2023 Planning and Wealth Management Outlook

Investors are in the crosscurrents of inflation spikes, rising interest rates, and possible recession.

Investors confronting still-high inflation, rising interest rates, global economic and stability uncertainty, and talk of a looming recession may be wondering what themes should guide their investment decisions in the year ahead.

Before getting into what we see as the top themes for the year, though, it's worth noting that the first step of any investor's financial journey should be formalizing their financial goals as part of a wealth management plan. Knowing how much money you’ll need for certain goals and when are essential when making decisions about how to invest.

As for 2023, we see five themes for investors to keep in mind:

  • Watch inflation
  • Manage liquidity
  • Assess emotions
  • Plan ahead for taxes
  • Check your estate plan

Watch inflation

Year-over-year inflation rates are slowing, but they may remain above the Federal Reserve's 2% target for some time. At the same time, investors should be aware of a few adjustments that could help offset some of the pain of higher prices:

  • The IRS has increased contribution limits for retirement plans, which means anyone saving for retirement could save more than ever in tax-deferred accounts like 401(k)s or IRAs. In our view, investing is the most practical way to outpace inflation over the long term.
  • Retirees received the largest cost-of-living increase in their Social Security payments in 40 years this year. That is on top of the sizeable bump they got in 2022.
  • Tax brackets were also adjusted higher to account for inflation, which could mean lower future tax bills.
  • Interest rates on short-term investments and bonds have risen to levels we haven't seen since 2008.

Beyond these immediate issues, we continue to recommend that for their long-term goals, investors maintain diversified portfolios that include both fixed income and equity investments.

Manage liquidity

Financial planning isn't just accounting for far-off goals. For some things, you may need money soon or even now.  Such funds should be protected, rather than left exposed to market swings. That's why having a clear understanding of your cash needs within the next two to four years is critical. It’s a question of risk capacity: knowing how much you can afford to lose compared with how much time you have to potentially recover.

So, for your near-term spending goals, consider taking these two steps:

  1. Estimate how much money you may need from your investments after other income sources in the next few months, the next year, and then the next two to four years.
  2. Invest that money with capital preservation in mind. Short-term rates may not beat inflation, but managing your money according to your goals’ time horizons is a key part of modern planning and wealth management.

One bright spot here is that you can actually earn a better return from cash and short-term investments than you have been in years thanks to the Fed having raised interest rates seven times last year. In fact, the potential earnings available for cash and short-term investments are more attractive now than they have been since 2008.

Attractive current short-term interest rates

Yield-bearing checking account: 0.45%; Uninvested brokerage cash: 0.45%; Yield-bearing savings account: 0.48%; Purchased money market fund: 2.18% to 4.42%; CDs (<1 year maturity): Up to 4.67%; Treasury bills (<1 year maturity): 4.65% to 4.81%; CDs (1-4 years’ maturity): 4.6% to 4.7%; Treasury notes and bonds (1-4 years): 3.67% to 4.67%: Municipal bonds (1-4 years): 2.55% to 3.21%; Corporate bonds (>BBB, 1-4 years): 3.89% to 4.79%.

Source: Charles Schwab & Co., Inc.

Data as of January 20, 2023. For illustrative purposes only. For current representative rates, clients can go to client.schwab.com/secured/cash-investments. Past performance is no guarantee of future results.

Assess emotions

Down markets like we experienced in 2022 test investors' emotions—and arguably highlighted the value of committing to objectives, guardrails, and an appropriately diversified portfolio. The alternative—letting market swings dictate your strategy as you bounce in and out of assets—can be costly.

To be sure, a diversified portfolio won't shield you entirely from losses, but proper diversification can help you manage your risk and exposure to volatility, potentially improving returns over the long-term. At the same time, it's helpful to remember that recoveries happen quickly, with the largest rebounds often coming mid-downturn.

Accordingly, we think staying committed to your goals and portfolio plans are going to be particularly important in 2023.

It's also worth noting that some retirees could now have more time for their investments to recover from the losses of last year after Congress pushed back the start of required minimum distributions (RMDs) as part of the SECURE 2.0 Act. Effective this year, the legislation raises the starting age for RMDs from tax-deferred retirement accounts to 73, from 72 previously. Then, in 2033, the starting age will increase again to 75. Of course, there may be other tax considerations to weigh here, as we'll see below.

Time in the market is more important than timing the market

Index annualized total return (2002-2021), S&P 500 Index: 9.5%; Excluding top 10 days: 5.3%; Excluding top 20 days: 2.6%; Excluding top 30 days: 0.4%; Excluding top 40 days: -1.5%

Source: Schwab Center for Financial Research with data provided by Standard and Poor's.

Return data is annualized based on an average of 252 trading days within a calendar year. The year begins on the first trading day in January and ends on the last trading day of December, and daily total returns were used. Returns assume reinvestment of dividends. When out of the market, cash is not invested. Market returns are represented by the S&P 500® Index which represents an index of widely trade stocks. Top days are defined as the best performing days of the S&P 500 during the 20-year period. Indices are unmanaged, do not incur fees or expenses, and cannot be invested in directly. For more information, see Schwab.com/IndexDefinitions. Past performance is no guarantee of future results. 

Investing for long-term objectives obviously isn't a short-term game. It's a commitment to staying the course and building wealth over time to gain financial freedom, flexibility, and achieve one's personal financial goals. Without having a commitment to the future, especially during market downturns or life changes, we tend to act on emotion. That can lead to regrettable financial decisions, especially in times of stress.

