Investors that once made astronomical gains are now facing a reckoning as the historic bull market ended with rising inflation, skyrocketing interest rates, and recession worries.
Uncertainty continues, but one thing is certain: the route to riches in the coming decade will look substantially different than it did in the previous decade. The bull market that generated annual returns of 19% for more than a decade has ended, and in its place, investors must be considerably more strategic than they were previously. Vanguard forecasts nominal annualized returns of 4.7% to 6.7% for U.S. stocks over the next decade and 4.1% to 5.1% for U.S. aggregate bonds.
These low expectations offer less room for investors to make rash judgments. Therefore, prudent financial preparation will be needed for the next decade.
Here are some methods that will allow you to keep more of what you earn and a roadmap to retirement and purchasing advice for real estate and other assets.
According to Jill Fopiano, CEO and president of Boston-based O’Brien Wealth Partners, retirees need to recognize that they cannot control the market, but they can control the planning tactics used in this environment.
How You Make Investments
You are familiar with the adage, “It’s not how much you make that matters, but how much you retain.” This is especially true during periods of modest market returns. If your portfolio’s returns are lower than they once were, you must avoid losing money due to poor planning.
Investing in a tax-efficient manner is a crucial aspect of any endeavor; you must be mindful of where you retain your assets. Taxable brokerage accounts are suitable for investments that are less likely to lose value to taxes, such as low-turnover funds, long-term holdings of equities, and municipal bonds. Save the securities that generate income and funds with a greater turnover rate for tax-preferred accounts, such as 401(k)s and conventional individual retirement accounts (IRAs).
And when it comes to income, be careful to take only the amount required to fund your costs or to fulfill the Internal Revenue Service’s minimum withdrawal requirement from IRAs. Tim Steffen, head of tax planning at Baird in Milwaukee, explains the easiest strategy to save on taxes is to avoid generating unnecessary revenue.
To retain more of your earnings, don’t overpay for your assets. Vanguard estimates that by switching from average-cost funds to low-cost funds, you may increase your annual returns by 0.30%, independent of market performance. The disparity is significantly higher when comparing expensive and inexpensive funds.
How You Budget
Spending wisely is crucial regardless of your financial wealth. Alex Guiliano, founder and managing partner of Resonate Wealth Partners explains that this means asking pertinent questions before making major purchases. The first question is, what is the intent? Is it for entertainment, to pass on to the next generation, or to get exposure to a certain asset class? Will it appreciate or depreciate? Especially in cases where people acquire wealth faster, he observes that passion tends to overpower this sort of careful evaluation.
Would renting be more profitable than buying if you’re considering a purchase for recreation, such as a vacation house? If a purchase makes sense, is it preferable to borrow or pay cash for it? If the asset requires maintenance, have you accounted for those expenses over its lifetime? What happens if the principal user passes away? Is there anyone else interested in using and caring for it?
Purchasing an item for a legacy vs. for capital appreciation necessitates distinct considerations. Can you provide guidance based on your own experience or access to experts? If you wish to transfer the asset to the next generation, are you using the proper titling? Guiliano says answering these questions can help you decide whether to purchase an asset and how to go about it.
Similar issues apply when parents wish to assist their adult offspring in acquiring a property. Young purchasers might benefit from parental help in today’s competitive real estate market, where loan rates have risen but property prices have remained stable. One alternative is for parents to provide their children with a loan at the relevant federal rate — the minimum rate established by the IRS for private loans, which was most recently 4.34 percent yearly compounded. According to Matt Pullar, partner and senior vice president of Sequoia Financial Group in Cleveland, some parents utilize their yearly gift exclusion to erase the loan’s installments.
According to Guiliano, when parents purchase a home for their children, emotional factors are equally as crucial as financial ones. Ensure that your expectations are aligned in advance and address potential outcomes: What happens, for instance, if parents pay a portion of a kid’s mortgage as a gift and the youngster loses his job? Would the parent be expected to assume complete responsibility for payment? Alternatively, what if the child receives a significant promotion? Would she anticipate the same degree of parental support regardless? According to Guiliano, “being on the same page” early might save a great deal of grief.
What You Leave behind
Perhaps you have donated generously to family members and various charitable organizations, but have you taken a step back to determine your philanthropic objectives? Gifts are more effective when given as part of a comprehensive plan. Don Heberle, chief executive officer of PNC Private Bank in Pittsburgh, states, “having a strategy is the most crucial aspect.”
One way to assist with philanthropic contributions is by knowing your goals and interests. Heberle suggests that the debate involves many generations. Engaging the next generation in philanthropic giving is one of the most effective methods to connect them to the family fortune. In addition to strengthening family ties, cultivating partnerships with charitable organizations can lead to a second act in retirement, such as a board seat or other volunteer work.
When it comes to philanthropy, wealthy families have an extra consideration: In 2026, the federal estate tax exemption will fall to no less than $6.46 million per person, from $12.92 million per person in 2023. Edward Renn, a lawyer at the international legal firm Withers in New York, advises his affluent clients to use up their exemptions as soon as they are comfortable. It is possible that Congress would prolong the higher exemption, but it is more probable that lawmakers will allow it to expire as planned to produce money, he adds. In addition, consultants often propose preparing based on what we know now rather than what could occur.
There are a variety of ways that family members might receive gifts. For 2023, you may make tax-free gifts of up to $17,000 per recipient. Paying a loved one’s tuition directly to the school can maximize your exclusion and give the gift of education since this will not count towards the lifetime exemption if done correctly.
If the annual exclusion is exceeded, contributions to a 529 college savings account contribute toward the lifetime exemption. According to Valerie Newell, partner, and senior financial adviser at Mariner Wealth Advisors in Cincinnati, having your affairs in order is a valuable but often-overlooked present you can make your family. It is remarkable how lengthy and complicated the estate-settlement procedure is, she says. To make things easy for your heirs, ensure that all of your assets are named correctly.
Even rich customers have balked at Newell’s expensive attorney’s costs, but consider this: if you don’t settle your affairs, this obligation and expense will fall on your heirs.