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.

 

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

Fifteen Year-End Tips

The end of the year is quickly approaching, and what a year it’s been. The S&P 500 is up more than 25%, and unemployment is near historic lows. It’s been a great year to make some money and do some good.

As we approach the end of the year, here are fifteen tips you can incorporate today.

  1. Contribute the maximum to your 401(k) or 403(b). You’re allowed to contribute $19,000 and if you’re 50 or older, you can add another $6,000.
  2. Contribute the maximum to your IRA. You’re allowed to contribute $6,000 and add another $1,000 if you’re 50 or older.
  3. Spend the money in your flexible spending account (FSA). The FSA is a “use it or lose it” plan, so make sure you spend it.
  4. The stock market has done well, but you may own a loser or two. If you are sitting on losses, sell them to offset your gains. The IRS will allow you to offset your gains dollar for dollar. If you have realized gains of $15,000, then you can realize losses of $15,000 to offset your gain. If you don’t have any realized gains, you can write off $3,000 per year until your loss is absorbed.
  5. If you have significant gains in a stock, consider gifting it to your favorite charity. You can send your shares in-kind directly to your charity to avoid capital gains. You’ll be able to deduct the fair market value of your gift. The charity can sell the shares, free of taxation, and use the proceeds for good.
  6. Review your asset allocation. With the increase in the stock market, your equity exposure might be too high relative to your risk level. If your alignment is off-kilter, consider rebalancing your account.
  7. Sell some of your investments to pay off your debt. Debt is a four-letter word, and the less debt you owe, the better off you’ll be.
  8. Take a trip. If you’ve done well this year, then reward yourself and take your family on a journey. It’s okay to spend money on experiences and enjoy the fruits of your labor.
  9. Update your beneficiaries. Review your beneficiaries on your retirement accounts and insurance policies. It only takes a few minutes to make the changes.
  10. Start, finish, or update your will. Have you been putting off contemplating your mortality? If so, use the holiday season to complete your will.
  11. Review your spending. Download your checking, savings, or credit card statements to Excel to review your spending habits.
  12. Start your budget to get ready for 2020. Apps like everydollar.com or mint.com can help you improve your budgeting.
  13. The IRS allows you to give away $15,000 per person. It’s a tax-free transfer, and there are no limits to how many people can benefit from your generosity.
  14. Donate cash to your favorite charity.
  15. Be an anonymous angel. Can you pay off someone’s debt? Do your local schools have children with student lunch debt? Are there families that need money for groceries or transportation? If you’re not sure, contact your local church or school because they usually have a list of people in need.

“His master replied, ‘Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. Come and share your master’s happiness!’ ~ Matthew 25:21

November 29, 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.

 

 

Baylor Bears Football

The Baylor Bears are enjoying an excellent football season. They currently rank 9th in the polls after trouncing The University of Texas. With a record of 10-1, they’re headed to the Big 12 Championship Game for the first time in school history for a rematch against Oklahoma. Hopefully, they’ll be able to avenge their gut-wrenching loss. If they win the rest of their games and get a little help from other teams, they may find themselves in the college football playoffs.

The turnaround is astonishing, considering the team only won one game in 2017. The 2017 season was Matt Rhule’s first at Baylor. His first job was to convince the young men on his team that they were winners despite the media saying otherwise. His goal is to develop young men and recruit new players to buy into his system.  At his introductory presser, he said, “If you come to Baylor and you come to play for me, that you’re going to get loved and you’re going to get developed each and every day because that’s hard. That’s not easy. Coaches say that but they don’t always want to do that. But that’s all that we did at Temple. That’s all we’re going to do at Baylor because that’s our purpose, to spend all of our time developing our players.”[1]

The Bears were on the brink of receiving the death penalty from the NCAA before Coach Rhule arrived. In addition to replacing their former coach, Baylor also hired a new university president and an athletic director.

When Coach Rhule took over the football program, he only had 45 scholarship players on his roster out of a possible 85, so he had some work to do to convince high school players to attend Baylor.[2] Coach Rhule had seen this picture before as the head coach for the Temple Owls. In 2013 his team won 2 games and lost 10. In 2015 the Owls won 10 games for the first time since 1979. The Owls aren’t known for football, but they ranked in the top 25 during Coach Rhule’s final two seasons with the team.

