New Year’s Resolutions

Lose weight. Exercise more. Save money. Take a trip. It’s that time of year again to make New Year’s Resolutions. In January, optimism is high, but by year-end, it fades. According to one study, only 8% of people achieve their goals.[1] My two main 2020 goals are to climb a 14er in Colorado and learn to play guitar. Maybe I can play the guitar on top of a 14er! What are your goals for next year?

Most goals fail because they aren’t specific. Saving money is a good goal, but how much? You’re more likely to hit, or come close, to your goal if you say, “I want to save $10,000 by December 30, 2020.” Details matter when setting goals.

Financial planning works because it requires specific data. Retiring at 65 is a tangible target, retiring someday is not.  Hoping to pay for college is not as powerful as saving $500 per month towards tuition in a 529 account.

Of course, health and wealth are important goals. But what if this year you set goals to give more, serve more, and love more? Bob Goff said, “Plans work, or they don’t. Love always works. Go with the sure thing.” He adds, “Make your life about people, and you won’t regret it.”

If you’re setting financial goals, you probably have money to give. What if you changed your focus to serve others? For example, can you give away 10% of your income to groups or organizations you support? Giving money to those in need has a multiplier effect. Your gift will benefit many, but most importantly, it will benefit you and your family.

What if you can’t give away 10% of your income? Give 5%. Give your time. Can you donate 10% of your time to serve? A Google search will yield a bounty of non-profit opportunities. Serving others is powerful. Several years ago we downsized our house, and I was feeling down because I had to give up the swimming pool. A few months after we moved, I went on a mission trip to Nicaragua and served those living in homes built with cinder blocks and plywood. I don’t miss my pool anymore.

Love always works, as Bob Goff said. Loving others sounds simple, but it’s hard to do. Jesus said in Mark 12:31, “Love your neighbor as yourself.” A simple command. Can it be quantified? Probably not, but do it anyway. Spend time with friends and family. Listen more; be present. Also, men, you don’t have to solve every problem.

Give, serve, and love are resolutions that cost you little, but they’ll pay huge dividends to those who benefit from your kindness.

Give often, serve early, and love always.

Happy New Year!

 In the same way, let your light shine before others, that they may see your good deeds and glorify your Father in heaven. ~ Matthew 5:16

December 31, 2019

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management 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 so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

 

 

 

[1] https://nypost.com/2018/12/21/new-years-resolutions-last-exactly-this-long/, Shireen Khali, December 21, 2018

The Christmas Eve Trouncing

Christmas Eve is a time of peace and joy as Christians celebrate the birth of Christ, and children of all ages anxiously await the arrival of Santa Claus. It’s a wonderful time to spread good cheer.

Pre-holiday trading days are usually benign as traders and investors leave their computers and trading desks to spend time with friends and families.  Volume and trading activity are light, and savvy traders can take advantage of price swings to profit as markets usually rise the day before a holiday.[1]

However, trading on Christmas Eve last year was a nightmare. The Dow Jones fell 1,462 points, or 6.3%, from the high on December 21 to the low on Christmas Eve, a brutal day for all. The dropped capped off a terrible fourth quarter, as the Dow Fell 12.5%.[2] Investors were worried about rising interest rates and an escalating trade war.

During the fourth quarter, investors panicked and removed $183 billion in assets from mutual funds. They ran for cover, looking for safety in money markets and U.S. Treasury investments.  The long-term U.S. Treasury ETF (TLT) rose 4.6% during the equity assault.

Market strategists were not optimistic about equities in 2019. Bank of America Merrill Lynch “…urges investors not to overlook the potential attraction of cash.”[3] Morgan Stanley was calling for “an outright earnings recession.”[4]

What happened since the Christmas Eve drubbing? Were investors wise to sell stocks? Was cash the answer? Let’s look.

From Christmas Eve of 2018, the Dow Jones has risen 31.05%. Not to be outdone, the NASDAQ rose 44.3%, the S&P 500 added 37.2%. Staggering returns.

When markets swoon, don’t panic. Fear is never beneficial for the long-term investor. If the market is cratering, do nothing. Wait for the storm to pass before you make any financial decision. Markets always recover.

If you’re a long-term investor, buy the dip. Use a market drop to add to your equity holdings. Look for quality stocks to put in your stockings as you’ll be rewarded with an excellent gift when stocks recover.

If you’re concerned about a market drop, buy bonds. Bonds perform well when stocks fall.

