Your wealth plan is supporting goals that might be decades away, but you’re living in the economic here and now.
The new year signals a fresh start and is an ideal time to evaluate whether you’re on track to realize your near-term and future financial goals and aspirations. “It’s a great time to look inward,” says Bryan Koepp, Wealth Planning Executive for Regions Private Wealth Management. “Review your balance sheet and understand it. What are your assets and why do you hold them? What’s their purpose? From there, ask: How can I make it better based upon my defined goals and aspirations?”
The coming year also holds considerable market, economic and political uncertainty: Inflation remains stubbornly high, the presidential election is looming, some major aspects of the tax code are set to expire, interest rates are in flux and economists are divided on whether we can expect a soft or hard economic landing, including a risk of recession. So how do you balance the impact—and opportunities—of short-term events while remaining true to your long-term financial plans?
“A major purpose of financial planning is to prepare for various scenarios and take advantage of new opportunities that can strengthen your financial future,” says Koepp. “But at the same time, short-term market and economic conditions shouldn’t cause you to change your overall investment philosophy and financial plan, which reflects your risk tolerance and the time horizon you have to achieve specific long-term goals. It’s important not to alter your long-term plan for the sake of making changes but rather to be tactical for a specific reason.”
What do election years promise?
While historical trends suggest that the market has, on average, done well in presidential election years, it would be a mistake to invest based on that kind of indirect correlation. Other factors such as corporate earnings and actions by the Federal Reserve are likely more important in predicting how markets behave. Investors can, however, expect markets to be volatile in the face of political uncertainty before the election, says Koepp. “That means paying attention to fundamentals, thinking about managing risk and working through the what-if scenarios. And don’t take your eyes off your long-term goals as you work through a volatile short-term period. By investing for the long term, you will weather short-term volatility.”
Tax changes ahead?
When the Tax Cuts and Jobs Act (TCJA) was passed in 2017, income tax rates for many taxpayers were substantially lowered, the standard deductions were increased, the alternative minimum tax was reformed, and gift and estate tax exemptions were significantly increased. But these changes are scheduled to sunset at the end of 2025, and without congressional action, the tax code will revert to the pre-2017 brackets and rates. This will mean an income tax increase for many taxpayers.
“Meanwhile, the 2024 lifetime federal estate tax exemption is projected to increase to $13,610,000 per taxpayer, $27,220,000 per married couple,” Koepp says, “but a TCJA sunset would result in that federal gift and estate tax exemption potentially being cut in half.
“Although people are wondering about the potential impact of the tax rules sunsetting, the outcome of the upcoming presidential and congressional elections will be key,” Koepp continues. “Depending on how Congress shifts politically after the 2024 election, the tax rules may be extended. They may expire. Right now, it’s still a wildcard regarding the future tax landscape.
“Regardless of the outcome, we expect to engage in more conversations around generational legacy planning, which often involves the transition of businesses and movement of other assets such as real estate to hedge the impact of future tax legislation,” says Koepp. “Not only might these estate planning strategies result in lower tax exposure, but they can also build a secure financial future for your heirs.”
The advantages of higher interest rates
Higher interest rates may be creating some sticker shock, coming out of a period when the Federal Reserve slashed interest rates to near zero to curtail the economic fallout from the COVID-19 pandemic. But the rock-bottom rates during the COVID era were an outlier as were 13% interest rates on mortgages during the early ’80s, says William Campbell, Lending Advisor for Regions. “Although they may feel high, today’s interest rates are actually fairly normal based on historical data over the last 40 years,” he says.
The Federal Reserve is expected to slow or stop hiking interest rates in 2024 as inflation cools. “The market is showing us that interest rates will remain close to where they are for the next three years,” says Campbell. “In four or five years, there may be a dip in rates, and then they will likely go back up in seven to 10 years.”
To benefit from higher interest rates, consider investing in low-risk money market accounts and CDs that are paying 4% to 5% interest. “A few years ago, people would have loved to be earning these rates on their cash,” says Campbell. If you have debt that charges high interest, use excess cash to pay it down, but hang onto any 2% to 3% fixed-rate loans that you acquired when rates were ultralow, Campbell advises. In most areas of the country, real estate values have gone up tremendously recently. “The amount of equity you have in your home to borrow against is probably substantially higher than it was two or three years ago,” says Campbell. “If you need to access capital and to borrow funds, a home equity line of credit can be an attractive option.”
