Working Forever

I’m going to work forever, never retire. I love my job, I like my clients, my commute is less than four minutes, and my office is air-conditioned with high-speed internet. What could be better? When I tell people I’m going to work forever, they think I’m crazy. Likewise, when I meet someone who’s going to retire early, I think they’re crazy. There’s probably a happy medium in there somewhere.

My movement is going to be called FINR (Finer): Financial Independent Never Retire, the opposite of the FIRE movement, Financially Independent Retire Early. Individuals who adhere to the FIRE movement save an excessive amount of their income so they can retire early.

Of course, if you’ve saved up enough money to retire early, go for it. If you want to work forever, knock yourself out. It’s your money. Someone once told me: “It’s my money; I can do whatever the hell I want with it.” If you have enough resources to cover your expenses for the rest of your life, then you can do whatever you want.

Several high-profile people are still working, or they never retired. Warren Buffett is 88 and his partner, Charlie Munger, is 95. Mother Teresa worked until the end. I’ve searched the Bible for the word retirement, and it doesn’t exist.

What are some advantages to working forever? Here are a few:

  • Live Longer. According to a Harvard Medical School study, they found that individuals who work longer also live longer and are in better health than those who retire early. They site physical activity, mental stimulation, and social engagements as key reasons.[1]
  • Delayed Social Security. Working longer will allow you to defer your Social Security benefits to age 70. You’re eligible to receive your benefits at age 62. For every year you defer your benefit, you’ll get an 8% raise. For example, at age 62, you may receive $21,475 per year, but if you wait until age 70, you’ll get $39,750.
  • No RMD’s. Working past age 70 will allow you to defer your required minimum distributions for the money in your 401(k). You’re still must take your RMD from your IRA if you work beyond age 70, however.
  • Save less. The longer you plan to work, the less money you need to save monthly. If your goal is to save $1 million in 10 years, you need to save $6,440 per month. Expanding your time horizon to 50 years means you only need to save $375 per month. Of course, you’ll never know when, where, or why you’ll need money, so save as much as possible today.
  • Give more. Working longer will allow you to give more money away through employee and employer contributions without dipping into your principal or savings.
  • Healthcare benefits. One obstacle to early retirement is paying for healthcare. Retiring before age 65 will force you to purchase private healthcare insurance — an expensive expense. Working beyond age 65 will allow you to use your employer’s health benefits.

Working longer doesn’t mean you have to forego living. I’ve seen most states and visited several countries. My family and I take vacations every year, and we enjoy hobbies. I still hike, bike, fish, run, read, and so on. Working hasn’t hindered our ability to enjoy life.

The end is inevitable Maverick; your kind is heading towards extension. Maybe so, sir, but not today. ~ Top Gun Maverick 2020 Movie Trailer.

July 20, 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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than 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.health.harvard.edu/staying-healthy/working-later-in-life-can-pay-off-in-more-than-just-income, Published June 2018, website accessed July 20, 2019.

All Time Highs!

A record number of climbers reached the peak of Everest this year. In fact, it was so crowded that climbers had to wait in a long line to reach the summit and the approach to the peak was described as a “traffic jam.”[1] A climber spends about two months getting acclimated to the elevation before they start their ascent to the highest point on earth.[2] After a few minutes at the top snapping a few selfies to capture the view they’ll start descending to base camp. A slow climb to the top, a faster descent home.

This past week the S&P 500 hit an all-time high of 3,013. It’s been a long, slow ascent for the index to reach its current peak. In 1998 it crossed 1,000 for the first time. It broke through 2,000 in 2014. Fifty years ago, it was at 92. When I started in the business it was 330 and the Dow Jones was trading below 3,000!

The rise from 92 to 3,000 hasn’t been straight up, of course. During the Great Depression the index produced a return of .6% per year (1929 – 1943). In the decade of the ‘70s it rose 15 points, or 1.5% per year. It fell 42% from August 2000 to September 2002. It cratered 46% from October 2007 to March 2009. Despite these rough patches, the index managed to generate an average annual return of 10% dating back to 1926.

What now? Will the S&P 500 fall back to earth? Will it dip or dive soon? Who knows? I’m sure it will be as volatile as it has been in the past. When it does drop, use it as an opportunity to buy a few quality stocks or funds. Buy the dip, historically, has been good advice.

If you’re concerned about a descent from the ascent, here are a few strategies you can incorporate today to protect your assets.

