What Is A 401(k)?

Corporate retirement plans are valuable tools for employees. In addition to personal savings and Social Security, a corporate retirement plan can help you retire in style, but what the heck is a 401(k) plan?

A 401(k) plan is a savings plan offered by your employer, allowing you to contribute a percentage of your pay to your retirement account. Your employer may also match your contribution, but more on that later. Let’s review some critical components of a 401(k) plan.

Contributions

The IRS allows you to contribute $22,500 of your pay to your plan; if you’re fifty or over, you can deposit another $7,500 for a total of $30,000. How much should you contribute? My recommendation is to contribute the maximum amount allowed by the IRS. If you can’t contribute the full amount, then aim for 10%. If 10% is too much, then match your employer’s match. If that is too high, contribute what you can because something is always better than nothing.

Profit Sharing

The 401(k) plan can include a profit-sharing match. However, from all sources, the maximum contribution to your plan is $66,000 or $73,500 with the catchup provision. Let’s say you’re fifty-five, earn $200,000 annually, and contribute 20% of your pay, and your employer matches 5% and offers a 10% profit-sharing match. Your regular contribution is $22,500, the catchup provision is $7,500, the match is $10,000, and the profit-sharing contribution is $20,000 for a total of $60,000.

Vesting

You are always 100% vested with your contribution because it’s your money, but your employer may restrict the employer match or profit-sharing contribution. For example, a six-year vesting schedule means that 20% of your employer contribution becomes yours every year. Then after six years, the entire balance belongs to you, regardless if you remain employed or move to a new company.

Traditional or Roth

Most 401(k) plans allow for traditional or Roth contributions. If you choose the traditional route, your contributions are pre-tax, and a Roth contribution allows for after tax-contributions, regardless of your income. If you’re a high-income earner, consider a Roth 401(k), so your funds will grow tax-free.

SPD

Each 401(k) plan comes equipped with a summary plan description (SPD), a resource guide for your plan. The SPD highlights the plan’s name, benefits description, vesting schedules, fees, investment funds, etc. Your HR manager or plan administrator should deliver it when you enroll.

Investments

Your plan fund lineup can include mutual, exchange-traded, and target-date funds. The lineup allows you to select funds and build your portfolio based on your risk tolerance. If you don’t want to make your own portfolio, you can choose a target-date fund based on your retirement year. For example, if you’re retiring in 2055, select the 2055 fund. The 2055 fund will get more conservative as you get closer to your retirement date. The investment process is automatic if you choose funds from the pre-selected list, meaning you do not need to invest the money every pay period.

Brokerage Window

A brokerage window allows you to select investments beyond the pre-selected fund lineup provided by your employer. You can buy individual stocks, bonds, mutual funds, and ETFs if your plan has a window. You may also trade options but tread lightly. If you select this option, you must make the investments each pay period; it’s not automatic. Several years ago, a client called because his 401(k) was invested in the money market account, and he was upset because the market was marching higher. I informed him he selected the brokerage account and had to invest the money himself, which he did not want to do, so we moved his funds back to the traditional side of his plan.

Loans

Most 401(k) plans permit loans, allowing you to borrow 50% of your vested balance to a maximum of $50,000. You can use the funds to purchase a home, pay for college, or cover medical expenses. Leaving your employer before you repay the loan is a distribution, subject to taxes and penalties. If you’re under age 59.5, the tax penalty is 10%.

Retirement

When you retire, you can leave your assets in the plan or roll them over to an IRA. If you keep your funds in the corporate account, you still must take your required minimum distribution at age 73, similar to an IRA.

Start

A 401(k) plan is an excellent way to create generational wealth, especially if your employer offers a generous match. Congratulations if you’re contributing the maximum to your plan, but if not, start today because the sooner you start, the sooner you can finish!

If you’re just starting out in the workforce, the very best thing you can do for yourself is to get started in your workplace retirement plan. Contribute enough to grab any matching dollars your employer is offering (aka the last free money on earth). ~ Jean Chatzky, Financial Journalist and Media Personality

January 31, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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 your asset level.

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.

Crank Up Your 401(k)!

