Jimmy J. Williams, CPA/PFS, CFP® | Live a Life By Design

Your Philosophy of Taxes is Critical to your Success

Posted on April 15, 2021April 15, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

It is time to file your 2020 individual income tax returns. Many people face this task with trepidation and stress. To help you focus on this important obligation of all Americans, I am providing you some simple, yet effective, strategies to reduce this process to its simplest form.

First, do not procrastinate until April of each year to begin preparing for this required activity. Too many of us dislike the process of gathering and organizing our information to perform the task of preparing our returns. Do you remember the question about tackling big projects? You know, “How do you eat an elephant?” The answer for the previous query, as well as the approach to your organization of tax information is the same, “one bite at a time”.

Every month, when you receive your bank and credit card statements, review them and highlight the line items that may be an income or deduction for your returns. Take a blank piece of paper and record the line items in their respective categories you determine on the paper. This sheet of paper will be your accumulator of all the monthly items of income or deductions for you.

Provide the sheet along with all your information returns received from your employer, banks, payers, investment accounts, etc. to your tax preparer as soon as possible in the month of February. Why so early? Keep in mind that most tax preparers work on a First-In-First-Out Method of completing returns for their clients. Also, by providing this information early in the term of tax season you will be gaining access and services from your preparer before the fatigue and craziness of tax season sets in.

Second, think about the types of deductions you can perform that allow you keep control of your money. Of course, I am referring to contributions to your employer-provided retirement plan, Traditional Individual Retirement Accounts and Roth Individual Retirement Accounts. What a great opportunity you have available to increase your security for the future while taking a current tax deduction on your returns!

Because of the pandemic, you have an additional month to contribute to your IRA or Roth IRA. If you wish to contribute to these tax-qualified accounts and claim the deduction on your 2020 income tax return, you must do so by May 17, 2021. The maximum contribution for individuals under age 50 is $6,000 for the 2020 tax year. For those of us 50 years of age or older, $7,000 is the contribution limit. The question becomes “how much should I contribute?” Of course, the answer may differ for everyone based on his or her particular facts and circumstances. However, I do have an answer that applies – as much as you are allowed by law!

Once your tax year has lapsed, your available deductions are limited. It is imperative that you take advantage of the provisions within the Internal Revenue Code and maximize your tax savings each year. A wise, old proverb found in the Bible guides us about managing our money properly: “Of what use is money in the hand of a fool, since he has no desire to get wisdom.” A friend asked me why money is so important to me. I informed him that money is not important to me, it is the freedom it affords me that is priceless.

Your philosophy toward filing and paying taxes should be one of gratitude. There are many people in countries without basic living needs such as running water, highways to drive on, food that is edible and medical care for the elderly and children. How are these programs funded in the United States of America? With our tax dollars! One of my favorite quotes of Judge Oliver Wendell Holmes, “Taxes are the price we pay for a civilized society.” Be grateful you pay income taxes each year. This act of filing and paying taxes means that your family had a means of support and enjoyed far more of life than many others may.

Related Podcasts

The Cost of Cash

Posted on April 9, 2021April 9, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

One of the most important areas of planning for a secure future is to be able to weather the storms of life without invading your long-term investments. When working with a new client, we always ask questions regarding their current monthly living needs. By monitoring and managing your basic living needs such as food, shelter, clothing, entertainment, gifts, etc., you can determine your cash needs on a monthly basis.

This is the first step to developing a cash management plan that will serve you well in life. Once you know the cash flow need for a typical month, it is critical that you expand the thought process to cover a period of 90 – 120 days. Should a catastrophic event affect your family you will be confident that you can sustain your lifestyle without negatively impacting your future by withdrawing retirement assets prematurely.

The process of cash management is a delicate one. There is such a state of having too much cash. Yes, you read the sentence correctly! When a portion of your overall net worth is in cash you are experiencing something negative in your overall financial picture – loss of purchasing power. One of the most critical costs of retaining cash is that you lose the opportunity for the investment (cash) to maintain or exceed inflation with growth. A prime example is a recent client who came to meet with us for retirement planning. When we spoke about his overall wealth, he was rather proud of the fact that he had accumulated what he thought would be sufficient assets to live the life he desired.

However, when we applied inflation and taxes to the overall asset structure he maintained currently, he was not so happy. When your investments are stressed with the actual costs of living, and we all know that inflation and taxation may be present during our lives, the overall balance of assets for your lifestyle is less than the amount you currently see in your bank account.