  • Take some gains and sell your stocks. Locking in a profit never hurts. You can sell your winners or losers to raise cash. Ideally, you’ll want to sell your winners in a tax deferred account like an IRA and sell your losers in a taxable account for the tax write off. Regardless, selling stocks to raise cash makes sense if you’re concerned about a drop.
  • Buy bonds. Buying bonds yielding 1% to 2% sounds boring. It is. Bonds reduce risk and volatility in your account. During times of duress, however, you’ll be glad you own bonds. In the drops I mentioned above, bonds performed well. During the Great Depression, long-term government bonds averaged an annual return of 4.3% (1929 – 1943). During the ‘70’s they averaged 5.5%. In 2000 bonds rose 21.5% and they climbed 25.9% in 2008.
  • Buy puts. Use put options to hedge your portfolio for short term moves. Options are used to protect individual positions like Amazon or indices like the S&P 500. This strategy is expensive, so use it sparingly. Let’s look at a put option for Amazon. Amazon is currently trading at $2,012. Buying the August 16, 2019 $2,010 put option will cost $6,155 for every 100 shares you own. If Amazon falls below $2,010 on, or before, August 16 you may profit on your trade. If Amazon stays above $2,010, you’ll lose 100% of your investment. If a short-term option strategy is too risky, you can extend the maturity date. For example, the January 17, 2020 $2,010 put option will cost $13,410. Still expensive and risky. To employ this strategy only work with an advisor who is well versed in trading options.
  • Do nothing. Be still and let your stocks run. Trying to time the market may cost you more than a market correction. Over time, a buy and hold strategy performs well. A recent study by Dimensional Fund Advisors highlights this point. From 1926 to 2018, they found the market is significantly higher after a market reaches a new high. According to their study, the market is 14.1% higher one-year after reaching a new high. The three-year average is 10.4% and the five-year average is 9.9%.[3] Don’t sell your stocks If your only reason to sell is because the market has reached a new high.

Everest will always be there and so will the stock market. Unlike Everest, the S&P 500 can continue to soar to new heights – without limit. I’m not sure what the market will do in the next few months, but I’m convinced it will be significantly higher 50 years from now. My recommendation is to stay the course and enjoy the view.

I lift up my eyes to the mountains – where does my help come from? ~ Psalm 121:1

July 13, 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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than 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.washingtonpost.com/world/2019/05/24/mount-everest-has-gotten-so-crowded-that-climbers-are-perishing-traffic-jams/?utm_term=.6d6dd10799e9, May 25, 2019 by Siobhan O’Grady

[2] https://www.nepalsanctuarytreks.com/how-long-does-it-take-to-climb-mount-everest/

[3] file:///C:/Users/parro/Downloads/Timing%20Isn%E2%80%99t%20Everything.pdf, July 2019

Call an Expert!

It was time to upgrade my laptop because my old computer was starting to show its age. I did my homework by comparing models, prices, warranties, etc. I had a working knowledge of computers and knew what I was looking for, so I didn’t consult anyone about my purchase.

After my due diligence was done, I purchased a brand name computer from a big box retailer. I spent one Saturday afternoon transferring the data to my new laptop. The transfer was easy and seamless. I was ready to go. However, my computer wasn’t. It was extremely slow. I was frustrated and upset at the lack of response from my new system, but I was going to give it a couple of days to see if it improved. No luck. The speed never increased, and the performance lagged my old computer. Most of my software systems were running at less than optimal performance.

I vented to my wife. She listened, for a while, and then told me to call an expert.

A few days later I contacted an IT expert to help me trouble shoot my system. The first thing he did was check the speed of the CPU. He showed me my CPU’s speed relative to others, and it was close to last, if not dead last. My computer would never be fast. Thankfully my purchase was still under warranty, so I returned it.

With the help of my IT consultant, we picked a new computer based on my needs. My new computer is smaller, lighter, and faster than my previous one. It works like a charm. Had I hired him prior to my first purchase I would have saved a lot of time, hassle and money.

Individual investors should hire an expert as well. Regardless if you’re a do-it-yourself investor or someone who has no interest in managing money, a professional can potentially help you improve your financial situation.  We can all use a little help.

Here are a few ways a Certified Financial Planner® can help you with your finances.

  • Budgeting
  • Financial Planning
  • Retirement Planning
  • Estate Planning
  • Education Planning
  • Special Needs Planning
  • Investment Advice
  • Investment Selection
  • Asset Allocation Models
  • Asset Management
  • Business Valuations
  • 401(k) Guidance
  • Cash Flow Planning
  • Charitable and Philanthropic Planning
  • Income Distribution
  • Required Minimum Distributions
  • Social Security Optimization
  • Beneficiary Updates and Reviews
  • Debt Management
  • Equity Compensation Analysis
  • IRA Rollovers
  • Life Insurance Analysis
  • Long-Term Care Insurance Analysis
  • Asset Protection
  • Risk Management
  • Fee Analysis
  • Second Opinions

This list gives you a good idea of the services provided by a Certified Financial Planner.® In addition, most planners have access to CPA’s, attorneys, mortgage brokers, bankers, and other professionals who can help you with most of your planning needs. Give us a call. Don’t go it alone!

for by wise guidance you can wage your war, and in abundance of counselors there is victory. ~ Proverbs 24:6

July 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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than 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.

 

 

 

The Trailhead

I just returned from Colorado where I spent a week riding horses and hiking in the Rocky Mountain National Park. One of my hikes was to the summit of Estes Cone. It’s considered a strenuous hike with an elevation gain of 1,800 feet or 551 feet per mile.[1]

Most trails are well marked from the beginning including the trail for Estes Cone. The trailhead for our hike was the Longs Peak trailhead. Longs Peak is the ultimate hike in the park and someday I’ll hike it, maybe. Our group was initially stuck at a fork in the road before we referenced our trail map. After a brief detour, we were back on the trail.

