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  • Unforeseeable Market Surprises

    The current political atmosphere, economic recovery following the COVID-19 pandemic, and recently passed legislation will significantly impact your financial decisions in 2021. Don’t be caught unawares by unforeseeable market surprises! Work with a financial planner to help you navigate your retirement strategy.

    Political Control and the Stock Market

    Presidential elections tend to significantly impact the stock market and the economy as a whole. With the inauguration of President Joe Biden, you may be wondering, “How will this new presidency affect the stock market?”

    No one knows exactly how the market will perform in any given year and past performance is no guarantee of future results. However, MFS Investment Management—an American-based global investment management company—has put together a chart offering some historical perspective. From 1926-2018, the S&P 500 index experienced different annual average returns in relation to the president’s political party and the majority party in both houses of Congress. Consider these five findings:

    1. The S&P 500 gained 15 percent per year under Democratic presidents and Republican-led Congresses.
    2. The S&P gained 6.6 percent under Republican presidents and Democrat-led Congresses.
    3. The S&P gained 11.4 percent when the White House and both Congresses were run by the same political party.
    4. The S&P gained 15.6 percent under Democratic presidents and split Congresses (one party controlling the House and the other controlling the Senate).
    5. The S&P gained 0.9 percent under Republican presidents and split Congresses. This seemingly skewed data entry could be partly caused by the fact that this scenario has occurred infrequently over the past century.

    Having a Democratic president and 50-50 tie in the Senate is the scenario we’re entering right now—the very definition of “divided government.” But if market data tells us one thing, it’s that “gridlock is good.” If the stock market moving forward follows historical trends, we could be in for a healthy S&P 500 annualized return for at least the next four years. That level of certainty—or at least the lack of uncertainty—really boosts the economy and helps businesses make decisions.

    COVID-19 and the Economy

    While historical market data is useful to consider, a unique and tremendously impactful factor is present in our current economic climate—a deadly pandemic. Moving into 2021, the Biden administration will have to deal with the fallout of COVID-19.

    The damage this pandemic has caused is specific to certain sectors of the economy, while others are fairing just fine. Lower-wage jobs have also been disproportionately affected, with engineering, technology, finance, and other professional jobs left relatively unscathed.

    Despite undeniable economic damage, the underlying economy is actually showing some strong performance and signs of recovery. Here is some economic data from the end of 2020 to consider as the new year gains steam:

    • National unemployment dropped to 6.9 percent—nowhere near 3.3 percent, which is where unemployment was a year ago, but things are moving in the right direction.
    • Corporate earnings for Q3 2020 declined by 7.5 percent compared to the previous year. This is far less severe than the anticipated 21 percent decline.
    • The Institute for Supply Management (ISM)—a widely looked-at manufacturing index—rose to 59.3, the highest measurement since 2018.
    • New factory orders, which serve as forward-looking economic indicators, rose to the highest level they’ve been in 17 years.

    Changes Implemented by the SECURE Act

    The traditional retirement strategies that financial planners have recommended for decades were upended in early 2020 with the passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This legislation is a significant departure from what the rules used to be regarding retirement accounts.

    Before this new bill passed, beneficiaries had the option of spreading out distributions from inherited retirement accounts throughout their lifetime. They would have been required to take out 2 to 3 percent each year, but then the rest of the money could remain in the account, earning interest on a compounded, tax-deferred basis for decades.

    With the SECURE Act, beneficiaries must empty inherited retirement accounts within 10 years. This new rule greatly accelerates the payment of taxes on that sum of money and shortens the amount of time the funds can grow.

    Adjusting Your Retirement Strategies in Response to the SECURE Act

    The tax implications of the SECURE Act are profound. There hasn’t been much analysis yet because the COVID-19 pandemic broke out shortly after the bill was passed, distracting the entire country in the process. Still, everyone should adjust their retirement planning strategies in response to the SECURE Act. Here’s how to be more tax-efficient, not just for you, but for succeeding generations.