The key to creating and maintaining a successful cash management program is in the process you utilize for your total investment portfolio. Cash is important and should be maintained in your financial plan. To arrive at the appropriate amount of cash needs it is critical you analyze your spending for a period of a month that is typical of your life. Do not measure a month like November when you are buying more food for Thanksgiving or gifts for Christmas. Rather, choose a month without these extraordinary expenses and evaluate what you are truly using the cash to provide you.

Once you understand where your money is being utilized, you may wish to make some adjustments. Now multiply the amount of cash flow needed in the month you analyzed it and multiply it by 3 or 4. The result of this calculation is the amount of cash you should maintain in a checking or savings account. If it sounds like you are losing money on these funds by not investing them in something that will meet or exceed inflation, you are correct. However, the real purpose of these funds is to provide you confidence and security if, or should I say “when”, a disaster was to strike your family.

Review your cash balance account every month and make certain you return it to your target amount. This is your security blanket. It is a good practice to analyze your spending at least one month per month to determine if you need to adjust your cash balance account for possible changes in life such as added prescriptions, increases in insurance needs, etc.

It is critical you plan properly for the future while sustaining your lifestyle today. If you don’t feel secure about your future, it is time to seek help. Contact a CERTIFIED FINANCIAL PLANNER™ professional to assist you in creating and maintaining a plan for your future. I’ll see you on the golf course!

Related Podcasts

Extra Time to Fund IRA For 2020

Posted on March 26, 2021March 26, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

Whenever someone tells you something that seems too good to be true, often your presumption is correct. However, since 1974, individuals have enjoyed the opportunity to “keep their money and report a tax deduction” which seems too good to be true. Sure, there are some rules and caveats that must be observed to take the deduction but overall, the Individual Retirement Account (IRA) is a powerful planning tool for your future.

Many changes have been enacted that impact IRA investors. The basic premise of “having your cake and eating it, too” continues for these types of accounts. Due to the recent IRS announcement of postponing the original due date of individual returns, you have another month to contribute to your IRA and take a tax deduction for 2020. Further, if you live in a declared disaster area, such as the State of Oklahoma, the President’s declaration postpones the filing due date for individuals to June 15, 2021. Ultimately, you can fund your IRA on or before June 15, 2021, and take a tax deduction for 2020.

Too many individuals fail to take advantage of IRA benefits. Some misconceptions are often the cause of this misunderstanding. Many people think they are too old to contribute to an IRA. The SECURE Act of 2019 eliminated the age limit for traditional IRA contributions. No longer are you limited to contributing to your IRA at age 70½. Many of our citizens continue to work during their retirement years. By earning income, the taxpayer may be eligible to contribute to their IRA until such time they no longer work. This is a game-changer for second career individuals!

Another misunderstanding is that single-earner family inability to contribute for the non-working spouse. Assume one spouse, age 30, is working outside the home while the other is caring for the children. If the working spouse earns income, and meets other criteria, she can contribute $6,000 to her own IRA and her spouse can make a spousal IRA contribution of $6,000 to a traditional or Roth IRA based on his spouse’s income.

One of the most common excuses or misconceptions I hear from individuals when talking about saving for their future by contributing to their IRA is that they simply can’t afford it. You are not required to contribute the maximum each year to your IRA to achieve tax benefits. Every dollar you contribute to your IRA is a possible reduction to your taxable income. A little unknown is of the tax law known as the Saver’s Credit may be helpful to you in reducing your tax burden. Lower income workers who make IRA contributions may claim the credit.

If you are single and earned $32,500 or less for 2020, you may qualify for this credit against your income tax burden. The maximum amount of credit is limited to the first $2,000 of your IRA contribution and you may claim a 50% credit for a maximum of $1,000 against your income tax liability. One of the best methods of teaching your children the power of investing and allowing compound interest to help them accumulate is the gifting of funds to their traditional IRA, or better yet, a Roth IRA.

Assume your granddaughter has landed her first job as a teenager and it pays her $10,000 for 2020. Being a wonderful grandfather, and noting this is an excellent teaching moment, you gift to your granddaughter $2,000 to her Roth IRA. She will receive a Saver’s Credit of $1,000 on her 2020 income tax return.

