In this special Axiom, we revisit some of your favorite insights from 2021. Happy New Year!
In 2021, nearly all of the most-clicked Week In Reviews featured this hot topic: inflation. Although labeled ‘transitory’ for months, inflation is still hot. What’s the future of inflation? Annex Wealth Management’s Derek Felske provides some insight.
TOP WEEK IN REVIEW TOPIC: Inflation
Inflation is the most significant economic concern going into 2022. Many are worried about a period of escalating prices, and don’t trust what they’re hearing from mainstream economists and central bank officials. At the start of 2021, the U.S. was forecast to end the year with 2% inflation, but it is close to 7% instead. The Fed is now in a difficult position. Fed Chair Jay Powell has backtracked on his “transitory” thesis, and accelerated the reduction in asset purchases. It is important to note that tapering is not tightening. We do expect the Fed to begin hiking the Fed Funds rate as soon as March but do not subscribe to the view that the Fed will raise rates aggressively.
The biggest risk is that inflation expectations may continue to rise and get imbedded in consumer psychology. The sharp increase in inflation has been a symptom of easy money policies, but more importantly, due to supply bottlenecks and increased consumer spending. If those factors were to ease, and inflation moderates. much of those fears could dissipate. The Fed could also pull off a delicate balancing act, where both growth and inflation decelerate, but not so much that the economic expansion is put in jeopardy.
We do expect volatility in the bond and equity market to be higher in 2022 than 2021. In fact, December was the most volatile month all year. The Fed’s presence in the fixed income market has dampened volatility. With their support waning, volatility in bonds will impact equity volatility, providing opportunities to alter portfolios on an opportunistic basis.
If history is any guide, the Fed’s “taper tantrum” of 2013 was followed by strong gains for equities, as traders bet the economy was healthy enough to stand on its own. Following Ben Bernanke’s comments in May 2013, stocks fell 5.8% in the next month, but for the rest of that year, the market was up 17.5%. Raising rates in 2022 could also be a “net positive” event by signaling that the central bank feels comfortable about the U.S. recovery.
The Fed will end its QE in March and currently expect to hike rates three times by the end of 2022. Policymakers forecast inflation to run at 2.6% next year, an increase from their 2.2% projection made in September, but to fall to 2.3% in 2023 and 2.1% in 2024. Its median projection was for rates to rise to 0.9% by the end of 2022, 1.6% in 2023 and 2.1% in 2024. Markets are betting that terminal rates, or where base rates will peak, will be lower than in previous cycles.
As always our investment committee will monitor economic, market and geopolitical conditions and make proactive changes where appropriate. We are honored by the trust you have placed in us. We send best wishes to all our readers for a great wrap-up to the holiday season and happiness and good health in the New Year. Happy New Year!
– Derek V.W. Felske, CFA® | Chief Investment Officer
BACK TO TOP ↑
In a year where being outside in nature held more appeal than ever, our piece on National Parks was the most popular topic! In case you missed it, see a bucket-list- worthy collection of sites to visit in this nation of ours, whether now or in the future. One of the many perks of planning a national park visit: they’ll be there for a long, long time! Be sure to send us your pictures!
TOP CLIENT EXCLUSIVE: National Parks
They come in all shapes and sizes, are over 100 years old, and our nation is full of them.
What are they?
Our national parks, of course!
As early as the 1830s, Americans were concerned about the blossoming economic, industrial, and population expansion out into the vast and unsettled territories of the American West. Very few people had ever seen that part of the country, but those that did were shocked by the beauty and uniqueness they saw and quickly understood that unless something was done, and on a grand scale, modernization would eventually take over.
In 1861, head of the government’s geological survey team Ferdinand Hayden was tasked to uncover the facts about the nature and land to the west. On returning to the capitol, it took Hayden little effort to convince Congress of the need to protect the lands from future destruction.[1] He informed them that time would soon run out.
In response, the nation’s first land specifically dedicated to the “benefit and enjoyment of the people” was placed under the direct control and protection of the Secretary of the Interior by Congress in 1872.[2] That land was Yellowstone, the first National Park in the world. The idea was simple, and its impact was profound: the idea that nature should be preserved from commercial or private interest to be enjoyed by everyone. The idea took hold quickly in the U.S. and around the world.
After the creation of Yellowstone National Park, other lands across the country, though mostly in the Western part of the country, were added to the Federal list of protected sites. Around this same time, Australians won the battle for their Tasmanian reserves and created the world’s second national park, known as the Royal National Park.[3] After that, Canada followed with Banff National Park, New Zealand with Tongariro Nation Park, and eventually after the turn of the 19th century, Europe and Africa followed suit.
Back in America, the management of these lands and historical sites was not centralized under one Federal Office until President Woodrow Wilson signed the “Organic Act” in 1916, creating the National Parks Service that focus on the conservation and maintenance of the lands.
