Between skyrocketing inflation, a generally downward-trending stock market, and high-profile job losses, 2022 has been a scary year for nearly all of us. The combination of stock market declines and high inflation meant you likely moved backwards financially, unless you were one of the lucky ones whose salary managed to keep up with your costs.
Along with those general financial challenges, my oldest child is expected to start college in 2023, making it an even more expensive year for my family. My 5 highest-conviction stock market moves for 2023 are generally focused on regaining some semblance of control over our finances and investments.
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1. I plan to prudently raise cash to pay off my mortgage early
I'm one of those whose salary failed to keep pace with inflation in 2022. On top of that, I recently found out a role I've held for years is being eliminated, reducing my anticipated income in 2023. Add my kid's expected college costs to the picture, and we have to cut other costs substantially just to stay in place.
Fortunately, our mortgage only has about four years left on it, while the principal and interest part of the payment is around $1,800 per month. That puts it in something of a sweet spot where it's a big cash outflow every month, but a low enough balance that we can put a plan together to knock it out. Where will that cash come from? Key sources will be:
- Repurposing 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 earned in 2020 but that pays out in 2023.
- Harvesting dividends from our stock investments as cash rather than reinvesting them.
- Delaying other investments until the mortgage balance is gone.
I still plan to rely on the stock market for long-term wealth creation. But managing the cash flow reality of 2022 and 2023 has to take priority to let us make it through to that long-term potential.
2. I expect to let my bond ladder shrink in 2023
In anticipation of our oldest child starting college in 2023 (and three siblings not far behind), we built a bond ladder to help with those costs. We originally targeted the ladder to be five years long, 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're expecting and the priority to free up cash to pay off the mortgage, it's very likely we won't be able to maintain the bond ladder at that length throughout 2023.
Bonds mature, after all, and when they mature, they turn to cash. New bonds need to be bought as old ones mature to keep a bond ladder at the same duration. So when cash needs to be put to a different use than buying bonds, a bond ladder will naturally shrink.
That reality is a key reason we extended our bond ladder when the stock market was exceptionally strong. This way, we can raise cash we need when we need it, while still keeping the bond ladder at or above its original design target to cover those additional expected future expenses.
3. I will prioritize Backdoor Roth IRA contributions once cash is available
My wife and I will both still be under 50 in 2023, so our contribution limits for IRAs for the year will be $6,500 each -- $13,000 total for the household. The income limits to make direct Roth IRA contributions are based on a household's modified adjusted gross income, including somewhat unpredictable things like capital gains. As a result, we make Backdoor Roth IRA contributions to get money in our Roth IRAs, rather than direct contributions, in case some surprise income puts us over the limits.
We have until April 15, 2024 to make IRA contributions and have them count for 2023. Unless things get worse on the income and inflation fronts, we should be able to come up with the $13,000 to reach those contribution limits by that time.
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'll turn to our kids' 529 plans
I'm a firm believer that parents should fund their own retirements before they fund their kids' educations. It's almost trivially simple to borrow money to cover college costs, while it's somewhere between expensive and impossible to borrow to cover retirement costs. If you wind up retired with more than you need to cover your retirement costs, you can always give your kids some money to help them 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 qualified educational purposes. Many states also offer tax breaks for 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, because there are heavy taxes and penalties associated with spending money from those accounts for non-qualified expenses. Making regular investments around that level builds a solid nest egg for college while minimizing potential penalties if "excess" money is needed elsewhere.
5. 2023 might be the year we can finally invest in our HSA
Our health insurance is a high-deductible health plan paired with a Health Savings Account (HSA). One of the best features of a Health Savings Account is that it's "triple tax advantaged." You can contribute pre-tax money into your HSA, see it grow tax-deferred, and then withdraw it for use completely tax-free if the money goes toward qualifying healthcare costs.
In addition, once you're 65, you can spend the money in your HSA on any purpose and only pay ordinary income taxes on the withdrawal (with no penalties) -- very similar to how a Traditional IRA works. That combination of factors makes HSAs very tempting places to use to invest for long-term returns.
But to be able to contribute to an HSA, you must be covered by ONLY a high-deductible health insurance plan. If you actually need healthcare services due to illness or injury, you're paying at least the first $1,500 (single plan) or $3,000 (family plan) of your actual healthcare bills. In addition, several common costs -- like braces -- aren't typically covered by health insurance but are qualified expenses for a HSA.
You might have enough income to cover your costs of living, fund your retirement, your kids' college expense, andyour HSA, and cover your out-of-pocket healthcare costs, but I don't. As a result, we contribute to our HSA, but also use the money in it to cover our qualifying health expenses, rather than investing it. At the moment, our HSA sits in cash, ready to be withdrawn if needed.
The market's tumble in 2022 showed why it's so dangerous to rely on selling stock to cover immediate costs. That's especially important to recognize given how unpredictable healthcare costs can be. That said, our HSA balance is finally approaching our family's in-network maximum out-of-pocket spend. Once we hit that level -- which could happen as early as my final 2022 paycheck -- we'd feel comfortable investing new contributions, rather than simply keeping them as cash.
At that level, it's likely we'll have money available in cash to cover a serious health concern without having to sell our investments when they're down. That gives us a reasonable shot at letting the invested portion of our HSA stay invested long enough for the market's compounding to work its magic.
That's the core of our plan to get back in control of our money in 2023
After a generally rough 2022 that threw so many of our plans off track, we're making 2023 the year we focus on getting back whatever control we can. By paying off our mortgage, we'll free up cash flow to better cover our other rising costs. By letting our bond ladder shrink and taking dividends as cash, we can raise cash without having to sell stocks while they're down.
With those near-term needs covered, we can then get back to the longer-term priorities of funding our retirement, putting money toward our kids' college, and getting the most out of our HSA. If all goes well, we'll get out of 2023 in a much better spot than we entered it. If it doesn't, hopefully the moves we're making will at least help us minimize the continuing pain.
Put your plan in place today
The end of one year and the start of another makes a great time to review and adjust your financial plans to make the most of what you have available. As painful as 2022 has been for many of us, now can be a great time to clean up the challenges of the past and make 2023 the start of an even brighter future.