2019 has been an excellent year for investors as every major asset class is in positive territory.  As we close out the year, and the decade, follow your plan, celebrate your success, and enjoy the holidays.

Merry Christmas!

Happy Christmas to all, and to all a good night!” ~ A Visit from St. Nicholas, by Clement Clarke Moore

December 24, 2019

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management 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 so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

 

 

[1] https://school.stockcharts.com/doku.php?id=trading_strategies:the_pre-holiday_effect, website accessed 12/23/2019

[2] YCharts

[3] https://www.forbes.com/sites/johntobey/2018/12/16/barrons-2019-outlook-professionals-sense-recession-risk/#c75cb9239d85, John S. Tobey, December 16, 2018.

[4] Ibid

If, Then

In college, I learned the if, then command while studying the BASIC computer language. BASIC is a conditional language that relied on the if command. If X is true, then Y is false, and so.

Financial planners rely on if, then statements regularly. It’s common for planners to include a statement like, “If you invested X amount in stock Y, then you’d have Z dollars today.” The examples show investors the advantage of long-term investing, despite the stock market’s gyrations. Some of the examples are outrageous, but we still use them anyway. For example, if you invested $100,000 in the stock market in 1926, you’d be worth more than $700 million today. This example is ridiculous on many levels. First, $100,000 in 1926 is equivalent to $1.5 million today. Second, would you have held on to your investment through the Great Depression? Doubtful. Third, it assumes you didn’t pay any taxes on your investment or spend any money for 93 years.

Despite the crazy claims, advisors use these examples religiously, including me.

Here are a few if, then statements.

If you invested $100,000 in Amazon in 1997, you’d have $92 million today.[1]

If you invested $92 million in Enron, you’d have zero dollars today.

If you sold stocks last December because the market was down 15%, you missed a 36% return in the S&P 500 this year.

If you sold bonds last year because you expected the Federal Reserve to raise interest rates this year, you missed a 13.7% return in long-term bonds through the iShares 20+ Year Treasury Bond ETF (TLT).

If you create a budget, it will help you with your spending.

If you spend less than you earn, you’ll save money.

If you save money, your assets will grow.

If you try to keep up with the Joneses, you’ll end up in the poor house.

If you make a Will or a Trust, you’ll protect your family.

If you own life insurance, you’ll also protect your family.

If you own long-term care insurance, you’ll protect your assets if you move into an assisted living facility.

If you participate in a high deductible health insurance program, consider opening a Health Savings Account to offset the cost of healthcare.

If you’re going to live in your city for five years or more, buy a home.

If you have a mortgage, add a few dollars to your monthly payment so you can pay it off early.

If you move often, rent a home.

If you have children, invest early and often so you can pay for some, if not all, of their college education.

If you work for a company that offers a retirement plan, contribute as much as possible so you can eventually enjoy your retirement.

If you have financial assets to meet your spending needs, defer your Social Security benefits until age 70 so you can qualify for the maximum benefit allowed.

If you have any assets, consider donating to a charity or causes you and your family support.

If you own an IRA or workplace retirement plan, check your beneficiaries to make sure they’re current.

If you complete a financial plan, you’ll have three times more assets than those people who do little or no planning.[2]

If you work with a Certified Financial Planner®, they will put your interest first.

If you finished reading this blog, thank you and Merry Christmas!

“First, solve the problem. Then, write the code.” – John Johnson

December 17, 2019

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management 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 so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

 

 

 

 

[1] Morningstar Office Hypothetical

[2] http://www.nber.org/papers/w17078

Friends

Friends was a favorite television show of mine. Each Thursday night, I was glued to the TV to watch the eclectic mix of characters – Rachel, Phoebe, Joey, Monica, Chandler, and Ross. They made me laugh for ten years. The show worked because each character had unique and special talents. One of my favorite episodes was when Joey put on all of Chandler’s clothes while getting ready for Ross’s presentation.[1]

Friends come to us from all corners of our life. Friends from school, church, work, the neighborhood, and so on.  Depending on where we are in our life our friends enter our lives at various stations. Some are lifelong friends who see us at our best and our worst. Others are seasonal. Friends can live next door or in different towns, in different states, or distant lands. You might talk with them daily, or once a year. Regardless, a good friend is worth their weight in gold.

I have friends that I’ve known since kindergarten, others I met in junior high, high school, or college. I’ve had great work friends. Friends from mission trips and others from the states where I’ve lived.

