06.14.21
7 ways to strengthen your financial foundation as the economy recovers
For those nearing or living in retirement, a strong financial foundation is critical for helping to accomplish your goals and protect your assets for another 20 or 30+ years. Below, we explore seven ways to help you optimize your planning in any market environment and steps you can take now to remain on track toward your goals.
Anchor yourself in a plan
"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."
How to strengthen your foundation
Anchoring yourself in a plan provides an opportunity to prepare for unforeseen, unexpected or negative events in advance. Planning helps to ensure that the amount of risk you’re taking is fully aligned with your goals, time frame and risk tolerance, and you’re able to quickly make adjustments to accommodate changing circumstances to remain on course toward your goals.
Tie a purpose to each asset you own
According to Eweka, one of the most important steps you can take if you are in or nearing retirement is to review your asset location strategy with your advisor.
“Using our asset location worksheet, we connect your goals to your time horizon and evaluate the purpose of each asset you own,” Eweka said. “This helps to determine ways to better protect your assets and remain on course toward your goals in any market or economic environment.”
Reviewing the location of your assets is beneficial because it helps to ensure:
“Using our asset location worksheet, we connect your goals to your time horizon and evaluate the purpose of each asset you own,” Eweka said. “This helps to determine ways to better protect your assets and remain on course toward your goals in any market or economic environment.”
Reviewing the location of your assets is beneficial because it helps to ensure:
- You have the right kind of asset in the right account
- Each asset has a purpose in your overall financial plan
- You're using smart strategies to help reduce the impact of taxes and market volatility
For example, if you’re retired and drawing income from your investment portfolio, an asset location review will reveal if you have adequate cash reserves to draw upon in an emergency or during periods of increased market volatility.
How to strengthen your foundation
Understanding the purpose of each asset you own helps to manage your tax exposure and the impact of market volatility, which can help your assets work harder and last longer.
Create a buffer
According to TIAA Chief Planning Strategist Dan Keady, CFP®, your plan not only provides a valuable roadmap for the future but a structure you can lean on to buffer, secure and optimize your assets as your personal circumstances and market conditions change over time.
Access to cash reserves is important in any economic environment, but especially during times of increased uncertainty. For example, in 2020 emergency savings created a “buffer” for those taking income from their portfolios by allowing them to dip into cash reserves instead of cementing losses by drawing down on their investment portfolios. Many people also took advantage of additional savings, resulting from a combination of reduced spending while saying home and government-issued economic impact payments, to pay down outstanding credit card debt. That put many people in a better position to weather uncertainty, such as job losses and furloughs, or a temporary drop in the value of their investment portfolios.
“Remember, low savings rates plus high credit card debt lead to financial fragility,” Keady said. “So maintaining adequate cash flow is critical in any environment but especially during difficult times.”
How to strengthen your foundation
Create a buffer. This is critical for helping to preserve long-term assets, especially during periods of economic uncertainty, or if you experience unexpected events or changes in your life. If you had to dip into savings last year, think about ways to replenish cash reserves in the months ahead.
To learn more about asset protection during turbulent times, read Positioning for recovery: How to buffer, secure and optimize your assets.
Build an income floor
Guaranteed income sources provide another effective way to buffer long-term assets subject to market fluctuations.
“Many people weren’t really focused on guaranteed income over the course of the decade-long bull market that preceded the pandemic, but they were thinking about it last year,” Keady said. “When we talk about lifetime income, we’re talking about creating a dependable income stream that you can’t outlive using your various income-generating assets in retirement.”
These include Social Security, a pension (if you have one) and fixed annuities, which provide guaranteed income. 1 These income sources combine to create a foundation to ensure your essential needs are met for food, shelter, clothing, transportation and healthcare over a period of 20 or 30+ more years in retirement.
How to strengthen your foundation
Adequate sources of guaranteed income in retirement can help tamp down emotional reactions during times of increased market volatility and avoid cementing losses in long-term assets. Your advisor can help you understand what income is supported by your plan and whether you need to adjust your income needs.
To learn more about lifetime income planning, listen to our podcast: How will you pay yourself in retirement?
Ensure the right documents are in place
“We frequently talk about risk management in the context of the capital markets, but managing risk encompasses far more than your investment strategy,” said TIAA Wealth Planning Strategies Director Colleen Carcone, CFP®.
Carcone cites the pandemic as an example of how quickly events outside of our control can impact our health, lifestyle and financial goals in ways we could not have imagined before. Last year’s uncertainty also led a growing number of people to reassess their goals, values and priorities and engage with their estate planning attorneys and wealth advisors to review their legacy plans and goals.
“The pandemic brought discussions about who will act on your behalf if you’re incapacitated to the forefront of family discussions,” Carcone said. “Who has the legal authority to act on your behalf? Who is authorized to receive updates on your condition if you’re hospitalized? What are your wishes when it comes to palliative or end of life care?" Carcone acknowledges that during times of uncertainty, there may be some things that are out of your control, but your estate plan isn’t one of them.
