- No one knows what will happen with markets in 2023. That uncertainty can feel out of control, but there are things you can control and steps you can take.
- Assess where your investment portfolio, liquid cash flow and retirement savings stand.
- Consider tax-efficient charitable giving and take investment concerns to a fiduciary financial advisor.
Before looking forward to 2023, we should pause to reflect on 2022.
The following quote from Jason Zweig of The Wall Street Journal sums up this very difficult year for investors: “Investing isn’t an IQ test; it’s a test of character.” Indeed, the most successful investor is not necessarily the smartest person in the room but the one with the most patience and self-discipline.
Our investing character was certainly tested throughout 2022. It was a dismal year for investing, with both stocks and bonds down — by 19% and 13%, respectively. The result was one of the worst years in history for the traditional balanced portfolio of 60% stocks and 40% bonds, which lost nearly 17% for the year.
Looking forward to 2023, the team here at Francis Financial reviewed several outlooks from major Wall Street firms, including JPMorgan, Goldman Sachs, Barclays and others, to help answer the question of what to expect in the next year.
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As you might expect, there is a wide array of estimates for what markets may look like in 2023, but there seemed to be consensus on a few key items:
- With the U.S. Federal Reserve raising rates as aggressively as they have, most expect a minor recession for the country’s economy.
- Earnings results for companies are likely to come down more than analysts currently estimate.
- Inflation will continue to decline, allowing the Fed to slow and ultimately stop further rate increases around the 5% level.
The current economic uncertainty is leading to substantial variability in market forecasts, with firms estimating stock returns will be anywhere from flat to up 10% by the end of the year. The only agreement is that getting there will be a bumpy ride, with many ups and downs.
However, there is more optimism with the bond markets, with intermediate-term bond yields now above 5%, providing hope that we will see a much stronger 2023 on the bond side.
Rest assured, that outlook is about as solid as your holiday Jell-O salad.
Market forecasts are an interesting exercise in learning about potential future outcomes. As Yogi Berra once said, “It’s tough to make predictions, especially about the future.”
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Regardless of how certain the prognosticators sound or how much logic they cite to support their predictions, they will be wrong. Until we build the DeLorean from “Back to the Future,” no one knows what will happen with markets in 2023. That uncertainty can feel out of control, but there are things you can control and steps you can take to make sure you are ready for whatever 2023 may bring.
1. Assess where your portfolio stands
An annual check-in with your financial advisor about your portfolio is a good practice, mainly because our lives change. As we age or as life circumstances evolve, we should reevaluate our risk tolerance. Taking stock of the previous year’s happenings is key. For example, a new child, a new job or a change in retirement plans may necessitate a change in your investment strategy.
It’s also essential to analyze the portfolio from a tax-efficiency perspective. Over the coming months, investors will be reminded how important a tax-efficient investment strategy is for their portfolio.
Investors will start receiving 1099 forms tallying taxes due to the IRS for investment income and capital gains in 2022. Holding your investments in the most tax-appropriate type of account can enhance your savings plans by helping to reduce or even eliminate taxes.
Taxable accounts, such as brokerage accounts, are best for investments that produce less in taxable gains or income. Candidates include tax-managed or index mutual funds and exchange-traded funds. Brokerage accounts are also a good home for municipal bonds.
Tax-advantaged accounts, such as individual retirement accounts and 401(k) plans, are best for investments that produce significant taxable returns. Candidates include actively managed mutual funds and ETFs. Retirement accounts are also a good home for taxable bonds and real estate investment trusts.
2. Conduct a cash-flow review
Tracking your spending and savings is one of the most important steps to building a sound financial plan. Be sure to review your projected saving and spending targets for 2023. An excellent place to start is by revisiting where your money went in 2022.
Most credit cards will send you a year-end credit card expense report with your total spending for this last year neatly categorized for you. These reports typically arrive in mid-January, but you can often log into your account online to get your report sooner.
Search your credit card spending summary for saving opportunities. Are you being charged for monthly subscriptions you no longer use? Can you uncover other potential money leaks, such as excessive restaurant or take-out charges, taxi or rideshare costs, and impulse and unplanned purchases? Sometimes we spend mindlessly, and over time, this can make a big dent in our wallets.
Once you have plugged any holes in your budget, turn to your emergency fund. Building your emergency fund is the most important investment in keeping your budget on track. The general advice is to have enough saved in this fund that you can pay all expenses for three to six months. A well-cushioned emergency fund is the best defense against unexpected costs that can leave you financially vulnerable.