Long-term friendships require work and patience, but it’s worth the effort. It’s challenging to maintain relationships for decades because your friends know your hot buttons. They see you on your good days and your bad ones. They’re by your side through thick and thin, celebrating your wins and consoling you in defeat. Holding stocks for a long time also takes work and patience. I’ve owned Disney, Microsoft, and Pepsi for years, and all three have caused happiness and sorrow. It’s easy to own a stock like Amazon when it’s up 17%, but how about when it’s down 94% like it was during the Tech Wreck in 2000?[2] To benefit from the upward trend in stocks, you must own them deep in the valley and at the peak.

Short-term relationships are seasonal. You might meet a friend on a mission trip or business conference. It could be a former neighbor who moved to a new state. Short-term friendships are beneficial regardless of their duration. Investments held for a limited time can enhance or protect your portfolio. Using options to generate income or protect a holding makes sense at times. Stocks can come and go, as well. You might buy a stock for a short-term trade or a seasonal trend. Stocks like Walgreens or Cisco will make occasional appearances in my portfolio, depending on their price.

And, unfortunately, some friendships turn toxic and blow up, never to return. Companies like Enron and Worldcom were friends to many during their glory days before they imploded and wiped out all their shareholder capital. For a moment in time, they were must own investments because of their meteoric returns despite their deteriorating financials.

The cast of Friends had six primary characters in front of the camera, and countless support personnel behind it. For your investment portfolio to succeed, a supporting cast is necessary. Relying on Certified Financial Planners®, attorneys, CPAs, money managers, and other professionals will pay dividends towards increasing your wealth.

Let’s review a portfolio of six different investments to see how they performed these past few years. The funds, a mix of distinct asset classes, have unique attributes designed to react differently depending on the market conditions.  The portfolio dating back to 1993 generated an average annual return of 9.63%. The portfolio’s best year was 2003, up 27.03%. The worst year was 2008, down 18.24%. This year it’s up 21.02%. During the past 16 years, it had three down years, and it rose 83% of the time.[3]

Here is the portfolio:

IVV = S&P 500 = 30%

EFA = International = 20%

TLT = Long-Term Bonds 30%

IJR = Small Caps = 10%

EEM = Emerging Markets = 5%

IYR = Real Estate = 5%

Though the portfolio performed well over the past 16 years, the returns for the individual holdings varied. For example, the small-cap, large-cap, and real estate sectors performed well over the past decade while bonds, international and emerging markets lagged. This past year, however, bonds have outperformed the other asset classes.  The leaders and laggards constantly trade the top spot, like horses in a race.

If every character of Friends were the same, the show would not have done well. The variety of actors is what made the show special. If you own similar investments, it’s not diversified, and it will not perform well over time. A diversified portfolio of low-cost funds should treat you well, like a good friend.

A friend loves at all times, and a brother is born of adversity. ~ Proverbs 17:17

December 16, 2019

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management 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 so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

 

[1] https://mashable.com/article/best-friends-episodes/

[2] YCharts

[3] Morningstar Office Hypothetical – 1993 to 2019.

You’re Retired. Now What?

Retirement is an exciting and frightening time, especially if you’ve been working for the past forty years. Yesterday you were working, today your retired.

I helped an individual jump into retirement. We consolidated multiple accounts and assets after completing a financial plan. He worked for more than forty years and enjoyed receiving a monthly paycheck. While working, he didn’t pay too much attention to his retirement or investment accounts. They were on auto-pilot. His 401(k) contributions were automatically deducted from his paycheck and invested across several mutual funds. He had a few legacy retirement accounts held at previous employers as a result of changing jobs during his long career. He also owned a few IRAs.

When he retired, he was unaware of how to generate monthly income. How will he generate and receive the income? What are the mechanics of moving money from his retirement accounts to his bank account? Would he live off the principal, or will the investments generate enough income to meet his needs? How much is enough? Will it last? Will he be okay?

The first course of action we took was to gather his data. What did he own, where was it held? We reviewed his asset allocation, risk level, and fee structure. We then evaluated his spending patterns and household expenses to create a sustainable retirement budget. Fortunately, he’s debt-free. The analysis included a realistic income projection.

Once we evaluated his financial foundation, we moved on to discuss his Social Security benefit. His financial position will allow him to defer his payout until age 70, the maximum age at which he can start receiving his benefit.

