Just because we can put 2020 behind us doesn’t mean we can put the uncertainties the year brought with it behind us as well.
Financial planners across Central Kentucky say that the key to planning for the new year is to plan on those uncertainties to continue. Between not knowing when a COVID- 19 vaccine will be available and whether Congress will pass another stimulus package, to not knowing how the incoming Biden administration will impact taxes and the economy, or how markets will react to the current economic situation, planning now means planning with purpose, experts say.
Andy Reynolds
“While the market/ economy looks relatively decent today, we are not out of the woods, yet,” said Andy Reynolds, COO with Ballast. “We are advising clients to continue to make disciplined financial decisions, limit excess debt and maintain appropriate liquidity needs should we see a market/economic slowdown during the winter months due to COVID-19 limitations.”
Now, more than ever, said John Boardman, also with Ballast, is the time to take stock of your financial picture.
John Boardman
“The environment has created a great deal of uncertainty in financial markets,” Boardman said. “Even without a pandemic, 2020 was likely to be quite dramatic with a contentious, politically divided election year. Add a global pandemic to that, and that drama has grown ten-fold. The most important step any person can take, particularly when the world looks scary, is to take an honest, unemotional view of their financial picture and plan. This process will provide you with clarity and peace of mind.”
Now is not the time for knee-jerk reactions, said James Fereday, senior vice president and chief investment officer for Wealth- South.
James Fereday
“Avoid making rash decisions around your long-term goals and planning. Trying to time when the pandemic will end is likely as difficult as predicting this past election,” Fereday said. “Ensure that you have a diversified strategy that includes all major asset classes. Many investors have already been negatively affected trying to time this rapidly moving market. We work with our clients to map out cash flow needs, short- and long-term, to ensure that market fluctuations don’t negatively affect their lifestyle.”
The pandemic, and 2020, has had an impact on clients, he said, emotionally and financially.
“This is a perfect year to take stock of how clients managed emotionally through a year where we had the quickest recession and subsequent recovery in recent memory,” Fereday says. “I don’t want to understate just how impactful this virus has been on certain industries, businesses, health care, working environments and student learning — we have all been affected on some level. On a long-term strategic basis, we are sticking with our current allocations, but shorter term we have made and are making tactical adjustments in our portfolios to take advantage of market conditions.”
Daniel Czulno, with Joule Financial, said people should take stock of what they will leave behind as well.
Daniel Czulno
“One of the effects of the pandemic is that it brought forward to mind the reality that many people have neglected to develop or finalize their legacy or end of life planning,” he said. “As we head into the new year, it’s a good time to not let this urgency fade and, instead, ensure that these plans and documents are not only finalized but are in a place that your loved ones are aware of and can access if needed.”
It’s also a time to continue to set money aside.
“Statistics show that many Americans aggressively increased their cash savings during the uncertainty of the pandemic and this is great news,” Czulno said. “Folks should target an emergency savings of three to 12 months of their living expenses to weather the natural ebbs and flows of life. Beyond that however, it’s important to consider moving any excess funds to some type of investment that can generate a return to, at a minimum, keep up with inflation.”
Andrew Hart, co-founder and chief planning strategist with Wallace Hart Capital Management, said those same moves are important for businesses as well.
Andrew Hart
“While several promising vaccines are on the horizon, there’s no telling just how long this pandemic will last,” Hart said. “That’s why the No. 1 thing business owners can do is establish a rainy-day fund. Ideally, a good rainy-day fund should be able to cover three to six months’ worth of your income. To do this, start setting money aside as soon as possible and stick to a schedule. Once you make saving automatic, you won’t even have to think about it.”
One step individuals may consider, however, is looking into a Roth IRA conversion, he said.
“Although we will have a new president in 2021, the likelihood is that tax rates will stay the same until 2025 before reverting higher. For that reason, I don’t think it’s a good time to make drastic changes to your tax strategy,” he said. “One exception to this, however, is to take a serious look at a Roth IRA conversion.
A Roth IRA is different from a traditional IRA, in that you pay taxes on your present-day contributions, not on your future withdrawals. With tax rates as low as they are, now may be a good time to convert your traditional IRA to a Roth. By doing this, you’re essentially choosing to prepay your taxes and lock-in tax-free advantages during your retirement, which is when you’ll need them most.”
Regardless, said Czulno, talking to a professional and having a plan is the best way to face the uncertainty of 2021.
“At the heart of every question a client asks, whether it’s ‘What will the stock market do in the next month?’ to ‘Where can I find yield on my investments?’ or ‘What tax changes should I expect?’ is the root question, ‘Will my financial plan be able to handle what lies on the horizon?’” Czulno said. “Those without a clear plan for their goals and how to achieve them tend to face the greatest uncertainty. Those with a clear plan, which is updated and reviewed regularly with their advisor or planner, tend to have the certainty that most of what happens in the future can be navigated appropriately.”