Financial Lessons of 2021
Key Points – Financial Lessons of 2021
- What’s the Latest We’ve Learned About Inflation?
- Controlling What You Can Control
- Be Tactical with Your Bonds
- What 2021 Taught Us About the Importance of Rebalancing
- Financial Lessons of 2021 That We’ve Learned So Far from Recent Legislation
- 19 minutes to read | 38 minutes to listen
From inflation to bonds and interest rates, there has been a lot to learn from the wealth of financial lessons of 2021. Dean Barber and Bud Kasper review some of those financial lessons of 2021 and give an outlook of what we can keep learning from them moving forward.
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Show Resources:
Find links to the resources Dean mentioned on this episode below.
- Register for the Modern Wealth Management Education Series
- Video & Article: Retiring with $1 Million
- Video & Article: Reviewing Rebalancing Strategies
- Download: Retirement Plan Checklist
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Reviewing the Main Financial Lessons of 2021
Dean Barber: Thanks so much to those who join us on America’s Wealth Management Show. I’m your host, Dean Barber, along with Bud Kasper. Bud, we are wrapping up 2021. That is hard to believe.
Bud Kasper: Yeah. How many years have we done this now? 15, 16?
Dean Barber: Close to 20 years. It’s been a long time.
Bud Kasper: Boy, I lost four years in the translation. It’s very good for me.
Dean Barber: I won’t say anything to your wife about that.
Bud Kasper: I appreciate that.
Dean Barber: So, I thought it would be a good idea for us to talk about some of the financial lessons of 2021 that people should take away when it comes to financial planning, investments, taxes, risk management, and estate planning. There are a lot of things that occurred throughout 2021. Bud and I have told several different stories of things that we’ve seen happen. People have heard us talk about everything from the Delta variant to the Omicron variant to inflation, interest rates, and yields.
What’s the Latest We’ve Learned About Inflation?
Let’s start with inflation. It really started to rear its ugly head early in the year. The supply chain has been stopped up. People couldn’t get chips for cars. That’s where we really started seeing a lot of the inflation hit first was with automobiles.
We saw a huge spike in energy costs, which then leaked into a huge increase in transportation and delivery costs. That leaked into goods and services, especially at the grocery store and it being more expensive to fill up at the tank.
Originally, Fed Chairman Jerome Powell thought inflation was going to be transitory. At first, it looked like that would be the case. They’ve now removed the word transitory from it, but I still think that inflation will start to wane. In other words, the rate of increase in prices will start to drop or slow down by the second quarter of next year. What are your thoughts?
Bud Kasper: I agree. Hopefully production will come back in. Once we get supply back in, there’s no reason for the prices to continue to rise. That’s what I’m hoping for. I believe that will happen, so I agree with you from that perspective.
The Main Takeaway: Develop a Comprehensive, Forward-Looking Financial Plan
Dean Barber: All right. What should we take away from that as far as a lesson learned? My takeaway from it is to develop a comprehensive, forwarding-looking financial plan. Bud and I don’t see a lot of people that come in that have a real financial plan. They have an investment strategy, but they don’t really have a financial plan.
The ones that do still have alarmingly low assumptions on inflation—1.5%, 2% type inflation. They were saying, “Well, this is what it’s been over the last decade, so let’s just put that into the plan.” That can give you a false positive on a plan. Then, you run into a year like this year when inflation is running hot at 6%, 7%, 8%.
Who knows where it’s going to wind up this year? It’s big and people are feeling it in their bank accounts. The money is not going as far as what it once was. If that’s happening while you’re on a fixed income in retirement and haven’t accounted for that probability of higher inflation, you’re going to be in trouble.
Inflation by the Numbers
Bud Kasper: You’re exactly right. As Dean mentioned, when we review every plan, we look at the assumptions on where we think taxes, inflation, and things like that are going to be. November was a lousy month when you look at what’s happened most recently from an inflation perspective. We had a 9.6% wholesale annual rate of increase since November 2020 and consumer prices are up 6.8% for the past year.