Next, we talked about risk management. Would he still need life insurance? What about disability or long-term care insurance? We decided to keep a small amount of term insurance, but he doesn’t need disability insurance because he’s no longer working. We spent a considerable amount of time discussing long-term care insurance. His asset level will allow him to self-insure an extended stay in an assisted living facility. However, I did encourage him to obtain a quote for long-term care insurance to see if it makes sense to transfer this expense to the insurance company. Buying a long-term care policy will protect his assets for his beneficiaries.

After we spent time reviewing his financial and insurance information, we talked about his expectations and concerns. What would he do in retirement? How will he spend his time? Will he expand his hobbies? Will he volunteer and help others? What are his hopes, dreams, and fears? The emotional side of retirement is just as important as the financial side.

I now had all the information I needed to complete his plan. I suggested he consolidate his 401(k) plans and IRAs into a single IRA. We transferred several accounts into one to simplify his reporting. Once we completed the consolidation, I reviewed his projected income to show him that the monthly payout would be a combination of interest, dividends, capital gains, and principal. Relying on interest and dividend payments will produce sporadic income payments, so we’re going to send him a set amount each month, regardless of the source of income. The steady income stream will allow him to better budget for his retirement spending. He’ll receive a net check because we’re going to withhold a certain percentage of his payment to send to the IRS for taxes. The budget we created will give him the freedom to spend his money without worry.

We built a globally diversified balanced portfolio of low-cost mutual funds that we will rebalance annually, or as needed, depending on the movement of the underlying investments. We will aim to keep the asset allocation and risk level intact so he can enjoy a lifetime of retirement income.

I let him know we will review his account and budget quarterly to make sure all is working well. We will adjust his plan as needed, depending on how well it is working.

Last, I told him to enjoy the fruits of his labor and enjoy the next chapter of his life.

I have seen personally what is the only beneficial and appropriate course of action for people: to eat and drink, and find enjoyment in all their hard work on earth during the few days of their life that God has given them, for this is their reward.  To every man whom God has given wealth and possessions, he has also given him the ability to eat from them, to receive his reward, and to find enjoyment in his toil; these things are the gift of God. For he does not think[i] much about the fleeting days of his life because God keeps him preoccupied with the joy he derives from his activity. ~ Ecclesiastes 5:18-20

December 11, 2019

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management 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 so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

Why I Started My Business

Starting a business is a crazy idea and a daunting task. Each month, about 540,000 individuals launch new businesses and half of them will fail within the first five years.[1] I took a leap of faith a few years ago to start my firm when I turned fifty and so far, so good.

The primary reason I started my business was to remove confusion, complexity, and worry from the financial planning and investment management process. I wanted to offer people an alternative to firms that sold products with exuberant fees. As Jeff Bezos said, “Your margin is my opportunity.” I also noticed that individuals didn’t know what they owned, the risk they were taking, or the fees they were being charged. My goal was to bring these issues into the light.

First, I was tired of hearing stories from people who bought products and services they did not need or want. The products were complicated and expensive, and most of them did not fit in with a client’s financial plan if they had one. The products were sold by brokers earning massive commissions and fees. I wanted to recommend low-cost investments to individuals based on their financial plan.

Second, I wanted to offer a competitive fee.  A lot of advisors charge 1% or more to manage a client’s assets, or require a high-fee retainer, or demand exuberant hourly rates. Also, advisors and brokers charge thousands of dollars for a financial plan. Our fee is .5% of assets ($5 per $1,000) to manage investments and a flat fee of $800 for planning. I like to say we’re twice the service at half the price!

Third, I wanted to help individuals with their financial needs regardless of their level of assets. It’s common for investment firms and advisors to have asset minimums of $1,000,000 or more. We work with clients at all asset levels from several million to several thousand.  We don’t have asset minimums, and we will work with anyone who wants or needs our help.

Industry experts and advisors tell me my fees are too low, and I need to set an asset minimum. They also encourage me to focus on a niche like attorneys. I disagree. If my firm sets an asset minimum of $1,000,000, what happens if I meet an individual with $750,000? Do I tell them I’m sorry I can’t work with you because you “only” have $750,000? If I only work with lawyers, do I say no to the doctor, teacher, or pilot?

Because my fee schedule is low and I don’t have an asset minimum, industry experts question if my clients are profitable. I have no idea. I don’t treat individual clients as profit centers. My firm, however, is profitable, allowing me to continue to serve clients.

