Retirement

Preparing Financially for 2022

By Dean Barber

November 30, 2021

Key Points – Preparing Financially for 2022

  • Preparing for Potential Tax Law Changes
  • A Slowing Growth Period on the Horizon?
  • It’s a Good Time to Consider Rebalancing
  • Predicting Equity Returns for 2022
  • An Outlook on Central Banks and the Green Initiative
  • Doing Nothing Isn’t the Answer for Preparing Financially for 2022
  • 13 minutes to read | 23 minutes to listen

As 2021 comes to a close, Dean Barber and Bud Kasper highlight a few things to consider when preparing financially for 2022.

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What to Consider When Preparing Financially for 2022

Dean Barber: We’re toward the end of 2021, headed into 2022. All eyes, ears, and attention are in the throws of the holiday season. Bud Kasper and I are going to talk preparing financially for 2022.

I don’t want to take away from what you all are doing and how you’re planning on enjoying and spending the holiday seasons. However, I think it’s critical right now to plan for some changes that are coming in 2022.

2021 Has Featured Some Challenges, But It’s Been a Solid Year

It’s been an incredible year in a lot of different ways. Unemployment is down. We do still have far more job openings than we have people that are willing to fill those jobs. We’ve got supply chain issues which will probably leak into next year. We’ve got inflationary pressures, but the markets have been good.

People that have participated are happy, and we’re seeing some innovation. As we look forward to 2022, Bud, what’s the number one thing on your mind that you think people need to be thinking about when preparing financially for 2022?

Preparing for Potential Tax Law Changes

Bud Kasper: I think my biggest worry is what taxes are going to look like and what changes are going to be proposed. Those changes can instantly impact how returns are going to be and how people live. How much will I have to give to Uncle Sam this year?

While there was a COVID bear market in there, what a 10-year timeframe we’ve had with this overall bull market. The old saying is, “Stock markets don’t die of old age. They die from policy.” The policy, of course, is the Federal Reserve.

The question is going to be whether the Federal Reserve will start to taper, which is simply means that they might let interest rates rise. If I had to make a prediction, nothing’s going to happen this year. I think we could see one increase between now and June 30, but I don’t foresee a series of increases from the Federal Reserve.

A Slowing Growth Period on the Horizon?

Dean Barber: Based on the research I’ve done, I think we’ll go into a slowing growth period, where we’ll continue to have expansion and growth through 2022 and likely 2023. I think we’re going to start seeing that growth slow down substantially. That will keep the Fed off the idea that it needs to start raising rates more rapidly.

I’m with you. I think that the biggest threat for the stock market and for individuals is increased taxes. The notion that a Build Back Better plan that is in the trillions can have a net cost of zero is really insane. It’s going to cost every American something in some way. You don’t just pull $2 trillion out of thin air and say it was free.

Bud Kasper: Or that it’s going to pay for itself?

Dean Barber: It pays for itself by our tax dollars. That fear is real. Bud and I talked about this here a couple of weeks ago on America’s Wealth Management Show where we said tax policy changes have become very prevalent. In the Trump administration, we had the Tax Cuts and Jobs Act. We then had the SECURE Act. There were also changes in the Obama and Bush administrations. We’re seeing tax code changes come at us now at a much greater speed.

Creating a Fluid Tax Plan

It’s very frustrating for our team of CPAs because it makes it more difficult to create that longer-term tax plan and preparing our clients financially for 2022. It makes it more critical that we start each year by creating that distribution strategy for the next year and following years and making sure it’s fluid rather than just looking at tax preparation starting at January timeframe.

Top of mind for preparing financially for 2022 for me is making sure that you know where your money’s going to come from if you’re ready to retired, and the right sources to allow you to pay as little tax as possible. If you’re not retired yet, where should you be saving money too? That should be top of mind. Did you get a raise in 2021? Take that raise and increase your 401(k) contributions.

Traditional 401(k) or Roth 401(k)?

The question then becomes if that raise goes to a Roth 401(k) or a traditional 401(k)? That’s a complex calculation to determine which one is accurate.

