5 Financial To-Dos Before the End of 2025

Key Concepts

Rebalancing: The process of adjusting a portfolio to maintain a desired asset allocation.
Risk Reduction: Minimizing potential losses in an investment portfolio.
Asset Allocation: The distribution of an investment portfolio among different asset categories, such as stocks and bonds.
Valuation: The current worth of an asset or company.
Required Minimum Distributions (RMDs): Minimum amounts that must be withdrawn annually from tax-deferred retirement accounts starting at a certain age.
Donor-Advised Fund (DAF): A charitable giving vehicle that allows for immediate tax deductions and future grants to charities.
Qualified Charitable Distribution (QCD): A direct transfer of funds from an IRA to a qualified charity, which can satisfy RMDs and be tax-advantaged.
Open Enrollment: A designated period during which individuals can enroll in or change health insurance plans.
Style Box Diversification: A method of diversifying stock portfolios across different investment styles (e.g., large-cap, small-cap, growth, value).

Portfolio Management: Rebalancing and Asset Allocation

Christine Benz, Morningstar's director of personal finance and retirement planning, suggests several financial steps to conclude 2025 strongly. The first key area is portfolio management, specifically rebalancing.

Benefits of Rebalancing:

Risk Reduction: The primary benefit is reducing risk by selling securities that have performed exceptionally well (and thus likely have higher valuations) and reinvesting in those with less robust returns but potentially more attractive valuations.
Alignment with Spending Goals: As individuals approach their spending targets (e.g., retirement), rebalancing becomes crucial to reduce portfolio risk. This involves building a "bullwork of safer assets" that can be accessed if spending needs arise earlier than expected.

Who Needs to Rebalance Most Urgently:

Individuals aged 50 and above: This group has benefited from significant equity gains since the global financial crisis. Rebalancing allows them to "take some winnings," move money into safer assets, and establish a buffer of secure investments.
Attractive Yields on High-Quality Bonds: Moving funds into high-quality bonds currently offers attractive yields, especially when compared to a couple of years ago. This makes reducing equity exposure less of a sacrifice in terms of potential returns.

Rebalancing for Savers:

US vs. Non-US Allocation: For those still saving for retirement, a key consideration is their allocation between US and international equities. Most investors are significantly underallocated to international stocks, which represent roughly one-third of the global market capitalization.
Style Box Diversification: Investors should examine their diversification across the "style box" (e.g., large-cap, small-cap, growth, value). While US large growth stocks have performed well, it's advisable to consider underperforming segments like small-cap value, which may offer better future potential.

Contribution Management:

Year-to-Date Contributions: Investors should review their contributions to retirement plans for the year. The end of the year presents an opportunity to increase contributions, potentially maxing out employer-sponsored retirement plans.
Catch-Up Contributions: For individuals over 50, catch-up contributions are available. Special catch-up contributions are also available for those aged 60 to 63.
IRA and HSA Contributions: There is still time to make contributions to Individual Retirement Accounts (IRAs) and Health Savings Accounts (HSAs) until the tax filing deadline.

Required Minimum Distributions (RMDs) and Portfolio Integration

For individuals aged 73 and above, Required Minimum Distributions (RMDs) from tax-deferred accounts are mandatory. Benz suggests integrating RMDs with rebalancing strategies.

Tying RMDs to Rebalancing:

Using Appreciated Securities: RMDs can be satisfied by withdrawing appreciated securities. This serves a dual purpose:
- Risk Reduction: It removes these appreciated assets from the portfolio.
- Satisfying IRS Obligations: It fulfills the RMD requirement.
- Liquifying Assets: It provides cash flow for the following year, offering a sense of security about future spending needs. This is described as a "two bird, one stone" approach.

Insurance Coverage Review

The end of the year is also an opportune time to review insurance coverage, particularly during open enrollment periods.

Open Enrollment for Health Insurance:

Employer-Provided Plans: This period is crucial for those with employer-sponsored health insurance.
Medicare Enrollment: Individuals enrolled in Medicare also have an open enrollment period.
"Shop It Around" Principle: Benz emphasizes not simply renewing the previous year's plan. It's important to assess changes in personal circumstances and available plan offerings.
Married Couples: For married couples, it's often beneficial to compare coverage options through each spouse's employer. Sometimes, being covered by one's own company's plan can be more cost-effective than being on a partner's plan.

Charitable Giving Strategies

The final to-do item relates to charitable giving, with opportunities to integrate it with portfolio management and potentially reduce risk.

Giving Appreciated Assets:

For Highly Appreciated Holdings in Taxable Accounts: Individuals with highly appreciated assets in taxable accounts can donate these assets directly to charity or transfer them to a Donor-Advised Fund (DAF).
- Benefits:
  - Removes appreciated assets from the portfolio, potentially reducing risk.
  - Eliminates the tax liability associated with the holding.
  - Provides a tax deduction.
- DAF Flexibility: Funds in a DAF can be disbursed to charities over subsequent years, offering flexibility.

Qualified Charitable Distributions (QCDs):

For Charitably Inclined Individuals Aged 70.5 and Above: The Qualified Charitable Distribution (QCD) is a valuable mechanism.
- Mechanism: Allows a portion of an IRA to be sent directly to a charity. For 2025, this amount can be up to $108,000.
- Tax Advantages:
  - The amount distributed to charity is not taxable income to the individual.
  - It satisfies the Required Minimum Distribution (RMD) if the individual is over 73.
  - For those between 70.5 and 73 (not yet subject to RMDs), it can reduce the portion of their IRA that will be subject to future RMDs.
- Superior Strategy: QCDs tend to be more advantageous than other charitable giving strategies for individuals in this situation.

Conclusion

As 2025 draws to a close, Christine Benz of Morningstar outlines actionable financial steps. These include rebalancing portfolios to manage risk and align with spending goals, particularly for those nearing retirement. For savers, focusing on international allocation and style box diversification is recommended, alongside maximizing retirement contributions. Individuals over 73 can strategically use RMDs for rebalancing. Reviewing insurance coverage during open enrollment and exploring tax-efficient charitable giving strategies like donating appreciated assets or utilizing Qualified Charitable Distributions are also key recommendations to finish the year strong financially.