When I’m told to raise fees or asset levels or focus on a niche, I think of the Coca-Cola Company. Coke has been selling beverages to individuals since 1892, and, to my knowledge, they don’t have a niche. Coke products are sold to billionaires like Warren Buffett and Bill Gates, as well as young children around the world. If you’re thirsty, you can buy a Coke product to quench your thirst regardless of your economic standing. Also, Coke products aren’t complicated or expensive.

My model works, and I look forward to helping all those who want or need financial guidance.

Work willingly at whatever you do, as though you were working for the Lord rather than for people. ~ Colossians 3:23

December 10, 2019

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management 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 so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

 

 

[1] https://learn.g2.com/small-business-statistics, By Bianca Pasare, website accessed December 8, 2019.

Is AARP Correct?

According to an article published by AARP, almost half of Americans fear running out of money in retirement.[1] A challenging part for people entering retirement is to determine how much income is needed to last a lifetime. You don’t want to run out of money at 83 if you’re going to live to age 90.  If you’re worried about running out of money in retirement, you probably don’t have a financial plan. A financial plan will help you answer several questions about your future, including how much is enough. Worrying is also a lack of faith.

I’m often asked, “How much income will I need?” and “How long will it last?” The first question is easier to answer than the second. You’ll need, at a minimum, enough income to cover your annual expenses. The amount of income you’ll need in retirement will be driven, in large part, by your expenses.

Your expenses probably won’t change dramatically in retirement. The dollar amount may stay the same, but the categories will change. For example, rather than spending money for college, you’ll allocate it to travel.

The best way to budget for your retirement expenses is to review where you’ve spent your money. What financial footprints have you left behind?  A deep dive into your spending habits from the past two to three years will help you paint a picture of where your future expenses may land. By identifying how you’ve spent your money, it will be easier for you to adjust your future spending.

After your review, can you find expenses to prune or eliminate?  By reducing your expenses, you’ll be in a better position to save for retirement. I also suggest increasing your spending budget by 5% or 10% to give yourself a little wiggle room before you enter retirement due to unexpected expenses.

As you get closer to retirement, I recommend reviewing your budget every quarter to get a better handle on your spending habits.  It’s not uncommon to see a spike in spending before retirement as a result of several factors like buying a new car or remodeling your kitchen.

It’s prudent to add a black swan, or random event, category to your budget as there’s always an unforeseen spending expense during the year like a car repair, home repair, or medical expense. A suggested amount for this category is 5% of your total budget.

In retirement, housing will account for most of your annual expenses. According to the Consumer Expenditure Survey[2] from 2014 to 2015, housing accounted for 32% of a person’s budget for those 65 and older. Transportation came in second at 15.6%, healthcare was third at 12.5%, and food items were fourth at 11.9%.  Housing is a considerable expense in retirement, even if you don’t have a mortgage. Utilities, property taxes, and repairs are fixed costs that will always attack your budget.

Let’s review the original question, “How much money do you need for a comfortable retirement?”  If your annual expenses are $100,000, you’ll need more than this amount to cover your expenses.  Your income can come from several sources like investments, pensions, Social Security, or property rentals.

To generate $100,000 in income, you may need $2,500,000 in assets. How did I arrive at $2,500,000?  The magic number in this equation is 4%. To get $2,500,000, divide your expenses by 4% ($100,000 divided by 4% = $2,500,000).  You can also multiply $100,000 by 25, the inverse of 4%, to get the same result. Why 4%? A former Registered Investment Advisor, Bill Bengen,[3] created the 4% rule. I won’t go into his analysis, but he found that if you withdraw 4% of your assets every year, you shouldn’t run out of money.

Let’s look at a few examples. Again, assume your annual expenses are $100,000. At $100,000, you’ll need an investment portfolio of $2,500,000 earning 4% ($2,500,000 x 4% = $100,000).   This calculation assumes you’re only spending income, and you’re not invading your principal.

By adding Social Security to your equation, the amount of assets needed in retirement will drop.  If your Social Security income is $30,000 per year, deduct this figure from $100,000 to get $70,000.  $70,000 is what you’ll need to generate from your investments.  Applying the 4% rule gives you $1,750,000 ($70,000 divided by 4%).