Coach Rhule has a vision, plan, and a process for turning around football programs in need. He trusts his process and so do the players.  “That’s what my whole message to our players is,” Matt Rhule said. “You’ve done this because of your process, this didn’t happen tonight, it happened every morning over the last two years.”[3]

Webster’s dictionary defines the process as “a natural phenomenon marked by gradual changes that lead toward a particular result.” Gradual changes. Success at any level takes time.

What can you learn from Coach Rhule’s turnaround?

You need a plan that captures your vision and gives you a process for investment success. If your investment process works, stay with it regardless of your short-term results.  When returns are lackluster, it’s easy to ditch your plan and start over. Investors who don’t have an investment plan usually chase returns and make irrational decisions. This strategy is not a good long-term solution for creating wealth. In December 2018, investors withdrew $183 billion in mutual fund assets as the S&P 500 fell 15.7%. In January 2019, they added $23 billion as the stock market rose by 15%. Investors were reacting, not investing. When adversity strikes, your plan and process will keep you in the game.

You need goals. A financial plan will help guide you towards your investment destination. It will be your playbook for financial success. Coach Rhule and other successful coaches have a plan for everything – practices, games, travel, meals, etc. He leaves nothing to chance, and he focuses on what he can control. He can’t control the outcome of the game, nor can you control the direction of the stock market. Focus on your plan and the things you can control, like savings and spending.

Coach Rhule is not alone. He has a team of coaches, assistants, and other personnel helping his team achieve their goals. Surrounding yourself with a group of advisors will pay dividends. Relying on a financial planner, investment professional, attorney, and CPA will help you fortify your foundation.

Last, celebrate your success. The Baylor Bears are having fun and enjoying their season. It’s been a long-time coming for the players and their fans; both are enjoying the ride. You must enjoy your success, as well. It’s okay to sell a few of your winners and spend the money on yourself or loved ones.

There is still much work for Coach Rhule and Baylor Bears to do, but so far, so good!

Sic ‘em Bears!

November 27, 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://sicem365.com/s/560/top-10-quotes-from-matt-rhules-introductory-presser, by Baylor Football, 12/2/2106

[2] https://www.espn.com/college-football/story/_/id/27969408/how-matt-rhule-charlie-brewer-rebuilt-baylor-back-big-12-contender, by Sam Khan, Jr., 10/31/2019

[3] https://www.fox44news.com/sports/matt-rhules-motto-trust-the-process-comes-to-fruition-for-baylor-football/, by Matt Roberts, 11/24/2019

My Uber Driver

My Uber driver was from Afghanistan. He moved to the United States with his wife and two young children to escape the atrocities and horrors of his former country. He was an animated character.

On my drive from the airport to my hotel, I learned much about this gentleman. He is attending school to become an aeronautical engineer. His goal is to make $150 a day from driving in between his other job and his studies. He has a plan and he’s driven to succeed so he can provide a better life for his family.

To succeed as an investor, you need goals – specific goals. Your plan should be unique to your situation and reflect your intentions.

Here are a few suggestions to help you get started with your plan so you can move closer to your goals.

  1. Define your goals. What items are vital to you and your family? Do you need to save for college? Retirement? Write your goals down and commit them to paper. Be specific.
  2. Take an inventory of your assets. List your investments by account and type. How much money do you currently have in stocks, bonds, or cash? What percentage of your assets are in retirement accounts? Taxable accounts? How much money are you saving monthly?
  3. Take an inventory of your liabilities. Do you have a mortgage? Credit card debt? Auto loans? Student loans? List how much you owe for each item, including the rate and term.
  4. Identify your insurance coverage. Life, disability, and long-term care insurance policies will help protect you and your family from unfortunate events. Don’t forget to include your home and auto policies. Also, do you contribute to a Health Savings Account? Your HSA can play an essential role in both your health and retirement planning.
  5. Do you have children? Setting up a 529 plan as soon as possible helps offset the cost of college. Automate your monthly savings and invest for growth because the cost of college continues to rise – unchecked.
  6. Update your estate plan. A Will or trust is paramount to help your family honor your wishes once you’re gone. What will happen to your family and assets? A Will or trust will also provide guidance to your families and doctors on medical issues if you’re incapacitated.
  7. Review your corporate retirement plan benefits. Do you have a 401(k) or 403(b) plan? Does your company offer a pension or cash balance plan? These accounts will probably constitute most of your assets so it’s essential you manage them correctly.
  8. Identify your beneficiaries. Your retirement plans and insurance policies will transfer to your loved ones by beneficiary designations. It only requires a few minutes of your time to check the beneficiary designations on your accounts, so do it today!
  9. Prioritize your goals. Your financial plan will list several items, so it’s imperative to identify those goals that are most important to your family.
  10. Contact the Social Security Administration to review your future benefits. Review your annual income amounts to make sure the data is correct because your income will determine your benefits.

