As we begin the new year, hope looms large with the news of several successful COVID-19 vaccine candidates helping to pave the way to economic recovery and an eventual return to normalcy. While 2020 is officially behind us, its lessons will remain with us for some time. Below, we look at some of the most important financial lessons learned in 2020, and actions you can take now to further strengthen and optimize your planning in the year ahead.
7 smart money moves for 2021
Change is inevitable
"Perhaps the number one takeaway from 2020 is that the world can change in an instant," said Shelly Eweka, CFP®, ChFC®, a Financial Planning Strategy Director at TIAA.
As the economy reopens following more than a year of restrictions, Eweka believes it’s important to reflect on what you experienced last year and the impact those experiences had on your life. What has changed for your family, career or lifestyle?
"Re-evaluating your goals and priorities is an important step for making sure you can continue to protect what’s most important to you," she said. "That includes reviewing your investment strategy, as well as the safeguards in place to protect your income, loved ones and property."
Since we can never know with certainty what lies ahead for the markets, economy or our own lives, these considerations are all part of the planning process, which is designed to help you navigate change in the months and years ahead. A key benefit of the planning process is the ability to stress test your strategy for extreme circumstances and events, like we saw in February and March 2020, when the S&P 500 fell 34%.
"These events are built into the more than 500 trials we run when we create your plan," Eweka said. "That allows us to identify gaps or vulnerabilities in your planning and address them before events like this occur."
2021 ACTION ITEM:
ANCHOR YOURSELF IN A PLAN
While change is inevitable, anchoring yourself in a plan can help ensure you’re in a better position to weather change. If you don’t have a plan in place now, schedule time to meet with a financial advisor to talk about your needs. But don’t wait! The sooner you begin, the sooner you can get back on track toward your important goals.
Emergency savings are a priority
"It’s hard to overstate the importance of emergency savings in 2020," said Dan Keady, CFP® and Chief Financial Planning Strategist at TIAA. "Even if you didn’t tap into those savings, knowing you had access to cash during a turbulent time provided many people with greater confidence during a period of growing uncertainty."
2021 ACTION ITEM:
REINFORCE YOUR SAFETY NET
If you tapped into emergency savings in 2020 due to a reduction in income or to avoid drawing down on your investment portfolio when market values fell, think about how you will rebuild those savings. Begin by making savings a line item in your monthly budget. If your spending patterns have changed, consider redirecting any savings into your emergency fund.
Spending needs can change overnight
Many people experienced budgetary changes in 2020, either due to a change in income or a shift in spending priorities. For many, spending went down since they weren’t commuting, socializing or traveling. Others took advantage of more time at home to complete home improvement projects, while others found they were
spending more money than intended shopping online.
Eweka says the beginning of a new year is a great time to get back to the basics of sound financial management, including how you plan to use your money in the new year and how that may be that different from last year.
2021 ACTION ITEM:
UPDATE YOUR BUDGET
Unchecked spending makes it hard to accomplish your goals within the time frame you desire. To keep your plans on track, create a monthly budget and update it regularly throughout the year. A budget provides a clear picture of your cash flow— what’s coming in and what’s going out—while helping to identify spending trends and opportunities to save more.
Market-proof your retirement
“A lot of people who weren’t focused on lifetime income coming into 2020 are thinking about it now,” Keady said. “When we talk about lifetime income, we’re talking about structuring a dependable income stream that you can’t outlive, using your various income-generating assets in retirement.”
Start with your income floor, which covers your essential expenses, such as food, housing, clothing, healthcare and transportation. Social Security can provide some of the foundation for your income floor, and if you have a defined benefit pension, you can include that income, as well. If there’s a gap, you may want to consider a guaranteed annuity,1 which can provide regular income similar to a pension.
“For many people, this is an effective strategy for ensuring your essential needs will be covered in retirement,” Keady said.
Guaranteed income sources can also provide an effective way to buffer long-term assets that are subject to market fluctuations.
“While much attention last year was focused on the severe stock market dip in February and March, many bond funds also fell in value,” Keady said. “However, fixed annuities did not fall in value. They increased in value by the interest they earned.”