The trailhead is often the best place to start when you go hiking.  It would be helpful if there were financial trailheads for individuals who want to save money, create a budget or pay off debt, but there isn’t, at least not one for everybody. Even though there isn’t a single map for financial success, others have left clues and markers to help you reach your financial goals. Here are a few suggestions.

Start. Hikers start at the trailhead because it’s usually the lowest point on the trail. Start by setting a few short-term goals like opening a savings account, paying off a credit card, or creating a budget. It’s okay to start small. A little nudge might be all you need to get moving.

Orient. When hikers reach the trailhead, they orient their compass to the summit and trail map. The map and compass will guide them to their goal. Likewise, your financial goals will help you orient your path. Well defined goals are needed for financial success.

Gear. Hikers love gear – shoes, packs, knives, poles, etc. These items are essential for a successful hike. Investors need quality gear as well. Financial software can make your life easier. Today you can find software for any scenario like financing college, paying off your mortgage, buying life insurance, or leasing a car.  These tools will help you get your financial house in order.

Guide. Our hike was led by one of the ranch hands where we were staying. He knew the trail and led us to a successful hike. We could have hiked without a guide, but it may have taken us longer to reach the top. To increase your chance of obtaining your goals consider hiring a Certified Financial Planner® who can help you guide your financial steps. A CFP® professional is trained to handle a multitude of investment and planning scenarios.

Valleys. Some trails will take you through a valley before you reach the summit. When you enter a valley, it might not feel like you’re going to reach your goal, but if you stay on the trail and follow your map, you’ll reach the summit. Markets will take you deep in the valley at times in the form of corrections or pullbacks. During these down days stay true to your financial path and don’t panic. Market corrections are normal and short-term in nature.

Obstacles. Trails can be besieged with rocks, trees, shrubs or water. If you’re not paying attention to your steps, you can trip and tumble. A hiker in our group referred to this as the “tuck and roll.” Staying focused on your financial goals is paramount so don’t get distracted by taking your eyes off your goal.

Rest. It’s okay to stop on the trail to catch your breath, drink some water, grab a snack and check your bearings. In fact, it’s recommended. It’s also recommended to review your accounts often to make sure they’re performing to your satisfaction. Reviewing your asset allocation, risk level, and performance will help you stay invested for the long haul.  Adjust your portfolio as needed so you can stay focused on your financial goals.

Peaks. The summit is the goal for hikers. The summit for Estes Cone is 11,006 feet. Your summit may be a financial goal you’ve reached. Your peak, or financial goal, will keep you moving forward. If you’ve reached your summit, celebrate.

Hiking is a great activity, particularly in a national park. The challenges of a mountain make for great adventure.

Investing is challenging, but with the right tools and resources you will have an opportunity to reach your financial summit. Climb on!

The mountains are calling, and I must go. ~ John Muir

July 2, 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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than 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.

 

 

 

[1] http://www.rockymountainhikingtrails.com/estes-cone.htm

My Fee Is Better Than Your Fee

Advisors, brokers, planners, bloggers, vloggers, Fin Twit experts, and other pontificators are praising the benefits of their own fee models while bashing all others. Strong opinions about whose fee schedule is best is a common thread. At the end of the day, however, a fee is a fee regardless of how it’s charged.

Firms may combine fee platforms or institute pricing tiers with minimum fees. For example, advisors may bill you hourly for their financial planning services while charging you an asset management fee.

One of my clients has been hounded by a stockbroker who has been trying to sell her an annuity. He told her the purchase would not cost her anything. After some research, I found out that he was going to receive a 5% commission.

Several years ago, an insurance agent approached me about buying a whole life insurance policy with an annual premium of $100,000. I was also told I wouldn’t incur any out of pocket expenses or fees. He was going to make $55,000 if I had purchased the policy.

If a broker tells you it won’t cost anything, you’re probably going to get fleeced.

Fees are confusing, especially if they’re called something else. It’s all semantics. Here’s a guide to help you navigate the murky waters of fees. This will help you identify the various types you might incur when you’re meeting with a financial professional or reviewing your account statements.

Commissions. If you buy or sell a stock, a commission will be added to or deducted from your trade. Bonds will also trade with a commission ranging from $1 to $30 per bond. If you purchase 100 bonds ($100,000) and you’re charged $10 per bond, your fee will be $1,000. This is referred to as a markup or markdown. Exchange traded funds and options will also trade with a commission. The more your broker trades, the more commissions they’ll earn.

Front End Load. Mutual funds with a front-end load will have commission rates ranging from 1% to 5% or more and it will be deducted from your purchase. If you invest $100,000 into a fund with a 4% front-end load, your fee will be $4,000, so $96,000 will be invested. The most common type of front-end loaded mutual fund is referred to as an “A” share.