January is an excellent time to crank up your 401(k) plan, and it probably needs a refresh after a year of losses, dividends, interest payments, and contributions. Here are a few suggestions to help you get started.

  1. Max out your contributions. The maximum amount is $22,500. If you’re fifty or older, you can add another $7,500.
  2. Increase your annual contribution if you’re not maxing out your plan. If you’re contributing 10% of your pay, consider increasing it to 12%. For example, if your annual salary is $50,000, an extra 2% is $1,000 per year, which could grow to more than $57,000 in twenty years. Also, the additional $1,000 annual contribution equates to about $40 per pay period.
  3. Increase your stock allocation. If your current stock allocation is 60%, consider raising it to 70% or 80%. After a losing year, the extra stock exposure could boost your plan as the stock market recovers.
  4. Rebalance your account. The market did not perform well last year, and your asset allocation is probably out of whack. For example, if you started last year with 60% stocks and 40% bonds, it could now be 50% stocks and 50% bonds. January is an excellent time to rebalance and adjust your investments.
  5. Consider a target-date fund if you don’t want to hassle selecting specific investments or rebalancing your accounts. Target-date funds are all-in-one, so all you need to do is pick the year you’re retiring and move your assets to that holding. For example, if you’re retiring in 2030, choose the 2030 target-date fund. Simple.
  6. Update your beneficiary designations. Did you incur a life event last year? Did you get married or have a child? Did you lose a loved one or get divorced? If so, then change your beneficiary designation to reflect your current status.
  7. IRA Rollover. If you lose your job, you can roll over your 401(k) plan to an IRA, leave it with your previous employer, roll it to your new employer, or cash it out. You may incur taxes and penalties if you decide to cash in your plan.  

Retirement comes at you fast, so make sure you’re doing all you can today to ensure your golden years are truly golden.

Retirement is not the end of the road. It is the beginning of the open highway. ~ Anonymous

January 23, 2023

Bill Parrott, CFP®, 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.

Hope Is A Strategy

Hope is in short supply, and people are hurting. We’re battling a global pandemic, fires, floods, racial tension, economic uncertainty, a war, and political turmoil – dark days. It’s hard to imagine times getting better, but they will. Try to find the good among the bad. Mr. Rogers once said, “When I was a boy, and I would see scary things in the news, my mother would say to me, ‘Look for the helpers. You will always find people who are helping.'” Great advice. There’s always a silver lining, and it takes courage to rely on hope and faith, but they are essential ingredients if you want to succeed.

What is hope? Webster’s dictionary defines it as a desire with expectations of obtaining and expecting with confidence. Powerful words. In addition to confidence, it takes patience, humility, and wisdom to rely on hope because we can’t see it or touch it, but it’s there.

The investment community says hope is not a strategy, but I disagree. Financial planners and investment managers, including me, tell clients they must have a plan to achieve their goals. A financial plan is needed, but you also need hope, especially when the stock market crashes like last year. As Mike Tyson said, “Everybody has a plan until they get punched in the mouth.” When your plan is not working and the days are dark, you need faith that things will eventually improve.

I rely on financial planning software, Excel spreadsheets, and my faithful HP12c calculator to help clients obtain their goals. I was full of hope and faith when I launched my firm seven years ago because it’s all I had. I was confident my business would flourish, so I didn’t worry about not having clients. I pursued each day with optimism. And, day by day, I built my business.

In helping others reach their financial goals, I must believe in the stock market’s long-term trend and our country’s economic resilience. I have centuries of data supporting my thesis when I talk to clients about their future, but the information is historical. It already happened, and how do I know it will continue? How do I know the stock market will be higher 100 years from now? I don’t, nor does anyone else. It’s a guessing game. However, based on history, I like my odds of success.

Illustration of lonely boy with bird wing shadow, surreal painting, concept art, conceptual idea of freedom hope and imagination

When times are tough, like now, it’s imperative to have faith in the future. I was talking to a client this week who is struggling. We talked through a few issues, and I suggested he focus on the good things in his life. It’s hard to be upbeat, but it’s necessary to keep moving forward.

Here are a few suggestions to help you keep putting one foot in front of the other.

