These are my 5 most compelling stock market moves for 2023 | The Motley Fool

Between soaring inflation, a generally bearish stock market, and high-profile job losses, 2022 has been a scary year for almost everyone. The combination of stock market declines and high inflation meant that you likely suffered financially, unless you were one of the lucky ones whose salary managed to keep up with your costs.

In addition to these general financial challenges, my eldest son is expected to start college in 2023, making it an even more expensive year for my family. My 5 most compelling stock market moves for 2023 are generally focused on regaining some semblance of control over our finances and investments.

1. I plan to raise funds prudently to prepay my mortgage

I’m one of those whose salary hasn’t kept pace with inflation in 2022. On top of that, I recently found out that a position I’ve held for years is being cut , which would reduce my projected income in 2023. Add my child’s expected college costs to the picture, and we have to drastically reduce other costs just to stay put.

Luckily, we only have about four years left on our mortgage, while the principal and interest portion of the payment is around $1,800 per month. This puts it in a sort of sweet spot where there is a big cash outflow each month, but a balance low enough that we can put a plan in place to eliminate it. Where will this money come from? The main sources will be:

• Reallocate much of our existing savings (like money currently set aside for a replacement car).
• Bond interest payments and maturing bonds from our bond ladder.
• A bonus I have won in 2020 but pay in 2023.
• Reaping the dividends from our equity investments in cash rather than reinvesting them.
• Delay other investments until the mortgage balance is exhausted.

I still plan to rely on the stock market for long-term wealth creation. But managing the cash flow reality of 2022 and 2023 must be a priority to allow us to realize this long-term potential.

2. I plan to let my bond scale shrink in 2023

In anticipation of our eldest child starting college in 2023 (and three siblings not far behind), we’ve built a bond ladder to help with those costs. We originally planned the ladder to last five years, but thanks to an exceptionally strong stock market in 2020 and 2021, we were able to extend it to seven years. Given the cost headwinds we expect and the priority of freeing up cash to pay off the mortgage, it is very likely that we will not be able to sustain the bond scale at this length throughout 2023.

Bonds mature, after all, and when they mature, they turn into cash. New bonds must be purchased as old ones mature to maintain a bond ladder of the same duration. So when the money is to be used for some other purpose than buying bonds, a bond ladder naturally narrows.

This reality is one of the main reasons we extended our bond scale when the stock market was exceptionally strong. This way, we can raise the cash we need when we need it, while maintaining the bond scale at or above its original design goal to cover these additional projected future expenses.

3. I will prioritize Backdoor Roth IRA contributions once the money is available

My wife and I will both still be under 50 in 2023, so our IRA contribution limits for the year will be $6,500 each – $13,000 total for household. Income limits for making direct contributions to the Roth IRA are based on a household’s adjusted adjusted gross income, including somewhat unpredictable items like capital gains. Consequently, we do Roth IRA Backdoor Contributions to get money into our Roth IRAs, rather than direct contributions, in case a surprise income would cause us to exceed the limits.

We have until April 15, 2024 to make IRA contributions and make them count for 2023. Unless things get worse on the income and inflation fronts, we should be able to find the $13,000 to reach these contribution limits by then.

For many reasons, a Roth IRA is the best type of account to use to save for retirement.

4. When the Roth IRAs are on track, I will look to our children’s 529 plans

I strongly believe that parents should fund their own retirement before funding their children’s education. It is almost trivially simple to borrow money to cover tuition, while it is somewhere between expensive and impossible to borrow to cover retirement costs. If you find yourself in retirement with more than you need to cover your retirement expenses, you can always give money to your children to help pay off their student loans.

529 plans are education-focused investment accounts. They offer people tax-deferred growth on their money and tax-free withdrawals when the money is used for qualifying educational purposes. Many states also offer tax breaks to residents of those states for contributing to their state-specific 529 plan.

Our targeted contribution level is the maximum tax deduction allowed for our state – $4,000 per child per year. We don’t really want to invest more than that in their 529 plans, as there are hefty taxes and penalties associated with spending money from these accounts on ineligible expenses. Making regular investments around this level creates a solid nest egg for the university while minimizing potential penalties if “excess” money is needed elsewhere.

5. 2023 could be the year we can finally invest in our HSA

Our health insurance is a high-deductible health plan combined with a Health Savings Account (HSA). One of the best features of a Health Savings Account is that it is “triple tax-efficient”. You can put pre-tax money into your HSA, watch it grow tax-deferred, and then withdraw it for use completely tax-free if the money is used for eligible healthcare expenses.

Plus, once you turn 65, you can spend your HSA money for any purpose and only pay regular income taxes on the withdrawal (without penalties) – very similar to how HSA works. a traditional IRA. This combination of factors makes HSAs very tempting places to use to invest for long-term returns.

But to be eligible to contribute to an HSA, you must be covered ONLY by a high-deductible health insurance plan. If you actually need health services due to illness or injury, you pay at least the first $1,500 (individual plan) or $3,000 (family plan) of your actual health care bills . Also, several common expenses, such as dental braces, are usually not covered by health insurance, but are eligible expenses for an HSA.

You may have enough income to cover your living costs, fund your retirement, your children’s school fees and your HSA, and cover your personal health expenses, but not me. Consequently, we to contribute to our HSA, but also use the money in it to cover our eligible healthcare expenses, rather than investing it. At the moment our HSA is in cash, ready to be withdrawn if needed.

The market crash in 2022 showed why relying on selling stocks to cover immediate costs is so dangerous. It is especially important to recognize that health care costs can be unpredictable. That said, our HSA balance is finally approaching our family’s maximum outlay in the network. Once we hit that level – which could happen as soon as my last paycheck of 2022 – we would feel comfortable invest new contributions, rather than just keeping them in cash.

At this level, it is likely that we will have cash available to cover a serious health condition without having to sell our investments when they are down. This gives us a reasonable chance of letting the invested a portion of our HSA stays invested long enough for market capitalization to work its magic.

This is the heart of our plan to take back control of our money in 2023

After a generally difficult 2022 that shattered so many of our plans, we are making 2023 the year we focus on regaining as much control as we can. By paying off our mortgage, we will free up cash to better cover our other growing costs. By letting our bond scale narrow and taking the dividends in cash, we can raise money without having to sell stocks while they’re down.

Once these short-term needs are met, we can then return to the longer-term priorities of funding our retirement, investing in our children’s college, and making the most of our HSA. If all goes well, we will emerge from 2023 in a much better place than where we entered it. If not, hopefully the steps we’re taking will at least help us minimize the lingering pain.

Put your plan in place today

The end of one year and the beginning of another is a great time to review and adjust your financial plans to make the most of what you have. As painful as 2022 has been for many of us, now may be the perfect time to address the challenges of the past and make 2023 the start of an even brighter future.