It’s not something that you can just say, everybody should do the Roth because some people should do traditional. Some people should do Roth, and others should have a combination of the two.

Bud Kasper: Correct. You should always do the Roth because anytime I can eliminate Uncle Sam out of my life, I feel happier.

Dean Barber: I agree that we should get money into Roth. The question becomes what the best strategy is for getting it into the Roth.

Bud Kasper: That’s where the planning comes in. Look at some of the proposals from the Biden administration. We reviewed them at the Ed Slott conference. The taxation is going after IRA money.

They’re targeting the Roths specifically. Ed gave us like six points to understand so that when the event possibly comes up or to fruition, we can react to them as CERTIFIED FINANCIAL PLANNER™ professionals.

Dean Barber: Do you think it’s possible that they eliminate the ability to contribute to a Roth?

Bud Kasper: That could happen in the present administration.

Dean Barber: One thing that is interesting that could fly in the face of that logic is something in this Build Back Better plan which would allow employers to make a matching contribution into the Roth portion of the 401(k). It’s very shortsighted on the government’s part, but what that suddenly does is if the employer is making a Roth contribution for the employee, that’s going to be taxable income to the employee that year. Therefore, it increases the amount of taxes that they’ll pay.

It’s a Good Time to Consider Rebalancing

Bud Kasper: That’s exactly right. Let’s look back at the stock market. That’s where everybody wants our focus to be to give people insight that’s coming on with that. Fundamentals tell us that it always comes down to earnings. Corporations are still doing a very good job of that. I don’t think that that’s necessarily going to be disrupted as we move into this new year. That should bode well for stockholders at that time.

Dean Barber: But most people don’t have 100% of their money in stocks.

Bud Kasper: Absolutely not.

Dean Barber: There are some, which is okay if you’re willing to accept the volatility and the risk there. But the bottom line is that if you began 2021 with a portfolio that was 60% equities and 40% bonds, you’re probably closer to a 70/30, maybe even a 75/25 allocation today.

One thing to do when preparing financially for 2022 is a reallocation or a rebalance. Take some of those winnings, set them back into the fixed income so that you get that right asset allocation. The right asset allocation is defined within your financial plan to know what the least amount of risk is that you need to be taking to accomplish all your objectives.

Go back to that plan to see where your allocation might be out of whack, whether it’s in your 401(k), IRA, trust, or your joint account. You need to do that rebalancing, especially when we have years as big as we’ve had in 2021.

Preparing for a Potential Capital Gains Tax Increase

It doesn’t necessarily mean that you need to wait. If you look at what the proposals are for capital gains in 2022, going up to a 25% tax on capital gains versus 20% this year, it may make sense to do that rebalance prior to year’s end.

Bud Kasper: Then we had the insanity with them saying they were going to have capital gain taxes on gains without there being a sale of a stock in the example we use.

Dean Barber: That’s off the table now.

Bud Kasper: I know, but it was proposed. And you know how crazy that is.

Dean Barber: That means that’s the way they’re thinking.

Bud Kasper: Exactly right, so be prepared, understand what parameters we need to work under to get the best net result for our clients.

Predicting Equity Returns for 2022

Dean Barber: So, Bud, what’s your prediction for equity returns in general for 2022?

Bud Kasper: I’m thinking a return of around for the S&P 500.

Dean Barber: So high single, low double digits?

Bud Kasper: Let’s put it this way, there is still a ton of money on the sidelines that is looking for a home because of COVID. Here’s the other side of the story. Because of COVID, people end up not spending money that they typically would. Therefore, they’ve socked it away. We’ve seen this.

It’s amazing when you look at the economies through the lens of different things—purchases of household goods, cars, etc. What do we have? We have used cars that are selling at high multiples. It’s been a strange situation associated with that to say the least.

In addition to that, we have opportunity that I think is coming because of the lag that we’ve had with the COVID crisis. We’re starting to work our way back out of that. When this supply chain opens and everything, and it will at some point, I think that bodes well for the market.

Dean Barber: I agree. I would put that number in the broad markets somewhere in the high single to low double-digit range. I’m not going to come out and specifically say 10% like you, but you’re bolder than I am.