Plan ahead for taxes

No one likes taxes, and most investors generally choose to avoid taxes today that they could pay tomorrow. But tax rates are currently close to post-WWII lows, and they're set to rise when the Tax Cuts and Jobs Act (TCJA) of 2017 expires at the end of 2025 (absent further legislation or action from Congress). Taking advantage of today's historically low tax rates can pay off over the long-term.

Tax rates may rise after sunset of TCJA

Current federal ordinary income tax brackets for married filing jointly are: 10% bracket: $10,275; 12% bracket: $41,775; 22% bracket: $89,075; 24% bracket: $170,050; 32% bracket: $215,950; 35% bracket: $539,900; 37% bracket: no limit. The 2026 sunset tax brackets for married filing jointly are: 10% bracket: $20,550; 15% bracket: $83,550; 25% bracket: $178,150; 28% bracket: $340,100; 33% bracket: $431,900;  35% bracket: $647,850; 39.6% bracket: no limit.

Source: Schwab Center for Financial Research

Shows current, 2022 tax rates and brackets based on the tax thresholds for single files and married filers filing jointly compared to anticipated tax rates after expiration of the TCJA in 2026 absent changes or new legislation. For example purposes only and should not be considered as tax advice.

 

Tax planning is a year-round activity. It starts with selecting the most tax-efficient accounts for your savings, making appropriate use of taxable brokerage accounts, and generally investing with taxes in mind. Then, consider ways not just to defer taxes to a future date, but to smooth your tax burden by strategically managing tax brackets. Such mindfulness can potentially help you lower your taxes and maximize your after-tax wealth.

Retired investors can benefit from efforts to smooth taxes, in our view. As noted above, retirees will have more time to let their tax-deferred savings grow now that the RMD rules have been changed. However, waiting to pay taxes on accumulated savings can also result in a sudden, much-larger tax bill once RMDs do kick in, with many of the additional dollars falling into higher tax brackets.

Some tax-management strategies to consider include Roth conversions, tax-gain harvesting, and tax-loss harvesting.

This could also include a significant potential opportunity to harvest losses from fixed-income investments after the punishing losses of last year. To be clear, this doesn't mean that we suggest investors permanently reduce their allocation to bonds. However, realized losses can be used to offset other current or future gains from bonds or other investments, and the proceeds can be used to reinvest or reposition fixed-income portfolios based according to an investor’s time horizon, risk tolerance, and the higher interest rates now.

Check your estate plan

Estate planning isn't just planning for the transfer of assets when you die. There's a sunnier side as well. Plan first for your own retirement, then identify what you want to accomplish during your life with your "excess" funds. For example, gifting, philanthropy, or contributing to a grandchild's education, are the rewards of careful estate planning.

Before you begin any estate planning, ask yourself these questions: Who do you want your wealth to go to? When do you want to share that wealth with them? What specifically do you want to share? How should they receive this wealth? And why is this important to you? Having a strong understanding of what you want to accomplish will help you identify the optimal and most tax-efficient plan for you and your family. 

Then, start with the basics. This includes working with a planner to review and coordinate beneficiary designations and titling on all accounts. Remember, beneficiary designations override your will and/or revocable trust. Then, move on to the other important documents including wills and durable powers of attorney. 

There's still time to plan for this, but those with higher wealth should also watch out for the 2026 expiration of the Tax Cuts and Jobs Act, when current lower gift and estate tax exclusion amounts will revert to 2017 levels (barring Congressional action). Concerned high-net worth individuals and families can plan now to make gifts prior to 2026.

Estate planning hierarchy

Everyone: Foundational estate plan: Beneficiary designations, titling, wills, revocable trusts, durable power of attorney. Under $5m: Next steps: Gifting, life insurance, special needs trusts, education planning. Over $5m: Family transition & estate tax: Estate tax or family trusts including credit shelter, family LLCs, charitable giving, estate tax.

Source: Schwab Center for Financial Research

Bottom Line

Investors are increasingly focused on what their money can do for them. Thinking about how these themes apply to your personal situation, we believe, will help you grow, protect, and distribute the money you've earned, saved, and invested.

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Diversification and rebalancing a portfolio cannot ensure a profit or protect against a loss in any given market environment. Rebalancing may cause investors to incur transaction costs and, when a nonretirement account is rebalanced, taxable events may be created that may affect your tax liability.

Investing involves risk, including loss of principal.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.

Tax-exempt bonds are not necessarily a suitable investment for all persons. Information related to a security's tax-exempt status (federal and in-state) is obtained from third-parties. Tax-exempt income may be subject to the Alternative Minimum Tax (AMT). Capital appreciation from bond funds and discounted bonds may be subject to state or local taxes. Capital gains are not exempt from federal income tax. 

Roth IRA conversions require a 5-year holding period before earnings can be withdrawn tax free and subsequent conversions will require their own 5-year holding period. In addition, earnings distributions prior to age 59 1/2 are subject to an early withdrawal penalty.

Neither the tax-loss harvesting strategy nor any discussion herein is intended as tax advice. Tax-loss harvesting involves certain risks including unintended tax implications. Investors should consult with their tax advisors and refer to Internal Revenue Service (“IRS”) website at www.irs.gov about the consequences of tax-loss harvesting

Performance may be affected by risks associated with non-diversification, including investments in specific countries or sectors. Additional risks may also include, but are not limited to, investments in foreign securities, especially emerging markets, real estate investment trusts (REITs), fixed income, small capitalization securities and commodities. Each individual investor should consider these risks carefully before investing in a particular security or strategy.

The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see www.schwab.com/indexdefinitions.

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