  • Serve others. Volunteer your time to help those in need. Serving people who can only repay you with a smile, hug, or handshake is time well spent.
  • Donate. Consider donating money to your local food bank or soup kitchen if you have financial assets. A Google search for non-profits in your neighborhood will produce several results. Pick one and send them a check.
  • Deliver. Do you know a neighbor who can use a helping hand? Cook them a meal. Mow their lawn. Wash their car. Buy them a cup of coffee. Listen to their story.
  • Sing. It’s hard to feel sorry for yourself when singing, especially with others. For the record, I have a horrible voice, and I can’t sing, but I do it anyway.
  • Mentor. Kids and young adults need mentors and tutors now more than ever. Do you have time to help someone with their studies or give them career advice?
  • Plant. Plant some trees, bushes, or flowers. Start a garden. Add some color to your backyard. Hang up a hummingbird feeder or install a birdbath.
  • Laugh. Watch a comedy or read comics. My family has a collection of Far Side cartoons by Gary Larson, and we flip through the pages occasionally to get a belly laugh.
  • Exercise. A walk or run can give you a quick reset. Play tennis or golf. Ride a bike. Go for a swim.
  • Watch. Wake up early to watch the sunrise. When I lived in Mission Beach (San Diego), hundreds of people would walk to the boardwalk to see the sunset. I’ve never been disappointed by the beauty of nature.
  • Adopt. A dog or cat can bring joy to your household. Visit your local humane society to adopt an animal. If you don’t want to care for a pet, watch some Youtube videos about animals – it will put a smile on your face.
  • Pray. Plug into the highest power source.  

As a nation, we have endured worse. It’s a difficult time for all, but it will pass. Focus on the things you can control, don’t worry about tomorrow, and keep the faith.

Gotta have hope!

Now faith is confidence in what we hope for and assurance about what we do not see. ~ Hebrews 11:1

January 17, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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.

Goodbye 2022

Goodbye, 2022, and good riddance. Don’t let the door hit you on the way out. What a brutal year for investors, as most asset classes lost money. In hindsight, I should have buried my money in the backyard or stuffed it under my mattress.

The S&P 500 is having its worst year since 2008. and long-term government bonds have dropped 25.5%, the worst year since 1926 and probably ever. Ever! The stock market posted stellar returns in 2021, rising 26.8%, and soared 72% since 2019. The momentum was on our side until the Federal Reserve raised interest rates by 1,700%. And who wanted to buy a T-Bill yielding 0.06%, which it did in January?

The Federal Reserve is trying to kill inflation by raising interest rates from .25% to 4.25%. The inflation rate is 7.11% after peaking at 8.58% in June. It is falling but still high, and the Federal Reserve will continue to battle the silent economic killer.

Consumer sentiment remains low, and investors are depressed. The US Index of Consumer Sentiment peaked on January 1 and has dropped consistently since the beginning of the year. The current index reading is 59.10, near the lows dating back to 1952, and it has averaged 85.8 for the past 70 years. It peaked at 112 in February 2000 before the S&P 500 fell 43%. You must be excited with the current number if you’re a contrarian or perpetual optimist.

Investors are bearish according to the recent US Investor Sentiment Percentage Bullish reading of 24.3%. 75.7% of investors are negative and expect stocks to fall further, and 24.3% are hopeful they will rise. Last April, the index peaked near 60% as most investors were optimistic about the future direction of stocks. Investors now expect markets to fall more, with little hope for the future. However, a low reading is bullish for stocks.

Cash is attractive relative to falling stocks and bonds, and it’s now possible to buy a one-month US T-Bill yielding 3.8%. Investors love T-Bills because they’re guaranteed and don’t lose money if held to maturity, and they provide relief to weary investors in the near term, but they’re no match for stocks in the long run. Since 1926, T-Bills averaged 3.24%, and stocks produced an annual gain of 10.2%. A dollar invested in T-Bills is now worth $21.97; for stocks, it’s $12,231. Inflation averaged 2.95%, so your net return on T-Bills was 0.29% before taxes. Cash is a short-term gain but causes long-term pain.[1]

I’m excited for 2023 because I believe in free markets and love owning great American companies. I’m also an optimist fond of diversification, asset allocation, and financial planning. And hope springs eternal.

