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…

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Happy Holidays!

Well, to say that this has been a crazy and challenging year would be an understatement of massive proportions. So much has happened in recent months and so much is still in flux for so many people. I don’t know about you, but I’m excited to put 2020 in my rearview mirror.

That said, as I’ve done in recent years, I’ll be taking the next couple of weeks off from writing my Tuesday blog. This buys me a few extra hours a week to spend with family and to reflect on the year past and what’s to come. I’ll still be hard at work for clients, of course, so let me know of any last-minute questions or other needs.

While this has been a difficult year there certainly were bright spots along the way. For that I’m thankful. I’m also thankful for the trust you place in me as your financial planner. I’m continually humbled by this. There’s no other work I’d rather be doing, and I’m honored that I get to do it with you. Even virtually.

From my family to yours, Happy Holidays!

Brandon

Have questions? Ask me. I can help.

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Some Ideas for Year-End Tax Strategy

Now that we’ve entered December it’s a good time to think about year-end tax strategies. But doing so is challenging because so much is different for 2020 with the passage of the CARES Act, stimulus payments, unemployment, and so forth. Also, speculation about the incoming administration trying to change tax policy complicates things further. All these moving parts make it difficult to figure out what to do, if anything, to improve your tax situation for 2020.

Going through the motions is still important, however. The process starts with getting a handle on what you expect your taxable income to be for the year. This helps you understand what tax bracket you’re likely to be in (you can Google the brackets to see how that works). If your income might be lower than normal in 2020, think about filling up your expected tax bracket with a Roth conversion or possibly pulling forward some of next year’s income into this year. You could even “harvest” gains in your portfolio to take advantage of a lower income year. Doing one (or even all) of these things helps smooth out how your income looks on paper and should save you some money in taxes over the long run.

Along these lines, here are parts of a recent article on year-end strategies from Christine Benz at Morningstar. I’ve italicized a few areas for emphasis and a link to the full article is included below. As a reminder, our tax code is full of complications, so make sure you do your homework before acting.

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Quarterly Update

It’s almost a cliché at this point to say that 2020 was a challenging year, financially and emotionally. Lives lost, but also livelihoods. The year also seemed to show a major disconnect between market performance and everyday reality. That disconnect was a popular topic throughout an eventful and consequential year.

The coronavirus took center stage, of course, with case counts in the US approaching 20 million and 340,000 deaths as we ended the year. Close behind was social and political unrest and violence in the streets. We even managed to sneak in a presidential impeachment trial, a Supreme Court nomination, and a General Election. And we can’t forget our fourth year of fires and smoke-filled skies. Quite the year indeed!

Even though it turned out well by year-end for stocks and bonds, 2020 was also one of the most volatile years on record. The year began strong but the emerging pandemic and stay-at-home orders in early Spring created lots of confusion for everyone. Investors the world over didn’t know what to think. Extreme anxiety and bouts of panic led to wild swings for major market indexes. In March, the Dow experienced some of its largest daily percentage declines in history (down 8, 10, or even 13%) often immediately followed by some of its largest daily percentage gains (up 7, 9, and 11%).

The bond market also struggled at times, especially during March. In a sign of complete panic, investors even shunned US Treasurys for several days during the worst of the virus confusion. Ultimately, the Federal Reserve and eventually Congress stepped up to backstop markets and the economy with trillions of dollars of aid. This emergency support was probably the single most important event for markets during 2020. Who knows where we would have ended up without it? But aid markets it did, and stock and bond prices recovered rapidly and performed surprisingly well, on average, over the remainder of the year.

Here’s a roundup of how major markets performed during Q4 and for the year, respectively:

  • US Large Cap Stocks: up 12%, up 18%
  • US Small Cap Stocks: up 31%, up 20%
  • US Core Bonds: up 1%, up 8%
  • Developed Foreign Markets: up 16%, up 8%
  • Emerging Markets: up 20%, up 19%

This positive performance was not evenly distributed, however. Investors clearly favored industries that stood to benefit from stay-at-home orders while punishing others. The tech sector was a clear outperformer, rising 44% for the year. Consumer Discretionary and Communication Services also fared well. Energy performed worst, showing a decline of 34% for the year due to demand uncertainties. But this could have been much worse given that the price of oil went negative in April for the first time in history. Commercial Real Estate and Financial Services also performed poorly, declining about 2% each during 2020.

