After a year like no other, helping investors see the potential surprises that may be lurking in their wealth plan has never been more important.
The winds of uncertainty, after all, are fierce. We're in the midst of a mass vaccine distribution rollout, but COVID-19 continues to weigh on the economy and jobs. And while interest rates and inflation have been at historic lows, they're ticking up. Add to all that the likelihood we'll see significant tax and social reform under a new administration in the White House, and you have the perfect recipe for financial ambiguity.
This confluence of events has many people rethinking their priorities for the future and making changes to their financial behavior—and justifiably so. What many don't realize, though, is how those personal changes and macro events can have huge implications on long-term goals.
That's why having a wealth plan, and making sure you've reviewed it with your advisor in the context of the world today is vital. But where do you even begin?
1. A wealth plan can help weather financial storms
Start with a conversation about how the uncertainty of the past year has impacted your life and your family's life along with a discussion about how it has or hasn't changed your plans for the future. For many Baby Boomers like me, the pandemic has been a dress rehearsal for how spending shifts in retirement. After a year without a daily office routine, I've spent significantly less on work clothing, gas, parking and lunch. That's a useful insight into how much my spending might shift once I've left the workforce. It's also good fodder for a discussion about what I might do with those savings.
Then consider shifts in personal goals. The pandemic tested our quality-of-life choices. Early retirement, career changes and relocations are increasingly in play. Many families, both young and more mature, are rethinking their housing situation. Some are eyeing cabins or second homes and others are choosing to move out of small spaces in the city and into larger homes in the suburbs.
Next, put all these changes and revised goals into context. This is where a financial advisor can be particularly helpful. A key part of our role as planners is helping clients understand all of the inputs to their plan and the related volatility that goes with it. Not just the capital market assumptions, but also inflation, interest rates and taxes. Many advisors use “what if” scenario planning to help illustrate the impact that small changes in one assumption, such as inflation, can have on plan results.
Ample time should be spent on the capital market assumptions, especially as we mark the one-year anniversary of the bull market. The shock of the pandemic sent the S&P 500 plummeting 30 percent in just 22 days in 2020. Since then, both the S&P 500 and Dow have advanced more than 75 percent to mark the best start to a new bull market ever. Clients who stayed invested have been rewarded with returns that arguably cannot be sustained over the long term.
It's natural for investors to want high growth to continue, but it's critical they understand it likely won't. Turning a blind eye to market risk in what feels like a good market can lull investors into a false sense of security, preventing them from taking simple but necessary steps to protect themselves for when things begin to shift.
2. Plan ahead for potential tax changes
Taxes will also be top of mind for most families. The new administration is foreshadowing a number of potential tax changes, including a higher income tax bracket for the wealthiest, a higher long-term capital gains rate, elimination of the step-up in basis at death and a lower estate tax exemption. While no concrete tax plan has been released, the general consensus is taxes are likely on their way up.
For many, estate planning will have more urgency as well. The potential of a lower estate tax exemption coupled with the Coronavirus Aid, Relief, and Economic Security (CARES) Act ten-year drawdown change for inherited individual retirement accounts (IRAs) has many Boomers contemplating how to best minimize their lifetime tax bill on their growing estates, especially those with large qualified portfolios. With the majority of the Boomers beyond age 59 1/2, qualified assets are accessible without penalty, but taxes will be due. Discussing ways to convert assets at a lower tax rate for future income needs or re-investing for growth at a preferred tax rate may make sense.
3. Build charitable giving into your wealth planning
Lastly, understanding how today's environment impacts gifting and philanthropy is important. For instance, the low interest-rate environment makes interfamily loans and certain estate gifting strategies very attractive. With longer life spans, sometimes it's more rewarding to gift to your children when they need it. By waiting until end-of-life, the next generation may already be in their peak earning years and may not need the money or the unwanted tax bill.
While the uncertainty factor feels like it's at an all-time high, there's no better way to bring down financial anxiety than with a solid wealth plan. In fact, one might argue there's never been a richer environment for planning conversations and for resetting needs, wants and wishes to better match the ambiguous reality of today.