Merry Christmas and Happy New Year! May God’s light shine brightly on you and your loved ones.

What a wonderful thought it is that some of the best days of our lives haven’t even happened yet. ~ Anne Frank

December 15, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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.


[1] Dimensional Fund Advisors Returns Web Tool from January 1926 to November 2022.

Social Security Facts and Data

The Social Security Administration is chockfull of data, and its website is a valuable planning tool. Below is some useful information.

  • Sixty-six million Americans are receiving a Social Security benefit totaling one trillion dollars. As a comparison, the US GDP is $25.7 Trillion.
  • Sources for Social Security revenues (2020): 89.6% = payroll tax; 6.8% = interest; 3.6% = Taxation of benefits.
  • There are 2.8 covered workers for each Social Security beneficiary, which could drop to 2.3 in 2035.
  • The median benefit for all beneficiaries is $1,590.
  • The median benefit for men is $1,814.
  • The median benefit for women is $1,403.
  • About 90% of people age 65 and older are receiving Social Security benefits.
  • 37% of men and 42% of women receive 50% or more of their income from Social Security benefits.
  • About 1 in 4 individuals may become disabled before age 67.
  • The number of Americans age 65 or older may increase to 76 million from 58 million by 2035.
  • 32% of workers do not have access to a pension plan.
  • 63% of workers save for retirement through their company plan.
  • The 2023 cost of living adjustment for the Social Security benefit is 8.7%.
  • By 2050, 80% of divorced spousal beneficiaries may be women.
  • The full retirement age for individuals born before 1954 is 66.
  • The full retirement age for individuals born after 1960 is 67.
  • If you’re divorced, your ex-spouse qualifies for benefits based on your earnings, but it will not impact your Social Security payout. To qualify for benefits, they must be 62 or older and unmarried.
  • The eligibility range for benefits is age 62 to 70, and your benefit increases by approximately 8% annually until age 70. For example, if your monthly payout at age 62 is $1,700, it could rise to $3,146 at age 70.
  • Your lifetime earnings determine your benefits, and the administration uses 35 years of wages in which you earned the most money.
  • The life expectancy for a male aged 67 is 17.6 years.
  • The life expectancy for a female aged 67 is 20.1 years.
  • On your personal Social Security site, you can check your benefits, estimates for your spouse, and employment history.
  • Create your Social Security page here: https://www.ssa.gov/myaccount/
  • The Social Security website has several calculators to help you optimize your benefits. https://www.ssa.gov/benefits/calculators/

I encourage you to establish your online account with the administration to track your benefits and income history to ensure you’re maximizing your benefits.

The data from the Social Security Administration is helpful but frightening. For example, the median benefit for all recipients is $1,590. A significant percentage of individuals rely on their payout for half their income, meaning many live on approximately $38,000 annually before taxes. Also, women may account for 80% of divorced spousal benefits by 2050, and 63% of workers are saving for retirement through their company plan, suggesting 37% are not.

Moral of the story: You must save money when you start working, and the more you save, the better. If you don’t invest regularly, you’re putting your faith in Social Security to cover all your retirement expenses, and the data says it is not a good idea.

The trouble with retirement is that you never get a day off. ~ Abe Lemons

December 1, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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.

Data source: www.ssa.gov

Year End Gift Giving Ideas           

Are you struggling to find the perfect gift for your loved ones? Are you having trouble buying something for the person who has everything? Do your loved ones need another pair of socks, matching pajamas, or decorative hand towels? It can be challenging to buy gifts for others, so here are a few last-minute ideas.

Cash. You can give away $16,000 per person without impacting your estate and gift tax exclusion, and it is not limited to family members. If you’re inclined, you can gift $16,000 to friends, neighbors, co-workers, and strangers.

Appreciated Securities. If you still own an appreciated security or two, consider donating it to your favorite charity. The charity receives your stock, and you receive a tax deduction. More importantly, you won’t pay a capital gains tax when you donate your shares, nor does the charity.