The financial side of your plan is easy to compute because it’s just math – you either have the assets to achieve your goals, or you don’t. The emotional side of your plan is more challenging. What will you do in retirement? What are your hopes, dreams, and fears? How will you spend your days?

Before you’re ready to retire or pursue a goal, spend time thinking about the emotional side of your plan. You’ll be prepared to move forward when your financial and emotional plans are in sync.

I’m confident my Uber driver will succeed because he’s committed to his plan. If you follow his lead, you’ll probably thrive as well.

A dream without ambition is like a car without gas…you’re not going anywhere. ~ Sean Hampton

November 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. 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.

 

Are You Earning 20 Percent?

The stock market is soaring this year with index returns topping 20 percent. The NASDAQ, S&P 500, and Dow Jones have risen 27.3%, 23%, and 18.4%, respectively. It’s a good year to own stocks despite Brexit, The Trade War, and the Boeing disasters.

Are you earning 20 percent? If so, congratulations. A 20% return is twice the long-term historical average of 10% for the stock market.

NASDAQ, Dow Jones, & S&P 500:

^IXIC_^DJI_^SPX_chart

If your assets are diversified, you’re probably earning less than 20 percent. Most likely, you also own small-cap and international companies along with a few bonds. Your exposure to large-cap stocks might be less than 25% of your total portfolio. The more stock exposure you have, the higher your returns are for this year.

Various Asset Classes:

IJR_VWO_TLT_SHY_EFA_chart

How have the other asset categories performed this year? Small-cap stocks = 17.3%, international stocks = 16%, emerging market stocks = 12.6%, long-term bonds = 11.6%, and short-term bonds = 1.2%.  A balanced portfolio of these asset classes has risen 17.3% this year.

Balanced Portfolio: 60% stocks, 40% bonds:

P176514_chart

Investing all your assets in the S&P 500 this year would have been a wise decision if you knew in advance the market would rise substantially. Remember, the market was down 16% last December, and few people dared to buy the dip. Last year the S&P 500 lost 6.24%, and during the Great Recession from 2007 to 2009, it fell 56%. During the Tech Wreck from 2000 to 2003, the index dropped 49%.

The Great Recession:

^SPX_chart (2)

The Tech Wreck:

^SPX_chart (3)

The 1970s was also a tough time for stocks. From 1973 to 1979, the S&P 500 lost 8.6%.

The Seventies:

^SPX_chart (4)

Should you invest all your assets in the stock market? If you have a high tolerance for risk and you can handle the volatility, then go for it — however, a more prudent recommendation is to invest in a low-cost globally diversified portfolio of mutual funds.

How do you know if you can handle the heat of a single index? Here are a few suggestions.

Investing requires patience and prudence. Do not chase returns or get lured into risky investment strategies, because if it looks too good to be true, it probably is. Instead, focus on your goals, invest often, keep your fees low, and think long term.

The simple believes everything, but the prudent gives thought to his steps. ~ Proverbs 14:15

November 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.

 

 

 

 

 

 

 

The Giving Season

November is the beginning of the giving season. From now until the end of the year, charities and non-profits will receive much-needed dollars to help fund their mission. For several organizations, the money they receive in the next few weeks will subsidize most of their annual budget. Individuals typically wait until the end of the year before they give because they don’t have a giving or philanthropic plan.

For where your treasure is, there your heart will be also. ~ Matthew 6:21.

During my financial planning meetings, I ask people if they have a charitable giving strategy or if they donate money regularly; thankfully, most people are generous. I once worked with an individual who didn’t believe in giving money away while he was living. He was going to donate his money at his death through his estate. He was missing an opportunity to see his gifts bear fruit.  I didn’t tell him that people who don’t give today won’t give tomorrow.