Individual Retirement Accounts are powerful tools that can yield tremendous tax-deferred savings over time. Start early and teach your children the power of compound interest. Albert Einstein, the famous theoretical physicist, is reputed to have said, “Compound interest is the 8^th wonder of the world. He who understands it, earns it… he who doesn’t, pays it.”

Related Podcasts

Stimulus Funds Are Not Free Money

Posted on March 19, 2021March 19, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

You can always count on change occurring in life. First, a pandemic that intrudes in all aspects of our world and, second, the federal government creating responses to the environmental changes. Many Americans will receive, or may have already received, additional economic stimulus payments in the amount of $1,400. Congress has an interesting approach to naming legislation and this most recent law is no different – The American Rescue Plan Act of 2021.

To receive the full amount of stimulus payment, individuals in the U.S. must have a Social Security Number and report adjusted gross income on their 2021 income tax return of $75,000 or less. If the adjusted gross income is higher than $75,000 but less than $80,000, the recipient will retain a portion of the $1,400. In other words, if you report $80,000 or more on your income tax return for 2021, you will be required to repay, through a lower refund amount, the advanced stimulus payment.

One of the changes for this round of stimulus payment is those who qualify for the funds. Unlike previous stimulus payments in 2020, the current stimulus funds are available to individuals, children and non-child dependents. For example, a family of four would receive a total stimulus payment of $5,600. This is helpful for families that are suffering from the effects of COVID-19 but, as my dad would always warn, “nothing in life is free”. The total cost of The American Rescue Plan Act is $1.9 trillion. As of the date of this writing, the United States of America owed more than $28 trillion to its bondholders and other creditors. This debt equates to $85,000 per citizen and $224,000 per taxpayer!

How do we repay such a debt burden? Well, I have good news and bad news. Let’s start with the good news. Individuals who are age 50 or older may not see a significant change in their share of the indebtedness or reduction in their lifestyle due to draconian income tax rates imposed on their earnings. The bad news is that our children and grandchildren will be carrying a heavy burden during their lifetimes to pay for our current overspending.

But, wait, there are other means of resolving our colossal debt balance. One of the most painful would be to cut government spending. Have you ever been given something and had it taken away once you were getting comfortable with its benefits? Not much fun. Cost cutting is one of the most effective yet politically costly methods of resolving our national debt.

Another painful method to resolving the debt crisis (and that is what we have) is to increase tax rates on taxpayers’ income. At one point in the history of our country, to fund World War II, the top marginal rate for income tax was 94%. I am not advocating we return to such a drastic increase in taxes but paying taxes is a price for living in a civilized society.

Perhaps the most convenient, and difficult, method of paying off the national debt is empowering our economy to grow at a faster rate. There were decades in the United States that our country’s growth rate would average 3% annually. What would happen to our country if we could double our growth rate to 6% for a 5-year period? Full employment and taxes rolling in to the U.S. Treasury at a much higher volume would provide the resources for liquidating the national debt.

To fairly apply these potential pain points, to all citizens, equitably is the most difficult task of any elected official. If we consider the opportunities that we could offer our future citizens by paying off our debt and investing that portion of our annual budget in the areas of technology, infrastructure and job creation that improve quality of life, we could truly increase the lifestyle of all citizens.

Now that you understand “free” stimulus isn’t actually free, how do you feel? My goal was not to bring about negative feelings but rather for all of us to fully acknowledge that my wise, old dad was correct – “there are no free lunches in life, someone is paying for it”.

Related Podcasts

Important Retirement Considerations for Educators

Posted on March 12, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

Educators are challenged every day. Why would you want to make your retirement transition challenging? You have worked for 30 years educating individuals that have changed the world through your guidance. Mrs. Smith, my first-grade teacher, was the first motivational speaker I heard in my life. At six years of age, Mrs. Smith instilled in me, or perhaps I should say endowed in my mind, the mantra and belief that “I could be anything I wanted to be if I worked hard enough”. This wonderful lady may have known, but I certainly did not, that she was bestowing to me a lifetime adventure of learning and dreaming that would reward me in tremendous ways throughout my life.

Teachers are the influencers, supporters, and cheerleaders for their students. What does this information have to do with retirement planning? Everything! At a time in the professional life of a teacher when he or she is making lifetime decisions, inadequacy rears its ugly head. As specialists in retirement planning, we focus on a variety of pension platforms and one of the most comprehensive is the Oklahoma Teachers Retirement System (OTRS). This system is the pension plan that provides support for teachers, administrators and support staff in the field of education in Oklahoma.