Back End Load or Deferred Sales Charge. Funds and annuities with a deferred sales charge will charge a fee if you liquidate early. A declining sales charge is applied based on the number of years you own your holding. A fund may have deferred sales charge that declines over five years where 5% is deducted the first year, 4% the second year, 3% the third year and so on. If you invest $100,000 into a fund with a deferred sales charge and you sell it in year three, the fund company will deduct 3%, or $3,000 from your proceeds. The most common share class with back end loads are “B” and “C” shares.

Wrap. A wrap account will charge a percentage based on your investment but not charge a commission for your trades because the commissions are wrapped into the fee. Wrap accounts are popular with brokerage firms. They’ll offer you an investment account that owns 50 to 70 stocks or more. Depending on the size of your investment, you may own 2 to 3 shares of a company and If you were paying commissions, the fees could climb quickly. I worked for a large brokerage firm several years ago and our wrap-fee program charged clients 3% per year – an extremely high fee.

AUM. The asset under management fee model is popular with Registered Investment Advisors. An advisor may charge you a fee of 1% on the assets they manage on your behalf. The fee drops with the more assets you have under management.

Retainer. A retainer fee model will give you access to an advisor or planner for a specific project or timeframe, but it may not include managing your assets. It’s similar to an a la carte menu at a restaurant.

Flat Fee.  Your fee is flat, or fixed, regardless of your asset level. This model favors large accounts and punishes smaller ones. Advisors will charge a flat fee for financial planning and investment management services. This fee differs from the retainer model because the relationship is intended to be long-term.

Hourly. This model works well if you want a limited scope offering or a one-time analysis like a second opinion. It also appeals to investors who want to pick their own investments but want guidance with their asset allocation or financial plan. Advisors may charge $250 to $500 per hour to create a financial plan, review your investments, or give you guidance on a special project.

Subscription. This is a relatively new model primarily aimed at millennials or high-income earners with little assets. A fee is charged based on your income or net worth and it’s billed monthly, like a car payment. Services may include budgeting, cash flow planning, debt reduction, 401(k) guidance, and investment selection.

Hedge Fund. Hedge funds typically have a 2 and 20 model. They’ll charge you 2% on your assets and receive 20% of your trading profits. For example, if you invest $1,000,000 and it grows to $2,000,000, your hedge fund will earn 2% on $2,000,000 and receive $40,000 in fees. They’ll also earn $200,000 on your trading profits.

Regardless of where or how you purchase a mutual fund, exchange traded fund or annuity, they’ll have ongoing fees and expenses. Mutual funds and ETF’s have operating expenses (OER) and the fees vary wildly. Mutual funds may also have a 12b-1 fee, charging you another .25% on top of the OER. An annuity has fees for mortality, riders, administration, and investments – to name a few. Annuity fees can climb to 3% or more. Individual stocks, bonds and options do not have ongoing fees or expenses after they’re purchased.

Fees come in all types of flavors, so pick one that works well for you and your family. If you’re concerned about fees, then open an account at T.D. Ameritrade, Fidelity, Vanguard, E*Trade, or Schwab and only buy individual stocks, bonds or low-cost index funds. The commissions and fees will be low so long as you don’t day trade your account.

Fees are important, of course, but it’s more important to work with an advisor you trust. One who puts your interest firsts and acts in a fiduciary capacity is recommended.

What about our fees? We charge .5% ($5 per $1,000) for assets under management which includes a financial plan. Our stand-alone financial planning fee is $800.  Good conversation, fellowship and bad jokes are free.

In the long run, we shape our lives, and we shape ourselves. The process never ends until we die. And the choices we make are ultimately our own responsibility. ~ Eleanor Roosevelt

June 25, 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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than 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.

 

 

 

 

 

What Are You Doing This Summer?

Summer has arrived and its vacation time! Travelers will be crisscrossing the globe in search of the perfect family vacation. Individuals will spend between 10 to 20 hours researching their vacation.[1] Proper planning will make your vacation more enjoyable.

Deciding where to go is only half the battle. Once you pick a location, then everything else will fall into place. How will you get there? What will you do? Etc. For example, if you’re going to Hawaii this rules out driving. A trip to Death Valley means you won’t be scuba diving.

Early planning can enhance your vacation experience. It will give you more options and potentially better rates. Last minute planning is frustrating. If you wait until the last minute to plan your trip your choices may be limited and more expensive.

Vacations aren’t cheap. The average cost is $1,145 per person, so a family of four can expect to spend $4,580.[2] About a quarter of the population will finance their trip with credit cards, personal loans, or a short-term payday loan.[3] Financing your vacation can add an extra 20% to 25% to your cost.

I love planning – all types. A few years ago, my family and I spent three weeks trekking around Europe by planes, trains and automobiles. It took me a year of planning to work on the logistics. Colored spreadsheets helped me with our travel plans, side trips, dining options, entertainment, and budget. It was one of our best family trips.

National Plan for Vacation day is January 30. According to travel research, they recommend a planning window of two to three months. The same study mentions that Americans leave 662 million unused vacation days on the table each year resulting in a “$236 billion missed opportunity for the U.S. economy.”[4]

Missed vacation days and poor travel planning won’t be detrimental to your family’s future but failing to plan for your financial future will be.

