Opinion: 10 things to talk about with your financial advisor

In today’s challenging markets and unprecedented economic circumstances, a mid-year review of your investments and wealth plan takes on greater urgency this year. Stock prices have fallen, interest rates have risen, the pandemic is still lurking and inflation is hovering at four-decade highs. Add in the looming retirement for many boomers, and the labor and housing shortages, and you have the perfect storm of insecurity. Here are 10 strategies to discuss with your financial expert in this volatile market:

1. Make appropriate inflation adjustments

You’ve probably built assumptions of a 2% to 3% inflation rate into your long-term portfolio. As of midsummer, the 12-month change in the cost of living was over 8%. Even if it doesn’t stay that high, you might want your assumptions to reflect an elevated rate of inflation going forward. This is especially important for retirees or shorter-term investments. Planning what-if scenarios to adjust for different rates of inflation can help you understand the implications for your long-term plan.

Inflation also affects home and car values. Make sure your insurance coverage is still sufficient to cover replacement costs.

2. Focus on your “real” returns

Many asset classes have produced solid post-inflation (or “real”) returns in recent years. That all changed last year as inflation soared. Assess whether your portfolio is effectively positioned to continue to deliver competitive, real-world returns over the long term.

3. Review your spending

You may need to adjust your spending to reflect the fact that most things are more expensive than they were a year ago. Putting money aside to invest in your most important goals should continue to be a top priority. If your budget is tight due to higher living costs, you should adjust your spending plan to keep your long-term financial goals on track. You may need to postpone voluntary spending or the large ticket items you plan to do, e.g. B. Your kitchen refreshment or this marquee trip.

4. Review your risk assumptions

This year continues to offer roller coaster rides in the market and provides a reality check for the risk assumptions built into your portfolio strategy. Are you okay with how volatile your portfolio is and are you willing to be patient and wait for a recovery? Or are you gritting your teeth at what appears to be continued market volatility? This is a good time to honestly assess your risk appetite and make adjustments to your portfolio accordingly.

5. Check how rising interest rates can affect your debt

Any variable rate loans are likely to become more expensive. Recent rate hikes are putting more pressure on the overall cost of new homes. This may include an adjustable rate mortgage on your home. Rates also vary for most college loans that are underwritten by private lenders. Make adjustments to your spending plan to account for these potential changes.

6. Consider rebalancing your portfolio

Regardless of market conditions, your asset allocation mix should remain in balance with your target allocation based on your risk appetite and time horizon. This applies to both rising and falling markets. As interest rates rise, you’ll likely find that your bond portfolio has lost value. As investments perform differently depending on market conditions and interest rates, the asset mix shifts away from your target allocation. This may require you to rebalance your overall portfolio, reducing positions that have grown beyond the starting level you set and adding positions that currently represent less than the original allocation percentage.

7. Protect your retirement income strategy

Market volatility is taking its toll on those in or nearing retirement. If you need to withdraw funds from your investments to meet current income needs (or plan to do so in the near future), you need to be aware of the risk of “return following”. This is the risk of suffering a significant portfolio decline too early in retirement while monies are withdrawn from your investments. In this case, your portfolio can lose value quickly and jeopardize your long-term retirement income strategy.

A line of credit available at all times can be a good option to hold you until the market recovers. Also, consider adding reliable sources of income to your portfolio. This could include the addition of a pension with a guaranteed income benefit. It’s a smart move to make sure you’re able to generate the income you need in falling markets.

8. Get your tax planning into high gear

The volatile markets of 2022 may present an opportunity to sell investment positions held in taxable accounts in order to recover tax losses. You can use these losses to offset other realized tax gains. If you have more losses than gains, you can claim up to $3,000 in losses to reduce ordinary income and/or carry those losses forward to offset gains in future tax years. This strategy makes the most sense when you find that certain positions are no longer a good fit for your portfolio. Be sure to abide by wash sale rules if you intend to buy back stock at a later date.

You would like to carry out a half-yearly assessment of your tax situation. Tax brackets are adjusted higher each year by the IRS, but these adjustments do not reflect the current rate of inflation. If your income has increased in line with or faster than inflation, you should review your tax deduction or estimated tax payments to avoid a surprise bill when you file your 2022 tax return next April. Bracket creep can also be a problem if you have state income taxes where you live. Check with your tax advisor.

9. Explore Roth IRA conversion opportunities

Roth IRA conversions (transferring funds from a traditional IRA to a Roth IRA) can be more effective when done at the right time. This is a taxable transaction as ordinary income taxes are payable on the converted amount. If you have returned some gains in your IRA portfolio, the current tax liability of a Roth conversion will be reduced. It can be an advantageous time to transform what you can. Be sure to consult a tax professional to fully understand the tax implications.

10. Be more careful about how you manage excess cash

When interest rates rise, investors can earn more from their cash balances. However, due to today’s high inflation rates, real yields on cash still remain in negative territory. You want to have enough cash or liquidity options to meet emergency needs (over three to six months) and to meet income needs for the next one to three years during retirement. Any extra money should be used as part of your asset allocation mix to help you achieve your long-term investment goals.

A time of transition

With so much happening in the markets and economy in 2022, now is the perfect time to rethink your current financial strategy. Major changes aren’t mandatory, but a mid-year report that discusses these and other pertinent issues in your financial life is as timely today as ever.

Angie O’Leary is Head of Wealth Planning at RBC Wealth Management-US. RBC Wealth Management, a division of RBC Capital Markets, LLC, Registered Investment Adviser and member NYSE/FINRA/SIPC. RBC Wealth Management does not provide tax or legal advice.

https://www.marketwatch.com/story/10-things-to-talk-about-with-your-financial-adviser-11656696016?rss=1&siteid=rss Opinion: 10 things to talk about with your financial advisor

Brian Lowry

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