At my firm, we recommend accumulating six months of expenses, particularly if you have one source of income, income that fluctuates or less job security than is ideal. If your expenditures increased this year, because you took on a larger mortgage or for some other reason, reassess to determine whether you still have an appropriate emergency fund.
The best way to make that assessment is through careful budgeting and monitoring of expenditures. If you are struggling to build that emergency fund, you may need to take a hard look at some of your other discretionary expenses and consider eliminating them until you reach the target fund balance.
3. Make sure you’re saving enough to meet your goals
Knowing if you are contributing enough to retirement accounts is crucial. One rule of thumb for a starting point is the 4% withdrawal rule. This formula states that in retirement, you can withdraw up to 4% of your final account balance sustainably. Sticking to this withdrawal rate gives you a high probability of not outliving your money during a 30-year retirement.
For example, if you accumulate $1 million, you can withdraw about $40,000 for your first year of retirement. If the balance is $975,000 on the second year, you can only safely take out $39,000. Financial advisors recommend having extra cash on hand to dip into for those times when your investment portfolio does not grow enough from capital gains, dividends and interest income to make up for the previous year’s distribution, therefore reducing the amount you can take out the year after.
Once you have your financial goals identified, use all the tax-advantaged accounts available to you. Retirement plans, educational savings 529 plans and health savings accounts can help you minimize taxes and efficiently save for the future. Contribution limits increased for all three of these savings vehicles this year, as well.
For 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan, the 2023 contribution limit will increase to $22,500, up from $20,500 for 2022. The catch-up contribution limit for employees ages 50 and over increased to $7,500, up from $6,500. Sometimes companies change or add to their retirement plan investment options, so review those to ensure you are invested in the most solid investment choices available.
While the IRS does not levy federal contribution limits on 529 plans, most parents contribute only up to the annual gift tax exclusion so as not to incur gift taxes. The annual gift tax exemption for 2023 rose to $17,000, up from $16,000 in 2022.
Know that friends and family members can also get in on the action by contributing to your kids’ 529 plans. Even better, these contributions do not eat into your annual gift tax exclusion or ability to fund the 529 educational plan.
Savvy college savers also have the option to super-fund a 529 plan. Super-funding lets you invest a lump sum contribution equal to five times the annual gift tax exclusion. This contribution is treated as if it occurs over a five-year period for gift tax purposes.
If parents are flush with cash in 2023 and want to make significant headway saving for college, each parent can contribute $85,000 (5 x $17,000) per child. If both parents use their super-funding option, they can double the contribution to $170,000 per child in 2023.
If you have a high-deductible insurance plan, HSAs allow you to save pretax dollars for medical care now and in retirement. The HSA contribution limits for 2023 rose to $3,850 for an individual and $7,750 for a family, up from the 2022 limits of $3,650 and $7,300, respectively. Those 55 and older can contribute an additional $1,000 as a catch-up contribution, as well.
One of the easiest ways to increase your retirement, education or HSA contributions is when you receive a raise. Rather than adjusting to spending the extra income, boost your contributions to increase your savings painlessly.
According to Willis Towers Watson, the average U.S. pay increase is projected to hit 4.6% in 2023. Employers are paying more due to high inflation and tight labor markets, which gives you an effortless opportunity to bump up your savings.
4. Consider charitable giving
Once you have met your savings goals, you may want to give to charitable organizations. Giving to charities should also be given attention to ensure you have a thoughtful plan of how, when and what to give. After all, everyone wins if you can maximize those gifts simply by being tax-efficient.
Instead of writing a check to a charity, look into donating highly appreciated stocks directly to the charitable organization. Alternatively, you can set up a donor-advised fund, which will allow you to donate stocks, bonds and cash to an account that can be invested and grow over time.
An added benefit is that you will receive an immediate tax deduction for any money added to the account without the pressure to immediately give all the money away. You can recommend grants from the DAF over time, and donating is extremely easy.
5. Share other concerns with an advisor
What other concerns do you have? Whether it’s concerns about inflation, high-interest rates, recession fears or something more personal, it never hurts to share those with your financial advisor.
The good thing about a test of our financial character is that we can always learn from it and improve. We can become better investors, which will positively impact our portfolios regardless of market conditions.
Successful investing does require strong character, including patience with the markets, self-discipline in attention to your portfolio and sound judgment. Know that you do not have to do this alone and your financial advisor is there to help.
If you do not currently have a financial expert on your team, you can find a fee-only, fiduciary financial advisor that perfectly meets your needs at www.NAPFA.org.