Personal Finance

How to rebalance your portfolio after lofty stock returns in 2024

Published

2 days ago

January 3, 2025

Business Finance News

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Stocks soared in 2024.

Congratulations! After taking a victory lap, it may be time to adjust your portfolio — because those heady returns likely threw your investment allocations out of whack.

The S&P 500, a stock index of the largest public U.S. companies by market capitalization, gained 23% in 2024. Cumulative S&P 500 returns over the past two years (53%) were the best since 1997 and 1998.

Long-term investors generally have a target allocation of stocks to bonds — say, 60% stocks and 40% bonds. But lofty returns for stocks relative to muted ones for bonds may mean your portfolio holdings are out of that alignment, and riskier than you’d like. (U.S. bonds returned 1%, as measured by the Bloomberg U.S. Aggregate Bond Index.)

This makes it a good time for investors to rebalance their portfolios, financial advisors said.

Markets still in good shape for this year and S&P could reach $7,000 by year end, says Ed Yardeni

Rebalancing brings a portfolio in line with investors’ long-term goals, ensuring they aren’t over or underweighted “inappropriately” in one particular asset class, said Ted Jenkin, a certified financial planner based in Atlanta and member of CNBC’s Financial Advisor Council.

“Every car should get an alignment check in the beginning of the year and this is nothing different with your investment portfolio,” said Jenkin, co-founder of oXYGen Financial.

How to rebalance your portfolio

Here’s a simple example of how portfolio rebalancing works, according to Lori Schock, director of the Securities and Exchange Commission Office of Investor Education and Advocacy.

Let’s say your initial portfolio has an 80/20 mix of stocks to bonds. After a year of market fluctuations, the allocation has changed to 85% stocks and 15% bonds. To return the mix to 80/20, you can consider selling 5% of your stocks and using the proceeds to buy more bonds, Schock said.

“Set your targets for each investment — how much you’d need to grow your money to be satisfied, and how heavy each investment should be relative to the rest of your portfolio,” said Callie Cox, chief market strategist at Ritholtz Wealth Management.

“If the allocation gets too big or small, consider buying or selling to get your money back in balance,” she said. “Wall Street portfolio managers do this on a regular schedule. It’s a prudent investing exercise.”

A ‘huge gap in market fortunes’ in 2024

Rebalancing isn’t just about stocks versus bonds. Investors may also be holding other financial assets like cash.

A diversified portfolio also generally includes various categories within asset classes.

An investor’s stock bucket might have large-, mid- and small-cap stocks; value and growth stocks; U.S. and international stocks; and stocks within different sectors like technology, retail and construction, for example.

It’s important for investors to consider whether target weights to certain categories have also gotten out of whack, advisors said.

“There was a huge gap in market fortunes last year,” Cox said. “Tech stocks blew most other sectors out of the water, and the U.S. ran away from global markets.”

The so-called “Magnificent 7” megacap tech stocks — Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla — accounted for more than half of the S&P 500’s total gain in 2024. The Nasdaq, a tech-heavy stock index, swelled almost 29%.

Boneparth: Allocate 5-10% to sectors like energy or healthcare if you're confident.

Non-U.S. stocks “continued to underperform,” returning about 5% last year, according to experts in Vanguard’s Investment Advisory Research Center.

“Right now, I think it’s smart to review your tech investments and think about taking some profits,” Cox said. “Tech rules our lives, but it doesn’t always rule our portfolios.”

Don’t forget about taxes

Investors in 401(k) plans may have automatic rebalancing tools at their disposal, which can make the exercise simple if investors know their risk tolerance and investment time frames, Jenkin said.

Additionally, investors may have mutual funds or exchange-traded funds whereby professional money managers do the regular rebalancing for them, such as within target-date funds.

When rebalancing, it’s also important to consider tax implications, advisors said.

Investors with taxable accounts might trigger “unnecessary” short- or long-term capital gains taxes if they sell securities to rebalance, Jenkin said. Retirement investors with 401(k) plans and individual retirement accounts generally don’t need to consider such tax consequences, however, he said.

