my net worth, I write letters to my beneficiaries. I explain which accounts they are beneficiaries on, and what they would need to do in the event of my death. I give them account numbers and phone numbers.

This is an important exercise I do each year. I ask “Would everyone understand what to do with my accounts in the event of my death?” If I think anything is unclear, I spell it out in excruciating detail.

Second, you need to stipulate contingent beneficiaries. This year I will be traveling to France with the sole beneficiary on some of my accounts. In the event something happened to both of us, it is unclear who would be the next in line to receive these accounts. Further, those who would be in line might not even be aware of the accounts.

So, I had a conversation with some of my relatives about making them contingent beneficiaries. I explained the scenario by which they would inherit the accounts, and gave them the same account and phone numbers in case something happened.

I stipulated “per stirpes” on these accounts, which means that if the beneficiary died before taking control of the assets, it would pass to their children. So, I told them to make sure they have a discussion with at least their spouse, so they would know what to do.

Reallocating Assets

The second thing I do as I am calculating my net worth is to determine whether some assets should be reallocated. For example, last year energy stocks soared and technology stocks plummeted. If I am trying to keep a certain percentage in each sector, I may need to sell some energy stocks and buy some technology stocks.

Also, I give some thought to my allocation as retirement approaches. Generally speaking, you should lighten up on risky equities and increase the number of income stocks and bonds in your portfolio as you approach retirement.

There are general rules of thumb, but one says that you should keep the percentage of your portfolio in safe assets (e.g., bonds, money market funds, government debt) about the same as your age. So, at age 60, that should be equal to 60% in safe assets.

One size doesn’t fit all here. It depends on the size of your portfolio, and your lifestyle. The general idea is that you don’t want to take big losses as you head into retirement, but if you have a large portfolio I think it’s perfectly OK to hold a higher percentage in stocks.

But, the first of the year is a good time to put some thought into that, and tweak your plan as needed.

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