Depending on your borrowing time horizon, you may want to consider longer-term fixed-rate loans instead of a one-year floating-rate loan. “We currently have an inverted yield curve, which means that interest rates on long-term loans are less expensive than on short-term loans,” says Campbell. “The market is predicting that interest rates will flatten out or even drop a bit over the next five years, which is causing the yield curve to deviate from the normal environment, where long-term rates exceed short-term interest rates.”
The vexing matter of inflation
The Congressional Budget Office is expecting that inflation will continue to gradually decline over the next year or two. But gradual declines may not be comforting as you confront prices that feel a great deal higher than they were a few years ago—or even just last year—and contemplate squeezing income from your portfolio.
Try to keep perspective. “Focusing on your personal balance sheet—something you can control—is critical during periods of high inflation,” says Koepp. “High inflation is likely to eventually revert back to normal levels, but in the meantime, you can continue to pursue your long-term goals regarding savings.” You might also leverage the anxiety that inflation can generate to help you prioritize the things that are most important to you. “This can give you a laser focus on your wants versus your needs,” Koepp says, and might help you lay out your goals and values for integration in your wealth plan. Times like this tend to highlight the value that your Wealth Advisor can bring. “Together you can look at scenarios that take into account the effects of inflation, your expenses and what you want to achieve,” Koepp suggests.
The role of credit in a wealth strategy
Counterintuitive though it may seem in the financial planning context, credit can in the right circumstances be an effective tool for building wealth. When you want cash to pursue an opportunity or meet a liquidity need, it’s not always prudent to sell stocks and bonds to get it. If the market is down, you may incur a loss when you sell your securities, or perhaps you don’t want to pay capital gains taxes when selling stock that’s appreciated. You might instead meet your liquidity needs by accessing a securities-based line of credit using your stock and bond portfolios as collateral. A home equity line of credit also provides liquidity without having to sell stocks and bonds.
Say you wanted to invest in real estate for its cash flow and potential return on investment. “You only need to use your own money for the down payment, and then you use leverage in the form of a term loan to purchase the building,” says Campbell. “Commercial real estate, for example, can generate very strong cash flow for investors, which they can use to add to their retirement accounts or continue building their investment portfolios.”
The strategy should be viewed as long-term and can make sense even during times of higher interest rates. “Sometimes people fixate on the interest rate instead of the dollars that come out of their pocket to pay for the interest,” says Campbell. “When we do the math to see what the payments will be, people often realize the advantage of using credit instead of depleting their cash reserves, which can be earning 5% in a money market account or CD, and which will be available for future opportunities such as investing in stocks and bonds.”
Making a wealth plan for more than just this year
Often people will focus solely on the monthly or annual performance of a 401(k) or an investment portfolio to gauge how well they are doing financially. “But investments and retirement savings are only one component of an overall wealth plan, which provides the roadmap, the guardrails and the confidence to allow you to accomplish your goals over years or even decades,” says Koepp.
A wealth plan starts with a full inventory of an individual’s assets, which often reveals a more favorable balance sheet than many people anticipate. “The accumulation of 401(k) plans, pension plans and various savings accounts can add up,” says Koepp. Only by getting a big-picture view of all your assets can you begin to make informed financial decisions. Are your investments underperforming? Is your asset allocation correct? A wealth plan can also identify gaps that you can work to close with strategies that you may not have previously considered.
A wealth plan evolves with you. “Your ongoing life events and changing priorities are vitally important to capture to make sure that the plan achieves what it's intended to do,” says Koepp. Equally important is to stress-test your plan against various market and economic scenarios.
People may worry about doing a wealth plan for the first time because they may worry about what it might reveal, says Koepp. “But the report just provides data. The real benefit of wealth planning is the interaction between an individual and his or her Wealth Advisor,” he says. “By examining various scenarios that will lead to different outcomes, together they can prioritize and target the best options for optimal success in achieving the individual’s goals.” Your Wealth Advisor can also call on a team of specialists to address specific concerns and needs.
Another benefit of having a Wealth Advisor is being able to talk through questions and concerns that arise from our 24/7 news cycle. “Not all financial information seen through traditional news and alternative media may apply to your personal situation. The sheer amount of information can be overwhelming,” says Koepp. “A Wealth Advisor has the experience to slow down the pace of that information, ascertain its validity and agnostically address clients’ questions to provide solace.”
Talk to your Regions Wealth Advisor about:
- Adjusting your plan for today's higher interest rates.
- How to plan now for the estate tax changes that are scheduled for late 2025.
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