Unfortunately, people spend more time planning their vacation than they do their financial future. If you spent 10 to 20 hours per year on your financial plan, it may have life changing results. In fact, Individuals who complete a financial plan have three times the assets of those individuals who do little or no planning.[5]

Financial planning is not as fun as planning for a family vacation, but it’s necessary, especially if you want to maintain your lifestyle in retirement. Financial planning will give you options. It will give you flexibility. Your plan will confirm your current lifestyle or give you suggestions for changes.

Spending one to two hours per month reviewing your financial status can pay lifetime dividends. Your plan will direct your steps, like a trail map. It will give you a financial destination. Once you determine where you need to go financially, everything will fall into place.  Deciding on how much money you’ll need in retirement is paramount. Here are a few planning tips to get you started.

  1. Take an inventory. What is your current financial situation? Where are your assets? How are they performing? What fees are you paying? In addition, track your expenses. Get a handle on how and where your money is being spent.
  2. Set goals. What do you want to do when you retire? Travel? Setting financial goals is just as important, if not more so, than goals like losing weight or getting in shape. According to the Peak Performance Center, “Your goals give you a clear focus on what you believe to be important in life.” If a goal is important to you, you’ll figure out a way to make it happen.
  3. After taking an inventory and setting goals, it’s time to prioritize your list. Your list might be long, so spend some time culling it. Reduce your list to three to five items you can pursue because too many goals may lead to inertia.
  4. After you’ve figured out what you have and what you want to do, put it to work. Activate your plan. Once your plan is up and running, then you can spend a few hours a month reviewing and tweaking it as needed.
  5. Hire a planner. If you’re not comfortable creating and implementing your plan, hire a Certified Financial Planner®. A CFP professional will help you quantify and prioritize your goals. In addition to developing your plan, they’ll act as your accountability partner. Hire a planner with the CFP® designation who works for an independent Registered Investment Advisory firm, is fee-only, and acts in a fiduciary (best-interest) capacity. You can search for an advisor in your area on these websites: feeonlynetwork.com, www.napfa.org, or www.cfp.net.

Your financial plan can give you a lifetime of vacations if you plan accordingly. It will free you to enjoy your trips. Don’t wait. Start planning today.

Enjoy your summer and safe travels!

No matter what happens, travel gives you a story to tell. ~ Jewish Proverb

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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than 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.

 

[1] https://www.vacationkids.com/vacations-with-kids/how-much-time-does-it-take-to-research-and-plan-a-family-vacation, Sally Black, June 20, 2017

[2] https://www.creditdonkey.com/average-cost-vacation.html, Kim P, October 8, 2018

[3] https://www.finder.com/vacation-loan-debt, Website accessed June 19, 2019

[4] https://www.travelagentcentral.com/running-your-business/stats-less-than-half-americans-take-time-to-plan-vacation-days, Newsdesk, January 29, 2018. Website accessed June 19, 2019.

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

Financial Mystery Dinners

Murder mystery dinners are popular. At these dinners’ guests try to guess who committed the crime based on a series of clues. Guests are also part of the show and may be prime suspects. You might have attended one of these events in the past, but have you ever been to a financial mystery dinner?

Let’s say you’re invited to a financial mystery dinner to solve a financial crime. The storyline is that four of the guests will run out of money in retirement. Why four?

According to The Employee Benefit Research Institute, 40.6% of households are projected to run out of money in retirement.[1] They have been conducting this survey since 2003 and the numbers are grim, especially for single women.

In another study from the World Economic Forum, they found that men could outlive their savings by 8 years and 11 years for women.[2]

The Federal Reserve estimates the average retirement account balance is $60,000.[3]  If your IRA balance is $60,000, you can expect an annual income of $2,400 – before taxes!

If you depleted your savings and had to rely solely on Social Security, the average monthly benefit is $1,345 or $16,248 per year.[4]

Here are the guests. Can you identify which four will run out of money during their retirement?

Marty Millennial. He’s a young man living at home. He earns a decent salary but keeps his money in a low yielding savings account at a major bank. He reluctantly contributes 2% of his salary to his 401(k) plan.

Tammy Teacher. Tammy has been an elementary school teacher for several years. She contributes to a 403(b) plan and she’ll receive a pension payment from her state when she retires. Her husband is a firefighter who will also receive a state pension.

Sandy Salesman. Sandy is a hard charging salesman who drives a Ferrari and wears a gold Rolex watch. He’s self-employed, has a small IRA, and changes jobs every 1 to 3 years to pursue a larger sales territory with better leads.

Robby Retiree. Robby has been retired for a few years. He and his wife love to eat out and travel. They own a large home, live on a golf course, and drive a Range Rover. He has an IRA and a few investment accounts. He’ll receive Social Security in two years. His wife was a homemaker and she’ll receive spousal benefits from Social Security when Robby files for his benefits.

Donna Doctor. Donna is a surgeon at a huge hospital in a major city. She graduated from medical school with several thousand dollars’ worth of student loans. She is a high-income earner who works long, stressful shifts.