Today, the U.S. has more than 400 areas under the supervision of the Parks Service, covering more than 84 million acres across all 50 states and U.S. territories. From the smallest national park in Arkansas coming in at about 5,500 acres to the largest park in Alaska covering 13.2 million acres, there are over 18,000 miles of trails in the national parks to explore![4]
These lands have been set aside for their many amazing and unique features, and they are just begging to be seen! Consider adding some of these to your list:
- Arches National Park, Utah: home to the largest concentration of stone arches in the world
- Mammoth Cave National Park, Kentucky: you can find the longest cave system in the world, having more than 3,454 mapped miles to track through
- Sequoia National Park, California: drive through the massive trunk of a sequoia tree that fell over the road – rather than undertake moving it, engineers decided to hollow out part of the massive tree instead.
- Yosemite National Park, California: home to Ribbon Falls, a waterfall nine times taller than Niagara Falls.
- Crater Lake National Park, Oregon: the deepest lake in the U.S. is located here, reaching 1,932 feet.
- Death Valley National Park, California: one of the hottest temperatures on Earth was recorded here: a sweltering 134 degrees Fahrenheit.
- Denali National Park, Alaska: the widest range of elevations is found here, from 200 feet in Yentna River to 20,302 at the summit of Mt. McKinley.[5]
If you are looking to make the most out of your travel, California and Alaksa contain the most National Parks with eight each. This isn’t surprising, given how large these states are. Also, if you are looking to cross off National Parks on your list, a drive through Utah will allow you to visit five parks in one trip since all the parks in this state are within an easy driving distance of each other and would make for lots of exploring in a short amount of time.
On average, Great Smoky Mountains National Park receives the most visitors every year, with the number reaching 12 million. That’s almost twice as many as the next largest, at Grand Canyon National Park coming in at about 6.2 million![6]
With parks, historic sites, and monuments all over the country, there are bound to be a few near by wherever you are in the country, or wherever you plan to visit. Getting out in nature is an excellent way to relax, breathe deeply the fresh, protected air, and enjoy some truly unique natural phenomenon that our predecessors fought to save. Without them, Yosemite Valley might be full of high rises buildings and bustling highways.
Instead, you can join the many millions of hikers, campers, nature lovers, and curious viewers to see what made it all worth it.
[1] https://www.nps.gov/articles/npshistory-origins.htm
[2] https://www.nps.gov/articles/quick-nps-history.htm
[3] https://www.bbc.com/travel/article/20120426-travelwise-birth-and-spread-of-the-worlds-national-parks
[4] https://www.outdoorproject.com/articles/59-fun-facts-about-our-national-parks
[5] https://www.outdoorproject.com/articles/59-fun-facts-about-our-national-parks
[6] https://fullsuitcase.com/best-national-parks-usa/
BACK TO TOP ↑
When it came to the Axiom’s weekly poll, the most popular question we asked was about our changed perceptions about saving and being wealthy post-pandemic. “Which number best describes what you think it takes to be wealthy?” had the biggest response of 2021, and many of you came back to find out the results of the poll.
TOP POLL: Week 3: Which number best describes what you think it takes to be wealthy?
There’s no question current inflation had an impact on responses – as most respondents believe you must hit the $3,000,000+ mark to truly be considered wealthy. The second-place response was $2,000,000.
According to an annual wealth survey by Charles Schwab, Americans surveyed pre-pandemic claimed it took $2.6 million to be wealthy. Post-pandemic, that number dropped 23%.*
*https://fortune.com/2020/07/27/how-much-money-does-it-take-to-be-wealthy-definition-net-worth-finances-comfortable-coronavirus-pandemic-covid-19/
BACK TO TOP ↑
This year, our clients were most interested in learning about the different ways to plan for the end of the year. Our team works with clients to create plans that can maximize the benefits of year-end tax strategies. While the end of the year is upon us, these are always great things to keep on your radar as we work with you to plan for 2022. Check out the list as a refresher and know we are always here to help plan, not just at the end of the calendar year, but all year round.
TOP DID YOU KNOW: Planning for the end of the year is important.
We’re here to remind you of a few things you may want to consider, if you haven’t already, as the year begins to wind down.
Did you know there are financial moves you can make that depend on the calendar year for completion? Below, Financial Planning Team Manager Eric Strom explains a few strategies that have end of year deadlines, and how they work.
Though these strategies may not be right for everyone, they may be right for you!
Charitable giving.
There are different charitable giving strategies that can provide tax advantages, but what they all have in common is that the gift must happen during the calendar year. Two popular strategies are Qualified Charitable Distributions (QCDs) and Donor Advised Funds (DAFs). QCDs are distributions from individual retirement accounts (IRAs) that go directly from the IRA custodian to the charity. The account owner must be age 70½ or older to be eligible for QCDs and the maximum annual amount per account holder is $100,000. This strategy excludes the amount donated from taxable income and can be used to satisfy some or all of the required minimum distribution for those age 72 and older. DAFs allow donors to make a large charitable donation in one tax year and receive an immediate tax deduction. However, the donor is allowed to recommend grants to various qualified charities over time, even years down the road.
