Funding Secured

On August 7, Elon Musk tweeted: “Am considering taking Tesla private at $420. Funding secured.” His tweet caused a storm on Twitter and in the stock market. At the time of his tweet, Tesla shares were trading around $343 per share before soaring to $387. Since the tweet, it has traded in a range of $345 to $380 as market participants and regulators focus on the “funding secured” part of his announcement. Does he have the financing? I hope so, because I’m rooting for him to succeed.

After he sent his tweet, I wondered how many individuals have secure funding for retirement.

What does it mean to be financially secure? In short, it means you have the resources to pay for your day to day expenses for the rest of your life. To find out if this is possible, I recommend taking an inventory of your personal assets, Social Security and pension benefits. Also, it’s paramount to keep tabs on your annual expenses, because this will determine the amount of assets you’ll need for a comfortable retirement.

Let’s say your annual expenses are $100,000 and you’ll receive $25,000 in Social Security benefits per year. After subtracting your Social Security benefit from your expenses, you’re responsible for funding $75,000 per year. At a 4% distribution rate, you’ll need $1.875 million in assets to cover your expenses ($75,000/4%). If you also receive an annual pension of $25,000, it will lower your funding requirement to $50,000 and your asset goal to $1.25 million.

Today most companies don’t offer a pension plan, and this is putting a strain on retirees. In a recent Wall Street Journal article, the rate of individuals filing for bankruptcy age 65 or older has tripled since 1991.[1] One of the factors sited for the rise in bankruptcies is the reduction in corporate pension plans.[2] The responsibility for retirement has shifted from corporations and the government to the individual. When my wife’s grandfather retired from a large oil company in Texas, he received Social Security, a pension, and healthcare benefits. He made more money in retirement than he did while working. His safety net was so strong that he didn’t need to save money for retirement. Today’s workers aren’t as lucky.

How can you fortify your financial future? Here are a few ideas.

Safe early and often. The sooner you start investing, the more money you’ll have for retirement. If you start investing $200 per month at age 25, you’ll have $1.3 million at age 65[3]. If you wait until age 45, you’ll end up with a paltry $155,000 – a difference of $1.1 million!

Buy stocks. The stock market is the best way to create long-term wealth. Since the end of World War II, the S&P 500 has averaged 11.3% per year despite numerous dips, drops, and downturns.

Keep an eye on inflation. Inflation has historically averaged 3% per year. If your annual expenses are $100,000 today, in 30 years they’ll be $242,000. A dollar today will be worth 41 cents three decades from now. To avoid the erosion of your dollar, allocate a substantial portion of your assets to stocks.

Don’t retire your money. A “safe” portfolio of CDs, U.S. Treasuries, cash, and money market funds might appear attractive in the short term, but over time they’ll barely produce a positive return. The 91-year average annual return for U.S. T-Bills has been 3.4%, after subtracting inflation of 2.9% your net return would’ve been .5% – before taxes!

Plan. A current financial plan will keep you on the path towards a profitable retirement. It will help you quantify your financial goals and allow you to prioritize items that are important to you and your family.

As you rocket towards retirement, follow your financial plan, invest your money, and think long-term. If you do these things, you will have an electrifying future.

When something is important enough, you do it even if the odds are not in your favor. ~ Elon Musk

August 13, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

[1] https://www.wsj.com/articles/bankruptcy-filings-surge-among-older-americans-1533641401, Anne Tergesen, 8/7/2018

[2] Ibid

[3] FV calculation at 10.2% interest, the 91-year average annual return for the S&P 500, before taxes and inflation.

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