Could We See a Rate Increase from the Federal Reserve in 2022?

Let’s go back to discussing the Federal Reserve. You made a comment earlier that you thought the Federal Reserve might do one rate increase before June 2022. Do you think that’ll be a 25 or a 50-basis point increase?

Bud Kasper: I think it’ll be 25. If it’s 50, that always causes an alarm. Therefore, higher interest rates would occur at that time. But remember what I said about bull markets not dying of old age. They die of policy changes.

Dean Barber: That policy change could be what the Federal Reserve is doing or could be tax code changes.

Bud Kasper: That’s a big factor. I totally agree.

Dean Barber: Especially increasing taxes on corporations because what does that do to what you said was the most important thing? It comes down to earnings, right?

Bud Kasper: Yeah. Then when you have that, it’s passed through. If there’s going to be higher taxes for corporations, they’re going to pass it through.

They want to keep their profit margins the same. They’re not going to say, “This year we’re going to work on 10% less than we had last year.”

An Outlook on Central Banks and the Green Initiative

Dean Barber: Exactly right. Let’s talk a little bit about the Central Bank. I want to expound upon the Central Bank and not limit it to just the United States. Let’s discuss Central Banks around the world. We’ve got this green initiative with the elimination of fossil fuels. The estimated cost of this green energy initiative is $35 trillion.

Bud Kasper: Yes. Unbelievable.

Dean Barber: That came from Janet Yellen just a few weeks ago.

Bud Kasper: She’s the director of treasury.

Dean Barber: That $35 trillion won’t be absorbed by independent businesses on their own or just by the United States. It’s going to take a focused effort from Central Banks around the world to fuel this change into the green initiative.

That means Central Banks are going to maintain a very accommodative monetary policy for the next decade to fuel what they need to get done for this green initiative to become a reality. Even if Central Banks are only supporting 50% of that $35 trillion, some of the money is going to come from Central Banks.

Bud Kasper: It does. That was very well said. When we look at what’s happening with the Federal Reserve and get a better understanding as to the management of that through Jerome Powell, remember that there is a chance that he won’t be in the chair seat. I think it’s before the end of the year that they make that decision. Janet Yellen has endorsed Powell to stay on, even though he was appointed by Trump.

Dean Barber: He’s done a fine job.

Bud Kasper: Agreed. He’s a very measured man and isn’t politically motivated. He’s simply economically motivated. What’s the best that we can do from our responsibility to the country from that perspective?

Filling the Abundance of Job Openings

Dean Barber: What’s the one thing that needs to happen in 2022 to ensure continued growth in the economy at a rate where it would be great? We’ve got to get workers that left the workforce due to COVID back in the workforce.

We have more job openings than people that are applying for jobs. We need to pay attention to where those job openings are and what kind of education or skillset it’s going to take to participate in those.

For example, let’s say that a lot of people that would be qualified for a job in California live in Tennessee. Are they willing to relocate? Are we going to go to a scenario where we can have a much more robust remote workforce that allows some of these people that have the skillsets and different geographical locations to get those jobs, even though they’re not physically present in the state which those jobs are needed?

Bud Kasper: That helps. There’s an acceptability of a certain amount of that. However, you might recall in a recent episode of America’s Wealth Management Show that I got angry about this topic. People are in a position where they’re really looking for guidance. They’re looking for some sense as to what reality really is in terms of, “How do I invest with all this going on?”

Let’s look at oil. I agree with the green initiative to an extent, but I don’t think we have to get there overnight. Remember when we were doing fracking because the price of oil was at a certain price, and we were energy independent? Now Biden is saying we need more oil from Russia and Saudi Arabia.

Dean Barber: That’s insane.

Bud Kasper: It’s counterproductive to America because there are jobs related to that.

It All Comes Back to the Financial Plan

Dean Barber: You’re exactly right. All the things we’re talking about that people need to do when prepare financially for 2022 can easily be addressed in their financial plan. Every year, there are changes in policy, interest rates, the economy, the stock market, and those types of things. It’s critical to update your financial plan with your advisor at least once a year because of those changes.