Many people become confused and simply disregard provisions of the pension plan that would help them live a better life. The OTRS requires certain decisions for the participants to retire that are lifetime elections. Once the decision is made, even when life may go strangely awry, you cannot change your initial plan for retirement. How can you mitigate this risk? First, ask questions of the plan administrators, read the plan manual and familiarize yourself with the information and terms of the plan.

Second, seek out an expert to help you coordinate retirement, estate and income tax planning to equip you with the capability to enjoy your retirement years with potentially less worry. The OTRS provides a monthly benefit to qualified participants once the election to retire is filed. However, you may not wish to give total control of your future cashflow to the plan. What will you do if your health were to suddenly worsen immediately after retiring? The plan contains a provision that allows participants with 30 or more years of service to elect a Partial Lump Sum Option (PLSO) which allows the participant to rollover, or transfer tax-free, a sum representing 12-, 24- or 36-months of benefits to an Individual Retirement Account. Why would you wish to do this? You are in control of the distribution of the funds should an unexpected event occur!

Third, the timing of your notification filed with the plan of your planned retirement date is critical for the receipt of your first retirement benefit payment. For example, if you wish to receive continuity in your family’s income, and you plan to retire on July 1, 2021, you must file your Pre-Retirement Information Verification (Form 3) on or before April 1, 2021. This date is non-negotiable. To help you understand the strict interpretation of this required date, if April 1, 2021, was a weekend or holiday, you would not be extended any grace period to meet this deadline. Additional subsequent dates must be met to experience a smooth transition to retirement.

Each person’s retirement is unique. Do not rely on others’ comments or experiences to make important decisions for your future. A horror story from the past comes to mind. One of the educators I know came to me after filing his initial documents with OTRS. After we discussed it for a few minutes, he realized he had made a horrible mistake on his paperwork. Certain elections were not heeded, and life was not going to be as he had planned. However, we were able to resolve the issues for him in time to meet his statutory deadlines. His first retirement trip was exciting, and his cash flow was on time.

To enjoy your future years, and experience uninterrupted cashflow, the OTRS filing process requires attention and proper timing. Seek out a Certified Financial Planner™ or other retirement planning expert to help you through this tedious process. You should be planning your next trip to celebrate retirement, not worrying about your lifetime income source. Go ahead, book your trip and do not forget the sunscreen!

Related Podcasts

Tax Relief For Recent Disaster Victims

Posted on February 26, 2021February 26, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

The Internal Revenue Service (IRS), a branch of the U.S. Treasury Department in which we are all familiar, issued a news bulletin today that described the tax relief provided Oklahomans whose lives were significantly disrupted by recent snow and winter storms. President Biden declared the State of Oklahoma a disaster area availing the leaders of our state, counties and municipalities to receive Federal Emergency Management Agency assistance for housing and other human needs. Taxpayers are entitled to relief, too!

To avail yourself to the relief granted by the IRS, you must live or have a business in the affected disaster area. All of Oklahoma’s seventy-seven counties were declared disaster areas allowing all citizens that need tax relief may receive it. The declaration permits the IRS to postpone certain tax-filing and tax-payment deadlines. For example, any business or individual tax returns, and related payments, required between February 8, 2021, and April 15, 2021, will now be due on June 15, 2021.

This relief will generally apply to most types of tax returns and payments. For example, if you are an individual or joint filer, your return would typically be due on April 15, 2021. Considering the relief granted by the IRS, your return is now due on June 15, 2021, without the filing of an extension of time to file or the payment of any tax owed. For those individuals subject to estimated tax payments, primarily self-employed or those with non-wage income, you will not be required to remit your first quarter tax payment until June 15, 2021.

One word of caution. Quarterly tax payments are due on April 15, June 15, September 15, and January 15 for calendar-year filers such as individuals. This would mean that your estimated tax payment due on April 15 and the second quarter tax payment due on June 15, 2021, are both due on the same day. Therefore, you are liable penalties should both payments fail to be remitted timely.

Some good news is found in the emergency relief declaration! For individuals who wish to contribute to an Individual Retirement Account (IRA) or Roth Individual Retirement Account (Roth IRA) they have until June 15, 2021, to make their contribution for a possible 2020 income tax deduction. This is the time to take advantage of the two-month period for reducing your taxes and contributing to your future for qualified individuals!