That’s just in the short term, but what’s it going to look like in the future? I wish I knew exactly what was going to happen, but that doesn’t mean we can’t prepare for it.
You Don’t Need to Be Flying Blind into Retirement
Last week, we met with a couple that had approximately $2.5 million. We reviewed their plan for about an hour to an hour and a half and were as personal as possible with them. We wanted them to understand in the importance of a comprehensive financial plan. That means that we’re accounting for all the elements that a plan should include so you’re not flying blind while preparing for or going through retirement.
Now, I need to do a little bragging. Once we finished reviewing their plan, I asked them how our presentation was. They said they had never seen anything that thorough. I thanked them because it’s so important to have the validation of whether we’re hitting the mark for what people are trying to do with their retirement.
Proper Retirement Planning Takes a Team Effort
Dean Barber: Absolutely. That’s the key. However, it goes even more in depth than that hour to an hour and a half that you review the plan with them. We spend at least an hour and a half or two hours with each couple to understand what’s going on in their life and what they want their future to look like. Then, we spend multiple hours behind the scenes, putting it all together and coming up with what you see as the final recommendations.
Bud Kasper: Oh, absolutely. And it’s not just one individual; it’s a team. The couple provides their data for us to look at, and then we put the puzzle together.
Dean Barber: That’s our Guided Retirement System™. If you want to get just a little bit of an idea of what Bud is talking about and how some of the financial planning techniques can help, check out our video called, Retiring with $1 Million. You’ll see how just a couple of financial planning techniques can add thousands of dollars to your retirement income. I also encourage you to pick up a copy of our Retirement Plan Checklist. It’ll let you know all the things you need to know when looking at getting to and through retirement.
Our Educational Series Highlights Financial Lessons of 2021 and Beyond
And before I forget, make sure to sign up for our Modern Wealth Management Educational Series. We have a new educational program that we put out every other week. It is virtual, so you can attend whether you are online at work if you’re working late in the day or if you’re sitting at home in the evening. We try to keep them around 30 minutes so it’s digestible.
If you are signed up, you will get an email letting you know the time and the topic. Those who have been signed up have hopefully learned a lot of financial lessons of 2021 that we’ve shared.
Our next educational series event is called Is Bitcoin Digital Gold? and will come out on January 12. It’s fascinating to think about what Bitcoin has done.
I’m looking forward to discussing that then, but let’s get back to some financial lessons of 2021 and touch a little bit more on inflation.
A History of Inflation
Bud Kasper: As we mentioned earlier, our consumer inflation rate of 6.8%. Since World War II, there have been six periods of which we had inflation of 5% or greater. Those periods are 1946 to 1948, 1950 to 1951, 1969 to 1971, 1973 to 1982, and 2008.
Dean Barber: There were years from 1973 to 1982 where inflation was in the teens.
Bud Kasper: I remember in 1972 when someone would get gas and they looked at odd and even numbers in the last digit of your license plate. Otherwise, you didn’t get gas. It was crazy. That’s how bad inflation was getting then and the supply of what was happening with gasoline was because of the inflation. We’re seeing that at the pump now.
Dean Barber: We certainly are. You must adjust your retirement plan based on the inflation rate so that you can see how it impacts your ability to do the things that you want to do.
It blows people’s minds when we start by assuming a 4% inflation rate as a base inflation rate. We don’t inflate everything at the same rate. If you have a mortgage, the mortgage payment isn’t going to inflate. Your taxes and insurance might inflate, but probably not at the core rate of inflation.
Healthcare is going to inflate much higher, so we use somewhere between 6.5% and 7.5% inflation there. Look at what you’re spending and nail down how each one of those are inflating. Then, adjust it up by 0.5% and look at the difference in what it’s going to take to do what you want to do five to 10 years from now. If you adjust it up to 1%, it can take your probability of success and destroy your ability to do what you want to do.
