As I sit here penning this blog, it seems like we are in for yet another round of COVID. The virus has mutated and the dominant version, the Delta Variant, is gaining steam. Unfortunately, this virus continues to bring bad news for humans and is going to impact a lot of folks. However, this mutation event will allow COVID-19 to live longer and continue to succeed in its quest to move through the population once again and fight another day.
This concept of mutation is an amazing thing and is worth paying attention to. As it pertains to the science of a virus, for sure.... but also, and importantly, in terms of a little self-reflection and assessment of how we think about our own behavior when it comes to personal finance.
- Would a mutation of our own help us to succeed at a higher level and optimize how we save, manage our cash flow, invest, and protect it? After all, much has changed over the past decade and beyond.
- Do we need to change with it and toss out some old financial ways of thinking and adapt, evolve, MUTATE to meet the changes that have already occurred and the ones that we anticipate?
The good news is that humans, like a virus, are not strangers to change and are able to "mutate", meaning we can and we do adapt. There are examples of this throughout history where humans on a mass scale have made large adjustments to meet changing times. Think World War II and the United States mobilizing into a War Time Economy after the bombing of Pearl Harbor, or the Industrial Revolution, or the Dot Com period in the late 90’s. A more recent example might be the first half of 2020 when COVID first hit, and the economy made a huge pivot over to services and technology. We found ourselves on Zoom or other web based meetings instead of in conference rooms, food delivered by Uber instead of going out to eat, and I bet you have little to no cash in your wallet right now because everything is electronic.
These shifts, adaptations, and mutations come with tradeoffs, certainly. However, the purpose of this blog is not to dive into those, but more to make us self-aware of our current financial behavior. To determine if a mutation of our own is warranted and if WE are MUTATING along with a shifting and evolving world. As a financial advisor who sits down with 12-15 families and business owners each week, it wasn’t until recently that I realized my meeting agendas tended to be filled with ideas that intersected the new environment we are in and needed to be discussed with people. So, let us explore a few of those ideas so you can determine if they pertain to you:
- Are you holding cash in a rising inflation environment with interest rates at historic lows? There may be a good reason to hold cash for this sure, but strictly financially speaking you may go backwards with a rate of return. Zero interest with high inflation over time can be expensive. Re-evaluate your cash position and determine if it is too much.
- Are you holding Bonds when they are paying low returns? Historically investors have taken risk with stocks and managed risk with bonds to dampen volatility. However, if you couple low yields with potentially rising interest rates, bonds could be in for a prolonged tough go. Is there an alternative to accomplish the role of bonds?
- Are you paying extra on the mortgage when the interest is so low? Older generations cherished the idea of a paid off home. And it could still be a good idea. However, interest rates are not 14% like they were in the 70’s and 80’s, and I have seen multiple families refinance in the 2’s on a 30-year fixed. If inflation is in the 5’s and interest rates are in the 2’s, paying extra on a mortgage may be way less attractive.
- Are you Maxing out your 401k, above the match, knowing we are in for a higher tax environment? If you are receiving a deduction today at one tax rate, only to take these dollars out in the future at a higher tax rate, the pre-tax contribution to a 401k may not be an efficient decision. Right now, we don’t know how future tax laws will play out or what tax environment any of us will be in retirement, but the current Administration has made it pretty clear taxes are on their way up. What does this mean for your 401k distributions in retirement?
- Are you still doing pre-tax 401k contributions when your 401k plan at work allows for ROTH contributions? Not long ago, it was difficult to find a 401k plan that allowed for ROTH contributions. Now, the ROTH option is very common. Have you considered changing your elections to ROTH from pre-tax? Income tax-advantaged distributions in retirement can be a valuable tool and this is one way to build that bucket.
- Do you own your Life Insurance personally or inside a Trust? One of the tax law changes being discussed is the lowering of the Estate Tax Exemption from $11.7 Million per person (2021) to something much lower. How you own your life insurance could very much matter depending on how this shakes out. Ever heard of an ILIT?
The reality is some, none, or all the points above may be appropriate for you. Every person's financial situation is different with varied incomes, net worth’s, and objectives. However, I hope we agree that the financial, interest rate, and tax environments today are different than they were for generations before us, and it will continue to change.
So, let us change with it and "mutate" when needed. The pandemic has been rough, but maybe we can learn something from this virus and find a way to change, to adapt and optimize our chances for financial survival.
Thanks for your time...
Ed