Personal Finance

Here’s how to maximize your 401(k) plan for 2025 with higher limits

Published

4 hours ago

January 5, 2025

Business Finance News

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If you’re eager to save more for retirement, you could be overlooking ways to maximize your 401(k) plan, including key changes for 2025.

Some 40% of Americans are behind on retirement planning and savings, according to a CNBC poll conducted by SurveyMonkey, which polled 6,657 U.S. adults in August.

But before making 401(k) plan changes, experts say you should always review your financial situation, including your income, immediate spending needs and goals.

“401(k) investing focuses on long-term retirement goals,” said certified financial planner Salim Boutagy, partner at Moneco Advisors in Fairfield, Connecticut. But it should work alongside other savings that cover your midterm goals, emergencies and immediate spending needs.

If you’re ready to boost retirement savings, here are some key things to know about your 401(k) for 2025.

Use higher 401(k) contribution limits as a ‘prompt’

Starting in 2025, employees can defer $23,500 into 401(k) plans, up from $23,000 in 2024. The catch-up contribution limit remains at $7,500 for investors age 50 and older.

“This higher ceiling isn’t just a win for high earners,” said CFP Jon Ulin, managing principal of Ulin & Co. Wealth Management in Boca Raton, Florida. “It’s a prompt for everyone to consider boosting their savings rate,” Ulin added.

Even 1% yearly increases “can make a substantial difference” thanks to compound growth over time, he said.

The retirement plan savings rate for the third quarter of 2024, including employee deferrals and company contributions, was an estimated 14.1% as of Sept. 30, according to Fidelity Investments, based on an analysis of 26,000 corporate plans.

Leverage the 401(k) ‘super max catch-up’

On top of higher 401(k) deferral limits, there is also a new “super max catch-up” opportunity for some older investors in 2025, said CFP Dinon Hughes, a greater Boston area-based financial consultant with Nvest Financial.

If you are between the ages of 60 and 63 in 2025, the catch-up contribution limit increases to $11,250, which brings the total deferral cap to $34,750 for this group.

Only about 14% of employees maxed out 401(k) plans in 2023, according to Vanguard’s 2024 How America Saves report, based on data from 1,500 qualified plans and nearly five million participants.

Roth conversions on the rise: Here's what to know

However, there is “one major caveat,” Hughes said.

Your 401(k) must allow the increased catch-up contributions. Otherwise, payroll could flag the added funds as excess 401(k) deferrals, he said. There can be tax consequences if excess deferrals are not removed.

“Check with your employer now to avoid a much bigger headache at the end of 2025,” Hughes said.

Check for ‘true up’ before maxing out early

Generally, experts recommend investing sooner to boost compound growth over time. But you could lose part of your employer’s matching contribution by maxing out your 401(k) early — unless your plan has a special feature.

Typically, your employer’s 401(k) match uses a formula to deposit extra money into your account. You must defer a certain percentage of income from each paycheck to receive your full employer match for the year.

Some plans offer a “true-up,” or deposit of the remaining employer match, for employees who max out their 401(k) plan before year-end.

If your plan offers this feature, it’s a green light to contribute aggressively in January, maximizing market exposure from day one.

Jon Ulin

Managing principal of Ulin & Co. Wealth Management

“If your plan offers this feature, it’s a green light to contribute aggressively in January, maximizing market exposure from day one,” Ulin said.

Some 67.4% of plans made true-up matches when matches were not made annually in 2023, according to the Plan Sponsor Council of America’s latest yearly survey. The feature is most common in larger plans.

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Personal Finance

Here are the changes to expect

Published

1 day ago

January 4, 2025

Business Finance News

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Retirees can expect to see some big changes in 2025 when it comes to their Social Security and Medicare benefits.

President Joe Biden is expected to sign a bill that will increase Social Security benefits for certain pensioners. Additionally, the annual Social Security cost-of-living adjustment goes into effect for all beneficiaries.

And Medicare enrollees who are worried about health-care costs now have a $2,000 annual out-of-pocket Part D prescription drug cap aimed at helping to reduce those financial pressures.

Here are some important changes to note for the coming year.

Some pensioners could get benefit increase

The Senate passed a bill in the final legislative days of 2024 to boost Social Security payments for millions of people who receive pensions from work in federal, state and local government, or in public service jobs such as teachers, firefighters and police officers. The House had passed the bill in November.

