After a year like no other, helping investors see the potential surprises that may be lurking in their wealth plan has never been more important.
The winds of uncertainty, after all, are fierce. We’re in the midst of a mass vaccine distribution rollout, but COVID-19 continues to weigh on the economy and jobs; and while interest rates and inflation have been at historic lows, they are ticking up. Add to all of that the likelihood that we will see significant tax and social reform under a new administration in the White House, and you have the perfect recipe for financial ambiguity.
This confluence of events has many people rethinking their priorities for the future and making changes to their financial behavior — justifiably so. What many don’t realize, however, is how those personal changes, depending on what they are, and macro events can have huge implications on long-term goals.
That’s why having a wealth plan and making sure you’ve reviewed it with your adviser in the context of the world today is vital. But where do you even begin?
Start with a conversation about how the uncertainty of the past year has impacted your life and your family’s life along with a discussion about how it has or has not changed your plans for the future. For many baby boomers like me, the pandemic has been a dress rehearsal for how spending shifts in retirement. After a year without an in-the-office daily routine, I’ve spent significantly less on career clothing, gas, parking and lunch. That’s useful insight into how much my spending might shift once I’ve left the workforce and good fodder for a discussion about what I might do with those savings.
Then consider shifts in personal goals. The pandemic tested our quality-of-life choices. Early retirement, career changes and relocations are increasingly in play. Many families, both young and more mature, are rethinking their housing situation — some eyeing cabins or second homes and others choosing to move out of small spaces in the city and into larger homes in the suburbs.
Next, put all these changes and revised goals into context. This is where a financial adviser can be particularly helpful. A key part of a planner’s role is helping clients understand all of the inputs to their plan and the related volatility that goes along with it. Not just the capital market assumptions, but also inflation, interest rates and taxes. Many advisers use “what if” scenario planning to help illustrate the impact that small changes in one assumption, such as inflation, can have on their plan results.
Especially this year, ample time should be spent on the capital market assumptions. As we mark the first anniversary of the bull market starting on March 23 — after the shock of the pandemic sent the S&P 500
plummeting 30% in just 22 days — both the S&P 500 and Dow Jones Industrial Average
have advanced more than 75% to mark the best start to a new bull market ever. Clients who stayed invested have been rewarded with returns that arguably cannot be sustained over the long term. It’s critical that investors understand this.
Taxes will also be top of mind for most families. The new administration is foreshadowing a number of potential tax changes, including a higher income tax bracket for the wealthiest, a higher long-term capital-gains rate, elimination of the step-up in basis at death and a lower estate tax exemption. While no concrete tax plan has been released, the general consensus is taxes are likely on their way up.
For many, estate planning will have more urgency as well. The potential of a lower estate tax exemption coupled with the CARES Act 10-year drawdown change for inherited IRAs has many boomers contemplating how to best minimize their lifetime tax bill on their growing estates, especially those with large qualified portfolios. With the majority of the boomers beyond age 59 1/2, qualified assets are accessible without penalty, but taxes will be due. Discussing ways to convert assets at a lower tax rate for future income needs or reinvesting for growth at a preferred tax rate may make sense.
Lastly, understanding how today’s environment impacts gifting and philanthropy is important. For instance, the low interest-rate environment makes interfamily loans and certain estate gifting strategies very attractive. With longer lifespans, sometimes it is more rewarding to gift to your children when they need it, instead of waiting until end-of-life when they will be in their peak earning years nearing their own retirement and may not need the money or the unwanted tax bill.
While the uncertainty factor feels like it is at an all-time high — at the same time that the complexity and taxability of the average estate is increasing — there’s no better way to bring down financial anxiety than with a solid wealth plan. In fact, one might argue, there has never been a richer environment for planning conversations and for resetting needs, wants and wishes to better match the ambiguous reality of today.
Angie O’Leary is head of Wealth Planning at RBC Wealth Management-U. S.
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.