2020: A Pivotal Year in Your Financial Plan

If you are like most people, you probably think 2021 cannot come soon enough. 2020 was a year of chaos and uncertainty, and the idea of what is normal has changed completely.  Navigating such a tumultuous time has required a lot of pivoting. Every part of life has been impacted by the experiences of 2020 in one way or another. As we look forward to 2021, it is helpful to look back at how 2020 has impacted our long-term financial goals and retirement plans.

How has 2020 directly impacted you?

Did you experience a decline in your retirement savings? Did you or someone in your family lose their job? Did you lose a loved one? Unfortunately, many people would answer yes to at least one of these questions. So how was your long-term financial plan impacted by 2020?

The first question you should ask yourself is: Do I even have a long-term plan? A recent study found that 67% of adults do not receive retirement savings advice from a financial planner or advisor. However, of those adults who have not utilized a financial planner or advisor, 54% say they think they would benefit from receiving retirement savings advice. Without having a plan in place, there is no way of knowing if you are doing well and maximizing your chances of reaching your goal.  In fact, there is no way of knowing if you will even reach your goal at all – whether that is retiring early, helping to pay for your children’s education costs, or leaving a legacy to your heirs or charity. In normal times, this uncertainty can lead to an increased level of stress and anxiety. So, in a year like 2020, where there are several additional layers of uncertainty added to the equation, the added stress and anxiety levels are amplified. This is all to say that it behooves everyone to have a financial plan in place in 2020 and in the years to come.

In any task you complete, whether you realize it or not, you develop a plan - you first define the desired goal and then outline the steps needed to reach that outcome. However, as the above study showed, most adults do not take the time to seek professional help to clearly define their goals or identify the steps needed to reach their long-term financial goals. These long-term goals and the associated steps that come with them are the backbone of your financial plan.

So, what is financial planning, and what actually makes up a financial plan?

Many people view financial planning as merely managing and investing in a portfolio. While this is undoubtedly an essential part of a financial plan, it is not a complete or comprehensive financial plan. Comprehensive financial planning is a proactive approach to ensure that all areas of your financial life are working together in a thorough and complementary way. This involves investment planning, education planning, tax planning, retirement planning, insurance planning, and estate planning. While any one of these steps can be done individually, comprehensive financial planning incorporates all these areas into one core plan.

Why should I pay someone else to develop a comprehensive financial plan for me?

Let’s start with investments, as it is very relevant to 2020. It certainly seemed tempting to get out of the stock market in March after the 20%+ decline (hopefully, you did not!). If you did not altogether leave the market, it was not easy to continue adding money to the market only to see it fall further (hopefully, you did!). Market declines are not easy to stomach for anyone, certainly when it is your own money seeing decreases, but relying on a financial advisor's experience lessens the odds of making an emotional decision in these times. Emotionally driven decisions often have the opposite result of what was intended, and you risk possibly putting yourself further in the hole. It is estimated that nearly 18% of investors sold their full equity positions between February and May. What is even more troubling is that the data shows that investors above the age of 60 sold equities at a much greater pace.

Working with an experienced financial planner or advisor who has experienced all market cycles proves beneficial in both up and down markets. Up markets are great – each month, you look at your statement, and the account balances are a bit higher. That is the name of the game, right? Well, down markets may seem not so great on their face as you likely see a decline in the balance, but from an investment perspective, this gives you the opportunity to purchase stocks at a “discount” that was not available before the market dip.

Additionally, down markets provide an excellent opportunity for a pivot. A pivot in this sense, as defined by entrepreneur and author Eric Ries, is “a change in strategy without a change in vision.“ Instead of focusing on the temporary drop in the investment value, focus on the other areas within your financial plan. Tax planning is very complementary to investment planning. Down markets often provide opportunities to improve upon your tax plan. One possibility could be as simple as realizing losses to decrease taxes for the year. Or it could involve looking at the merits of converting pre-tax growth in an IRA to tax-free growth in a Roth IRA (a form of tax diversification).

No one enjoys seeing the value of their portfolio drop but being opportunistic in those moments can significantly impact your long-term financial plan. Having both an annual and long-term tax plan in place allows you to see opportunities where it may make sense to accelerate recognizing income to current years or defer recognizing income to later years.

When the stock market is bouncing all over the place, what else can you do to keep your plan on track?

Control what you have the power to control; position yourself well on what you cannot control. You cannot control market volatility, but you can control how your portfolio is allocated and diversified. Ensuring that your portfolio has exposure to all the major asset classes, including foreign and small-cap stocks, is a better long-term strategy as we move through different market cycles. 2020 was a great example of this – over a very short period, some stock prices were cut in half, while other stock prices increased by multiples. During this time, well-diversified portfolios were able to offset the losses with other gains. This is why you hear that well-diversified portfolios reduce certain types of risk. You should not be relying on one stock or even one asset class as your long-term game plan.

Are Estate Documents a necessity?

No matter if the market is soaring to all-time highs, dipping to lows, or somewhere in between - everyone needs an estate plan. This could be as simple as Wills, Powers of Attorney (Durable and Healthcare), and adding beneficiaries to relevant accounts. Or it could be more complicated, and different trusts may be required. These documents ensure that your wishes – both financially and medically – would be fulfilled in the case of death or incapacitation. Whether you wish to leave everything to your spouse, your heirs, your extended family, or a charity, estate documents are legally binding, and the only way of knowing that your wishes will be followed. If you do not have estate documents, make that your goal for the 1^st quarter of 2021.

Insurance: how much is enough?

Everyone’s insurance needs are different. Generally, if your income is providing for others, you should have life and disability insurance. However, you also should not pay for coverage that is not necessary. By having a comprehensive financial plan in place, you would be able to see how death or disability could impact your family’s long-term financial picture and then determine the appropriate amount of coverage.

Life insurance is not the only insurance review you should do. Look at your homeowners’ and car insurance coverage (if applicable). Are your home and personal items appropriately insured? Do you have enough personal or business liability coverage? In both insurance and estate planning, you need to take a proactive approach rather than a reactive approach.

A decline in the market should not lead to a decline in your health.

One of the major themes that emerged from 2020 is self-care – whether it be physically, mentally, emotionally, or any other form, you need to take care of yourself. Most people do not enjoy taking on the mental load of creating their financial plan – let alone continually adhering to it. Constructing portfolios, digging through tax returns and projections, looking for areas of unnecessary risk exposure, or running retirement projections – these are areas that many people would rather block from their minds and assume that they are on the right path. Most people do not enjoy thinking about these items. However, as with any problem, it does not go away if you ignore it. Financial planners and advisors understand this. At Allegheny Financial Group, we want you to feel confident that you are on the right path towards your goals while also identifying areas that can be improved. With this layer of stress removed from your life, you can focus on the things you enjoy.

2020 showed us that no matter how much planning we do, we cannot plan for everything. However, by having a comprehensive financial plan in place when new variables are added to the equation, you can pivot quickly and adjust to the new normal. Contact a CERTIFIED FINANCIAL PLANNER™ practitioner today and get started on your path towards meeting your financial goals.

Author: Matthew Haller, CFP^® | Allegheny Financial Group | December 2020

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Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered Broker/Dealer. Member FINRA/SIPC.