Having the right documents in place, beginning with a living will, durable powers of attorney and healthcare directives, provides legal authority to those you trust to act on your behalf, ensuring your wishes are met during your lifetime and your legacy is honored after you are gone.
How to strengthen your foundation
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, 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.
Be nimble
As the economy recovers, new opportunities will arise to help people optimize their planning, including certain legislative changes that were extended into 2021.
For example, if you’re charitably inclined, several opportunities to pursue your goals under the CARES Act were extended. Like last year, individuals who do not currently itemize on their tax returns, can take a $300 above-the-line deduction for cash contributions to charities. New in 2021, joint filers (who aren’t itemizing) will be allowed to take an above-the-line deduction of up to $600 in cash contributions to charity this year. However, these must be cash donations made directly to an organization. They do not apply to donations made through a donor-advised fund or by supporting organizations, or gifts of securities or other assets.
Another big change is that if you do itemize, the amount you can contribute and deduct from taxes is normally limited to 60% of your adjusted gross income. That limitation or “cap” remain suspended in 2021.
“Essentially, this allows anyone who’s interested in doing so to make significant contributions in 2021, potentially offsetting 100% of their income,” Carcone said.
She encourages those seeking ways to optimize their planning to schedule time to meet with their tax professional and financial advisor to discuss different options and strategies for maximizing income and reducing tax exposure.
“All planning decisions have tax consequences,” Carcone said. “So it’s really important that you’re talking to your advisors on a regular basis, and before you implement these or any other strategies.”
For example, if you’re charitably inclined, several opportunities to pursue your goals under the CARES Act were extended. Like last year, individuals who do not currently itemize on their tax returns, can take a $300 above-the-line deduction for cash contributions to charities. New in 2021, joint filers (who aren’t itemizing) will be allowed to take an above-the-line deduction of up to $600 in cash contributions to charity this year. However, these must be cash donations made directly to an organization. They do not apply to donations made through a donor-advised fund or by supporting organizations, or gifts of securities or other assets.
Another big change is that if you do itemize, the amount you can contribute and deduct from taxes is normally limited to 60% of your adjusted gross income. That limitation or “cap” remain suspended in 2021.
“Essentially, this allows anyone who’s interested in doing so to make significant contributions in 2021, potentially offsetting 100% of their income,” Carcone said.
She encourages those seeking ways to optimize their planning to schedule time to meet with their tax professional and financial advisor to discuss different options and strategies for maximizing income and reducing tax exposure.
“All planning decisions have tax consequences,” Carcone said. “So it’s really important that you’re talking to your advisors on a regular basis, and before you implement these or any other strategies.”
How to strengthen your foundation
Regularly reviewing your plan with your advisor helps to ensure you’re aware of any new opportunities to enhance your planning and reduce your tax exposure as laws and regulations are updated, changed or expanded.
To learn more about opportunities available under the CARES Act, listen to our podcast: The CARES Act: What’s in it for you?
Stay connected
Planning is the foundation of financial well-being and communicating regularly with your financial advisor is essential.
That’s because your advisor has the advantage of not being emotionally connected to your money, which can be critical during periods of increased uncertainty and market instability. Keady encourages people to “use your advisor as a sounding board,” especially if you’re unsure whether you’re approaching investment decision making from an emotional or rational perspective.
“Your advisor can help ground you since he or she is not emotionally attached to your money," Keady said. "That helps to ensure that you make informed and confident decisions based on your planning and your goals, rather than day-to-day market swings.”
That’s because your advisor has the advantage of not being emotionally connected to your money, which can be critical during periods of increased uncertainty and market instability. Keady encourages people to “use your advisor as a sounding board,” especially if you’re unsure whether you’re approaching investment decision making from an emotional or rational perspective.
“Your advisor can help ground you since he or she is not emotionally attached to your money," Keady said. "That helps to ensure that you make informed and confident decisions based on your planning and your goals, rather than day-to-day market swings.”
How to strengthen your foundation
Staying the course doesn’t mean sitting still. Working closely with your advisor can help ensure you address vulnerabilities before they occur, have a solid foundation in place and avoid emotional decision making.
To learn about more ways to remain on course toward your goals, schedule time to meet with your TIAA wealth advisor today.
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1All guarantees are subject to the claims-paying ability of the issuer.
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 views expressed in this material may change in response to changing economic and market conditions. Past performance is not indicative of future returns.
No strategy can eliminate or anticipate all market risks, and losses can occur.
Investment products may be subject to market and other risk factors. See the applicable product literature or visit TIAA.org for details.
The views expressed in this material may change in response to changing economic and market conditions. Past performance is not indicative of future returns.
No strategy can eliminate or anticipate all market risks, and losses can occur.
Investment products may be subject to market and other risk factors. See the applicable product literature or visit TIAA.org for details.
Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser.
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