We live in interesting days. 2021 has brought us another year of ups and downs. On one level, many folks have finally felt confident enough to travel and be with family. On another level, we all know friends and family members who have suffered or died due to complications from COVID-19. Some rejoiced at the marvel of medical science which has so quickly created vaccinations against COVID-19, while others were forced to get vaccinated or potentially lose their jobs. In spite of some volatility spurred by the new Omicron variant, the markets continued to enjoy a remarkably strong recovery following the 2020 COVID lows.
The U.S. stock market had another amazing year. Investors have enjoyed the impact of government stimulus increasing profits of some of the world’s largest companies. The top 10 companies in the S&P 500 now comprise 30% of the overall index. These 10 companies have the power to either make or break the S&P 500 in any one year. One danger we see is that investors may become used to the great returns that we have experienced over the past few years. Remember, markets also go down. Our goal is to help our clients achieve an average return between 6% and 10% a year depending on risk exposure. Any year with returns greater than that should be welcomed, but not expected.
The U.S. bond markets have generally struggled. After a strong year for bonds in 2020, last year was a more challenging environment for bonds with increasing inflation and interest rates generally creeping up from their pandemic lows. One concern that we have is that investors may abandon bonds funds that struggled in 2021 in favor of funds that performed better. They may not be aware of the increased risk associated with those better returns.
Inflation and Cash
Everyone who has money in a traditional bank savings account is frustrated with the really low interest rate being offered by most banks. The national average interest rate for savings accounts is 0.06%. In other words, if you put $100,000 into the average savings account, you would earn $60 of interest in 1 year. To add insult to injury, the current inflation rate is 6.8%. This means that money sitting in savings accounts has a real return of -6.74% when factoring in inflation.
What should you do about this?
- Maintain no more than 3-6 months’ worth of living expenses in bank savings accounts.
- Talk with your advisor about different options that may be better vehicles for surplus savings that meet your risk tolerance and timeframe.
What is in store for us in 2022?
No one but God knows the future. That being said, here are a few things that we are watching out for.
1. COVID-19 –
- Omicron is likely a variant with more bark than bite. It will eventually pass, while new variants are likely to take Omicron’s place of prominence in the news media (and governments) fear-mongering.
- Greater pressure for everyone to become vaccinated and get even more booster shots.
- Vaccine Mandates are likely to be challenged all the way to the Supreme Court.
2. Tax Changes –
- President Biden is likely to finally get a tax bill passed, but it will be much less of an overhaul and more of a tweak. This is likely due to the midterm elections taking place this fall, putting pressure on moderates in the Senate who want to get re-elected.
- There will be conversations about keeping the monthly child tax credit payments going permanently to help alleviate child poverty while increasing our nation’s indebtedness.
- The following items have been proposed and could be detrimental to many of our clients. We are watching with keen interest to see if these items become law:
- Eliminating the Backdoor Roth IRA option.
- Ending the Stepped-Up Cost Basis At Death rule (currently off the table).
- Increased tax rates.
3. Politics –
- Based on President Biden’s current poor popularity polling, the Democrats may struggle to keep control of both the Senate and the House of Representatives.
- Expect state and local elections to heat up in response to local COVID trends.
- It is likely to see increased censorship of dissenting points of view on social media and other outlets.
4. Inflation & the Economy –
- Inflation will continue to be a problem for as long as we struggle with our supply chain issues. Some are predicting that the supply chain problems will not ease until later in 2022. This means that we could see another year of higher inflation.
- Another factor that will likely impact inflation is government stimulus. The more the Feds pump money into the economy, the more likely we are to see prices increase.
- The economy is incredibly strong in spite of inflation. This is evident by low unemployment, high corporate profitability, high stock market valuations, and companies finding it harder to secure sufficient staffing rather than willing customers. Unless there are significant and protracted lockdowns due to COVID-19, the economy is likely to remain strong.
5. Investing & the Stock Market –
- In light of the last statement about the potential for a continued strong economy, it is not impossible to see the markets continue to perform well.
- One factor that could temporarily dampen the markets is the ending of Quantitative Easing (the Feds forcing more cash on the balance sheets of the banks in order to promote business lending and overall investing). Quantitative Easing needs to end and could have a temporary negative impact on the markets.
- There are likely going to be periods of time with protracted downturns. There is no way to predict when these will happen, or how significant they may be. The best things that investors can do to prepare for them are (a) do nothing and wait them out when they come, and (b) make sure that your risk level is where it needs to be before the market acts up. In addition, keeping cash on hand (in savings or money market accounts) for emergencies or other short-term planned expenses remains prudent.
Reminders for the New Year
There are several things that we would like to remind you of as 2022 gets into full swing.
1. Tax Return –
- Consider having Beacon Tax Services (BTS) do your tax return this year. We are excited about having Amy Gambler as our new Director of BTS. She and our experienced team are committed to helping you pay as little tax as legally, ethically, and morally possible (BeaconTax.org).
- If you do not use our tax service, please provide a copy of your 2021 Federal Tax Return once it is completed. It is very important that we keep an eye on your income taxes each year as we manage your invested assets. Our desire is to reduce your taxes and not increase them. They are also helpful when considering the impact of charitable giving and Roth IRA Conversions.
2. Legal Documents –
- If you have not already done so, please provide the most recent version of your Wills, Trusts, and Power-Of-Attorney documents. We retain copies of these documents in our records not only for your benefit but for your heirs as well.
- Take a few moments to review your legal documents to make sure that they still reflect your desires. Also, make sure that those whom you have appointed to the various roles in the documents (Executor, Trustee, Guardian, Power of Attorney), are still the persons whom you want to serve in those capacities.
- Keep your documents up to date. If you need to make changes, please contact your attorney and let us know so that we can keep our files up to date.
- We have a list of Christian attorneys around the country if you need to draft a new Will and Power-of-Attorney. Just call us.
3. Retirement Savings –
- If you are able, try to max out your Roth IRAs for 2021 and 2022. You are permitted to make 2021 contributions up until April 15, 2022. The contribution limits have not changed for 2022. They are still $6,000 per person (under age 50) and $7,000 for those 50 and over.
- Talk to your advisor about potentially doing a Roth Conversion. This could be a great long-term tax and estate planning move.
- Make sure to get a copy of your 401(k) or other employer-sponsored retirement plans to your advisor each year. We try to review your 401(k) each year and help make adjustments as needed.
- Need to take an RMD (required minimum distribution) and have no need for the money? Use a Qualified Charitable Distribution (QCD) and fund ministry or your favorite charity. This saves you from paying more taxes while allowing you to give generously.
In spite of all the uncertainty that you may feel about the future, we are confident in God’s good plan for you and your family. Keep trusting in Him especially when things look darkest. He is still in control and He is always good.
Thank you for the many referrals this past year. We are honored with your business and your friendship.
Tim Russell, Roy Russell, Mark Magruder, Jeremy Ehst, Stephen Virkler
LFG Advisory Team