TAX TIPS: Another year goes by, another tax season arrives

Many of us probably felt that 2020 lasted a very long time. But now that 2021 is upon us, we can make a fresh start – and one way to do that is to make some New Year’s resolutions. Of course, you can make these resolutions for all parts of your life – physical, emotional, intellectual – but have you ever considered some financial resolutions?

Here are a few such resolutions to consider:

Don’t overreact to events.When the coronavirus pandemic hit in mid-February, the financial markets took a big hit. Many people, convinced that we were in for a prolonged slump, decided to take a “time out” and headed to the investment sidelines. But it didn’t take long for the markets to rally, rewarding those patient investors who stayed the course. Nothing is a certainty in the investment world, but the events of 2020 followed a familiar historical pattern: major crisis followed by market drop followed by strong recovery. The lesson for investors? Don’t overreact to today’s news – because tomorrow may look quite different.

Be prepared. At the beginning of 2020, nobody was anticipating a worldwide pandemic and its terrible consequences, both to individuals’ health and to their economic well-being. None of us can foretell the future, either, but we can be prepared, and one way to do so is by building an emergency fund. Ideally, such a fund should be kept in liquid, low-risk vehicles and contain at least six months’ worth of living expenses.

Focus on moves you can control. In response to pandemic-related economic pressures, some employers cut their matching contributions to 401(k) plans in 2020. Will some future event cause another such reduction? No one knows – and even if it happens, there’s probably nothing you can do about it. Instead of worrying about things you can’t control, focus on those you can. When it comes to your 401(k) or similar employer-sponsored retirement plan, put in as much as you can afford this year, and if your salary goes up, increase your contribution.

Recognize your ability to build savings. During the pandemic, the personal savings rate shot up, hitting a record of 33% in April, according to the U.S. Bureau of Economy Analysis. It fell over the next several months, but still remained about twice as high as the rate of the past few years. Of course, much of this surge in Americans’ proclivity to save money was due to our lack of options for spending it, as the coronavirus caused either complete or partial shutdowns in physical retail establishments, as well as dining and entertainment venues. But if you did manage to boost your own personal savings when your spending was constrained, is it possible to remain a good saver when restrictions are lifted? Probably. And the greater your savings, the greater your financial freedoms – including the freedom to invest and freedom from excessive debt. When we reach a post-pandemic world, see if you can continue saving more than you did in previous years – and use your savings wisely.

These aren’t the only financial resolutions you can make – but following them may help you develop habits that could benefit you in 2021 and beyond.

Has COVID-19 changed your retirement plans? You’re not alone

Have your retirement plans changed because of COVID-19? If so, you have plenty of company. Nearly 40 percent of those planning to retire say the pandemic has disrupted their intentions, according to the Edward Jones/Age Wave Four Pillars of the New Retirement study. You might have been thinking about retiring early – can you still do so?

Even without a crisis, it’s not a bad idea to review your important life goals from time to time. So, in thinking about the possibility of early retirement, consider these factors:

• Your retirement lifestyle – Your ability to retire early depends somewhat on what sort of lifestyle you’re anticipating during your retirement years. If you think you’ll be traveling extensively or pursuing expensive activities, you might not be able to afford to retire as early as someone with more modest ambitions. Of course, there’s no “right” or “wrong” way of living in retirement – we all have our own dreams and preferences. But be aware that different lifestyles do carry different price tags – and have different effects on when you can retire securely.

• Sources of retirement income – Obviously, a key factor in knowing whether you can retire early is the amount of retirement income you can rely on.

So, you’ll have to assess all your sources: Social Security, any other pensions you might receive, and your investment portfolio, including your 401(k) and IRA. For Social Security, the longer you wait until collecting, the larger your monthly payments (although they will “top out” when you reach 70, excluding cost-of-living adjustments). In regard to your investments and retirement accounts, you’ll need to establish a withdrawal rate that’s appropriate for the length of time you expect to be retired. So, by adjusting these variables – taking Social Security earlier or later, taking more or less money from your retirement accounts – you can help determine if the retirement date you had in mind is viable.

When you first decided you wanted to retire early, you might have been motivated by, among other things, a weariness of your current job. But has that changed over time?

After all, many employers have found that their workers can be just as productive working at home, so, even when we’ve gotten past COVID-19, we might see a sizable shift in the geography of the workplace. In any case, if your feelings about work have changed in some way, leading you to think you could work longer than originally planned, you’d likely gain some financial advantages. You’d make more money, for starters, but you’d also keep building your 401(k) and IRA, and you could even possibly delay taking Social Security.

The pandemic may lead to a reevaluation of many financial goals – and taking early retirement might be one of them.

By thinking carefully about your situation and your options, you can come up with a course of action that’s right for you.

What have investors learned from 2020?

As the new year approaches, it’s fair to say that we’ve all learned something about the social, political, physical and environmental forces that have affected everyone. And, in some ways, our lives will be changed, perhaps permanently. But as an investor, what lessons can you learn from 2020?

Here are some to consider:

• The markets look ahead. Here’s something many investors discovered in 2020: Investment prices don’t always move in the same direction as the overall economy. This might not have seemed apparent right after the COVID-19 pandemic struck in mid-February, as the overall economy and the stock market took big hits. But just about five weeks later, the markets began a rally that lasted several months. During this time, the economy also recovered somewhat, but still remains on weak footing.

What can explain this discrepancy between the markets and economic activity? Essentially, economic numbers, such as the unemployment rate and gross domestic product (GDP), reflect what’s happening today, but the markets are always looking toward tomorrow, which means they are anticipating a stronger economic recovery and the results that come with it, such as greater corporate earnings in 2021. No one can say for sure what the future holds, but you can usually know the market’s opinion by its performance.

• Opportunities will always exist for investors. Although the coronavirus seems unprecedented, the equity markets have rebounded from many crises before it. From war to global financial meltdowns, the market has seen it all. But even at the height of these events, when the markets might be most affected, individual segments or industries can do well.

For example, in the current environment, when many people have been forced to work and shop from home, and get their entertainment online, it’s probably not surprising that some parts of the technology sector have seen their economic activity grow, along with their stock prices. Here’s the key point: Investment opportunities always exist, especially in times of market stress – and smart investors will find them and incorporate them into their portfolios in a way that’s appropriate for their goals and risk tolerance.

• Patience and discipline can pay dividends. As mentioned above, the stock market dropped sharply in the weeks immediately following the pandemic, but then gained steadily for months afterward. Investors who tried to “cut losses” and exited the market likely did so at the wrong time and missed out on the beginning of the upturn. Unfortunately, this is not uncommon – investors who overreact to market declines often find themselves on the investment sidelines just when a new rally begins.

This article was written by Edward Jones for use by your local Financial Advisor. Edward Jones, Member SIPC.