Donor Advised Fund (DAF). If you’re unsure where to donate your dollars, consider establishing a donor-advised fund and giving your money away later. You’ll receive a tax deduction when you contribute money to your fund, but you don’t have to distribute the funds immediately. For example, if you contribute $100,000 to a DAF today, you can give away smaller amounts over the coming years to multiple charities. Here is a link to Schwab’s Charitable Fund: https://www.schwabcharitable.org/donor-advised-funds

Qualified Charitable Distribution (QCD). If you’re 70 ½ or older, you can distribute up to $100,000 from your IRA to charitable organizations. In addition to supporting a nonprofit, the distribution fulfills your annual required minimum distribution (RMD). You won’t receive a tax deduction for your gift and won’t pay taxes on the distribution. It’s a win-win.

Charitable Remainder Trust (CRT). A CRT is similar to a donor-advised fund, except you’ll receive income from your gift and the charity receives your remaining assets at your death. For example, if you donate $1 million to a CRT, you may receive annual income in the range of $50,000 to $80,000, and when you pass, the remaining assets are sent to the organization you selected.

529 Education Plan. The gift of education is priceless. If you have grandchildren or great-grandchildren, consider establishing a 529 education plan. The money grows tax-free if you use the funds for education expenses. A 529 plan can pay for tuition at multiple levels, including K through 12, college, trade, graduate, law, or med school.

Fruitcake. It’s an excellent gift, and it will never expire!

It’s the gift-giving season. If you have ample resources, consider helping those in need or supporting the next generation. Your gift will spread joy and cheer for years to come.

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

November 21, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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.

Corporate Leftovers

It is the eating season – Thanksgiving, Christmas, and New Year’s, when there will be plenty of food and leftovers. I love the day after Thanksgiving because I can make a huge turkey sandwich on sourdough bread with guacamole. As we approach the end of the year, you might have corporate leftovers that need your attention. It’s essential to check your benefit options so you’re not leaving anything on the table.

Here is a list of popular benefits to check before the end of the year.

  • Retirement plan. Check your year-to-date contributions to ensure you’re maximizing your retirement plan assets. The government allows you to contribute $20,500 if you’re under 50 and another $6,500 if you’re over. If you are going to fall short of the maximum amount, you can increase your contributions between now and the end of the year.
  • Match the match. A common benefit that employees and plan participants often miss is the employer retirement match. If your employer offers a 5% match, you should deposit at least 5% of your compensation to the plan – match the match because it is free money.
  • Flexible Spending Account (FSA). A flexible spending account is a use-it-or-lose-it benefit. If you still have funds in your FSA, you must use them before the end of the year because most of the assets do not roll over to 2023. The current contribution limit is $2,850, and the maximum carryover amount is $570.
  • Health Savings Account (HSA). You can contribute to a health savings account if your employer offers a high-deductible medical plan. An individual can deposit $3,650 annually, and a family can add $7,300. If you’re 55 or older, you can contribute an extra $1,000. Unlike a flexible spending account, you can roll over and keep your health savings account benefits. An added benefit to a health savings account is that at age 65, you can use it to fund your retirement.
  • Employee Stock Purchase Plan. If you work for a publicly traded company, they may offer an employee stock purchase plan (ESPP), allowing you to contribute up to $25,000. If you participate in an ESPP, you can purchase your stock at a discount, usually up to 15%.
  • Vacation Days. Most employees do not take all their vacation days, so check your benefits page to see if you still have any days remaining. Several ski resorts are now open, so take advantage of early powder days and bluebird skies.
  • Education Benefits. Some companies offer tuition reimbursement or credits for attending school or participating in certificate programs.

It’s worth a few minutes to check your benefits page to ensure you don’t leave any leftovers behind. You can also contact your HR department for further information.

Leftovers make you feel good twice. First, when you put it away, you feel thrifty and intelligent; “I’m saving food!” Then a month later, when blue hair is growing out of the ham, and you throw it away, you feel really intelligent: “I’m saving my life!” ~ George Carlin

November 19, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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.

