Samuel Irvine, CFP®, CRPC®

After the roller coaster of 2020, everyone was glad to welcome 2021. But now that we’re nearing the end of this year, it’s clear that things are not back to “normal.” The world and the markets have continued to experience ups and downs throughout 2021, but the foundations of a successful personal financial plan have remained the same.

Investing in the market is a long-term strategy, and should be part of a complete, individualized financial plan geared to an individual’s specific financial goals. When you have a solid plan in place, you may tweak it from time to time, but you remain fixed on your long-term goals. This allows you to pay less attention to inevitable uncertainty and market swings and more attention to whether you’re still on track to meet your goals. That approach is a cornerstone to building wealth and in 2021, it’s been vital.

Looking Back at 2021

A booming real estate market played an important role in this year’s economic recovery. Historically low interest rates and a demand much higher than supply drove up real estate prices in markets across the country. Almost everybody knows somebody who sold their home for thousands above asking price within days or hours.

As the year comes to an end, supply chain issues persist, which could keep housing supply from catching up with demand. The housing market is likely to stay strong, although interest rates are expected to increase.

In 2020, as we all wondered whether the markets might recover from the shock of the pandemic, few could have predicted the market strength we’ve seen. The market has performed exceedingly well in 2021. Throughout the pandemic, we encouraged clients to stay invested despite the uncertainty. Our clients leveraged their financial plans to remain focused on their objectives, and benefited from this coaching, which has ultimately been very advantageous.

However, what goes up may very well come down, and we expect volatility to persist as the state of the world and the economy remains uncertain. As such, we must remain aware of implications such as changing federal policies, rising inflation, likely changes to tax law, and of course COVID-19. But none of those should pose long term planning concerns, so long as we remain steadfast in pursuit of your planning objectives.

Planning for 2022

Despite the uncertainty and volatility, market fundamentals remain strong. Looking forward, we anticipate another favorable year for those who remain invested in the market. While returns are likely to remain positive, it is important to adjust expectations as we anticipate that market performance is likely to fall back in line with longer-term trends, compared to the rare gains of 2021.

As we wrap up the year, it’s time to think about minimizing your tax burden next spring. After the volatility and changes of the past 18 months, year-end planning may look a little different. Here are a few important things to keep in mind:

• Capital gains distributions. If you own mutual funds in a taxable account, you may have a tax bill for mutual fund capital gains and income distributions, even if you didn’t sell any shares and reinvested the gains. With the market’s exceptional performance this year, it’s a good idea to anticipate larger gains than in years past if you own mutual funds. You may be able to harvest losses in your portfolio to avoid paying extra taxes.
• Charitable giving. As part of the federal response to the pandemic, taxpayers were able to claim up to $300 in charitable giving “above the line” on their 2020 tax returns. The benefit has been extended for 2021 and increased to $600 for couples filing jointly. People who are 70 ½ or older also have the option of making Qualified Charitable Distributions (QCD), a tax-efficient way to make charitable donations with funds from a Traditional IRA.
• If you have plans to make a large gift to a child or other family member, 2021 may be the year to do it. That’s because there’s potential for a near-term reduction in the estate tax exclusion, or the amount excluded from estate tax when a person dies. Currently, the estate tax exemption is $11.7 million for 2021, but lawmakers are expected to reduce it.
• Distribution planning. Looking ahead to 2022, individuals over age 72 will need to plan for increased required minimum distributions (RMDs) from their IRAs. In 2020, the IRS suspended RMDs, and now, the markets are up 20 percent, so many people will see a big jump in the amount they’re required to take.

If you’ve stayed invested in the market this year and benefited from its great gains, it may be important to focus on protecting that growth as you plan for the coming year. Some of our clients will need to shift asset allocations to protect their growing portfolios. Others may need to renew their investment objectives; for instance, many people have adjusted their time horizons to retirement in response to the pandemic and changing environment. One survey shows that the number of business owners who plan to retire sooner than originally planned has doubled in less than a year.

As market fundamentals remain strong, we anticipate that 2022 will prove to be a year in which market returns remain positive. We recommend staying committed to the wealth building cornerstones of setting goals, creating a personal financial plan, and sticking to the plan.

If you’re ready to build a plan focused on your individual goals, Davie Kaplan can help – we’ll ask the right questions to understand where you want to go, and help you anticipate and adapt your roadmap for changing life circumstances. Our expert team of CPAs and Certified Financial Planners has been serving families and businesses in the Rochester, NY area since 1934. We offer deep, industry-specific experience and a local touch, and we’re equipped to help clients of all sizes.

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