For those taxpayers who suffered a casualty loss caused by the disaster, the option to claim the loss on the return in the year the casualty occurred or claim on the preceding year (2020) is available. This election, which must be claimed on a timely filed return, and may help relieve the tax burden some taxpayers would otherwise have been required to pay on June 15, 2021.

Should you receive a notice of penalty for late payment of your 2020 income taxes or estimated tax payments for those filed on June 15, 2021, the IRS will provide abatement of the penalties by calling the telephone number provided on the notice. It is wise to consult with your CPA or tax preparer to determine what steps should be taken to achieve the relief sought from this declaration.

Other types of taxpayers are allowed additional time to file returns, too. For example, if the entity is a corporation, partnership, trust or exempt organization, with an original due date for the 2020 tax return between February 8 and April 15, the due date is now June 15, 2021. However, any Forms W-2 or 1099 that are due by February 28, 2021, should be filed in a timely manner or an extension of time filed with the IRS.

If your records were destroyed during the disaster, the IRS will provide, free of charge, copies of previously filed tax returns for affected taxpayers. What can be better than that?

For two consecutive years our state, and its wonderful citizens, have been subjected to significant disruption caused by natural disasters. Let us hope Mother Nature is not serving up a trifecta!

Related Podcasts

When to Claim SSA Benefits

Posted on February 12, 2021February 12, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

When the economy takes a downward trend and the retirement you planned did not quite work out in the manner you thought, what can you do? Most of us look at this scenario as an opportunity to engage in the workforce. Much confusion exists about working while claiming your Social Security Benefits.

“Can I work and receive my SSA benefits?” This is the typical question we receive when planning for retirement with our clients. I look the client straight in the eye and answer “depends”. Well, that wasn’t very helpful. However, the SSA regulations applied to this scenario are complex and may be confusing to many of us. To properly apply the rules, think in terms of life sections: 1) before reaching your full retirement age (FRA) as defined by law; 2) the year you reach FRA; and 3) the period after you reach FRA.

Let’s address the first section of life which is before you reach FRA. The earliest a person can receive SSA benefits, without being a survivor or disabled, is age 62. To determine your FRA, you must consider the year of your birth. For example, if you were born in the period of 1943-1954, your FRA is 66. The amount of SSA benefits you are entitled to at age 62 is reduced permanently to 75% of your projected full retirement benefits. For example, if you would have been entitled to $2,000 a month of SSA benefits at FRA, by claiming your benefits at age 62, your lifetime initial benefit will be reduced to $1,500 per month. The loss of $500 per month of lifetime benefits, depending upon your longevity, may become a significant amount. By working and delaying your claiming of benefits closer to your FRA, you will have opportunity to receive a larger percentage of your benefits. For example, if you claimed your benefits at age 64, you would be entitled to 86.7% of your full retirement benefit. The closer your age to your FRA, the greater percentage you may claim of your full retirement benefit.

The next section of life is the year of reaching your FRA. Let’s assume you were born July 1, 1955. Your FRA would be 66 years and 2 months. Therefore, you could work in your full-time position earning up to $50,520 in the period of January 1 to June 30, 2021. You would be allowed to claim your SSA benefits and receive the full retirement amount even though you worked more than that allowed for those beneficiaries who wish to retire before FRA. This is where the confusion lies. Think about the individual who decided to retire early at the age of 63. This person may earn only $18,960 in 2021 without impacting their SSA benefits. However, for every $2.00 earned over the $18,960 limit, their SSA benefit will be reduced by $1.00.

Lastly, let’s explore the impact on the SSA benefits and the amount of earnings an individual may earn initiating with the month after reaching FRA. A person who has delayed claiming SSA benefits until reaching FRA, may continue to work full-time and not subject their SSA benefits to any reduction. There are some tax implications that will be imposed on your SSA benefits when you file your individual income tax return but we will address this issue in a future column.

Thinking about the three phases of before, reaching and after retirement age will help you make a better decision on the timing of your SSA benefits. We typically perform an analysis that helps you understand the economics and the qualitative issues of claiming your benefits at the proper time. This complex set of laws can be difficult to grasp. Seek out a complimentary consultation to determine the date of claiming your SSA benefits and maximizing your retirement income. See you on the golf course!