Peter Pilot. Peter is a pilot for a major airline. He’s been flying for about 15 years. His airline offers a pension, but he is concerned about the financial stability of his employer. He knows the sad history of airline carriers going bankrupt. He’s now a first officer. He has three kids and they all participate in club soccer.

Linda Lawyer. Linda is a trial lawyer. She and her husband have two daughters who are about to get married. Her firm has generous benefits including profit-sharing and cash balance plans. Her husband is a staff accountant for a local municipality.

Danny Developer. Danny is a computer programmer for a high-tech company. He’s paid handsomely for his coding skills and he’s been rewarded with stock options and restricted stock. His company will go public this year.

Ashley Athlete. Ashley is a professional soccer player for a team located on the East Coast. Her salary isn’t great, but she earns extra income from endorsements and coaching soccer clinics.

Frank Farmer. Frank owns a farm in Texas on several thousand acres. He grows corn and wheat and earns a decent living from his crops. He and his wife have four children and seven grandchildren. His family will have an estate tax issue when Frank and his wife pass away.

How did you do? Which four guests will run out of money? Of course, there’s no way to know with the limited clues given, so time will tell. However, here are a few things you can incorporate today to improve your odds of enjoying a successful retirement.

  • Invest for growth. Over time, stocks outperform bonds and cash by a wide margin. Stocks do carry risk, but not bigger than the risk of running out of money in retirement. If you invested $10,000 in stocks ten years ago, it would be worth $26,220 today. The same amount invested in short-term bonds would be worth $10,060.
  • Save early and often. The sooner you start saving, the better. Even if you’re going to receive a pension, Social Security, or other guaranteed payouts, you still need to save your money. How much? A suggested amount is 10% to 15% of your annual income.
  • Contribute to your company retirement plan. A 401(k) plan is a great tool for creating wealth, especially if your company offers a match. If you contribute 5% of your income and your company matches 5%, your making 100% on your investment. 401(k) plans are efficient and easy to use. Invest for growth because you won’t be able to touch this money for 10, 20, 30 years or more.
  • Pay off debt. Eliminate high credit card debt, auto-loans, student loans and mortgages before you enter retirement. High levels of debt will be a hindrance to a successful retirement. According to one study, the average debt balance for individuals age 75 or older is $36,757.[5]
  • Create an emergency fund. A cash hoard will help you when trouble hits. It will also allow you to pay for things without using a credit card and accruing more debt. A recommended cash amount is three to six months of household expenses.
  • Develop a spending plan. A spending plan will help you identify how your money is being spent. It will give you an opportunity to reduce, or eliminate, your expenses.
  • Generate a financial plan. A financial plan solves a lot of financial mysteries. It will reveal the clues needed to produce a fruitful retirement. It will give you direction.

Don’t be caught short in retirement. Do all you can today to make sure you have financial assets when it matters most. It would be a crime not to!

Just the facts ma’am. ~ Joe Friday

June 14, 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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than 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.

 

 

 

[1] https://www.fool.com/retirement/2019/05/19/heres-how-many-us-households-will-run-out-of-money.aspx, Christy Bieber, May 19, 2019

[2] https://www.barrons.com/articles/outlive-retirement-savings-world-eonomic-forum-retiree-global-51560453625?mod=hp_DAY_6, Reshma Kapadia, June 13, 2019

[3] https://smartasset.com/retirement/average-retirement-savings-are-you-normal, Amelia Josephson, April 16, 2019.

[4] Ibid

[5] https://www.cnbc.com/2018/04/04/growing-debt-among-older-americans-threatens-retirement.html, Annie Nova, April 4, 2018

Spend It Like Beckham

A client called recently to let me know he was going to make a major purchase. He wanted to know if his purchase was going to affect his investments. After a few clicks through his financial plan, we determined he could make the purchase and it would not have an impact on his long-term goals. He made the purchase.

Over the years I’ve had several conversations with clients about purchasing big ticket items from cars to boats to planes.  I worked with a gentleman that purchased a sizable apartment in Paris. He had the financial resources to make it happen and the total cost was a fraction of his net worth. Another individual was building a home on an island in the Pacific Northwest. He was going to turn it into a B&B with Ferrari’s and an airplane (he was a former pilot for a major airline.) After completing his financial plan, I told him he couldn’t afford all his purchases. He had to choose between the home, the cars or the plane.

Lately there has been a lot of discussions, blogs and articles about giving up coffee so you can afford a comfortable retirement. It’s unlikely a cup of coffee will derail your retirement, but I get the spirit of the argument. Spending money on coffee or a Cartier watch makes sense if you have the money.

Money is a use asset. It’s designed to buy goods and services. It doesn’t make sense to die with millions of dollars in your bank account. Of course, blindly spending on things can destroy your financial future. So how do you know how much money you can spend? Here are a few thoughts.

Do the math. The stock market is performing well this year, rising 11.5%. A balanced portfolio of 50% stocks and 50% bonds is up 9.4%. If you started the year with a million-dollar portfolio in a balanced account, you’d be up $94,000.  Withdrawing $50,000, $60,000 or $70,000 from your account will not hurt you financially.