We like to do it twice a year so that we make sure that as these changes occur, we can see the effect on you as an individual. Then, we determine what we need to do. It’s not something where we can come in here and say, “These are all the things that everybody needs to do for 202,” because that’s just simply not the case.

We’re not cattle. We’re not all going the same direction with all the things that our neighbors, aunts, uncles, coworkers, or whatever have. We have very individual needs, wants, and objectives that should be well spelled out within the financial plan. That way, we can put the concerns that you have into the plan and say, “If this happens, how does it impact you?” Once you understand that, then we can determine what strategies we should deploy to start combating those concerns.

Risk Is the Common Denominator

Bud Kasper: It always comes down to the common denominator of risk. When we look at where markets are today, let’s look at COVID. For most of the pandemic, bonds worked very well. But if you remember, they had a little blip there at the beginning of the period. It put a big scare into the bond market, so much so that Jerome Powell had to step in and say the Federal Reserve would be the buyer of last resort of bonds.

Dean Barber: That’s what this tapering is all about. It’s slowing the purchase of those bonds.

What’s Going on with Bonds?

Bud Kasper: But as we saw to the end of the year, it was fundamental with the stock market being down that bonds should do well. And they did. Now, we go into our current year, which we’re about to close out, and we have just the opposite. Bonds are not providing the returns that bring stability to a portfolio construction. What do we do about that? Remove bonds from the portfolios?

Dean Barber: You can’t do that.

Bud Kasper: No, but there are specific bonds that have a better ability to handle a higher interest rate scenario, which typically would be negative. In this case, I think we can still eek out some decent returns with the appropriate bond investments.

Dean Barber: I agree. Preparing financially for 2022 should include looking at the bond holdings that you have. Bonds need to be a part of the portfolio.

Bonds have been and always will be a stay-rich investment. What types of bonds can react or do the best in a possible rising interest rate environment? Let’s touch on interest rates quickly and then we’ll wrap up.

Dean’s Prediction for the 10-Year Treasury Going into 2022

My prediction on the 10-year treasury is that we finish 2022 with the 10-year treasury still under 2%. I don’t think we’re going to see a lot of upward pressure, which means that we’re not going to see a lot of upward pressure on mortgage rates and those types of things. A collapse in the housing market or anything like that isn’t something that I envision.

I believe we’ll see continued support from the Fed through tapering. I think we see a very slow, gradual, maybe one increase next year—two at the most—but I still think that ends us in 2022 with the 10-year treasury below 2%.

Bud Kasper: I could go along with that as well. The one thing that I count on from the Federal Reserve is having a measured response to what’s happening economically. When you look at what the rest of the world is doing, they’re buying U.S. bonds. We are the entity that the world comes to for the safety and consistency of the returns that we can. purchase. A full faith of the United States is still intact.

Dean Barber: You might just use the analogy that we still have maybe the least ugly house on the block. Right?

Bud Kasper: Yeah. We’re still above zero.

Dean Barber: Right. There are still negative rates around the country.

Bud Kasper: Oh yes. There sure are.

Doing Nothing Isn’t the Answer for Preparing Financially for 2022

Dean Barber: Anyway, the bottom line is to not sit and do nothing. Don’t freeze because of potential policy changes in the future. Make sure that that plan is updated. The key to preparing financially for 2022 is forecasting those changes through a stress test within the plan. See how it affects your ability to do the things you want to do. You can then come at it from a more measured and intelligent way to determine the things you should be doing.

Bud Kasper: You’re right, Dean.

Dean Barber: Bud, thanks for joining me here for our Barber Financial Group educational series. Just as a reminder, this is the last educational event for 2021. We’ll be back after January 1 with a new set of educational series events from Barber Financial Group.

As you begin preparing financially for 2022, make sure to schedule an appointment with one of our CERTIFIED FINANCIAL PLANNER™ Professionals. We can visit with you in person, by phone, or by virtual meeting. We hope you enjoyed this. Have a very wonderful holiday season with however you plan to spend it.


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The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.