Financial Best Practices for Year-End 2022

Believe it or not, another year has rounded third base and is dashing toward home plate. That said, there’s still time to make a few good plays in 2022, while positioning yourself to score in the year ahead. 

Here are a few of the base hits and home runs that we're sharing with clients.

Keep Your Eye on the Ball

While there are always major-league events during the year, it seems as if 2022 has had more than its fair share of wild pitches. 

• Inflation is real, persistent, and needs to be managed. (Read more, Investing in Inflationary Times)
• We also can’t rule out the possibility of stagflation and/or a recession (although neither has happened yet). (Read more, Will A Recession Sink Stocks? and How An Economic Recession Resembles A Bad Mood) 
• Heightened levels of market volatility may have left you once again wondering whether this time is different. (Read more, Too Costly To Hazard A Guess)
• Wider worries prey on our minds as well, such as the war in Ukraine, and oh yes, climate change. (Read more, Remembering Summers Past)
  

Our Advice:
Remain in the batter's box. Try to ignore current events, which are often wild pitches. You have a high probability of getting around the bases and back home if you build an evidence-based portfolio, personalized to meet your intentions in a tax-aware manner. Isn’t that your aim to begin with? (Read more, The Investment Instructions in My Will)

Prepare for More Strikeouts, But Zoom Out

Through September of this year, stocks¹ were down -23%. While stocks rallied through November, a 23% decline would be a mild decline by historical standards. 

If you zoom out, it helps to realize that even the best batters strike out (in fact, the best batters strike out most of the time). Fortunately, markets are different in this regard than baseball players. While a batting average of .300 is excellent, the most reliable players in a portfolio—diversified stocks— tend to get "hits" most of the time, with a positive yearly return some 70% of the time (.700). (Read more, Bull & Bear Markets: A Timeline, and Temporary Declines Interrupting A Permanent Advance?)

Our Advice:
Although things can get a lot worse before they get better, they're still expected to get better. This too shall pass. For savers, your same dollar contributions now buy more shares and stand to benefit you more. For retirees, consider that your ability to accept a smaller inflation adjustment or to decrease spending by just a few percent may be all you need to rationally ignore current events.

Consider Rebalancing to Buy Low

Last year was the time for your offense to shine as markets surged. This year, your defense has been put to the test as markets struggle. Have any gaps appeared? 

A key to successful investing is creating a good plan and sticking to it. But, even those that can "stick it out" will find themselves off-target as markets move. Buying and selling to get back on target is called "rebalancing". For instance, last year's strong market performance instructed us to trim back positions that had grown (to "sell high"). This year's declining market presents a chance to add to positions that are down (to "buy low") by adding new cash deposits or by rebalancing your existing positions.

Since markets tend to rise over time, rebalancing has historically offered a reliable method to "buy low and sell high" over time. Rebalancing doesn't work every time, and it can be especially difficult in the rare instances when both stocks and bonds struggle² as they have during 2022, but it does tend to work when applied consistently over time. (Read more, Keep More of What You Earn (Tax Planning for Physicians)) 

Our Advice:
Putting cash to work when uncertainty is high has historically been a winning strategy. Still, in the moment it can be hard to proceed. "Rebalancing" offers a way forward: an objective method to invest while still being defensive. By adding new cash, or simply by rebalancing your existing positions back to pre-selected targets you're putting yourself in position to capture gains if markets advance, while also creating a protective position if markets decline. 

Consider Roth Conversions in a Down Market

New York Mets pitcher Max Scherzer earned $43,333,333 this year³. After subtracting federal, state, and city taxes, he might have kept around 50%. Still, not too shabby.

Have you considered what you'd keep after the U.S. Government takes its cut of your retirement account? Embedded taxes exist in all pre-tax accounts. You or your beneficiaries will pay this tax bill someday (unless you give the money to charity).

Consider paying some of this bill in advance when markets struggle. As markets fall, so too does this bill, which can be generated by moving funds from a pre-tax retirement account, over to a Roth account—called a Roth Conversion. (Read more, How High Earners Create Tax-Free Roths and Roth Conversions: What You Need to Know)

Our Advice:
Don't leave a runner stranded on base by neglecting to take advantage of this year's market decline and historically low income tax brackets. Consider harnessing both items by performing a Roth Conversion. Even for the highest-income earners, strategically choosing to pay a specific portion of this bill today can make sense (especially given the SECURE Act's new 10-year distribution rules). 

