The world during COVID-19: Take these tips to help your financial future

The world began in 2021 with continued fear and uncertainty attributable to the impact of COVID-19 and a death toll in the hundreds of thousands.

However, inflation was muted, oil was $48/barrel and the optimism for vaccines against COVID-19 developed in November began to spread through the population along with the shot.

Assisted by trillions of dollars in stimulus money, some companies began reporting record profits. The stock market stacked a return of more than 20% on top of the 18% where it ended 2020. Unemployment has swiftly trended down to just 4.2%, oil hit a high of $85/barrel and the U.S. consumer reported a record total household net worth of $141.7 trillion in June 3.

The latest reading of inflation in November came in at a staggering 6.8% over last year; the highest reading in nearly 40 years. With interest rates on deposit accounts practically at 0%, inflation does not need to hit such high numbers for it to have a significant erosion of purchasing power.

The current state for bonds follows this theme, as evidenced with the 10-year U.S. Treasury trading at approximately 1.5%. That is beneath the 1.7% pre-pandemic inflation levels and far from the current inflationary pressures on the goods we use for everyday life.

With banks flush with cash and hungry for loans, these rates may be with us for some time. However, predicting the direction of interest rates is not the objective.

When thinking about your wealth, here are some ideas to consider for your financial future:

One option to take advantage of these low rates would be to refinance your mortgage. With real estate prices soaring, a cash-out refinance to pay off credit cards may be tempting. Refinancing debt to make room for more consumer debt (i.e. credit cards) at variable rates may not be a wise decision.

Align your investments with your income needs. Cash and bonds still serve a purpose for short-term and intermediate cash flow needs and to cushion the portfolio in times of stock market distress. Design an investment portfolio to match your cash outlays and plan for retirement and, above all, stay the course.

Historically, company stocks have had the ability to pass higher costs of goods and services onto the consumer, which could help that portion of your portfolio better combat inflationary pressures. This is a feature not available with bonds or cash.

With the gains in the stock market, stay true to your long-term investment plan and evaluate rebalancing your portfolio at least twice a year. Paying taxes on capital gains is not a bad thing, especially at these lower tax rates.

If Congress fails to act on tax hikes in 2022, these current lower personal tax rates enacted under the Tax Cuts and Jobs Act of 2017 are scheduled to sunset in 2025. That means in just a few short years, we will be facing higher rates even if Congress does nothing to change the tax code.

One idea to discuss with your financial professional is to rebalance your investment portfolio to intentionally trigger capital gains taxes at these potentially lower rates. This effectively resets your cost basis on your appreciated assets to a higher price per share.

In a world of potentially higher tax rates, resetting your cost basis does two things:

▪ When you rebalance in the future, it lowers the capital gain if your investments continue to push higher.

▪ If the market experiences a pullback, you may realize a capital loss which could help offset higher tax rates.

However, be mindful that realizing capital gains adds to your Adjusted Gross Income. Many financial qualifiers are tied to AGI, such as the taxability of social security, Medicare premium surcharges, deductibility of medical expenses, IRA contributions, and others. Know the consequences before you act.

Roth IRAs may prove to be a great tool in times of higher taxes. Roths can be funded with direct contributions, provided income guidelines are met. You also can convert money from a Traditional IRA into a Roth IRA and pay the tax on the untaxed amounts in the Traditional IRA. Or you could contribute to a Roth through an employer-sponsored retirement plan.

Finally, you may consider a back-door Roth contribution, which has been on the congressional chopping block for some time. This technique allows otherwise ineligible high-income wage earners to contribute to a Roth. This strategy requires the assistance of a qualified financial professional as there are intricacies that must be followed.

In the new year, work with your credentialed financial planner to make sure all your assets are deployed at their highest and best use in a diversified portfolio with an asset allocation to match your goals.

Andy Drennen is a CERTIFIED FINANCIAL PLANNER professional and a member of Financial Planning Association of Greater Kansas City. He is a senior portfolio manager and director of ESG Strategies with Simmons Private Wealth in Springfield, Missouri. Simmons Private Wealth does not provide tax, accounting or legal advice. The views and opinions expressed in this article are those of the author and are not endorsed by, and do not necessarily reflect the views of Simmons Private Wealth.