2023 Planning and Wealth Management Outlook

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

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.

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.

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.

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.

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 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.

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.

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.