Conversations With My Wife

My wife is wicked smart. She earned her Ph.D. in Gerontology and Public Policy from the University of Southern California. She is a ferocious reader who tackles projects passionately and researches them intensely. Each night we take long walks to discuss various topics and try to solve the world’s problems – including the financial markets. About once or twice a year, however, she freaks out about our financial situation, which forces us to sit down to review our investments and financial plan, and when finished, she feels better.

Her concerns range from losing all our money to living too long. Our conversations run deep when we talk about our future. In addition to her fears, we explore charitable giving and retirement planning.

Let’s explore her main issues.

Will we lose all our money?

The stock market is down significantly; will we lose all our money? It’s a valid concern, especially since the Nasdaq is down 28% and long-term bonds have lost 32%. It has been a brutal year for all asset classes. She sees our account values and pays attention to the market, so she’s aware of the pain caused by falling prices. However, I tell her the odds of us losing all our money are less than zero. It’s impossible because we own stocks and bonds scattered worldwide, diversified by size, category, country, etc. On average, I tell her that stocks drop every four years or so, and I let her know I buy the dips and that the best time to buy stocks is when others are selling. And since the beginning of the year, we have continued to increase our allocation to equities because they will eventually recover. We’ve been married for thirty years, and during that time, the stock market has lost 50% of its value twice and suffered several corrections of 20% or more. Despite the downdrafts, stocks have risen more than 780% since our wedding anniversary, and I’m confident that the market will be considerably higher in another thirty years.

Will we run out of money?

My wife studied and taught gerontology, so she’s aware of longevity and aging. Our family tree also has a history of longevity, and she does not want to run out of money in retirement, which is another valid concern. One of the reasons we allocate more than 80% of our assets to stocks is to not run out of money when we are old and frail. Stocks are the best investment to combat inflation and longevity risk. I tell her I’m not worried about today’s stock market losses because we need our money to last another forty or fifty years. I don’t care that the market is down a few points this year because it will recover and eventually trade higher. Also, if we sell stocks today and buy bonds, we’ll lose money to inflation, a greater risk to our financial future than falling stocks.

What if you die early?

She is worried I might die early and leave her financially stranded. A few years ago, I wrote a love letter to my wife and daughter outlining the steps to take if I die early. The instructions are detailed, and I update them often. In addition to the love letter, we have adequate insurance and a family trust. I also have a succession plan for my business, so we’re covered on multiple fronts when I do pass away. More importantly, I’m going to heaven when I die, so she’ll always know where I hang out.

I treasure my wife and our long walks, and it’s an ideal time to connect and decompress while getting in 10,000 steps. I love our walk and talks because they get us out of the house and put us on neutral territory where all topics are fair game. We’ve solved many problems, but not all of them, so we will continue to walk because it is our most productive hour of the day.

Happy walking.

If you tell the truth, you won’t have to remember anything. ~ Mark Twain

November 18, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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.

How Much Can I Spend?

The market turmoil and volatility are causing heartache for investors, and rightfully so, especially those in retirement. Losing a paycheck after a lifetime of employment is terrifying, but not having a steady paycheck in a down market is even worse. However, we can’t control the market, but we can control our spending, and Americans love to spend money.

Spending is a crucial ingredient for a successful retirement. Once your assets can cover your annual spending, you can retire, regardless of age. Most people rely on Social Security and personal investments to meet their needs, and a few will benefit from a pension plan. Social Security payments and pension benefits offer fixed payouts, unlike variable consumer spending.

We offer financial planning to help individuals better plan for their golden years, and annual spending is a number we need to complete the process. Yet, few can provide an adequate number because they don’t track their expenses, and it is the one variable required to answer the question about retirement. If you tell me how much money you spend, I can tell you if you’re ready to retire.

By now, you have probably heard of the 4% rule. I won’t delve into the research, but the study found that you should not run out of money if you withdraw 4% of your assets each year. The good news is that now you can buy a 30-Year United States Treasury Bond yielding 4%. So, if you retire today, you can guarantee a 30-year fixed payout of 4%! If your account balance is $1 million, you can lock in an annual payment of $40,000. If your annual expenses are $100,000, you need $2.5 million in assets. The math is simple: Multiply your expenses by 25 to arrive at your asset level.