Inflation Won’t Cause You to Go Broke, But It’ll Make You Live Like You’re Broke
I always say that inflation will never cause a person to go broke, but it’ll cause them to live like they’re broke. They think they can’t afford something or can’t get more income. Don’t go into retirement like that. Don’t do it. Our Retirement Plan Checklist touches on inflation a lot, so be sure to download it and check it out. We have a lot of education to prepare you to get to and through retirement.
I encourage you to meet with one of our CERTIFIED FINANCIAL PLANNER™ Professionals before the end of the year so that you can head into 2022 understanding your entire financial position. Are you OK financially? Do you have enough? Are you on track to do what you really want to do?
An Important Financial Lesson of 2021 and Every Year: Control What You Can Control
As we turn the page to 2022, I think another financial lesson of 2021 and for every year is to control what you can control. There are always going to be things—whether it’s politically, geopolitically, pandemic-related pandemic or something like that—that are going to be out of your control.
Focus on the things that you can control and don’t let those things that are out of your control allow you to make emotional decisions that can cause irreversible financial mistakes.
Bud Kasper: You’re right. Going through retirement and trying to anticipate all the various things that can happen is a serious challenge. We all have this history.
The Latest on Interest Rates and Bonds from the Federal Reserve
Speaking of anticipating changes, the Federal Reserve met last week. When they say “taper,” which is a word that for some reason never resonates with me, what they’re talking about is raising rates.
The other part of it is the bond buyback program, which has been in place since the onset of COVID. That probably will be the first thing that they’ll do. They’ll stop buying as many bonds as they’re currently buying. When you’re buying bonds, you’re bidding the price higher and …
Dean Barber: Pushing rates lower.
Bud Kasper: The whole point of doing that is because low rates are stimulus to the economy. That’s what the Federal Reserve wanted. That’s why they engineered it that way. Now we’re at that precipice where inflation is coming back and they need to change direction. That tells us to anticipate some higher rates.
If you’re in a portfolio of bonds, you’re going to have some pressure. We’ve seen that pressure this year across the broad base bond market.
Dean Barber: Let’s talk about that because I think that’s a financial lesson of 2021 that’s been learned. Let’s take a quick review of where interest rates began, what they’ve done this year, and where they are today.
Interest rates began on the 10-year treasury, which is our benchmark. That’s what we call the risk-free return at 1%. Interest rates on the 10-year treasury over the summer got as high as about 1.74%. Right now, we’re sitting at about 1.45%.
Another Financial Lesson of 2021: Be Tactical with Your Bonds
That being said, the Barclays Bond Aggregate has a total return this year of a little less than -2%. I think we’re about -1.63% on the Barclays Bond Aggregate this year. If you didn’t understand this year that different types of bonds are going to perform differently in different interest rate cycles and in different inflationary environments and just sat there with all your bonds in the bond aggregate, you got hurt.
You need to understand that senior secured debt, floating debt, mortgage-backed securities, and a list of others can perform well in a rising interest rate environment. Some of those portfolios are up anywhere from 3% to 7% or 8% this year. That’s where your bonds should be.
The financial lesson for 2021 to learn here is to be tactical with your bonds just like you would be tactical with your equity positions.
Breaking Down Bond Performances in 2021 Compared to 2020
Bud Kasper: When you look at 2020 and how it was impacted by COVID, that was a great time to be in bonds. We got superior returns out of almost every type of bond style. They were great in 2020, but not so great in 2021.
What’s it going to mean for the future? Well, if the Federal Reserve does what it’s going to do, it’s going to be hard to be in bonds and make any reasonable amount of money.
Dean Barber: In the bond ag, that is. I think there is going to be plenty of money to be made in bonds. It’s just not going to be the simple go-buy-the-bond aggregate.
Bud Kasper: Right. Those are going to be specialized type of bonds that will perhaps provide some greater opportunity. But there most certainly is an issue that we need to deal with moving forward.
My mind always goes back to Paul Volcker. Many people will recall that when we had that very difficult inflationary period from 1973 to 1982, the tough part from that was raising rates. All that was going to do was make it harder for people to live the lives they wanted to live.
