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2021 Financial Planning Outlook: 3 Trends and Implications

2020 has been a tumultuous year. The COVID-19 pandemic, sharp economic slowdown and subsequent market volatility highlighted that financial planning—including helping to protect wealth—is an important complement to investment management. Times of high anxiety remind us that having a financial plan—and sticking to it—can help provide a sense of control.

Heading into 2021, we see three trends that could have implications for planning and wealth management:

  • low short-term interest rates that likely won’t budge;
  • tax uncertainty, but probably not sweeping tax policy changes;
  • various planning needs exposed by the pandemic.

Here’s an overview of these trends, along with implications and takeaways to help you navigate the year ahead.

Short-term rates likely will stay low

We expect the Federal Reserve to keep the short-term federal funds rate anchored near zero in 2021, although longer-term Treasury yields may rise as investors anticipate an economic bounce when COVID-19 vaccines become widely available.

The federal funds rate tends to drive rates of return on the most secure investments, including short-term Treasury securities and cash. If short-term rates are likely to remain low, you may be wondering: Is there any point in holding cash?

The answer is yes.

During the pandemic-driven market downturn, we saw cash serve multiple purposes. It can be a diversifying and stabilizing asset in a portfolio. A cash reserve can also help you take advantage of opportunities that may arise, such as buying stocks when prices drop. Last but not least, cash is important as an emergency reserve in case something bad happens—like a job loss or furlough.

The diversification benefits of cash and short-term investments—such as yield-bearing checking or savings accounts, purchased money market funds, short-term Treasuries, or bank certificates of deposit (CDs)—can help buffer a portfolio during a market downturn. Because stocks tend to be relatively volatile, you’ll want to consider keeping money you expect to need soon in more-stable investments. For instance, if your child will be starting college next year, you don’t want to be forced to sell stocks at depressed prices to fund that first-year tuition; consider cash, short-term Treasuries or a CD ladder instead.

Cash can also put you in a position to benefit from potential opportunities. As we saw in 2020, market downturns can be brutal but short—after hitting a low in March, the S&P 500 was reaching new record highs again by August. Although we typically don’t recommend trying to time the market, had you seen an attractive buying opportunity during the downturn, cash would have helped you take advantage of it.

We continue to suggest that all investors maintain emergency reserves to cover three to six months of expenses, in investments that can be accessed easily, such as savings in a yield-bearing checking or savings account, or a purchased money market fund. This can help you bridge an unexpected employment gap, or the effects of a downturn on your business. If you’re near or already in retirement, consider boosting cash reserves to cover 12 months of expenses after accounting for other income sources, such as Social Security. This can help you avoid having to sell stocks in a down market to fund everyday expenses; also, knowing you have a stable source of liquidity can allow you to invest for the longer term with more confidence. 

Finally, review all your debt and look for refinancing opportunities while rates are low. Individuals and families refinanced mortgage debt at a record volume in 2020, and we expect that trend will continue in 2021. Learn about the four common reasons to refinance and what to consider when making a refinance decision.

Big tax policy changes are unlikely in 2021

One of the questions we get most often around elections is “will my taxes go up?” Taxes are an important expense for any investor, and while many people are concerned as Washington prepares to inaugurate a new president, we do not necessarily expect major changes in tax laws.

At the time of this writing, we’re waiting to see the outcome of January 5th runoffs in Georgia for two U.S. Senate seats. The results will determine whether Republicans maintain control of the Senate, or whether Democrats gain a thin majority. Either way, it will be nearly impossible—or at best very difficult—to enact sweeping tax changes.

With a Democratic majority in the Senate, a portion of the federal estate tax exemption could be on the chopping block. With that possibility in mind—and it’s only a possibility—here are tax moves to consider, if you have a net worth that would apply. Before taking any action, though, speak with an advisor and/or meet with an estate planning professional to weigh your options.

If you have:

Consider this tax tip:

< $5 million in assets

Don't make any significant changes to your estate plans based on the possibility of estate tax laws in the future. Even if the estate tax exemption changes, you will most likely remain under the exemption limit (state estate tax may apply).

