I don’t personally know anyone who wanted 2020 to last longer than it did. It was like riding a roller-coaster. But as thrilling as any ride can be, you can only take so much. Especially with the markets.
The year started out with the fall election looming large on the horizon…the outlooks for the economy and financial markets were positive as the year began and then…well, we all know what happened. A force outside the market (deadly pandemic) resulted in a recession and sky-rocketing unemployment and devastation of life as we knew it and sent the markets into a downward spiral…but then, the last 9 months of the year resulted in returns that surprised even the experts in the markets. The S&P returned 18%, the NASDAQ more than a whopping 44% and the Dow Jones Industrial Average a comparatively “modest” 9%.
Markets thus far in 2021 have responded fairly positively to the rollout of a vaccine and a new administration in Washington. Concerns about radical changes to the tax code have receded and there is a perception of pent-up consumer demand that, once it is safe to shop, dine and travel without the threat of Covid-19, could lead to an economic recovery and continued positive market performance as we move through 2021.
So, as we think about our financial lives in the wake of all this turbulence, are there areas of focus we might be wise to consider?
First, the wisdom of having a reserve fund of 3 to 6 months of living expenses is a timeless piece of advice. 2020 might have made it obvious, and we should all consider this as a goal for 2021. No need to elaborate on that.
If 2020 taught us a second lesson, it is that missing even part of a year of market activity can come at a high opportunity cost. So long as debt is managed and you can afford to, you should take maximum advantage of pre-tax IRA contributions ($6,000 a year or $7,000 if you are 50 or older) and/or retirement plan (401(k), 403(b) and SIMPLE IRA) contributions. Again, this can shelter as much as $26,000 from tax while adding to a retirement account that grows tax-free. Similarly for the self-employed, SEP plans can allow up to 25% of income to be sheltered in the plan (up to $58,000) and is often used by high-earners.
Also, if available to you through work, take advantage of employer matching contributions to your employer-sponsored retirement plan. Even if it’s a small amount, it’s worth having the additional funds to build your retirement.
We also learned that the SECURE Act passed in late 2019 brought a positive change for people working into their 70’s. People over age 70 ½ can contribute earned income to IRA’s, up to $7,000 a year, which was not possible before the legislation was enacted. There is no longer an age limitation on contributions as long as you have at least as much earned income as you want to add to your IRA.
For many years, 70 ½ was also the age at which people had to begin taking funds out of their retirement plans. The “Required Beginning Date” or RBD triggered the need to take a “Required Minimum Distribution” or RMD. To the extent you did not withdraw the full amount, you risked as much as 50% in tax of the undistributed amount. Now, that RMD doesn’t begin until age 72. In other words, age 72 is the RBD for RMD. This recognizes not only that people live longer, but are working longer and not need to withdraw funds so soon.
So while we’re all ready for a quiet, stable and peaceful year, let’s remember some of the simple, basic things we can do to help ourselves have a productive year and plan for a prosperous future.