Related Podcasts

Predict Your Future By Creating It

Posted on February 5, 2021February 5, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

Many of you will read the title of this article and wonder what it means. President Abraham Lincoln once said, “The best way to predict the future is to create it.” One of the roles I relish, when working with our clients, is the ability to help people reach their goals in life. Often clients will look at me during the planning process and possess only two items of information: 1) where she currently resides financially; and 2) where she wishes to be at retirement. The chasm between these two points of life may seem bottomless and unreachable. Before you shake your head that you agree with the previous statement, let me share a proven method of predicting your future.

First, you must clearly define your desires for your future. It is often said that “no archer can hit a target that doesn’t exist.” The process of future design begins with your imagination. Do you wish to relocate in retirement? Do you dream of a second career? What about your volunteerism you wish to enhance during retirement? Will you need specialty medical assistance and support in retirement? What type of home do you wish to reside in retirement? There are many considerations and you should list all of them that you wish. There are no wrong answers!

A plain piece of paper and your favorite writing instrument will open your mind to the world you want to develop. Once the list is completed, for now, you should breathe a sigh of relief. You have now performed more planning for your future than most people. More time is spent by individuals planning their vacation than planning their future!

Second, you should evaluate your current financial statement. What have you saved for the future? Do you possess an emergency fund? One of the quantitative misunderstandings by most people is that your life in retirement will cost you less than your current lifestyle when working. This is not necessarily true. Think about it. Your medical costs may rise due to age or you may locate where you wish to spend most of your day in your hobby. These types of activities require funds and it is a fact that most retired individuals will continue to require 90% – 95% of their currently living expense in retirement.

When planning for our clients’ future, we assume the same lifestyle in retirement as experienced in their career. Why? It is better to assume more income is required and save more than enough for a lifetime than to be deficient. No one wants to simply exist in their retirement. Therefore, it is critical that a projection assuming taxes, cost of living increases, medical needs, housing costs, etc. be developed into your plan for the future. Success in retirement depends on the ability to weather any financial storm that may arise.

Lastly, you must bridge the chasm with an active savings plan that allows you to maximize growth for the future. Time is your friend when investing. Start early and be consistent in the savings process. If you are starting a little later than intended to save for retirement, there is hope for you. With a proper review of your current circumstances, you can make strategic changes in your savings plan that will give you the most probable opportunity for success. As retirement planning specialists, we have witnessed the fear people experience when the vision for the future is not clear.

Seek out a complimentary consultation to see if you qualify for a “second opinion” of your plan for retirement. If you don’t have a plan, lets get one started. Live for today but plan for your future. Might as well, that’s where you will be spending your time in retirement. See you on the walking trail!

Related Podcasts

Difference Between Economy and Markets

Posted on January 22, 2021January 22, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

What is the driver of our economy in the United States? Is it labor? Not entirely because our nation is suffering one of its highest unemployment rates in recent history based on a report by the U.S. Bureau of Labor Statistics dated January 8, 2021, and the world keeps spinning. The current United Stated unemployment rate of 6.7% is not the actual number that concerns me. When you understand the factors that compute the unemployment rate in our country, you must also consider those individuals who have simply dropped out the job market and resigned themselves to remaining unemployable. The true number of unemployed and underemployed individuals in the United States, the quoted unemployment rate would easily double.

Is our economy built on industries? Yes. The five most productive industries in the United States, for 2019, are healthcare, technology, construction, retail and durable goods. Each month the Bureau of Economic Analysis, an official agency of the United States Department of Commerce, reports on the various components of the economy both domestic and internationally. Due to the lack of business operations in the second quarter of 2020, caused by the impact of COVID-19, the gross domestic production in our country fell by more than 31.4% but rebounded sharply when businesses reopened and employees went back to work in the third quarter of 2020.

If the economy has been so volatile, why have the markets been so robust? The answer is not a simple one but allow me to offer a response. Based on a report in Barron’s published on January 2, 2021, the Standard & Poor’s 500 Index (S&P 500) returned 18.4% for the calendar year 2020. This index is representative of the overall economic condition of the United States. Consider the fate of smaller, less capitalized companies primarily based in our country. The return of the Nasdaq Composite for 2020, based on the same Barron’s report, was 45%. Smaller companies have the ability to adapt to economic conditions but may not have the funding necessary to survive economic downturns.