    Use more of your retirement account now.

    The old recommendation was to pay for things like end-of-life medical care with an after-tax account to keep taxes low and preserve any IRAs for the next generation. However, because of the new 10-year rule, it now makes more sense to reverse this recommendation in many cases. Using more of your before-tax retirement accounts now means you don’t end up passing on more taxes to your beneficiaries, who may be in a higher tax bracket when they receive the money than you are as a retiree living on social security.

    Pull down the balance of your retirement account with a qualified charitable distribution.

    This strategy involves sending your required minimum distribution directly to charity so you don’t have to report that portion as income on your tax return.

    Consider converting your account into a Roth IRA.

    From a historical standpoint, financial planners have generally recommended traditional IRAs to most of their clients. However, because of the SECURE Act’s 10-year rule, Roth IRAs—which are comprised of after-tax dollars—are getting more attention. Just remember that if you convert a traditional IRA into a Roth account, you must be able to afford the taxes now.

    If you need help navigating unforeseeable market surprises and changes brought about by the SECURE Act, please contact Nelson Financial Planning for a consultation today.

  • 6 Numbers You Must Know Before Retirement

    Throughout your lifetime, you’ll have many numbers to remember, and as you get older, it seems like there are even more. We’ve got some more numbers for you, and you’re going to want to remember these, because they’re important when you’re preparing for retirement. What are some financial numbers you need to know for your financial future?

    1. The first number is your monthly cashflow. It’s important to have a handle on your income vs expenses and know exactly where your money is going. To determine this, write down all your income, subtract all of your expenses, and look at the dollar amount that remains. If it’s a gain, great! If it’s a loss, it’s time to rethink your budget. Use a budget to keep track of the income and expenses occurring on regular basis and be aware of your loss or gain each month.
    2. The next number is the money you can expect from your Social Security benefits. What would you get if you took Social Security at age 62? What about the ages between that and 70? Social Security benefits account for about 40 percent of the average retiree’s income, so you’ll need to determine how you’ll pay for the rest of your expenses.
    3. Know how much you have in your retirement savings. Calculate how much money you will be able to access from all sources of liquid investments. These are investments you can immediately convert to cash, as opposed to things like real estate, which can’t be easily liquidated. Divide that number by 25 to find the amount of income you could reasonably use to fund your retirement. The sooner you start saving for retirement, the better off you’ll be when you reach retirement age, because compound interest will help you build your fund. Be aware that when you do access your retirement funds, you’ll likely owe taxes.
    4. It’s important to know your credit score. This number determines how much you can borrow and how much interest you’ll pay. A score below 760 means there’s room for improvement. Paying your bills on time is the biggest factor in your credit score, and your debt to income ratio also has a big impact.
    5. That brings us to the next number: your debt to income ratio. To determine this, add up all of your monthly payments, including rent or mortgage, student loans, credit cards, and other debts. Divide this number by your gross monthly income, and the resulting percentage is your debt to income ratio. Below 35% is optimal.
    6. Know the interest rate on your debts. This is the cost of your money. Look at your statements to determine your interest rates, then put your cash into paying down the highest-interest debts.

    As you can see, the first three numbers have to do with how much you’re putting away for your retirement- your assets. The last three are about the debt you’re carrying, or your liability. Planning for retirement also involves carefully considering how much money you’ll need once you’re no longer working. The rule of thumb has been to plan for 70 to 80 percent of your current income, but many retirees are finding that a comfortable amount is closer to 100 percent.

    When you’re ready to create a strong financial plan for the future that will allow you to live the lifestyle you want to live, Nelson Financial Planning can help. As one of the best financial planning firms in Central Florida, we provide guidance and financial advice so that you can make informed decisions about your future. We believe you should enjoy your retirement, so we’ll work with you to create a plan for a stress-free future. Call (407) 307-3061 or contact us today to set up your free consultation.