Dean’s Prediction for the 10-Year Treasury in 2022 Stays Firm
Dean Barber: I could go into whole dissertation about why I don’t think that the central banks worldwide are going to be able to raise rates very quickly. I do think there’ll be some upward pressure, but I still think that we will end 2022 with the 10-year treasury right around 2%. So, I don’t think it’s going to be a rapid, significant increase in rates.
Bud Kasper: Like a hair-on-fire kind of situation. We still have negative rates over in Europe.
Dean Barber: Exactly right. And we have this whole Green Initiative and it’s going to require a lot of injection of dollars from central banks around the globe to make that work. There’s a lot to that. If you’re interested in talking about that and all the other subjects that are on your mind, get a conversation started with one of our CERTIFIED FINANCIAL PLANNER™ Professionals.
What 2021 Taught Us About the Importance of Rebalancing
Dean Barber: We did a show last week that was all about reviewing rebalancing strategies, which kind of coincides with financial lessons from 2021. On the topic of rebalancing, I was with a client a couple of weeks ago who started out the year with about a 60/40 portfolio. Now, that client has about a 75/25 mix.
I suggested for that person, who is in retirement and taking income, to take the excess returns that we made in the equity positions this year and we set them aside in an uber safe account within the same portfolio. That’s going to be where that person spends from for the next two years.
Another Financial Lesson of 2021 and the Test of Time: Don’t Be Greedy
In other words, excess returns this year on equity portfolios, 60/40 portfolios, presents the ability to set side two years’ worth of income on top of the income taken this year. My point is to not get greedy, especially as you’re entering retirement or are already retired. Take the gift that was given in the great returns that we had this year and set that aside.
Bud Kasper: Absolutely. We refer to that as harvesting. It’s part of a bucket strategy that is frequently utilized in retirement. It makes a heck of a lot of sense. We’ve all been blessed with the strong returns this last year. Set those aside and put them in a position where they can feed you income to get you through any rough patches. If there is a prolonged rough patch, we’ll look at adjustments to make in your portfolio to grow the money and keep it safe.
An Outlook on Harvesting from … Kenny Rogers?
Dean Barber: That’s the key. Anytime you have equity positions in your portfolio, you’re going to have volatility in those. Just think about some of the lyrics to Kenny Rogers’ song, The Gambler. You got to know when to hold them, know when to fold them, and know when to walk away.
Don’t do a simple buy-and-hold strategy. You can do it with a portion of your portfolio and do an asset allocation piece, but you need to have a part of your portfolio that you can be more dynamic with and more tactical with. Understand that equity valuations have gotten a little frothy, but that doesn’t mean that we’re due for a bear market.
What it does mean though is that future gains probably won’t be like they have been over the last couple of years. Nevertheless, economic growth and corporate profits look solid for 2022. That tells us to expect lower returns in equities next year and more volatility, but don’t anticipate a bear market.
Finding the Right Balance of Stocks and Bonds in Your Portfolio
Bud Kasper: I agree. It goes back to having a mix in your portfolio between bonds and stocks. Bonds can be your friends at times. They weren’t your friend this year, but they didn’t lose money. We always need to put that in context.
Dean was referencing something earlier that I want to dive deeper into regarding bonds. Rather than being in what we’d call traditional government bonds, there are a lot of different bonds like mortgage-backed bonds that are securitized by underlying real estate. You’ve heard of junk bonds, which are high yield bonds. You have bank loans, which is a form of a bond as well.
There are plenty of alternatives. There are also some more esoteric bonds that are allowing us to get some decent returns. We’re not trying to hit home runs. We’re just trying to hit solid doubles and keep a steady return out of all the asset classes that we have represented in the portfolios.
Keeping Tabs on Your 401(k)
Dean Barber: No question about it. Keep an eye on what you’ve got, especially inside of your 401(k). Don’t by any stretch of your imagination believe that there’s anybody in that company or the 401(k) sponsor that’s paying any attention to what you need that money to do. This is your responsibility.
