Epictetus, the Greek philosopher from the first century, proposed simple advice that remains relevant today¹:
“It's not what happens to you, but how you react to it that matters.”
With the recent US Presidential election in the rear view, there will be a fair amount of change in the coming years, and Americans are already reacting. We are anticipating economic improvement, tax reform, national security changes, and a laundry list of other agenda items that were not passed between 2016-2021. The reaction, as with any Presidential election, has brought a mixture of emotions across the country.
One way to address change and uncertainty is to undergo a year-end review of your wealth management plan. This may not sound like a reasonable step with the holidays quickly approaching, but taking control of something you can control typically has a positive impression on your overall welfare. You will be able to start the new year with confidence, knowing exactly what is needed to protect your financial health today and in the future. These four steps can act as a guide for this process:
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Assess your work and income situation
Specifically with the broad-reaching legislation for businesses in the 2017 Tax Cuts and Jobs Act (2017 TCJA), we should anticipate a continued focus from this leadership on US-based companies and less regulation. Think about your industry and your company. What impact – short- or longer-term – will the reforms have? How could your income be affected? If income could be affected negatively, what steps should you take to reduce income risk? If income could be affected positively, how should that change your savings rate or investment allocation?
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Review your spending and expenses
The end of the year is a good time to review spending and expenses and ensure your spending plan is ready for the new year. If your income will be significantly different in the new year, your spending plan may change. Typically, a spending plan keeps spending and saving aligned with income. If income will be lower next year, you may need to reduce the amount spent and saved. If income increases, you should increase the amount you save and relatively increase the amount you spend. What subscriptions are unused, and how can you offload that unnecessary cost? What factor should you use for tax purposes and saving for April tax payments? How will the changes in interest rates change your debt exposure?
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Evaluate your financial plan
It is of paramount importance to review your current financial plan annually. A review will uncover progress toward your financial goals, and can help determine if future tax reform or economic changes will require a change in spending and saving. We believe viewing current spending and saving decisions through the lens of your financial goals can help you decide if any plan modifications are warranted. For instance, when income decreases, some people choose to save less, knowing it will push their financial goals further into the future. Others decide to spend less so they stay on track to reach their goals. Often, people decide on a combination of reduced spending and reduced saving. The choices you make depend on your circumstances. A family with students in college or a family that has a member with significant healthcare issues may not be able to significantly reduce spending and they may have to save less. If a decision is made to reduce saving, do you have enough time before retirement to rebuild your nest egg? Will you need to retire later? Will you need to spend less in retirement?
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Conduct year-end tax planning
Sound tax planning can help you reduce the amount you owe in taxes. Some generous tax provisions were made possible by the 2017 TCJA, which is set to expire in 2025. The 2017 TCJA is the reason the estate tax exemption is higher than it has been before. If you plan to gift large amounts or transfer significant wealth through your estate plan, confirming your plans this year could help you take advantage of current circumstances. Accounting Today reported: ²
“…lifetime gift and estate tax exemptions present a powerful estate-planning opportunity. Many estate and gift tax strategies hinge on the ability of assets to appreciate faster than the interest rates prescribed by the IRS…. there’s a small window of opportunity to employ estate-planning techniques while interest rates are still low, and the lifetime gift exemption is at an all-time high.”
Having a discussion with your tax or financial professional may help you minimize taxes owed this year.
While the future is full of uncertainty, the way you react to what has happened may significantly affect your financial health and well-being over the short term, as well as your ability to reach your financial goals over the long term. The team at LGT Financial Advisors and Lane Gorman Trubitt are here to partner with you to guide you to your goals. We believe comprehensive wealth management is holistic, ongoing, and personal to your needs, and we are here to help you. Reach out to our team to learn about empowered decision-making for your wealth-being.
Sources:
1 https://www.brainyquote.com/quotes/epictetus_149126
² https://www.accountingtoday.com/list/top-10-year-end-tax-planning-tips
To learn more about wealth planning, contact one of our trusted advisors.
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