But according the Congressional Budget Office, the CARES Act passed in March coupled with the recent year-end aid package could backfill nearly 8% of the estimated 10% hit to GDP caused by the pandemic. Currently, the CBO and others are expecting our economy to recover by 2022. All this aid plus extremely low interest rates, various programs from the Federal Reserve, and expectations for further stimulus from Congress are helping investors to carry this optimism into the new year.

There’s lots of downside risk to this positive market outlook, however. We’re obviously still deep within a renewed wave of the pandemic and the economic impacts are unfolding. Roughly 14 million are still unemployed or underemployed and many jobs lost won’t be coming back. Yelp indicates that around 60% of restaurants closed due to the pandemic won’t reopen. Millions are at risk of eviction or foreclosure and it’s unclear who will ultimately foot the bill for missed payments. So, even assuming the CBO is correct, the road to full recovery will be long and bumpy for many.

Additionally, while typical investors aren’t overly bullish right now, some retail investors have started day-trading again. This helped margin debt (money borrowed against stocks to buy more stocks) hit a record near year-end. Investors on margin can be forced to add money to a declining portfolio or sell stocks to pay off their debt. The latter tends to exacerbate selling pressures, so any near-term volatility could be heightened at times, even as market prices march higher.

Last year was tough for many in a variety of ways, no doubt about it, and this brief letter only scratches the surface. Let’s hope 2021 proves to be a better year for all. As always, please let me know of any changes to your plan and questions that come up along the way.

Brandon Grundy, CFP®

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Accepting Annuities

It’s sometimes difficult to think about relatively mundane financial planning topics with all that’s going on right now. But these things are still important. They’re what we can control. That said, let me indulge in a little “inside baseball” this week.

I’ve written previously about how much I loathe annuities. They’re expensive, complicated, and are said to be sold and not bought. (In other words, a reasonable person wouldn’t buy one, someone must sell it to them.) That latter point is probably my biggest problem with annuities; armies of highly trained and highly paid salespeople masquerading as financial planners and peddling their wares to unsuspecting grandmas.

But that’s just a stereotype. As with all stereotypes that emanate from grains of truth, we should look deeper to see what, if any, value there is to be had. This is what I’ve tried to do over time with annuities. I’ve attended copious continuing education sessions and have delt with many companies and brokers, while always trying to peel back the layers to find the good stuff. This has led to an evolution in how I think about annuities and which types I think might be most appropriate for retirees. Simply put, not the variable or equity-indexed kind, but a simpler variety known as a SPIA (Spee-Ah), short for Single Premium Immediate Annuity.

SPIAs aren’t appropriate, or even necessary, for every retiree. But for those folks needing to stretch their savings into extra income, or for others who like the peace of mind that comes with having a specific expense, such as a monthly mortgage payment, covered by a specific income source, a good quality SPIA can work.

It’s interesting that other fiduciary financial planners have been on a similar path in recent years. I’ve talked with these folks and other experts at conferences (when we used to have conferences in person) and read analysis from the more analytically minded.

The following article is a good example of this thought evolution. Like me, the author is a practicing planner who has pinched their nose long enough to develop a better understanding, even an appreciation of, the utilitarian nature of a SPIA. What follows are excerpts from the article. It was written for an industry audience so there’s some jargon to contend with. I’m also including a link to the whole thing if you’d like to read additional detail and see some charts.

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Happy Thanksgiving!

This is going to be a challenging holiday season. I don’t think that’s news to anybody. To me, Thanksgiving has always been a time to reflect on the year gone by and to look ahead at the year to come. To take stock and appreciate what’s been accomplished. But so much has happened, and continues to happen, in 2020 that last Thanksgiving seems like a distant memory.

Frankly, it’s sometimes hard to feel gratitude and to be thankful amid all the uncertainty and fear plaguing us these days. But then I remind myself that I truly have much to be thankful for. We all do. I have a wonderful family, good friends, work that fulfills me, and (hopefully) good health along with a positive outlook for the future.

So I hope you enjoy Thanksgiving this week, even if it’s unlike any you’ve yet experienced.

From my family to yours, Happy Thanksgiving.

Have questions? Ask me. I can help.

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