2021 ACTION ITEM:
CREATE A DIVERSIFIED LIFETIME INCOME
If you’re in or nearing retirement, work with your advisor to understand your retirement income needs and how much of that will be derived from guaranteed sources, such as Social Security and a pension. Consider how a strategy utilizing a combination of your guaranteed income sources along with fixed and variable annuities can help create an income stream that you can’t outlive.1
Life comes at you fast
While much of the focus in recent months has been on the virus, it’s also important to remember that other expected and unexpected life events continue to take place.
"This is a time to take a realistic look at what's going on in your life. You want to make sure that you’re prepared and your loved ones will be taken care of if something unexpected occurs," Eweka said.
That begins with reviewing your estate planning. If something happens to you, who will take care of your kids? What if you become incapacitated? Who will make decisions on your behalf? Do you have the right documents in place?
Also consider your charitable goals. Maybe your priorities or values have changed in recent months. How does that impact your legacy plan? Keep in mind, you don’t have to wait until year end to give to the organizations or causes you support. A tax-smart charitable giving strategy may help you offset income taxes throughout the year. That’s especially important for those subject to required minimum distributions (RMDs) in 2021. Remember, if you waived RMDs in 2020, your taxable income may be higher this year.
2021 ACTION ITEM:
REVIEW YOUR ESTATE PLANNING
Planning enables you to prepare for both expected and unexpected events at every stage of your life, from naming a guardian for your minor children and pets to transferring assets to your grandchildren in the most tax-efficient way. Begin by ensuring the right documents are in place and up-to-date to protect your interests and loved ones.
Managing risk requires a disciplined process
As we saw in 2020, having a disciplined and repeatable investment process in place can be especially important during periods of change and uncertainty, when managing your investments requires even more time and expertise.
"That’s where engaging professionals who are working on your behalf every day can really make a difference," said John Canally, CFA, a Chief Portfolio Strategist at TIAA.
According to Canally, as equity valuations remain at above-average levels and interest rates are near all-time lows, this has profound implications for portfolio construction going forward. Investors can expect much lower than average returns on both stocks and bonds in the next decade or so.
"That makes it critical to have a plan to generate income outside of the ways you might have done so previously,” he said. “For example, if you generated income through bonds or a basket of utility stocks in the past, that's going to be harder to do given where rates are now."
While promises of a vaccine jolted the markets upward in recent weeks, Canally believes little will change for the economy until a vaccine is widely available. As a result, broad diversification across countries and asset classes will remain important for investors seeking to manage portfolio risk in the months ahead.
“Back in the fall, we saw some countries reinstate full or partial lockdowns, while others took different approaches,” he said. "So, it's really difficult to navigate that from an investment standpoint. You would need to figure out which countries are going to shut down and for how long, and what impact that will have going forward. Investors are better off with a widely diversified portfolio that has exposure to all of those countries and all of those sectors, to take advantage of all the ups and downs."
2021 ACTION ITEM:
CONSIDER REBALANCING YOUR PORTFOLIO
Over time, market swings can throw your asset allocation out of balance, and potentially your risk targets and investment goals. When this happens, you can rebalance by moving money from investments that take up a greater portion of your portfolio than desired into those that could use a boost—to get back to your initial (or target) asset allocation. This also requires a strategy for dealing with the tax liability associated with harvesting losses, which can get complicated. Plan to meet with your advisor to discuss how professional portfolio management may help you move closer to your goals.
Lesson learned: Don’t go it alone
In 2020, many people realized how important it was to have access to a trusted advisor when things got complicated. Whether you’re concerned about your income needs, charitable giving goals or the impact that recent run-ups in the equities markets may have had on your portfolio, this is a great time to meet with your advisor to review your plan to determine if you’re still on track toward your goals.
2021 ACTION ITEM:
FIND OUT HOW TIAA CAN HELP
Whether you need a few questions answered or advice on a specific issue, TIAA brings more than 100 years of experience helping investors and retirement plan participants navigate change at all stages of life. Best of all, if you have a TIAA retirement plan, you have access to advice from an advisor at no additional cost.
For more information on these and other strategies to help you optimize your planning and stay on course toward your important goals in the new year, schedule time to meet with your TIAA advisor.
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1Some annuity products limit liquidity and the ability to make withdrawals once you have annuitized. Fixed annuity guarantees are subject to the claims-paying ability of the issuer.
Advisory services provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services®, LLC, a registered investment adviser.
This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.
The TIAA group of companies does not provide legal or tax advice. Please consult your financial or tax professional before taking any action.
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