One of the things that’s happened over the last couple of years is that some companies have developed some amazing technology that allow us to manage 401(k)s for people. Wherever they’re working, we can link up to that 401(k) plan and make the adjustments to the portfolio as they’re needed. That’s a critical thing because that’s where most people’s money winds up.
Bud Kasper: For sure. There are a lot of new people that I’ve had the opportunity to meet that say they’re waiting for the hammer to fall.
Is the Fear in the Market Warranted?
Dean Barber: Everybody is talking about that right now. There is a lot of fear in the market right now. That fear is showing itself in the way of volatility. The question that we must ask right now is whether this fear is warranted. Should we be reducing equity exposure? If you have a 60/40 portfolio and you’re now 75/25, you should be reducing your equity exposure.
How much equity exposure you should have depends on your overall financial plan. Rerun your financial plan with the current equity exposure and then rerun it with 50% or 60% equities. Does it still work? How much of the risk can you take off the table with the frothy markets being how they are today? You can get down to an exact science with this. It doesn’t have to be a guess.
Bud Kasper: If you look at the last 10 years, we had one bear market in a 10-year bull market. That bear market was because of COVID. If you look at a portfolio during that timeframe, especially looking at the S&P 500 as your proxy for growth, it looks great.
Let’s add five more years to the equation. You start to see a very different story because now we have a bear market in that 15-year timeframe. It’s good for you to know this because we do have cycles. Oftentimes, the bull markets can extend way beyond 10 years.
Positive Disruptions
It doesn’t mean that we’re not going to have a disruption. Disruptions are often healthy. They make you pause, look back, and rethink your portfolio from time to time to see if there are little nuances that perhaps need to be brought forth at that time.
Dean Barber: The whole thing boils down to having overall financial clarity. The only way you get that financial clarity is by having a financial plan completed. We use a system that’s proprietary to us with our Guided Retirement System™. I’d love to introduce it to you.
Financial Lessons of 2021 That We’ve Learned So Far from Recent Legislation
As we finish talking about financial lessons learned from 2021, we’ve discussed inflation, interest rates, bonds, stocks, and rebalancing. There was also a very large piece of legislation, the Build Back Better plan, that has not yet made it through Congress. It originally started out at $3 trillion of social spending.
I think one of the financial lessons of 2021 that we can get from Congress is that there is no such thing as status quo. There is a constantly evolving and changing narrative in Congress. What that narrative changes for you personally is your tax situation. We’ve seen so much tax legislation over the last five years.
How the Tax Code Has Become So Complex
When Bud and I were young in the industry, the Tax Reform Act of 1986 was the first major legislative change on the tax code for like 25 or 30 years. The Tax Reform Act of 1986 stuck around until Bill Clinton came in and changed some things again. After that, it was like we were getting changes every other year involving the tax code.
It makes the idea and the strategy of forward-looking tax planning far more difficult than what it used to be. At the same time, a forward-looking tax plan becomes far more critical to the success of your overall financial plan.
Bud Kasper: One word I like to use when explaining to clients about what’s happening in the economy is disruption. There’s never a time when we don’t have some form of disruption going on in our economy or from our political format.
The Fallout from the Keystone Pipeline Closing
When we go back to inflation, the three most recent inflationary episodes were largely a function of oil shocks. Remember what Biden did when he became president? He knocked out the Keystone Pipeline.
Dean Barber: People can’t see me right now, but I’m shaking my head. Negative.
Bud Kasper: We were an independent, self-reliant exporter of oil prior to that. I know we have the Green Initiative and I don’t think there’s anybody that to a certain extent wants to see improvement in that area. But not at the financial cost of people by having self-sufficient oil production that we’ve built for ourselves taken away
If you want to see a situation which illustrates the sickness of that, go to Europe. They don’t have any energy and need to do everything. That’s where Russia came in and got a bit of a foothold because they have that gas deal that they did with them.
Pain at the Pump
These are issues that drive me crazy from that perspective because it wasn’t necessary. I understand that the Biden administration wants the Green Initiative, but not at the cost of the people you represent. You can see that by looking at the pump. We all know what’s happening with the price of gasoline.
