November 2020 Financial Planning & Investment Newsletter

In This Issue: Financial Planning & Investing

Each month we cover Financial Planning & Investing topics that apply to you.  We cover a variety of topics in each of our monthly newsletters to point out timely information that applies to you!

Investing: More of the Same

Election 2020 has delivered a divided government. While Biden appears to be winning the Presidency, the GOP has kept the Senate and picked up a few seats in the House. In short, no one came out of the election a clear winner. 

The investment environment for much of the last 10 years has seen a surge in growth-oriented tech stocks and a steady decline in bond yields. The initial reaction to Election 2020 is a continuation of this theme: big tech stocks like Facebook and Amazon are surging, while government bond yields have fallen back to where they were a few months ago.

Now that we have a result from this historic election, it’s time to turn our attention towards the future and look at what this means for the economy and the stock market. The policy outlook may be uncertain, but the outlook for the stock market might be less so. 

Divided We Fall?

Over the course of my career I’ve heard a lot of market pundits say, “stock markets love gridlock.” The theory is that a divided government means there’s less chance of one side or the other pushing through agendas that are unfriendly to the economy and market. 

Yet the data on stock market performance during divided and united governments suggests otherwise. Since 1945, average annual returns for the stock market were better when either Democrats or Republicans controlled the presidency and Congress.  Read more…

Investing: Asset Location

Today we are going to talk about one of the silent killers of investment performance, taxes.  Taxes are a fact of life and we can’t avoid them forever.  However, we can be strategic about when incurred so that it doesn’t negatively affect our finances any more than necessary.  This article perfectly shows how financial planning & investing can work together for your benefit.

One thing I see a lot when reviewing investment statements is that people like to own mutual funds.  While they may be good mutual funds that perform well, they are not tax-efficient but are rather tax-inefficient.  What I mean by that is many mutual funds pay out “capital gains distributions” at the end of the year. These are proceeds from the sale of stock and other assets by the fund’s managers that are passed on to you the investment owner.  The gains are reported on a 1099 and picked up on your Tax Return as income, which you pay tax on.  It doesn’t matter whether you bought or sold it during the year, that tax burden is going to come to you whether you like it or not.  Read more about asset location.

Financial Planning:  High Income Earners 401(k) Mistake

We all know each year in our 401(k) we have a maximum amount we can save. This year that maximum amount is $19,500. And let’s assume you get paid once per month giving you twelve pay periods for the year. You save an equal amount each pay period. So you know that when you get to the end of the year you will fully fund this $19,500 that you can contribute. You start at the beginning of the year and begin to fill it up. But what most high income earners may not be aware of is if you make too much money, too soon, you cannot put in the full $19,500.  

You could get stuck if you make too much, too soon! Read more about the High Income Earner’s 401(k) mistake. 

Tax: Update Your Monthly Contributions

Did you know the maximum amount that can be contributed to retirement accounts can change from year to year?  It’s true. And taking advantage of these contribution limits increases can make a big impact over your working career.  Today, I want to walk through this with you to make sure you are indeed maxing out these accounts when able!

For the year 2020, the maximum amount that can be contributed to a 401(k) is $19,500.  If you’re over age 50, you get to contribute an additional $6,500 for a total of $26,000.  If we are just looking at the $19,500 that works out to $1,625 per month.  

What can you do if you’re not on-track to maximize your 401(k)? Read more about updating your monthly retirement contributions.

Tax: What Needs to Happen by 12/31/2020

As we approach the end of the year what things do we need to be thinking about?  What HAS to happen before 12/31?  We’ve created a list of these items and more.

Tax Planning:  Create your tax return ahead of time.  Do an analysis so there are no surprises.

Retirement Accounts:  Contribute enough to get your free employer match or the maximum amount you can each year.

IRA Contributions:  This can actually be done after year-end.  But if you can contribute sooner the funds can be invested sooner.  This is another example of financial planning & investing paired together.  Read more about what tax-related activities have to happen before 12/31.