Planning is Still Important

I don’t think anyone really expected that changing the calendar would radically improve our situation. Still, that sense of optimism that typically comes with a new year is facing stiff headwinds as we emerge into 2021. Personally, I’m trying to remain hopeful while also doubling down on controlling those few things that can be controlled.

One of those things is planning. Yes, it’s difficult to plan amid all this chaos but it’s important to think about financial planning specifically as a process, not an outcome. The process is helpful, even necessary, as it helps us understand our options in a rapidly changing environment. So, if you’ve been in your foxhole for a while (which is entirely rational, by the way… I’m thinking of redecorating mine…), maybe now or sometime soon is a good time to peek your head out and assess the situation and what, if anything, has changed for you.

It’s easy do this virtually. I use GoToMeeting and Zoom so we can choose the most appropriate platform for you. We can also just chat via phone or even indulge in a lengthy email string. Whatever method we choose, don’t let your financial questions (or anxieties) fester too long. I’m here to help.

Along the lines of things to think about for the year, here are some parts of a recent piece from Schwab. Most of the issues raised are ongoing, of course, like dealing with holding cash at low interest rates and trying to wait on drawing Social Security. But tax uncertainty and retirement account changes will likely come up soon. The article is a good summary of the financial planning outlook at this point.

Click the link below to continue reading…

Heading into 2021, we see three trends that could have implications for planning and wealth management:

  • low short-term interest rates that likely won’t budge;
  • tax uncertainty, but probably not sweeping tax policy changes;
  • various planning needs exposed by the pandemic.

Here’s an overview of these trends, along with implications and takeaways to help you navigate the year ahead.

Short-term rates likely will stay low

We expect the Federal Reserve to keep the short-term federal funds rate anchored near zero in 2021, although longer-term Treasury yields may rise as investors anticipate an economic bounce when COVID-19 vaccines become widely available.

The federal funds rate tends to drive rates of return on the most secure investments, including short-term Treasury securities and cash. If short-term rates are likely to remain low, you may be wondering: Is there any point in holding cash?

The answer is yes.

During the pandemic-driven market downturn, we saw cash serve multiple purposes. It can be a diversifying and stabilizing asset in a portfolio. A cash reserve can also help you take advantage of opportunities that may arise, such as buying stocks when prices drop. Last but not least, cash is important as an emergency reserve in case something bad happens—like a job loss or furlough.

The diversification benefits of cash and short-term investments—such as yield-bearing checking or savings accounts, purchased money market funds, short-term Treasuries, or bank certificates of deposit (CDs)—can help buffer a portfolio during a market downturn. Because stocks tend to be relatively volatile, you’ll want to consider keeping money you expect to need soon in more-stable investments. For instance, if your child will be starting college next year, you don’t want to be forced to sell stocks at depressed prices to fund that first-year tuition; consider cash, short-term Treasuries or a CD ladder instead.

Cash can also put you in a position to benefit from potential opportunities. As we saw in 2020, market downturns can be brutal but short—after hitting a low in March, the S&P 500 was reaching new record highs again by August. Although we typically don’t recommend trying to time the market, had you seen an attractive buying opportunity during the downturn, cash would have helped you take advantage of it.

We continue to suggest that all investors maintain emergency reserves to cover three to six months of expenses, in investments that can be accessed easily, such as savings in a yield-bearing checking or savings account, or a purchased money market fund. This can help you bridge an unexpected employment gap, or the effects of a downturn on your business. If you’re near or already in retirement, consider boosting cash reserves to cover 12 months of expenses after accounting for other income sources, such as Social Security. This can help you avoid having to sell stocks in a down market to fund everyday expenses; also, knowing you have a stable source of liquidity can allow you to invest for the longer term with more confidence. 

Finally, review all your debt and look for refinancing opportunities while rates are low. Individuals and families refinanced mortgage debt at a record volume in 2020, and we expect that trend will continue in 2021. Learn about the four common reasons to refinance and what to consider when making a refinance decision.

Big tax policy changes are unlikely in 2021

One of the questions we get most often around elections is “will my taxes go up?” Taxes are an important expense for any investor, and while many people are concerned as Washington prepares to inaugurate a new president, we do not necessarily expect major changes in tax laws.

With a Democratic majority in the Senate, a portion of the federal estate tax exemption could be on the chopping block. With that possibility in mind—and it’s only a possibility—here are tax moves to consider, if you have a net worth that would apply. Before taking any action, though, speak with an advisor and/or meet with an estate planning professional to weigh your options.

The pandemic has underscored planning needs

The COVID-19 pandemic has changed how some Americans are thinking about—and planning for—retirement. The pandemic also has exposed some areas of financial planning and wealth management that otherwise may have been overlooked or even avoided.

  1. Reassess retirement planning. According to a 2020 Schwab survey, more than half (52%) of Baby Boomers (typically defined as those born between 1946 and 1964) surveyed said the pandemic has made them more focused on developing a clear financial plan for retirement. And a 2020 TD Ameritrade survey of U.S. adults found that 71% of those surveyed anticipated that the pandemic would affect their retirement plans, with 37% of Boomers indicating they had delayed or considered delaying retirement, and 23% indicating they had retired early or considered it because of the pandemic.

Will the pandemic cause a fundamental redefinition of what retirement means in America? We don’t think so, but these shifts in how people are thinking about retirement point to the importance of planning beyond your portfolio, including living arrangements in retirement (perhaps downsizing or moving to a more affordable location) and the desire for (and cost of) long-term care insurance, especially if you plan on aging at home. 

Most of the Boomers questioned in our 2020 survey said they felt confident in their retirement savings, but the survey revealed a disconnect in that confidence. On average, those surveyed said they plan to spend $135,000 a year to live their “best life” in retirement. But overall, they’ve saved an average of just under $1 million. Even with Social Security, we estimate that total would not last much more than 10 years of retirement if people spent at that rate. Working with a professional to create or update a retirement income plan can help pinpoint any disconnect between how much you need to live your best life and how long you expect to live, and then address it.

  1. Retirement policy changes may be ahead. We’re keeping an eye on a few additional developments related to retirement planning. In November, the U.S. House of Representatives proposed a new retirement-related bill. Commonly called the “SECURE Act 2.0,” it could provide more flexibility for retirement savings. It stands a good chance of being voted on in 2021. If passed, the bill would further increase the required minimum distribution (RMD) age from 72 to 75, and allow some older workers to make even larger contributions to their retirement accounts.

Also, the pandemic has caused some analysts to project that the Social Security trust fund may run out of money earlier than originally expected. As a result, those near retirement may be tempted to start benefits early, and recessions tend to lead to an increase in people starting benefits at age 62—the earliest age possible. If you’re nearing retirement, the timing of your filing decision is one of the most critical—and largely irreversible—retirement decisions you’ll make. Make an informed choice. Generally, we suggest that investors in good health, and with the means to do so, wait as long as possible (up to age 70) to start Social Security.

Here's a link to the article if you’d like to read the whole thing.

Have questions? Ask me. I can help.

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