Dean Barber: That goes back to inflation. If you think about the rhetoric that we hear that inflation is all caused by COVID, that’s not true. A large part of the inflation is the increased energy cost. The increased energy cost has nothing to do with COVID.
If anything, the amount of energy that was being used during 2020 was far less than what was being used in 2019 and even in the early part of 2021. But then when you stop the Keystone Pipeline, it disrupts our energy independence and oil goes from $30 a barrel to over $80 a barrel. That’s hugely inflationary across the board and had absolutely nothing to do with COVID.
Bud Kasper: And who pays the price for that?
Dean Barber: Me, you, and so many other Americans.
And Negative Disruptions
Bud Kasper: Exactly. This is a negative disruption. It wasn’t necessary. It was a political mandate if you want to think of it that way, but now we’re paying the price and it’s going to take a while to get it back out of it again. I’m not sure how all that is going to work out.
In conjunction with that, there was the hiring of thousands of new IRS representatives. Why would that be? It’s obvious that they’re going to go after as many people as they possibly can from a tax position. You could say, “I make less than $400,000, so I won’t be a target.” You just wait and see.
Dean Barber: They can get an overreaching scenario there, but that comes back to the whole tax code. If you want to take advantage of the tax code in its current form and in new forms as it comes up, it’s not about giving your information to your tax preparer, plugging it into your online tax program, or if you’re doing it yourself. That’s tax preparation. We call that tax compliance and reporting history.
Tax Preparation and Tax Planning Aren’t One in the Same
Tax planning is having a thorough understanding of the tax code. It’s about having a thorough understanding of different savings vehicles, the tax rules around those different savings vehicles, and the timing of which you take the distributions from those different vehicles in what amount and percentage in retirement that ultimately dictates your long-term tax burden.
If you have a good, forward-looking tax strategy, you can significantly reduce that long-term tax burden regardless of what the rates on the tax code are.
Those rates are just the rates. There are all the rules that are within the tax code that you can take advantage of, but only with a good, forward-looking financial plan.
You might say to yourself, “Why hasn’t my CPA done that?” Most CPAs aren’t equipped to do it. It’s not that they’re not smart enough to do it. For a CPA to give you a good, forward-looking tax plan, they first need to have a well-constructed financial plan. They need to understand everything that you have now, want in the future, and all the resources you have to get there. Then, they can construct that forward-looking plan.
That’s why we have CPAs on staff. Once our CERTIFIED FINANCIAL PLANNER™ Professionals create the financial plan, the CPAs review it from a tax perspective and determine how to minimize taxes. It’s not just minimizing taxes for 2021 or 2022; it’s for a lifetime.
Bud Kasper: Very well said. When I talk to some of the CPAs that represent my clients, I think the reality is that they are so busy doing returns that they don’t have time to do the planning.
The Key to Minimizing Your Taxes Over Time
You have CFP® professionals to do the plan work and then the integration of the tax component follows. That tax component can be magnificent in terms of what the results are over time. You must remember that if you get a tax advantage through planning, that advantage is compounded year after year in savings. We can illustrate that to you. Many people will fall out of their chairs when they say, “If you plan this way over your lifetime, this is how much money you save in taxes.”
Dean Barber: The numbers are very significant over time. It can be the difference between success or failure in a person’s retirement. Our Retiring with $1 Million video touches on that from some tax perspectives.
Bud and I hope you have learned some of these financial lessons from 2021 that we’ve talked about every week on America’s Wealth Management Show. Those lessons help explain what our Guided Retirement System™ is designed to do, which is to provide you with clarity, confidence, and control in your financial situation. We appreciate everyone who joins us America’s Wealth Management Show. I’m Dean Barber, along with Bud Kasper. Stay healthy, stay safe. We’ll be back with you next week same time, same place.
If you would like to discuss some of these financial lessons of 2021 more in depth, you can schedule a complimentary consultation with one of our CERTIFIED FINANCIAL PLANNER™ Professionals by reviewing our calendar. We’re available to meet with you in person, by phone, or during a virtual meeting.
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