Despite a year of COVID variants, supply chain disruptions, rising inflation and legislative gridlock, 2021 saw another strong bull market in stocks and a record low jobless rate. But perhaps the most remarkable aspect of 2021 was something that didn’t happen – the tax code did NOT get completely upended as so many feared it would.
As far back as May, Novi President and Managing Partner, Robert Dunn, CFP® advised the readers of our weekly blog not to Overreact to Proposed Tax Changes. In particular, Dunn advised our followers not to make any changes to their existing planning until all the information about pending tax changes was in hand. “I realize the numbers may be scary, but again, there’s a big difference between proposed legislation and actual law...History shows final legislation is rarely as onerous as initial proposals making headlines,” wrote Dunn at the time. That’s why it’s so important to stick to your plan during times of potential tax upheaval. “Staying the course during periods of tax uncertainty is just as important as staying the course during times of market uncertainty,” he added.
When reviewing our most popular blog posts of 2021, the evidence is clear that discussions about one’s relationship with money was just as important to our readers as advice about retirement, investments, and college savings. In fact, our best read post of the year was Dunn’s 3 Things I Learned About Money When I Was Growing Up.
We think that the reason this post seems resonated with so many of you was that in many couples – no matter how close – the two spouses have widely divergent views about money. If those differences are not acknowledged and addressed during a marriage, they can create a great deal of friction down the road.
“My earliest memory regarding the money messages I received was soon after my parents got divorced,” recounted Dunn. “This is when I started to grasp just how stark the differences could be in how people approach their money and financial circumstances. One parent was constantly concerned about where the next dollar would come from, while the other parent never demonstrated meaningful concern. The more cavalier parent always believed more money would be coming through the door and would spend freely. As you can imagine, this made the financially conservative parent even more tense. Ultimately, Dunn said his financially conservative parent achieved security, but hesitated to spend on some elements “that may have brought joy in the present.” Meanwhile, the free-spending parent never felt secure thanks to not planning ahead.
“This experience helped me realize that this is what makes personal finances so personal,” noted Dunn. “For me, it’s important to get to know individual personalities—and how they complement or clash with one another in relationships with money—to help my clients create financial plans that work in their favor.”
Retirement Insights of 2021
As financial planners, it may come as no surprise that our posts about retirement topics dominated our Top 10 Most Read Pieces of 2021.
In his post: Are You Taking Full Advantage of Your 401(k)?, author Ryan M. Vogel, CFP®, our firm’s Partner and Chief Planning Officer, explained that even folks who are maxing out their 401(k)s could be leaving money on the table by overlooking an after-tax Roth 401(k) to supplement (or replace) their 401(k) which, of course, is a deferred-tax vehicle . Vogel said they’re also missing out on retirement savings opportunities by failing to ask their plan administrator for better investment options and lower fees.
It’s also important to note that your retirement years are not all one and the same. As Ryan Dunn, CFP® illustrated in his popular post: Your (Really) Golden Years Between Retirement and RMDs, the 10-year window between age 62 and 72 is a “sweet spot for maximizing tax benefits if you play your cards right.” For instance, Dunn said a Roth conversion is one of the most common techniques our firm recommends for successful early retirees. You can take the money you’re holding in a traditional IRA, pay the tax now (since you’re probably in a lower tax bracket) and then convert a portion of it to a Roth IRA. That way the money continues to grow tax-deferred--and you can take the money out tax-free whenever you’d like since Roth IRAs are not subject to RMDs. With substantially lower taxable income in retirement, many clients do a Roth conversion at a 10% to 12% tax rate—much lower than the 24% to 35% rate they would have paid during their prime working years.. “That’s a massive tax savings,” added Dunn. He also reminded readers that their eventually Social Security benefit will grow by 8% annually, for every year they can defer taking benefits between age 62 and 70. That’s essentially a 77% return on your patience, if you can defer until age 70.
Another retirement post that hit home with many of you was: Social Security Claiming Strategies For Single Divorced & Widow Women. As our team explained, women generally have shorter working careers and often receive lower pay. Additionally, they also tend to have longer life spans than their male spouses, so they should carefully consider how and when they claim Social Security.
Our research finds nearly half of older, single women get the majority of their income from Social Security, compared to only one in five (21%) of married women. Unfortunately, many single women make the mistake of claiming Social Security as soon as they’re eligible. But as mentioned earlier, for each year they can delay, their benefit amount increases by 8% each year from age 62 to 70, so it pays to wait.
