Hope. Healing. Reflection. That’s what I’m thinking about. It feels like the pendulum is being pulled back so far that when it inevitably releases and swings the other way, we may see some powerful good at work. At least, I hope so.

Being forced to live and work from home for about a year now, we can’t help but reflect on what it all means. What is most precious to us? What do we want for the future? What do we want to do once we’re free again? What can we get done now while we’re waiting for the vaccines to be distributed to all of us?

I usually write a “calendar” article about this time of year with various financial planning ideas to accomplish throughout the year. This time, it felt like I needed to take a slightly different approach. I hope there are elements that resonate for you as you think about the upcoming year.

First Quarter: 2021

Most of us are still at home. Waiting. Upgrading our technology, if we didn’t get it all accomplished last year. Sprucing up our home offices so that we’re more efficient and productive. So that we can better communicate with our clients. Last year was triage. This year we figure out what permanent adjustments need to be made.

The beginning of the year is a good time to do some diagnostics. These are the basic types of analyses that I like to do to see what work needs to be done. Like a doctor running some tests. What needs to be prioritized as we map out our time this year? Here’s what I’m going to do personally this quarter:

  • Update my Net Worth Statement
  • Organize my Financial Records
  • Get my Taxes Ready to File

Net Worth Statement

Know what you own and what you owe. This exercise invariably leads to reflection on saving, spending and giving. If you see that you need a deeper savings cushion to help get you through unexpected tough times, think about how you can save more in your taxable accounts as well as your retirement accounts.

While we’re at home, can you clean up any accounts? I frequently see lots of old retirement accounts that could be rolled over to an IRA and consolidated. You may gain economies of scale by owning fewer accounts. It will be easier to keep track of and rebalance if your money is in fewer places. And how many bank accounts do you really need?

Have you refinanced your mortgage in the past year? Rates are ticking up, so if you want to try to save some money by refinancing, get going. And how about a home inventory so you know that your belongings are properly insured? We’re at home. Walk around and write down your most valuable items and what they are worth. Does your home owners’ insurance cover the grand total?

Financial Records

Now I talked to you about this during the peak of COVID (Stuff to Do While Quarantined – Clean Up Financial Records). But maybe you were just too frazzled to pay attention. So let’s try again. This is admittedly a very boring task. And frankly, a lot of financial planning is just incredibly boring. There, I said it. I was a musician before I did this. But financial planning is incredibly practical. And it can set you up to go do more interesting things. So it’s worth it to tackle some of these boring topics. After all, you can make anything fun if you put your mind to it. We’ve had a year to reflect on that.

You need to get organized to file your taxes anyway. So get your filing done. And go through all of your files to shred anything you no longer need. It’s winter. You’re stuck inside. Get this task behind you before we can break free again.

And while you’re at it, dig out what you need for tax filing purposes. Like what you gave to charity in 2020. There were some big rule changes that allowed you to give more. And some of those rules have been extended and clarified for 2021. You can give $300 to charity without itemizing. $600 as a couple. And the deduction for 100% of Adjusted Gross Income (AGI) now extends through 2021. Think about all the organizations that are trying to help people—step up and do your part.

Tax Preparation

Do you have your tax organizer yet from your CPA? If so, start filling that out. If you do your own taxes, pull together what you need as you wait for your W-2s and 1099s to arrive. Think about if anything will be different in 2021 that you need to discuss with your CPA.

As we’ve seen in other years of dramatic market pullbacks, some mutual funds made LARGE capital gains distributions at year-end. That happens because the funds are required to pay out capital gains at least once a year. If the fund had to meet redemptions and thereby sell securities to do that, it’s likely they will experience realized gains.

What can you do to avoid that? Well, you can sell the fund, but if you have built-up gains since you bought it, that may only compound your tax problem. You can look for losses in other securities in your portfolio. We try to do that during times like last March and April when many securities were down significantly. That’s called loss harvesting.

Or you can try to hold funds in retirement accounts where there is no immediate tax. Or investigate ETFs (exchange-traded funds) where there may be less capital gains payouts. But again, that assumes you can sell a mutual fund where you may have a gain. Another idea is to buy ETFs going forward or tax-managed mutual funds.

Second Quarter: 2021

I’ve been thinking about hope lately. Hope that the vaccines start to get COVID under control. With 80% of the deaths being in the over age 65 group, and those folks in some of the first waves to get the vaccine, I hope the death rate is one of the first things we start to see drop. That would go a long way in starting to heal our collective hearts.

Hope springs eternal and spring may bring hope this year. As the weather gets better and we venture out more, we’ll start to think about what changes will become permanent and what the future may look like. For our kids. For our parents. For ourselves.