401(k) contributions.
This is the season to make last minute changes when there are just a handful of paychecks left this year. If you’re trying to stay in a certain tax bracket or qualify for a particular tax credit (such as the child tax credit), you may want to manipulate your 401(k) contributions to achieve that tax planning goal. Increasing your pre-tax 401(k) contributions for these last few paychecks could help lower your income if you are right at the cusp of the next tax bracket or just above the income cutoff to receive a certain tax credit. Those who are 50 or older by the end of the year can also contribute an additional catch-up amount of $6,500 in 2021.
Gain or Loss harvesting.
Intentionally creating gains or losses in taxable investment accounts is referred to as gains or loss harvesting. Realizing losses can provide a tax benefit by offsetting the tax consequence of gains taken. In addition, losses can potentially offset a small amount of ordinary income as well. On the other hand, harvesting gains could help you take advantage of the favorable capital gains rate, which is lower than ordinary income tax rates. The capital gains tax rate depends on your income but could be as low as 0% for investors with low income. Selling assets that have either appreciated in value or lost value must happen by the end of the year to impact your 2021 tax situation.
Flexible Spending Accounts & Health Savings Accounts.
Flexible spending accounts (FSAs) are usually described as “use it or lose it.” This means that you generally must spend the assets down by year-end or money you have in the account could be lost. Squeezing in a last-minute qualified medical expense will ensure your FSA savings will not be forfeited. Conversely, health savings accounts (HSAs) are not required to be used by the end of the year and are a great way to save pre-tax income for medical expenses in the future. HSAs are often referred to as triple tax-advantaged with pre-tax contributions that grow tax-free, and distributions are tax-free when taken for qualified medical expenses. Maximizing HSA contributions before the end of the year will reduce taxable income. Those who are 55 or older by the end of the year can also contribute an additional catch-up amount of $1,000 in 2021.
Roth conversions.
Converting tax-deferred dollars to Roth is a great strategy to use during low-income years. This allows you to lock in lower tax rates now instead of waiting to pay taxes upon withdrawal in the future when you may be in a higher tax bracket. If you decide to use this strategy, the conversion itself must happen before the calendar year end. Roth conversions can be used to accelerate income into a lower tax bracket now and to help create tax-free Roth assets for the future.
Contact your Wealth Manager if you have any questions, and they will be happy to discuss if these strategies could apply to you.
BACK TO TOP ↑
2021’s most popular Ask Annex question was submitted by Susan – who had questions about gifting money to her son.
TOP ASK ANNEX: “I would like to gift my son $60,000 to buy a house. I have over $100,000 in my checking and saving accounts. What is the best way to do this?”
We asked Annex Wealth Management’s Eric Strom, CFP®:
Thanks for contacting us. Congratulations on being able to consider helping your son out. You’re wise to ask about the best way to gift funds to your son. Part of the answer involves understanding the gift tax rules, so let’s start there.
The tax code allows each individual tax payer to gift up to $15,000 per recipient per year without filing a gift tax return. Therefore, if you’re married, you may give $15,000 to your son in 2021 and your spouse can also gift $15,000 for a total of $30,000. This is called the annual gift tax exclusion.
Now, fear not. If your gift exceeds $30,000 then, yes, a gift tax return should be filed. However, this doesn’t mean gift tax is due. In addition to the annual exclusion, the tax code provides a lifetime gift and estate tax exemption of $11.7 million per person. This means a married couple can gift up to $23.4 million during their lifetime in addition to the annual exclusion. Filing a gift tax return simply reports the amount given over the annual exclusion so the IRS can apply the gift to your lifetime exclusion. What this means in simple terms is yes, you can give $60,000 to your son and likely not owe any gift tax. You will just need to report the gift through the gift tax return. To avoid the additional paperwork, perhaps you can gift $30,000 this year and another $30,000 in January?
We hope this helps.
Have a question for Annex? Submit it here!
BACK TO TOP ↑
Your favorite three radio clips in 2020 included Know The Difference Minutes: “Better Economic Data”, and “The Top 3 Most Dependable Car Brands”, as well as an Annex radio segment: “Ramifications Of Inheriting Money” – where Annex Wealth Management’s Estate Planning Attorney, Jill Martin, JD covered key aspects of inheriting money – the tax ramifications, the need to be patient, and why you may need to adjust your expectations.
KNOW THE DIFFERENCE MINUTE:
Better Economic Data
KNOW THE DIFFERENCE MINUTE:
The Top 3 Most Dependable Car Brands
ANNEX RADIO
BACK TO TOP ↑
Oops! We could not locate your form.