If you have a company pension, your need to generate income from your investment portfolio falls further. Let’s say your annual pension is $20,000. This reduces your income number to $50,000 after subtracting Social Security and your pension ($100,000 – $30,000 – $20,000 = $50,000). The assets needed are $1,250,000 ($50,000 divided by 4%).

As you can see, the more passive income you receive, the fewer assets required. We started with an individual with no passive income requiring assets of $2,500,000 to generate $100,000 in annual income. The retiree who receives a pension and Social Security was able to lower their asset level to $1,250,000 to receive the same level of income.

The “three-minute financial plan” can calculate the amount of assets you’ll need for retirement. You can compare it to your current level of assets to see if you have enough money to retire. If you have enough assets to cover your expenses, you can retire at any time – on your terms.

The math will help answer the second question, “How long will my money last?” If you’re withdrawing less than your accounts are earning, you should never run out of money. An account earning 5%, withdrawing 4%, will grow at 1%.

If you withdraw more money than your account can generate, you run the risk of running out of money. For example, if you retire with $500,000 and your withdrawing 10% a year ($50,000) from an account earning 5%, your retirement nest egg will only last 15 years.

Let’s pay another visit to the three-minute financial plan. I’ve included a table to help you calculate the level of assets you may need to cover your expenses. A 40-year-old with $50,000 in annual expenses will need $2.3 million at retirement. An inflation rate of 2.5% will increase her annual expenses from $50,000 to $92,697 at age 65. Applying the 4% rule to her inflation-adjusted expense number (divide by 4% or multiply by 25) will give her $2.3 million ($92,697 x 25).

You can identify your asset level from the table below. Use the inflation factor nearest your age to calculate the future value of your expenses. Once you have this number, multiply it by 25 to give you your asset level needed in retirement.

Age

(A)

Inflation Factor

(B)

 

Expenses Today

(C)

Future Value Calculation

(B x C = D)

Multiple

(E)

Assets Needed

(D x E)

40 1.85 $50,000 $92,500 25 $2,312,500
45 1.64 25
50 1.45 25
55 1.28 25
60 1.13 25
65 1 25

This model will also tell you the growth rate needed to achieve your goal. Let’s say you’ve saved $200,000 by age 40, and you’re contributing $19,000 (the maximum allowed) to your company retirement plan.  We know your asset goal is $2.3 million based on the math in the chart, so an annual rate of 7.02% for 25 years is needed to reach your asset goal.

If you’re able to save an additional $6,000 (the catchup provision) per year, the rate of return needed is 6.17%. The rate of return number dropped because you’re saving more money. The more you can save, the less your account will need to earn.

The three-minute financial plan will tell you quickly if you’re on track to meet your retirement needs – or not.  This plan can help you set the framework necessary to reach your goal.  A long-term rate of 7.14% is aggressive, so you’ll need to own more stocks than bonds. An appropriate asset allocation for this growth rate suggests a portfolio of 75% stocks, 25% bonds.

Let’s change the parameters and look at a 55-year-old who wants to retire in 10 years. She has $100,000 in annual expenses and $2,000,000 in savings. Her expenses in 10 years will be $128,008. The asset level she’ll need is $3,200,211 ($128,008 x 25).  She’ll have to earn 4.08% to reach her goal – a conservative rate so that she can own more bonds than stocks. An allocation of 75% bonds, 25% stocks would be appropriate for her portfolio.

How much is enough, and how long will it last? As you read, you can answer these questions with a few inputs on a calculator or Excel spreadsheet. Once you know the answer to these questions, you can adjust accordingly. The three-minute financial plan is your quick guide to getting your retirement on track.

“Therefore, I tell you, do not worry about your life, what you will eat or drink; or about your body, what you will wear. Is not life more than food, and the body more than clothes? Look at the birds of the air; they do not sow or reap or store away in barns, and yet your heavenly Father feeds them. Are you not much more valuable than they? Can anyone of you by worrying add a single hour to your life?” ~ Matthew 6:25-27

December 3, 2019

Bill Parrott, CFP®, CKA®, is the President and CEO of Parrott Wealth Management 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 so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

[1] https://www.aarp.org/retirement/planning-for-retirement/info-2019/retirees-fear-losing-money.html?cmp=SNO-ICM-TW-AO-SP&socialid=2337257241, By Harriet Edleson, AARP, May 21, 2019

[2] http://www.bls.gov/cex/22015/midyear/age.pdf

[3] http://www.retailinvestor.org/pdf/Bengen1.pdf