  • Your Expenses: $_________________
  • Multiply your expenses by 25 to arrive at your required asset level.
  • Assets Needed: $_________________

If your assets are sufficient to cover your expenses, you can retire. Congratulations! If not, you need to reduce your spending or increase your assets.

How long will your assets last? Another beneficial calculation is to divide your assets by your expenses to see how long your money will last. For example, if your assets are $1 million, and you spend $100,000 per year, your money will last ten years. If you reduce your spending to $50,000, it can last for twenty years. This practical calculation will shine a light on your financial situation.

  • Your Assets: $___________________
  • Your Expenses: $________________
  • Divide your assets by your expenses.
  • Asset longevity (Years): __________

Spending is the primary level, but what if you don’t want to reduce your expenses? What if you love your lifestyle and don’t want to cut anything from your budget? You need to increase your revenue if you don’t want to reduce your spending. Can you work part-time, drive an Uber, teach a class, or turn a hobby into a career? Another strategy is to turn non-income-producing assets like commodities or cryptocurrencies into cash-flow-generating investments.

The stock market will recover, the economy will rebound, and geo-political tension will ease, but your expenses will last forever.

Too many people spend money they haven’t earned to buy things they don’t want, to impress people they don’t like. ~ Will Rogers

November 12, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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.

Stay The Course

Stay the course is boring financial advice, and people hate it, especially when stocks fall. Doing nothing is challenging; it’s hard, and it feels like a cop-out. When stocks fall, clients want action; they want to rearrange the deck chairs and take control of the situation, but it could do more harm than good.

Most financial planners recommend a buy-and-hold strategy when managing money which is simple when stocks rise but challenging when they fall. It’s a popular recommendation because stocks rise about three-quarters of the time, and no one can time the market.

Pilots set their coordinates for their final destination and rarely diverge from their route unless necessary. They will change course to avoid storms or turbulence, but, for the most part, they keep the nose of their plane headed toward their target. This past summer, my wife and I drove thousands of miles visiting several national parks. Each day we’d set our GPS for the next park, and we did not deviate from the directions and arrived safely each time.  

I’ve gotten in trouble whenever I ignore a trail map while hiking, biking, or skiing. When my daughter was about ten, we went skiing at Crested Butte, and I decided to take her on an unmarked shortcut back to the ski lift. It did not go well. We got stuck in waist-deep powder and could not move. We had to forge our path; it took a long time before we could return to the trail. It was a scary ordeal.

A financial plan will help guide you to your destination by quantifying your goals, assessing your risk tolerance, and measuring your time horizon. It will lead you through a perilous market and treacherous economy. When markets are falling, and clients are worried about losing money, a financial plan can bring peace. The likely recommendation from the advisor is to remain calm and stay the course because of the plan.

Investors have liquidated nearly $100 billion from growth-equity mutual funds over the past year, likely transferring the money to a money market fund or savings account.[1] This strategy might be safe in the near term, but it could prove disastrous over time. The report ended on September 30, 2022, and since then, the Dow Jones has risen nearly 13%, its best monthly performance in more than 35 years! To get above-average returns, you need to stay in the market. As I’ve told clients, “If you’re not on the plane when it takes off, you’re not getting on.” Selling from a position of fear is not wise. If your plans change, then alter your investment strategy. However, if you don’t need your money and your goals remain intact, stay the course!

I recently met with an individual who is interviewing several financial advisors. He is looking for one who can trade the hottest and most popular sectors, in this case, energy and commodities. I informed him that we select a buy-and-hold portfolio based on his financial goals and do not trade sectors or chase securities. I then showed him a 10-year chart of how the Dow Jones Industrial Average destroyed commodities. He was not impressed and is convinced that there is an advisor out there somewhere who can time the market. I wished him well.

It’s a difficult market; returns stink, but stocks recover. Be patient, follow your plan, and stay the course.

What kind of man would live where there is no daring? I don’t believe in taking foolish chances, but nothing can be accomplished without taking any chance at all.” — Charles A. Lindbergh

October 28, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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] YCHARTS Fund Flow Report – 9/30/2022