Take a few tips to navigate your financial future

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Andy Drennen

The world started in 2021 with lingering fear and uncertainty over the impact of COVID-19 and the death toll in the hundreds of thousands.

However, inflation was subdued, oil was $ 48 / barrel, and optimism for the COVID-19 vaccines developed in November began to spread through the population with the shooting.

Aided by trillions of dollars in stimulus money, some companies have started to record record profits. The stock market returned over 20% on top of the 18% where it ended 2020. Unemployment quickly fell to just 4.2%, oil hit a high of $ 85 / barrel and the US consumer said a record net amount for households. valued at $ 141.7 trillion on June 3.

The latest inflation reading in November was 6.8% compared to last year; the highest reading in almost 40 years. With interest rates on deposit accounts practically at 0%, inflation does not need to reach such high numbers for it to have a significant erosion in purchasing power.

The current state of bonds follows this theme, as evidenced by the 10-year US Treasury note trading at around 1.5%. This is below the 1.7% inflation levels before the pandemic and far from the current inflationary pressures on the goods we use for everyday life.

With banks full of cash and hungry for loans, these rates may be with us for a while. However, predicting the direction of interest rates is not the goal.

When thinking about your wealth, here are some ideas to consider for your financial future:

One option to take advantage of these low rates would be to refinance your mortgage. With real estate prices soaring, refinancing cash to pay off credit cards can be tempting. Refinancing debt to make room for more consumer debt (i.e. credit cards) at variable rates may not be a wise move.

Align your investments with your income needs. Cash and bonds are still used to meet short- and medium-term cash flow needs and to amortize the portfolio in times of stock market crisis. Build an investment portfolio that matches your cash spending and retirement plan – and most importantly, stay the course.

Historically, corporate stocks have had the ability to pass higher costs of goods and services on to consumers, which could help that part of your portfolio better fight inflationary pressures. This is a feature not available with bonds or cash.

With stock market gains, stick with your long-term investment plan and assess your portfolio rebalancing at least twice a year. Paying capital gains taxes is not a bad thing, especially at these lower tax rates.

If Congress does not act on the tax hikes in 2022, those lower personal tax rates currently enacted under the Tax Cuts and Jobs Act of 2017 are expected to expire in 2025. That means that in just a few short years we will be facing higher rates even if Congress does nothing to change the tax code.

One idea to discuss with your financial professional is to rebalance your investment portfolio to intentionally trigger capital gains taxes at these potentially lower rates. This effectively resets your cost base on your appreciated assets to a higher price per share.

In a world where tax rates are potentially higher, resetting your cost base does two things:

When you rebalance in the future, it reduces the capital gain if your investments keep growing.

If the market takes a hit, you could realize a capital loss that could help offset higher tax rates.

However, remember that the realization of capital gains adds to your adjusted gross income. There are many financial criteria related to the AGI, such as Social Security taxation, Medicare surcharges, medical expense deductibility, IRA contributions, and others. Know the consequences before you act.

Roth IRAs can be a great tool in times of higher taxation. Roths can be funded by direct contributions, provided the income criteria are met. You can also convert money from a Traditional IRA to a Roth IRA and pay tax on the amounts not taxed in the Traditional IRA. Or you could contribute to a Roth through an employer sponsored retirement plan.

Finally, you can consider a backdoor Roth contribution, which has been on the table in Congress for some time. This technique allows high-income employees who are otherwise ineligible to contribute to a Roth. This strategy requires the help of a qualified financial professional as there are subtleties that must be followed.

In the New Year, work with your Certified Financial Planner to ensure that all of your assets are maximally and best deployed in a diversified portfolio with an asset allocation that matches your goals.

Andy Drennen is a CERTIFIED FINANCIAL PLANNER and a member of the Financial Planning Association of Greater Kansas City. He is a senior portfolio manager and director of ESG strategies with Simmons Private Wealth in Springfield, Missouri. Simmons Private Wealth does not provide tax, accounting or legal advice. The views and opinions expressed in this article are those of the author and are not endorsed by, and do not necessarily reflect, the views of Simmons Private Wealth.


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