Consider Harvesting Tax Losses

Baseball season ended in early November, but it’s still harvest season in your portfolio. Market downturns present a unique type of harvest called a "tax-loss". By selling taxable assets at a loss, and promptly reinvesting the proceeds in a similar (but not identical) fund, you can collect losses to offset other taxable gains in this year, or in future years. You can even offset a portion against earned income each year.

There still may be opportunities to capture before year-end, especially if you’ve not yet harvested losses year to date. (Read more, Keep More of What You Earn (Tax Planning for Physicians)) 

Our Advice:
Don't overlook your potential to harvest lemonade from this year's market-lemons. Some people see tax-loss harvesting as the best invention since sliced-bread. Others point out that tax-loss harvesting pushes gains into the future, kicking the "tax-can" down the road to an unknown future rate. Both views are right, so consider working with a trusted professional to take your best action.

Seize the Day on Charitable Giving

Unplanned, sporadic charitable gifts can be one of the most expensive ways to give to charity. Worse, gifts are commonly not deducted from income (even though they are tax-deductible). Charitable organizations need contributions as sorely as ever, so if the idea of a tax break would encourage you to give more, all the better! (Read more, The Most Expensive Way To Give? With Your Checkbook)

Our Advice:
Charitable giving remains another timeless tactic for supporting others while offsetting taxable items that you may need to report. So, if you’re charitably inclined, you may as well make the most of your generosity by pairing it with our simple tax planning strategies (especially when you're interested in the Roth conversions mentioned above). 

Plan Ahead for Estate Planning

If your family is concerned about the lifetime estate exemption limit—a limit over which large assets transferred to family during life or at death are generally taxed at a rate of 40%—considerate planning now can potentially save a large tax bill later. Imagine your family is on a baseball field playing defense. Suddenly, the umpire doubles the distance between the bases and pushes the fence back twice as far. Your task as a defender just became easier. That is similar to the situation we find ourselves in with a current estate exemption limit of $12,060,000, and a reduction scheduled to occur on January 1, 2026, to $5,490,000. Now may be the time to act while the limit is temporarily doubled.

Even if the estate exemption isn't a concern, consider if your family would be prepared to get around the bases when you're inevitably not here for them. (Read more, Getting Your Ducks in a Row (An Estate Plan as a Gift))

Our Advice:
Consider revisiting (or creating) your estate plan today. If the estate exemption is looming over your family, consider a current gifting program that passes assets to future generations, often guarded and guided in trust, while the limit on transferred assets is "temporarily" doubled⁴. While many families can safely ignore the exemption, they shouldn't ignore the potential mess an unplanned estate can create. Your estate may be worth a little or a lot, but a well-structured estate plan is one of the greatest gifts you can bequeath to your loved ones to reduce their stress load during an already stressful time.

An opportunity for a fresh start?

If the last few years of headlines—COVID-19, our withdrawal from Afghanistan, crypto booms and busts—have taught us anything about predicting the future, it's that it remains forever murky. 

At the time, we didn't know how any of these issues would end. In a way, they simply represented a new set of issues to confront. And confront them, we did, only to have an entirely new set of issues appear— inflation, a potential recession, market volatility, and war in Europe. We can't predict how these new issues will end. Nor can we predict what's next, but we can prepare. With that realization guiding our actions, plus the suggestions above, we think you can be prepared for just about any pitch thrown at you.

How else can we help you wrap 2022, and position you and your loved ones for the year ahead? We stand ready to assist. 

Schedule some time with us at www.openwindowFS.com/connection.

1. "Stocks" as represented by the S&P 500 Index.
2.  Past performance is no guarantee of future results. *8% of quarters both stocks and bonds are negative, 92% of quarters either stocks or bonds are positive, or both stocks and bonds are positive. Number and percentage of quarterly periods with negative returns are calculated using monthly return data from March 1979 – March 2022. US Stocks: Russell 3000 Index. US Bonds: Bloomberg U.S. Aggregate Bond Index.
3. https://en.as.com/mlb/who-are-the-highest-paid-mlb-players-in-2022-n-2/
4. From IRS.gov: "Under the tax reform law, the increase is only temporary. Thus, in 2026, the [exclusion] is due to revert to its pre-2018 level".