“The best-laid plans of mice and men often go awry,” wrote the poet Robert Burns—something investors in the current climate can undoubtedly relate to. “By most measures, the market has recovered from the big losses we saw in the spring, but investors are still feeling a lot of uncertainty about the future,” says Marilin Walker, a Schwab wealth strategist based in Indianapolis. “It’s hard for any of us to know what to make of this new normal.”
Here, Marilin and three of her colleagues share the top five client questions they’re hearing now and their guidance for investors to consider moving forward.
1. Should I delay my retirement?
For those nearing retirement, the final working years are often the most important: Salaries tend to be bigger and contribution limits are higher, helping them in their final push to maximize their savings. But this year’s economic uncertainty resulted in a lot of lost income for the millions of Americans who were laid off, furloughed, or saw a cut in pay—and many near-retirees may be rethinking their retirement date as a result.
“Delaying retirement until the current uncertainty has passed and you are on firmer financial footing is certainly one option, but there are other levers you can pull,” says David Jamison, a Certified Financial Planner™ professional with Schwab’s Centralized Planning Team.
If you’re determined to retire on schedule, reducing your spending now so you can double down on saving is one solid strategy. Collecting Social Security earlier than intended is another. “Taking Social Security early isn’t something we’d typically recommend, but if it allows you to retire on time and keeps you from having to tap your portfolio early, it might be worth it,” David says.
Although you can file for Social Security as early as age 62, you’ll collect 30% less than you’d receive at full retirement age (between 66 and 67 for today’s retirees)—and roughly 75% less than you’d receive at age 70 (after which there is no incremental benefit). “A lot of people know that waiting to take Social Security increases their benefit,” David says, “but they may not realize how much they’d be leaving on the table by filing before age 70.” (See “Why waiting to collect pays,” below.)
Married couples have another option: the so-called 62/70 split. With this strategy, the lower-earning spouse takes Social Security at age 62 and the higher-earning spouse postpones filing until age 70 to maximize her or his benefit. What’s more, if the older spouse is the higher earner and was born before January 2, 1954, she or he can collect a spousal benefit until they file for their own benefit at age 70.
“Social Security is one of the few truly guaranteed sources of income, so be sure to consult a financial planner before you make a decision,” David says.
Why waiting to collect pays
A higher Social Security payment benefits not just the older partner but also the surviving spouse, who’s eligible to collect the deceased’s checks for life after reaching full retirement age (FRA).
Source: Social Security Administration. Monthly benefits calculated using a birthdate of 01/02/1960, earnings of $185,000 in 2020, and retirement in 01/2022. Hypothetical investor begins collecting benefits in January of each year.
2. How should I respond to elevated volatility?
Despite this year’s swift market rebound, volatility has remained well above its long-term average. “Even if your portfolio has recovered, it’s hard not to be unnerved by the potential for continued volatility,” says John Pettee, a Schwab wealth strategist. “I’m getting a lot of calls about what, if any, actions they should take.”
Each individual’s financial situation is different, but most people would benefit from a comprehensive portfolio review. Is your asset allocation strategy still on track? How risky are your investments? Are the returns you’re getting worth the fees you’re paying? “Big market shocks remind us why good portfolio hygiene is so critical,” John says.
That said, the volatility we’ve seen this year has made it clear that some investors simply aren’t as comfortable with risk as they thought they were. If recent ups and downs have you reconsidering your true risk tolerance, be sure you understand the trade-offs before making a change because reduced risk often means smaller returns.
As unsettling as a short-term surge in volatility can be, you also have to remember that, over the long term, money you keep invested has the potential to ride out market ups and downs. Staying focused on the future can make it easier to stomach the jolts.
3. Is there an opportunity to reduce my tax liability?
A rising tide may lift all boats, but a rising market doesn’t always lift all investments. Indeed, many companies have struggled to stay afloat amid the pandemic, and investors may have some losing positions among their holdings as a result.
“The silver lining of the market’s uneven recovery is the potential tax benefits it has created,” Marilin says. If any of your investments have lost value, harvesting some of those losses can help offset taxes owed on gains and/or ordinary income.