More math. If your account is averaging a 5% return every year and your withdrawing 4% from your account, you shouldn’t run out of money. For example, you start with a million-dollar portfolio and withdraw $40,000 for ten years. After ten years you received $400,000 and your account balance is worth $1.125 million. Here’s a real-world example: You invested $1,000,000 in Vanguard’s Balanced Index Fund (VBINX) 25 years ago and withdrew 4% of the account balance each year. After paying taxes and fees, your account balance is worth $2.5 million today, and you received $1.8 million in distributions.[1]

Establish a spending plan. A spending plan, or budget, will help you with your purchasing decisions. Knowing where your money is going is half the battle. Recording your spending habits is a liberating experience.  Setting up a slush fund for impulse items will allow you to make stress free purchases. Your budget will also help you with buying big ticket items. The best place to start for your spending plan is to review your bank and credit card statements for the past 6 months.

Create a financial plan. A financial plan is a difference maker. In addition to reviewing your spending habits, it will incorporate your assets, liabilities, hopes, dreams and fears. Most of my clients have completed a financial plan so when they call to ask if they can make a major purchase, I’m able to answer their question in minutes. Also, when the market is falling like it did in December, I was able to tell clients their financial future was not in peril. A financial plan is paramount if you want to succeed financially.

If you have the money and the resources to buy something, go for it! Spending your money is acceptable, especially if you’ve run the numbers and it falls in line with your budget.

An investment in knowledge pays the best interest. ~ Benjamin Franklin

June 13, 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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than 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.  This article has nothing to do with David Beckham. I’ve never met him, and I have no idea how he spends his money.

 

 

 

 

 

[1] Morningstar Office Hypothetical – 5/31/1994 – 5/31/2019.

E Ticket

Growing up in Southern California I went to Disneyland often.  In the ‘70s they issued tickets rather than an all-inclusive pass. Their ticket system used letters – A through E, with an E Ticket being the most coveted. They were the most popular and exciting rides like the Matterhorn or Space Mountain.  The ticket book consisted mostly of A tickets with a couple of E tickets. My friends and I would scour the park looking for E Tickets if we ran out of money to buy more. At the end of the night, I’d go home with several A tickets stuffed into the front pocket of my Toughskin jeans

The Matterhorn and Space Mountain were a blast to ride. Rising, falling, and twisting at high speeds is a thrill – but not for everybody. Slow, steady climbs followed by steep and rapid drops aren’t for the faint of heart.

The stock market is like a roller coaster. It’s a slow steady climb punctuated by a few steep and rapid declines. Last year is a perfect example.  From January 1 to October 3 the Dow Jones rose 8.5%. From October 3 to December 24 it fell 18.7%.

The VIX is the volatility, or risk, index and it spiked 210% as the market fell during the fourth quarter of last year. The VIX is currently trading around 16. At 16, it projects a 1% daily move in the stock market. With the Dow currently trading at 26,000 a 1% move means the market can rise or fall 260 points daily.

To calculate how much an index, or stock, can move divide the implied volatility by the square root of 256. What is the square root of 256? It’s 16. Why 256? There are approximately 256 trading days during a calendar year. The current implied volatility of the VIX is 16, 16 divided by the square root of 256 is 1. If implied volatility spikes to 32, then the daily move in the market would be 2%, or 520 points – up or down.

The implied volatility of Apple is about 28, meaning a daily move of 1.75% (28/16). Apple is currently trading for $189, so a 1.75% move is $3.30 – up or down.

Volatility returned to the market in May. From January through April the Dow Jones rose 14% with barely a ripple. In May it fell 6.1% while volatility leaped 26.4%.

Risk, volatility and wealth are intertwined. The stock market carries risk, and therefore you can earn an equity premium, and this is where wealth is created. Since 1926 stocks have risen around 75% of the time, averaging 10%. U.S. T-Bills are safe and have never lost money, however, after taxes and inflation are factored into your returns, they become negative.

How should you handle volatility?

Buy the dip. Stocks rise and fall. When they drop, use it as an opportunity to buy quality stocks or index funds. If you had the courage to buy stocks on Christmas Eve, you would’ve made 19% on your investment.  During the Christmas Eve rout stocks fell 6.3% or about 1,400 points, so buying stocks would’ve required fortitude and grit.

Keep a shopping list. Identify stocks or funds you want to purchase at lower prices and when the market falls it will give you an opportunity to buy some shares.  For example, the price of Apple dropped to $146 in December. It’s now trading at $190 – a gain of 30%.

Automate. Automate your investments to remove emotion from the buying process.  Set up a monthly draft from your bank to your investment account and you’ll be able to dollar cost average into the stock market regardless if it’s up, down or sideways. Investing $100 per month for the past 20 years in the Vanguard S&P 500 index fund is now worth $64,266 – an average annual return of 8.13% per year.

