Opinion: Keys to your financial future in post-pandemic world

The world began 2021 with continued fear and uncertainty attributable to the impact of COVID-19. The U.S. had experienced debilitating supply chain disruptions, taxing unemployment rates and a death toll in the hundreds of thousands from the virus.

However, inflation was muted, oil was $48 a barrel and the optimism for vaccines developed against COVID-19 began to spread through the population along with the shot.

Assisted by trillions of dollars in stimulus money, some companies began reporting record profits. The stock market stacked a return of over 20% on top of the 18% where it ended 2020. Unemployment has swiftly trended down to the 4% range, oil shot up to $85 a barrel and U.S. consumers’ total household net worth peaked at $141.7 trillion.

The latest reading of inflation in November 2021 came in at a staggering 6.8% over last year, the highest reading in nearly 40 years. With interest rates on deposit accounts practically at 0%, inflation does not need to hit such high numbers for it to have a significant erosion of purchasing power.

The current state for bonds follows this theme, as evidenced with the 10-year U.S. Treasury trading at approximately 1.5%. That is beneath the 1.7% pre-pandemic inflation levels and far from the current inflationary pressures on the goods we use every day.

With banks flush with cash and hungry for loans, these rates may be with us for some time. However, predicting the direction of interest rates is not the objective.

When thinking about your wealth, here are some ideas to consider for your financial future.

One option with these low rates is to refinance your mortgage. With real estate prices soaring, a cash-out refinance to pay off credit cards may be tempting. Refinancing debt to make room for more consumer debt, i.e. credit cards, at variable rates may not be a wise decision.

Align your investments with your income needs. Cash and bonds still serve a purpose for short-term and intermediate cash flow needs and to cushion the portfolio in times of stock market distress. Design an investment portfolio to match your cash outlays and plan for retirement but, above all, stay the course.

Historically, company stocks have had the ability to pass on higher costs of goods and services to the consumer, which could help that portion of your portfolio better combat inflationary pressures. This is a feature not available with bonds or cash.

With the gains in the stock market, stay true to your long-term investment plan and evaluate rebalancing your portfolio at least twice a year. Paying taxes on capital gains is not a bad thing, especially at these lower tax rates.

If Congress fails to act on tax hikes in 2022, these current lower personal tax rates enacted under the Tax Cuts and Jobs Act of 2017 are scheduled to sunset in 2025. That means in just a few years, we will be facing higher rates.

One idea to discuss with your financial professional is to rebalance your investment portfolio to intentionally trigger capital gains taxes at these potentially lower rates. This effectively resets your cost basis on your appreciated assets to a higher price per share

In a world of potentially higher tax rates, resetting your cost basis does two things: No. 1, when you rebalance in the future, it lowers the capital gain if your investments continue to push higher, and No.2, if the market experiences a pullback, you may realize a capital loss, which could help offset higher tax rates.

However, be mindful that realizing capital gains adds to your adjusted gross income. There are a lot of financial qualifiers tied to AGI, such as the taxability of social security, Medicare premium surcharges and individual retirement account contributions. Know the consequences before you act.

Finally, you may consider a back-door Roth IRA contribution. This technique allows otherwise ineligible high-income wage earners to contribute to a Roth, but it requires the assistance of a qualified financial professional.

In the new year work with your credentialed financial planner to make sure all your assets are deployed to match your goals.

Andy Drennen is a certified financial planner and senior portfolio manager at Simmons Bank in Springfield. He can be reached at andy.drennen@simmonsbank.com.