Now, Biden is expected to sign the bill into law in the coming days.

The Social Security Fairness Act eliminates two provisions that reduce Social Security benefits for certain individuals who also have pension income from public work where Social Security payroll taxes were not paid.

That includes the Windfall Elimination Provision, or WEP, which reduces Social Security benefits for individuals who also receive pension or disability benefits from employers who did not withhold Social Security taxes.

It also includes the Government Pension Offset, or GPO, which reduces Social Security benefits for spouses, widows and widowers who receive their own government pensions.

Together, the rules affect around 2.5 million beneficiaries, according to the Congressional Research Service. Once enacted, the law may provide higher benefit payments to those individuals.

Notably, it may provide retroactive payments of those benefit increases for the months after December 2023.

The legislation marks the biggest change to Social Security since certain couples claiming strategies were phased out in 2016, said Martha Shedden, president of the National Association of Registered Social Security Analysts.

“We’re sort of in limbo as to how that process will proceed, when people will see that increase and how the retroactive [benefits] will be applied,” Shedden said.

All Social Security beneficiaries to get 2.5% COLA

In 2025, all beneficiaries will see a 2.5% increase to their Social Security benefit checks, thanks to an annual cost-of-living adjustment.

Of note, the 2024 increase was 3.2%. This year’s COLA is the lowest increase beneficiaries have seen since a 1.3% increase in 2021, reflecting a decrease in the pace of inflation.

The change will be effective with January checks for more than 72.5 million Americans, including Supplemental Security Income beneficiaries.

The average worker retirement benefit will be $1,976 per month, up from $1,927 in 2024, according to the Social Security Administration.

Maximizing your Social Security benefits

Monthly Medicare Part B premiums go up

Monthly Medicare Part B premiums — which are often deducted directly from Social Security checks — may affect just how much of a bump beneficiaries see in their 2025 benefit payments.

Medicare Part B covers physician, outpatient hospital and certain home health services, as well as durable medical equipment.

In 2025, the standard monthly Part B premium will be $185 per month — a $10.30 increase from $174.70 in 2024.

Part B deductibles will also rise, to $257, in 2025 — a $17 increase from the $240 annual deductible for 2024.

Medicare Part B premiums are based on a beneficiary’s modified adjusted gross income, or MAGI, from their tax returns from two years prior. In 2025, beneficiaries who had less than or equal to $106,000 in MAGI in 2023 will pay the standard monthly Part B premium, as will married couples with less than or equal to $212,000.

Beneficiaries with higher incomes will be subject to income-related adjustment amounts, or IRMAA, that increase their monthly premium payments.

Medicare $2,000 prescription drug cap goes into effect

Annual out-of-pocket Medicare Part D drug costs will now be capped at $2,000, as changes enacted with the Inflation Reduction Act go into effect.

Beneficiaries with Medicare Part D drug plans that have a deductible will pay out-of-pocket costs until that threshold is met. In 2025, the highest deductible for those plans is $590.

Once beneficiaries pay their full deductible, they will owe 25% of the cost of coinsurance until their out-of-pocket spending on both generic and brand-name drugs reaches $2,000. After that, those beneficiaries will have what’s known as catastrophic coverage, which means they won’t be on the hook to pay out-of-pocket Part D costs for the rest of 2025.

However, beneficiaries will also have the option to pay out-of-pocket costs monthly over the course of the year, instead of all at once.

Notably, insulin costs have also been capped at $35 per month, both under Medicare Part D covered treatments and Medicare Part B covered insulin used with pumps.

Social Security trust fund depletion dates get closer

In 2024, the Social Security trustees projected the trust fund the program relies on to help pay retirement benefits may be depleted in 2033. At that time, just 79% of those benefits may be payable, unless Congress acts sooner.

Social Security’s combined trust funds — used to pay both retirement and disability benefits — are projected to run out in 2035.

Now that the calendar has turned to a new year, those depletion dates are closer.

Notably, the previously mentioned Social Security Fairness Act that will provide increased benefits to some pensioners may move the trust fund depletion date six months closer.