One word of caution when considering any investment is to think long-term. In the past couple of weeks, I have received requests from individuals for the “hottest” stock or “one that is priced low and guaranteed to rise in value in a short time”. The answer I provided each of these individuals is to think long-term, diversify to lower risk and consider your current needs. One of the individuals commented that he “didn’t have much time until he wants to retire” and intimated that he would have to earn excellent returns over the next two years to meet his goals. I am not one to trample on others’ goals but I can assure you that one should not expect the markets to behave in a predictable manner for the short-term to payoff big investments.

The most probable method of reaching your goal for investing is to start early, invest consistently in good and bad markets and stay focused on the long-term. It will reward you to discount the suggestions of those that promise “no risk” and “excellent returns” when the real world of investing contains no such attributes. All investments have risk. One of the safest investments you can make is to place cash in a savings account. However, that investment has significant purchasing power risk. Your money’s ability to buy goods and services in the next ten years will be impaired due to the impact of inflation. Think about it in an economic sense, your money is earning less than 1% and inflation is greater than 2%. Not a good outcome for your future.

To provide yourself peace of mind, it is critical you stress test your portfolio by measuring performance during market cycles that are not at the peak. If I had a crystal ball, I could inform you of market movements and the world would be swimming in butterflies and unicorns. That is not reality. What is real is financial advice given you in a fiduciary manner that addresses your needs, goals and risks. Wouldn’t you sleep better if you knew you could weather a financial storm? Seek out a Certified Financial Planner™ professional for a complimentary consultation and analysis. Sleep well, my friends.

Related Podcasts

New Year, New Opportunities, New Tax Laws

Posted on January 15, 2021January 15, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

If there is one thing in life you can count on, that would be income tax changes! Over the past few months, we have seen changes in our world that create anxiety for many people – elections, natural disasters, COVID-19, etc. One of the best methods of understanding the factors of anxiety is to acknowledge who controls the process – you. I’ve said it many times, but it is most important that you invest in yourself by taking care of your mental health. By feeding on a diet of negative news on the TV, you implant in your brain the thoughts that control your psyche for the day. Rather than listening to or watching these events that cause you to be anxious, consider reading a good book or walking in the park to gain a fresh perspective about life.

We can’t totally ignore life because we do owe a duty as citizens of the greatest country on the planet. Annually you are asked by the federal, state and local governments to report certain assets, income and other activities for purposes of paying your fair share of the burden to live in a civilized society (well, somedays it may not seem civilized, but it is). Former Justice of the Supreme Court, Oliver Wendell Holmes, coined the phrase applying taxation as the price for a civilized society but, as citizens, we are owed a duty by those elected to represent us to utilize our taxes in a meaningful way that brings order to our world.

Before you file your 2020 individual income tax return, you may want to consider these important changes that may help your family. President Trump signed the Consolidated Appropriations Act, 2021on December 27, 2020. The law impacts individuals in a manner that helps provide family support and small businesses with additional payroll assistance.

No doubt you have watched the news lately and determined that your bank account may contain $600 more than you originally noted. For those individuals who filed electronic returns for 2019, and whose bank information was on the return, many received their stimulus payments the first week of January. One misunderstanding about the Recovery Rebate Credits of $600 is that the payment is a credit against 2020 income taxes. Individuals with adjusted gross income in excess of $75,000, or joint filers with adjusted gross income in excess of $150,000, are not eligible to receive the stimulus payment.

Teachers also receive additional relief for personal protective equipment costs that may be deducted as qualified educator expenses. This above-the-line deduction is helpful to reduce adjusted gross income which lowers the overall hurdle of other expenses the family may incur such as medical expenses that are deductible as itemized deductions.

If you are unable to itemize deductions but wish to continue to support your local qualified charitable organization, you may do so. The law changes in 2020 allows an above-the-line deduction for qualified charitable donations in the amount of $300.

As we begin a new year for our lives to enjoy, it is critical that we recall the reasons for the founding of the United States of America. The preamble to our constitution provides us a goal for which we must, in a collective manner, strive toward: 1) establish a system of laws and justice equally applied to all citizens; 2) create and maintain a defense of our nation from enemies; 3) promote the general welfare of our citizens; and 4) secure the blessings of liberty. We are a nation of people with one common interest – freedom. Our nation is the beacon to all other nations on the planet as an example for true independence and the opportunity for every citizen to be successful on their own terms. Happy New Year!