But second quarter will likely still be at least partially locked down. We’ll still need to wear masks. Not everybody will be back in the office. So let’s focus on planning that you can still do at home while we’re waiting. Here’s what I’m planning to do in the second quarter:

  • Review Investments
  • Analyze My Current Tax Return
  • Integrate Tax, Investments and Legacy Planning

Review Investments

Personally, I look at this quarterly. I highly recommend you have an Investment Policy that lays out your target asset allocation within a range. Make sure you’re within that range. If you made changes to your policy during the height of the pandemic, think about where you want to be going forward. Do you have an allocation that you can live with in both good and bad times? Sticking with your plan can help you stay on track longer term.

Beyond allocation, do you want to make any other changes to your portfolio? There are early signs that the value style of investing may respond positively as our economy comes out of a recession. If the U.S. dollar is weaker as we confront our budget deficit issues, do you have enough in international stocks to balance out your portfolio? And if we see legislation to address climate control and green technology, do you want to think about how much of your portfolio should address sustainability? Every portfolio is unique to you as the investor. So there is no one size fits all.

Analyze Current Tax Return

Sometimes there can be a mad rush to get the tax return filed and as far as you get is paying what you owe (or maybe YOU get a refund) and throwing that return in a file. Done. Until next year.

But it can be fascinating to actually look at the return and see what it is telling you. Do you have a lot of dividends or interest? Is there a way to better manage that? Asset location is a strategy to help lessen the income tax burden. Were you able to itemize deductions? Maybe you should think about “bunching” deductions this year. That’s a technique where you give more in some years so that you go over the standard deduction and can itemize.

Minimum distributions from retirement accounts are required again in 2021. Should you make any charitable donations from IRA accounts this year? If you’re over age 70 ½, you can give up to $100,000 for each person from a retirement account to charity and not pay tax on that. It has to go directly to charity, not a Donor Advised Fund. But it may help you avoid paying more in Medicare premiums or in higher Social Security tax.

Integrate Tax, Investments and Legacy Planning

If you want to take your planning to the next level, try integrating your strategies. Don’t just think about each in isolation. That’s actually NOT boring. It gets pretty interesting.

If there is one piece of advice I could give you, it would be to SAVE. Saving gives you freedom. You need to save both in your retirement plans and in your taxable accounts. If you hit a rough patch in 2020 (or you’re still pulling out of one), you’re going to need to double down on savings. And if you’ve been stuck at home, you probably had no choice but to save. Now don’t go crazy when we start to emerge from lockdown.

Here’s my take on how to prioritize your savings:

  • If you are offered a company match in your retirement plan, contribute enough to take full advantage of that “free money.”
  • Fund a Health Savings Account. You’ll get triple tax benefits with an HSA: a deduction for the contribution, tax-deferred growth and tax-free distributions assuming you use the money for health-related expenses in retirement.
  • If you are eligible to contribute to a Roth IRA, fund that next. You can contribute up to $6,000 in 2021 for Roth and/or traditional IRAs ($7,000 if age 50 or older).
  • Make sure you are saving in a taxable account outside of your retirement plans. You need to build a cushion for emergencies and you want to build up those assets for greater flexibility. Keep a balance between retirement savings and savings in taxable accounts.
  • If you are trying to juggle education funding and retirement savings, and your kids are still relatively young, take advantage of tax-free growth on contributions to a 529 College Savings Plan. And you might get a state tax deduction for contributions.
  • Fully fund your company retirement plans. If you have the cash flow, max out on your contributions. You can contribute $19,500 in 2021 ($26,000 if age 50 or older). You’ll gain the advantage of tax-deferred or tax-exempt savings.
  • If you aren’t eligible to contribute to a Roth IRA and you’ve fully funded your company retirement plans, you can still make non-deductible traditional IRA contributions. You won’t get a current tax deduction, but your contributions will grow tax-deferred. You will pay a penalty if you take money out of traditional IRAs before age 59 ½.

And if you’re thinking about tax, investing and legacy planning, let’s focus on the early years of retirement—before you have to start taking required minimum distributions. Then you may be able to do “tax bracket planning.” You can combine strategies of taking capital gains when your income is lower with starting to pull money OUT of your retirement accounts so that you take advantage of paying tax at lower brackets. That can help reduce required minimum distributions after age 72.

The Second Half of 2021

You know what? I have a tendency to ramble on sometimes. And this article is long enough already. So I’m going to leave you with this today and come back to you a little later with ideas for the second half of the year. But just to give you an idea of what I’m thinking about….

Third Quarter: Stretching Out after Lockdown

  • Home Inventory/Insurance Review
  • Reassessing Travel, Leisure
  • Year-End Checklist

Fourth Quarter: Feeling Grateful

  • Thinking about Giving
  • Reviewing Spending and Healthcare Costs
  • Reviewing Goals

Excerpts from this article are from my upcoming series of books Dreams of WealthTM. You’ll find them at Amazon as soon as I can finish things up. I’ll be doing that while we continue to live with hope for healing and to reflect on what comes next. Best wishes for a happier and healthier 2021.

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