Meanwhile, divorcees can claim their ex-spouse’s benefits as long as they were married for at least 10 years. The amount they receive is equal to 50% of their ex’s benefits. If they qualify for their own benefits, they receive either 100% of their benefit amount or 50% of their ex’s -- whichever is higher. If their ex passes away, they receive benefits as a widow, which means they get 100% of the ex’s payout.
NOTE: Widows and divorcees who were married for at least a decade are eligible for survivor benefits when a spouse dies with the caveat that they won’t qualify for survivor benefits if they remarry before age 60.
Inherited IRAs are another area that trips up many of our readers. As Daniel Satz, CFP® explained in Feeling Even more SECURE about Retirement the SECURE Act -- a well-intended safety net established during COVID –created a big problem for many successful families. How? Because people inheriting non-spousal IRAs now have to take their entire distribution within 10 years, rather than stretching it out over the course of their lifetimes. As a result, they pay higher tax on that income, especially if they are still in their prime earning years.
In response to this challenge, Satz walked readers through three smart ways that parents with
high-earning adult children can avoid burdening their responsible kids with high taxes on
inherited IRAs they pass on:
1. Roth Conversions 2. Retirement Trust Plans and 3. Charitable Remainder Trusts
We urge you to review Dan’s post if your missed it.
College Savings of 2021 It’s no secret that the cost of attending college keeps rising faster than wages and the inflation rate. Brenden Leese, CFP®’s post Why Thoughts Turn to College Savings on May 29th really hit home when it went live on May 29th (i.e. 5/29). Many of you have children or grandchildren attending elite private universities costing over $70,000 a year in tuition, room, and board. Unfortunately, with your income, assets and home equity, you’ll not qualify for most scholarships and financial aid programs. Enter 529 college savings plans.
Study after study shows that 529 Plans are one of the most effective and tax-efficient ways for families to save for the ever-rising cost of college. As Leese explained, they’re especially beneficial if you start saving for your child or grandchild soon after they’re born. Anyone can open a 529 plan, regardless of your incomes or assets.
Contributions grow tax-deferred and there is no tax on the withdrawals as long as the money is used for your child’s/beneficiary’s qualified education expenses. Further, you can contribute between $235,000 and $529,000 in each of your 529 accounts, depending on which state’s plan you use (you don’t have to use your home state’s plan). Even better, you may now use up to $10,000 a year of your 529 for K-12 tuition, and any money that’s left over in the account after college can be applied to graduate school or transferred to another family member for their higher education pursuits.
Despite all those benefits, there are compelling reasons why you might not want to overfund your child’s 529 plan even if you can afford to do so. See Brenden’s post for a real-world example of a successful couple who chose not to overfund.
Importance of a Patient and a Balanced Life
While the path to financial freedom is filled with investment theory, tax strategies and asset allocation considerations, the emotional and psychological considerations to get you there are just as important.
As Client Service Associate, Madison Mount, explains in her premiere post Fitness & Finance: The Correlation Between a Healthy Life and A Wealthy Life, we live in a convenience-obsessed, “instant-gratification society.” But when it comes to building wealth and creating a fit lifestyle “it’s a marathon, not a sprint,” she writes. “A long-term plan will guarantee more success when compared to a short-sighted opportunity, explains Mount. In any area of our lives (whether it be fitness or finance), there’s an opportunity cost to our decisions. If we decide to eat that extra slice of pizza, Mount observed, we are gaining five minutes of satisfaction, but we are giving up the progress we are trying to make to be healthier. This same concept applies to our everyday finances. “In order to build your wealth, you may have to give up eating out so frequently or buying that new car. In terms of opportunity cost we need to give up immediate gratification in order to achieve sustainable wealth,” noted Mount.
The skills that healthy people use every day are the same skills that help people grow wealth. By developing healthy habits, Mount said you are “training your mind to think long term,” and you are practicing discipline, focus, patience, and self-control. “Healthy people are not tempted by immediate gratification and can view the bigger picture,” Mount added.
We thank you for reading our weekly blog so faithfully. If you have suggestions for future topics to cover, please contact our Client Experience Coordinator, Candace Henry. We’d love to hear from you and hear about what you’d like to read in 2022.