$5 million to $20 million in assets

Consider a partial gifting strategy to lock in the current $11.58 million estate tax exception ($23.16 million if married). You may not be able to gift the full estate tax exemption amount and still maintain your desired lifestyle. However, you have opportunities to use various trusts to lock in a portion of the exemption amount – for example, by utilizing one spouse’s exemption.

> $20 million in assets

Consider a full (or partial) gifting strategy to lock in the current $11.58 million estate tax exception ($23.16 million if married). You can even make a gift via a trust to ensure that your wishes are met.

Source: Schwab Center for Financial Research
 

If Congress remains divided, it will be difficult for either party to advance major changes in tax policy, and it will take time to gather support for any sweeping legislation. This lead time will allow you and your advisor to think through the implications to your financial plan, if any. However, in any year, you should consider various year-end tax planning opportunities, such as tax loss harvesting, tax gain harvesting, charitable gifting, and a Roth conversion.

The pandemic has underscored planning needs

The COVID-19 pandemic has changed how some Americans are thinking about—and planning for—retirement. The pandemic also has exposed some areas of financial planning and wealth management that otherwise may have been overlooked or even avoided.

1. Reassess retirement planning. According to a 2020 Schwab survey, more than half (52%) of Baby Boomers (typically defined as those born between 1946 and 1964) surveyed said the pandemic has made them more focused on developing a clear financial plan for retirement. And a 2020 TD Ameritrade survey of U.S. adults found that 71% of those surveyed anticipated that the pandemic would affect their retirement plans, with 37% of Boomers indicating they had delayed or considered delaying retirement, and 23% indicating they had retired early or considered it because of the pandemic.

Will the pandemic cause a fundamental redefinition of what retirement means in America? We don’t think so, but these shifts in how people are thinking about retirement point to the importance of planning beyond your portfolio, including living arrangements in retirement (perhaps downsizing or moving to a more affordable location) and the desire for (and cost of) long-term care insurance, especially if you plan on aging at home. 

Most of the Boomers questioned in our 2020 survey said they felt confident in their retirement savings, but the survey revealed a disconnect in that confidence. On average, those surveyed said they plan to spend $135,000 a year to live their “best life” in retirement. But overall, they’ve saved an average of just under $1 million. Even with Social Security, we estimate that total would not last much more than 10 years of retirement if people spent at that rate. Working with a professional to create or update a retirement income plan can help pinpoint any disconnect between how much you need to live your best life and how long you expect to live, and then address it.

2. Retirement policy changes may be ahead. We’re keeping an eye on a few additional developments related to retirement planning. In November, the U.S. House of Representatives proposed a new retirement-related bill. Commonly called the “SECURE Act 2.0,” it could provide more flexibility for retirement savings. It stands a good chance of being voted on in 2021. If passed, the bill would further increase the required minimum distribution (RMD) age from 72 to 75, and allow some older workers to make even larger contributions to their retirement accounts.

Also, the pandemic has caused some analysts to project that the Social Security trust fund may run out of money earlier than originally expected. As a result, those near retirement may be tempted to start benefits early, and recessions tend to lead to an increase in people starting benefits at age 62—the earliest age possible. If you’re nearing retirement, the timing of your filing decision is one of the most critical—and largely irreversible—retirement decisions you’ll make. Make an informed choice. Generally, we suggest that investors in good health, and with the means to do so, wait as long as possible (up to age 70) to start Social Security.

3. Re-examine estate planning documents and insurance coverage. The pandemic forced many of us to face our own vulnerability. Is your insurance coverage adequate, and do you have basic estate planning documents in place? Now is the time to review these topics with your advisor. Start with this estate planning checklist and review advance directives, such as a living will, health-care proxy, and do-not-resuscitate order.

Putting it all together

Navigating the current trends of low interest rates, tax uncertainty, and evolving financial and retirement needs is best done with a comprehensive plan. Financial planning, wealth management and investment planning can work together to help you reach your financial goals. Use these trends and their implications as the starting point for a conversation with a financial planner this year.

What You Can Do Next

Important Disclosures:

An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

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 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.

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

Schwab Plan is available to clients at no cost, but any investments you ultimately make may incur costs such as advisory fees.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Investing involves risk, including loss of principal.

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.

TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.

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