Each one must give as he has decided in his heart, not reluctantly or under compulsion, for God loves a cheerful giver. ~ 2 Corinthians 9:7.

Most individuals don’t have a coordinated giving plan, and as a result, they wait until the last minute to make donations. Without a strategy, you may be missing valuable deductions, so here are a few ideas to help you with your charitable contributions.

Appreciated Securities.  The stock market has done well, so you probably have stocks with unrealized capital gains. When you donate appreciated securities to a charity, you get the deduction, avoid a capital gains tax, and your charity receives the money. Let’s say you purchased YETI Holdings in January at $14.84, and today it’s selling for $31.90 for an unrealized gain of $17.06 or 115%. You can gift your shares directly to your charity and avoid paying taxes on the appreciation. The charity will sell the shares on the open market to receive the cash, and they, too, will avoid a capital gains tax. You must donate your securities to a 501c3 organization to receive a deduction

Qualified Charitable Distribution.  The IRS allows you to satisfy your required minimum distribution by giving your money directly to a charity from your IRA. It’s called a qualified charitable distribution (QCD), and you’re allowed to donate up to $100,000 per year. The QCD will enable you to avoid paying taxes on the distribution, and it will satisfy your required minimum distribution.

Donor-Advised Fund (DAF). A Donor Advised Fund allows you to transfer appreciated shares to the fund. Once inside the DAF, you can sell your shares and purchase new investments without realizing a capital gain. You can deduct the contribution from your taxes, and it occurs in the year of your gift, not in the year of distribution. You don’t have to distribute the proceeds immediately, so if you’re not sure which charities to support, you can defer the payment until you identify the organizations. For example,  you can transfer $100,000 worth of ABC Inc. stock to your Donor Advised Fund, sell it, reinvest the proceeds, and then send a portion of the funds to your favorite charity. The funds that remain inside your DAF will grow tax-free.

Charitable Remainder Trust (CRT). This trust allows you to transfer your shares to a Charitable Remainder Trust, sell your holdings, diversify your assets, and receive income from the proceeds. At your death, your charity will receive the remainder of the trust assets. The stock, once transferred, can be sold free of taxation and the proceeds reinvested into a diversified portfolio of stocks, bonds or funds. Your contribution to the trust qualifies for a charitable deduction. The amount of income you can receive from the trust is between 5% and 8% of the portfolio value. You will pay ordinary income tax on the income you receive.

Cash.  Cash is king, and it’s easy to give away. The IRS allows you to give away $15,000 per person per year without having to pay taxes. However, you won’t receive a tax deduction, but you’ll be able to help the next generation. For example, if you have four children and ten grandchildren, you can give away $210,000 this year. You can also give $15,000 to friends and strangers if you want.

The end of the year is a great time to give money to those in need, and it’s always the right time to help others.  However, an annual charitable giving strategy may be beneficial to your long-term planning and budgeting needs.  A philanthropic plan can pay huge dividends to you and those you support.

Do not withhold good from those to whom it is due, when it is in your power to do it. ~ Proverbs 3:37.

November 5, 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.

 

 

 

 

You’re Hired!

While working at Morgan Stanley, I hired scores of individuals for the firm’s financial advisor training program. Directly or indirectly, I talked to hundreds of individuals about our firm. To hire hundreds, I reviewed thousands of resumes.

Finding individuals to work at Morgan Stanley was not hard, especially during the late ‘90s. The blue-blood, white-shoe firm attracted superior talent, and working for the firm was a status symbol, especially for recent college graduates.

I enjoyed the process, and I met some fantastic people. Of all the people I hired, a few of them stand out. Here are four individuals (not their real names) who made a strong impression.

Andy wanted an opportunity to improve the quality of life for his family. He worked for a big-box retailer at the time I hired him, and on his first day of work, Andy walked into our office dressed like Gordon Gekko. He traded his vest for a blazer. Andy looked the part. But, more importantly, he changed his mindset now that he worked for a prestigious Wall Street firm. He did well, and every few years, he calls to thank me for giving him a shot at a new career and a better life.