It might also be a good time to consider converting your tax-deferred retirement accounts to a Roth IRA. That’s because you have to pay taxes on the fair market value of the account at the time of the conversion—so if your account value is down, you can reduce the upfront tax hit on the conversion.
Once the assets are in the Roth account, all withdrawals in retirement are tax-free1—and, unlike traditional tax-deferred accounts, Roths aren’t subject to the required minimum distributions mandated by the IRS starting at age 72.
Likewise, holdings that have declined in value can create unique estate-planning opportunities. For example, if you’re concerned about estate taxes being levied against your heirs, you might consider establishing a grantor retained annuity trust, or GRAT.
With this strategy, you make an irrevocable transfer of assets to a GRAT, from which you receive an annuity for a specified number of years before the remaining assets are distributed to your beneficiaries.2 If you structure it as a zeroed-out GRAT—meaning your cumulative annuity payments are equal to the value of the trust’s assets at the time of the transfer—your beneficiaries will receive any assets that have appreciated above the required IRS 7520 rate without any gift tax (see “How GRATs work,” below).
“The benefit of executing a GRAT transfer now is that your assets may be lower in value today than they’ll be by the time the trust expires,” John says. “Thus, any appreciation would pass to your GRAT beneficiaries gift-tax-free.”
How GRATs work
Any appreciation of assets transferred to a grantor retained annuity trust (GRAT) can potentially pass to its beneficiaries tax-free.
*Interest is determined by the IRS 7520 rate; in September 2020, the rate was 0.42%.
†Based on an annual rate of return of 5%.
‡If you pass away before the entire GRAT is distributed, the remaining value—including all earnings—is transferred back to your taxable estate.
4. How can I best help others in need?
The ripples of widespread economic shutdowns have been felt by nearly everyone, prompting many financially secure clients to look for ways to help family and friends in need.
Cash gifts are a common way to provide direct assistance. Under current limits, individuals can gift up to $15,000 per recipient per year to an unlimited number of people without eating into the giver’s lifetime gift and estate tax limit of $11.58 million for 2020. (Married couples can give a combined $30,000 per person per year.)
Some clients are also taking advantage of the tuition gift tax exclusion, which allows individuals to make tuition payments of any size directly to a college or university on behalf of a loved one. “These gifts are also exempt from the lifetime estate tax limit,” Marilin says. “And because there’s no limit to the size of the tuition payment, it’s a great way for wealthier individuals to reduce their taxable estate.”
Of course, it’s not just family and friends that clients care about. “I’ve heard from dozens of clients who want to adjust their giving strategies to accelerate support to a variety of causes,” says Marianne Hayes, a Schwab wealth strategist.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act improved the tax benefit of charitable giving in two key ways:
- A new above-the-line income adjustment allows donors who take the standard deduction to write off up to $300 in annual charitable contributions. (Those who itemize deductions can’t take the new income adjustment but can continue to itemize their charitable gifts.)
- For the 2020 tax year, donors can deduct cash gifts of up to 100% of their adjusted gross income (AGI). For example, if you have $500,000 in income this year, you can give away that same amount to charity and deduct the full amount. After 2020, the cash gift deduction cap will revert to 60% of AGI (see “The AGI exception,” below).
To be eligible for either charitable deduction, the cash donation must be made directly to a qualified charity—not via a donor-advised fund or other philanthropic channel.
The AGI exception
Donors can deduct cash gifts of up to 100% of their adjusted gross income (AGI) for the 2020 tax year—but only 60% thereafter.
5. How can I help reposition myself for future success?
“From consolidating accounts and rolling over old 401(k)s to updating beneficiary designations and naming trusted contacts, there’s no time like the present to get your financial house in order,” Marilin says.
Beyond completing relatively simple housekeeping tasks, you might want to revisit your financial and estate plans as well. “Ask yourself if recent events have changed your outlook for your investments or your legacy,” Marianne says. “If they have, now’s the time to make adjustments so that you can face the next chapter with confidence.”
1Provided the account holder is age 59½ or older and has owned the account for at least five years.
2If the grantor dies during the GRAT term, the GRAT assets will be included in the grantor’s estate and may be subject to estate taxes.