“That’s the major looming issue right now, is what can be done to shore up those trust funds,” Shedden said. “That’s going to require very comprehensive, bipartisan changes to multiple parts of the Social Security rules in the program.”

However, most financial advisors emphasize that shouldn’t affect personal claiming decisions.

For younger generations, there could be changes to future benefits, said George Gagliardi, a certified financial planner and founder of Coromandel Wealth Strategies in Lexington, Massachusetts.

“But for those already receiving or about to get Social Security checks, I don’t think that there is anything to worry about,” Gagliardi said.

Other important changes to note

Maximum taxable earnings — the amount of wages subject to Social Security payroll taxes — will rise to $176,100 in 2025, up from $168,600 in 2024. Once workers hit that cap, they no longer pay into the program for the rest of the year.

Social Security beneficiaries who claim benefits before their full retirement age and who continue to work face what is known as a retirement earnings test. The earnings exempt from the retirement earnings test is now $23,400 per year in 2025 for those under full retirement age, up from $22,320 per year in 2024. For every $2 in earnings above the limit, $1 in benefits is withheld. For the year an individual reaches retirement age, a higher threshold of $62,160 in earnings applies, up from $59,520 in 2024. For every $3 in earnings above the limit, $1 in benefits is withheld. Of note: this only applies to the months before a beneficiary turns full retirement age. Starting from their birthday month, the retirement earnings test no longer applies. Importantly, once a beneficiary reaches full retirement age, any previously withheld benefits are applied to monthly benefits.

Do you want to talk to the Social Security Administration face to face? Starting Jan. 6, the agency is requiring appointments for local office services, such as obtaining Social Security cards. To improve efficiency, the agency is directing individuals who need help to first try its online or automated telephone services. However, people who are unable to schedule in-person appointments, particularly vulnerable individuals, may still come in and get in-person service.

Personal Finance

Here’s the 401(k) plan contribution limit for 2025

Published

2 days ago

January 3, 2025

Business Finance News

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If you’re ready to focus on retirement in 2025, early January could be the perfect time to boost your 401(k) plan contributions, financial experts say.

More than half of American workers feel they are behind on retirement savings, according to a Bankrate survey that polled 2,445 U.S. adults in August.

But starting in 2025, your 401(k) plan has a higher contribution limit — and a special catch-up for older investors — which could help grow your nest egg.

For 2025, you can defer $23,500 into your 401(k) plan, up from $23,000 in 2024. Investors aged 50 and older can make catch-up contributions of $7,500 on top of the $23,500 limit.

Typically, it takes a couple of paychecks for 401(k) deferral changes to go into effect, according to Boston-area certified financial planner Catherine Valega, founder of Green Bee Advisory.

Boosting your contribution to max out deferrals can be easier earlier in the year because the higher percentage is spread across more paychecks.

Be aggressive with your investments, especially if you have decades until retirement.

Catherine Valega

Founder of Green Bee Advisory

“Be aggressive with your investments, especially if you have decades until retirement,” said Valega, who urges clients to max out their 401(k) plans if possible.

Starting in 2025, there’s also a special catch-up limit for investors aged 60 to 63, thanks to a change enacted via Secure 2.0. Instead of $7,500, this group can save $11,250 for catch-up contributions, which brings their total deferral limit to $34,750 for 2025.

Invest ‘as much as you feel comfortable’

While many investors aim to max out 401(k) deferrals, it can be difficult with other short-term goals, like paying off debt or buying a home.

To that point, roughly 14% of employees maxed out 401(k) plans in 2023, according to a 2024 Vanguard report, based on data from 1,500 qualified plans and nearly five million participants.

Max contributors were typically older, with higher income and a longer tenure with their current employer, the report found.

'Hidden' benefits of HSAs: Here's what to know

Ultimately, you should defer “as much as you feel comfortable” not tapping until retirement, said CFP George Gagliardi, founder of Coromandel Wealth Strategies in Lexington, Massachusetts. Otherwise, you could owe a 10% penalty and taxes for early withdrawals, with some exceptions.

Plus, you need a “sufficient emergency fund” outside of your retirement savings, he said.

Typically, experts recommend a minimum of three to six months of expenses for an emergency fund, depending on your family’s circumstances.