Buy bonds. If you’re concerned about volatility in the stock market, buy bonds. U.S. Government bonds are a great hedge for falling stocks. As stocks fell in May, long-term U.S. Government bonds rose 6.4%. During the market meltdown in 2008 government bonds rose 28%.

Do nothing. Volatility is like turbulence; it will eventually pass. When an airplane hits a turbulent patch, the pilot reminds us to stay seated and tighten our seatbelt. The pilot knows it will be temporary.  Flying is a few moments of fear mixed in with hours of boredom. May is gone and the first week of June is looking good for stocks. In fact, it’s the best weekly performance of the year.

Don’t panic. Investors without a plan sell stocks when the market falls and buy when it rises. When the market isn’t cooperating – sit tight. In December investors withdrew $183 billion from mutual funds as the market fell. When the market rebounded in January and February, they added $43 billion. If you sell when the market is falling, you’ll miss the rebound and the opportunity to generate meaningful long-term gains.

Volatility is part of investing. It is a tool you can use to enhance your returns, if you use it correctly.

Stay in your seat come times of trouble. Its only people who jump off the roller coaster who get hurt. ~ Paul Harvey

June 7, 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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than 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.

 

 

 

 

Fake News!

Fake News is everywhere, I think. Who knows?

Fake news is on the rise, undermining credible news stories and causing angst. It attacks people, places and things by reporting stories that aren’t true. People shoot first and ask questions later by reacting to false headlines. Online posts, media outlets, and Heads of State rant against the proliferation of fake news stories. If someone doesn’t like a post or news story, they shout: Fake News! With all the data circulating the internet it’s imperative that you spend time separating the wheat from the chaff.

Fake news is alive and well in the investing world. Here are a few examples:

  • I don’t need to save money to accumulate wealth. False. One of the largest components to your wealth creation is how much money you save and invest monthly. How much should you save? A suggested amount is 10% to 15% of your income. If you’re waiting for a lottery ticket, corporate buyout, IPO, or inheritance from a rich uncle, you may be waiting for a long time – possibly forever. Saving $1,000 per month for 30 years will grow to $1.2 million if you can earn 7% on your investment.
  • I can borrow my way to wealth. Debt is an anchor and it will hinder your opportunities to create wealth. The more debt payments you’re making, the less money you can invest. Debt is also a fixed cost and will last the life of your loan. For example, if you borrow $300,000 for 30-years at 4.5%, it will cost you $247,000 in interest.
  • I’m young, I don’t need life insurance. If you’re married with young kids, have a mortgage, a few car loans, and a student loan or two, you need life insurance. How much? At a minimum you’ll need enough to pay off all your debts. If you include the cost for college and survivor income for your spouse, it will add to the amount of life insurance you’ll need. A stay-at-home spouse needs life insurance as well.
  • I’m young so I don’t need to save money until I’m older. Dave Ramsey tells a story about Jack and Blake. Jack is 21 years old and saved $2,400 per year for nine years and then stopped investing. He invested a total of $21,600 and it grew to $2.54 million. Blake, on the other hand, started investing at age 30. He invested $2,400 for 38 years. His total investment of $91,200 grew to $1.48 million. Jack’s nest egg is more than a million dollars greater than Blake’s all because he started when he was young.[1]
  • I’m old, I don’t need to invest for growth. You may live to age 100, or beyond. A person who retires at 65 might spend 35 years in retirement. If you retire your money to a bank or money market fund when you stop working, it will lose value after you factor in inflation and taxes. At a 3% inflation rate, your dollar will lose 35% of it’s value after 35 years – a loss of 1% per year. Contrast this to an investment in Vanguard’s S&P 500 Index Fund on May 29, 1984. A $10,000 investment is now worth $398,000!
  • I can trade my way to prosperity. Day traders, market timers and speculators generate high commissions, short-term tax liabilities, but not wealth. Asset allocation accounts for 93.6% of your investment return. The remaining 6.4% is attributed to market timing and investment selection.[2]
  • I can keep up with the Joneses. Do your friends drive Ferraris and drink Screaming Eagle Cabernet Sauvignon, but you drive a Prius and drink La Croix? If so, hanging out with your friends could be damaging to your wealth. Trying to keep up with your neighbors financially is a fool’s errand. Focus on your finances, not theirs. Who cares if your neighbor has a bigger boat?
  • I don’t need a financial plan. Have you tried taking a road trip without a GPS? Have you ever been lost on a mountain trail without a map? If you’ve ever planned a family vacation, you know the benefit of a solid plan. A financial plan will help you quantify and prioritize your goals. It will be your guide and travel companion.

Facts matter, especially when it comes to investing. Investment truth for success: Invest early, invest often, think long-term, keep you your fees low and create a financial plan.

The problem with quotes on the Internet is that it is hard to verify their authenticity.” ~  Abraham Lincoln (source: the Internet)

May 30, 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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than 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.

[1] Financial Peace University

[2] Determinants of Portfolio Performance, Financial Analyst Journal, July/August 1986, Vol 42, No. 4, 6 pages; Gary P. Brinson, L. Randolph Hood, Gilbert L. Beebower.