June graduated from Yale University and she was a native of South Korea. She was a quick study and eager to learn. She wanted to know how to succeed in the business, so I told her to meet with as many people as possible and open two new accounts per week. June followed the script, and she was one of my most successful hires.

Larry was a former professional tennis player who played at Wimbledon. He walked into my office unannounced and said he wanted to work for Morgan Stanley. We talked for some time, and I offered him a job. Like most professional athletes, he was focused and disciplined.

Bob was a former Marine, full of energy. After a few months on the job, I walked into his office, and he had numerous spreadsheets lining his wall. The categories included contacts, appointments, new accounts, and assets. I told him he would make it in the business, and he wanted to know how I knew. I told him his goal-setting and drive would take him to new heights. He’s still going strong, twenty-five years later.

Recruiting for a large Wall Street firm like Morgan Stanley is easy. Hiring for a small firm is challenging. My firm is growing, so I posted a job opening for a new advisor or financial planner. It was a three-month ordeal, a dreadful experience. It was so bad that I’m reluctant to go through the process again, despite the growth of my firm.

After a decade of hiring, I learned a few things. Here are a few suggestions to help you improve your recruiting process.

  1. If the person you’re interviewing arrives on-time for their first interview, don’t hire them. To arrive on time is to arrive late. Look for individuals who arrive early, and the earlier, the better. People who arrive on time for their initial interview will show up late to the office once they start working for your firm.
  2. Set up multiple interviews for your candidate, don’t rely on one person to make the hiring decision. After interviewing an applicant at Morgan Stanley, the receptionist told me he was rude and disrespectful. On paper, and in my interview, he was the ideal candidate. I didn’t hire him, and after the experience, I had candidates meet with several people in the office. We would then gather to review our notes before I made an offer.
  3. Invite your candidate to breakfast, lunch, or dinner. You’ll learn much by the way they eat their food and hold their utensils. Do they know the proper way to use a knife or fork? One candidate held his fork like a flare, and when he’d talk, he’d wave it around like he was trying to signal an aircraft. Do they wait for others to be served, or do they dive in without a care in the world? Walt Bettinger, the CEO of Charles Schwab, invites candidates to lunch and purposely messes up their order to see how they react.[1] Do they roll with the punches, or do they get upset?
  4. Saying ‘please’ and ‘thank you’ are paramount for a new hire. A candidate who’s not polite will not make a good employee.
  5. Did they send you a thank-you email after they completed the interview? An email is okay; a handwritten note is better. In a world of electronic communication, a thank you letter will allow the candidate to stand out from the crowd.
  6. Once hired, how do they set up their office? Do they personalize their space? Do they hang pictures? Do they have photos of their family? If not, they won’t stay at your firm long.

Once your new employee is on board, you owe them a duty of care. It’s your responsibility to make sure your new hire feels welcomed. Here are a few ideas to make them feel appreciated.

  1. The first 48 hours are crucial. Let them know you care about them by introducing them to your staff. If possible, walk them around your office so they can meet the others. Show them the entire office, including the restroom and breakroom. Check in with them often during the first few days to make sure they feel comfortable.
  2. Send a welcome email to your employees so they can get to know their new colleague. Include a bio, picture, job description, etc.
  3. Send a welcome gift to the individual’s family, so they know they’re also part of the team.
  4. Post an ad in your local paper or magazine so their friends, family, and neighbors can see they have a new job.
  5. Set up their office, so when they start on day one, it’s ready to go. Is the computer working? Is the printer connected? Do they have business cards? Is their office stocked with paper, paper clips, pens, pencils, folders, and sticky notes? Is it clean? When I left Morgan Stanley to join A.G. Edwards, my new office was a temporary storage closet. I had to clean it myself, and nothing worked. I was not impressed with their preparation and did not feel welcomed.
  6. Give them some swag – hats, shirts, pens, mugs, whatever you got. They now ride for the brand.
  7. Keep the employee busy. Have them work on special projects. Include them on calls and visits so they can meet the firm’s clients.
  8. Be flexible. Be patient. It will take them time to get up and running. Give them grace so that they know you care about their long-term success.

Hiring successful people takes time. Be firm in your commitment to finding the best candidates. Be authentic and humble, and most importantly, trust your instincts.

Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. ~ Warren Buffett 

November 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. 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.businessinsider.com/charles-schwab-ceo-takes-job-candidates-to-breakfast-messes-up-their-order-2016-2, Jacquelyn Smith, February 18, 2016

Can You Endure?

Webster dictionary defines endurance as the “ability to withstand hardship or adversity, especially the ability to sustain a prolonged stressful effort or activity.” The ability to endure trials and tribulations is vital if you want to experience victory. We learn and grow through adversity.

Loyalty and vision are also critical components of endurance. Do you believe in your mission? Do you have goals? Do you have a plan? If your vision is clear, you will stay loyal to your calling.

Sir Ernest Shackleton led an expedition to the Antarctic on the ship Endurance. After it got stuck in ice, the men drifted on an ice floe for over a year before landing on Elephant Island. Sir Shackleton left the men on the island to find a rescue boat and returned three months later to rescue his crew. All the men survived.[1]

Abraham Lincoln lost several elections before being elected the 16th President of the United States in 1860.

Harriett Tubman escaped slavery and made 13 missions to rescue approximately 70 slaves through the Underground Railroad. She also helped John Brown recruit men for the raid on Harpers Ferry.[2]

Louis Zamperini was a World War II veteran and hero. His plane was shot down over the Pacific Ocean, captured as a prisoner, and held as a prisoner of war in Japan until the end of the war in 1945. His pain and suffering were detailed magnificently in Laura Hillenbrand’s book Unbroken: A World War II Story of Survival, Resilience, and Redemption.

J.K. Rowling battled poverty and depression to become the first billionaire author, the author of the Harry Potter series.[3]

Bethany Hamilton was attacked by a shark and lost her left arm. Her harrowing story of survival is portrayed beautifully in her book Soul Surfer: A True Story of Faith, Family, and Fighting to Get Back on the Board.

Helen Keller overcame blindness and deafness to achieve greatness.

It’s hard to imagine what it’s like to endure a prolonged bear market, especially when stocks are up more than 20%.  Not only is the market up significantly this year, but it has also risen 353% since March 2009. It’s now the longest-running bull market in history. It’s easy to stay the course when things are going well.

The significant returns we’re enjoying today were birthed from one of the worst bear markets in history. From 2007 to 2009, the S&P 500 fell 56%. The Great Recession is still raw for many investors.

During the Tech Wreck from 2000 to 2002, the S&P fell 46%. The market rebounded 95% from 2002 to 2007.

The Tech Wreck and Great Recession wreaked havoc on the S&P 500 as the index lost more than 14% from 2000 to 2010 – a lost decade for stocks.

If you invested $10,000 in the S&P 500 on April 1, 2000, and held on through November 1, 2019, it’s now worth $20,470, generating an average annual return of 4.4% per year. If you endured, you doubled your money.

A return below 5% doesn’t sound great, but it’s a positive number, and you doubled your money. What if you diversified your portfolio and added a few more asset classes? A balanced portfolio of large, small, and international companies mixed in with a few bonds and real estate holdings, rebalanced annually, produced an average annual return of 7.26% per year.[4]

If you’re not willing to endure the difficult times, you can play it safe and invest in short-term U.S. Treasuries. The iShares U.S. Treasury 1 – 3 Year Bond Fund (SHY) has returned 1.10% to shareholders for the past ten years. A $10,000 investment a decade ago is now worth $10,110 – safe and sorry.

In addition to your balanced portfolio, a financial plan will help you vanquish worry and fear. Your plan will help you endure and overcome difficult markets.

It’s impossible to predict when a bear market will arrive., so don’t try and time the market. Bear markets are part of investing, but if you dare to hold on to your investments during difficult times, you may reap the benefits when stocks recover.

Rejoice in hope, be patient in tribulation, be constant in prayer. ~ Romans 12:12

November 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://en.wikipedia.org/wiki/Endurance:_Shackleton%27s_Incredible_Voyage

[2] https://en.wikipedia.org/wiki/Harriet_Tubman, website accessed 11/2/19

[3] https://en.wikipedia.org/wiki/J._K._Rowling

[4] Morningstar Office Hypothetical, 4/1,2000 to 10/31/2019. The Dimensional Funds included were DFSTX, DFUSX, DFEMX, DFREX, DFIVX, DFISX, and DFIGX. 60% stocks, 40% bonds.

Are You Emotionally Attached to Your Stocks?

It’s easy to fall in love with a stock, especially if you handpicked it yourself. Over the years, I’ve talked to scores of investors about their favorite stocks, and most prefer to hold on to them forever regardless of allocation or performance. If you’re emotionally attached to a company, try not to overlook several risk factors.

It’s easy to get anchored to your original purchase price. If your stock falls below your purchase price, you might be reluctant to sell it for a loss for fear of admitting you were wrong. Another challenge for investors is when a stock drops below the all-time high. If it hit the high price once, it must do it again. Of course, it doesn’t have to do anything.

Enron traded at an all-time high on August 23, 2000, closing at $90.75 per share. At its peak, Enron’s market-cap was more than $70 billion, and, at the time, it was the 7th largest publicly traded company.[1] Two years later, it would be worthless. As a comparison, Berkshire Hathaway is currently the 7th largest publicly traded company.

Here are a few companies that are currently trading off their all-time highs: IBM peaked at $215 on March 14, 2013. It’s now trading at $135, down 37%. Boeing peaked at $440 on March 1, 2019. It’s currently trading at $339, down 23%. Tesla traded to an all-time high of $385 on September 18, 2017. It’s currently trading at $328, down 15%. Exxon traded at $104.37 on June 28, 2014, and it is now $69.25, down 34%. 3M sold at $258 on January 26, 2018. It’s currently selling for $166, down 36%. These companies may return to their peaks, but in the meantime, they’re a drag on portfolios.

During my career, I’ve found investors fall in love with three types of stocks. The first is a company located in their backyard, the second is a story stock highlighted on TV, and the third is a mega-cap stock.

Locals in California, pick Apple. Oregonians run with Nike, Washingtonians click on Amazon or Microsoft. Texans ooze over Exxon and Tennesseans like the way FedEx delivers. Investors who own homegrown stocks like to hold them forever.

Story stocks get big headlines. Tesla gets a lot of screen time, as do recent IPOs like Uber, Peloton or Beyond Meat. If it’s new, it must be a winner, but not always.

Mega-cap stocks like Apple, Microsoft, Alphabet (Google), Amazon, Facebook, Berkshire Hathaway, Visa, JP Morgan, Walmart, and Procter & Gamble are popular holdings, and, rightfully so. These battleship stocks have stood the test of time and have rewarded shareholders handsomely. Mega-cap stocks also have another benefit to shareholders in that consumers use their products daily.

By investing in homegrown stocks, you might miss opportunities in companies scattered around the globe.  Advantest Corporation is a Japanese company, which is up 148% year-to-date. Fortescue Metals Group in Australia is up 137%. Li Ning Company in China is up 213%, and Hotai Motor in Hong Kong is also turning in a stellar performance, up 108%.

A basket of globally diversified index funds will remove the emotional attachment of investing and give you exposure to thousands of companies. It’s easy to fall in love with Tesla, not so much with a small-cap international index fund. Also, your diversified portfolio will allocate a portion of your assets to bonds, and no one falls in love with a bond fund. However, when the market corrects, you’ll be glad you own a bond fund or two.

A financial plan will also help you with your emotional attachment. A good plan will quantify and prioritize your financial goals. Your plan will also direct your advisor on how best to construct your investment portfolio. Your plan and portfolio will synch to your goals.

Despite the numerous benefits of financial planning, a recent study by Vanguard found, “many advisors are not preparing financial plans for their clients.” Their study found that only 47% of advisors created a formal plan for clients with $100,000 to $1,000,000.[2]

To achieve long-term financial success, create a financial plan, invest in a globally diversified portfolio of mutual funds, and keep your fees low.  If you follow this plan, you might fall in love with your results!

Love is patient and kind; love does not envy or boast; it is not arrogant or rude. It does not insist on its own way; it is not irritable or resentful; it does not rejoice at wrongdoing but rejoices with the truth. Love bears all things, believes all things, hopes all things, endures all things. ~ 1 Corinthians 13:4-7

 

October 28, 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.begintoinvest.com/enron-stock-chart/, Website accessed on October 23, 2019

[2] The Vanguard Advisor’s Alpha® Guide to Proactive Behavioral Coaching, Donald G. Bennyhoff, November 2018.