The Miser

The Miser is a classic Aesop Fable. It’s a story about a man who buries his gold under a rock. He visits his gold stash so often that a thief follows him and steals it. The miser is distraught when he realizes it’s gone, though he had no plans to use the gold to buy things. A lot of us are probably like the miser in the story. We check our investments daily to make sure they are safe and sound, but we don’t intend on using them to purchase anything. We’re happy when our balances rise and sad when they fall.

Money is a useful asset, intended to buy goods and services. It’s the heartbeat of commerce. But, some investors are reluctant to spend for fear of running out of money.  Since March, investors have poured $3.6 billion into savings accounts and money market funds. While it’s prudent to save money for the future, hoarding it today does not benefit anyone.

I’ve completed more than 100 financial plans over the past five years, and one of the most common fears is running out of money in retirement, a valid concern. However, this fear should not stop you from living your life today. If you don’t plan on spending your money to live, your no worse than the miser in the story. And, you can’t take it with you once you’re dead.

Here are a few ideas to help you with your spending.

  • Complete a financial plan. Your plan will guide your spending and give you projections for your assets. Once you see your spending plan on paper, you may be more comfortable in tapping your nest egg, and if you’re not pleased with the results, it can be adjusted to meet your needs.
  • Spend on experiences. If you’re reluctant to buy things, spend your money on experiences. Is a post-COVID trip in order? How about purchasing a vacation home so you and your family can create lasting memories? According to Momentum Worldwide, 76% of consumers prefer to spend money on experiences than material items.[1] My family and I enjoy visiting National Parks in the summer and skiing in the winter; it has been money well spent. My grandparents owned a vacation home in Laguna Beach, and I have fond memories of visiting it often.
  • Donate to your favorite charity. Despite a roaring stock market and robust real estate returns, people are hurting. Recently in Dallas, more than 6,000 cars and 25,000 people waited in line to receive food from local food banks.[2] Donating to your local food bank or other charities will help those in need, and it will help you as well. The IRS allows you to send up to $100,000 from your IRA to a certified charity through a Qualified Charitable Donation (QCD). If you own stock in a taxable account that has appreciated, consider donating it directly to a charity. You can write off the fair market value, and your charity can sell it free of taxation and use the proceeds to fund their operation.
  • Help the next generation. You can give away $15,000 per person per year, and your lifetime gift tax exclusion is $11.7 million (2021). If you give money away while living, it will allow you to witness the beauty of helping others while reducing your taxable estate. The government is giving you a gift to give money away, so take advantage of their generosity.
  • Donate now, give later. A donor-advised fund allows you to make a considerable contribution today and defer distributions to a later date. Your irrevocable gift is deductible in the year you make it even if you do not distribute any funds. The money can be invested for growth or safety, potentially allowing you to give more money away as your investments grow. For example, if you contribute $100,000 to a DAF today, you’ll be able to write it off your taxes regardless if you distribute any funds or not. Here is a link to Schwab’s Donor-Advised Fund: https://www.schwabcharitable.org/donor-advised-funds
  • Spend your gains. A balanced portfolio consisting of 60% stocks and 40% bonds is up 10.75% for the year.[3] If you invested $1 million on January 1, your gain would be $107,500, so you could spend this amount without invading your principal.
  • Spend your income. A portfolio of dividend-paying stocks or income-producing bonds is an excellent way to spend money without touching the principal portion of your account. If your account generates 3% in income, you can withdrawal $30,000 from a $1 million portfolio.

It’s a delicate balance between spending money today or saving it for the future, but it’s possible, especially with proper planning.  Also, tomorrow might not come, so spending money while you’re happy and healthy is recommended.

Happy Spending!

Here is a link to Aesop’s Miser Fable: http://www.read.gov/aesop/112.html

Spending money is much more difficult than making money. ~ Jack Ma

December 3, 2020

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] https://www.prnewswire.com/news-releases/76-of-consumers-prefer-to-spend-on-experiences-than-on-material-items-new-study-finds-300937663.html, website accessed December 2, 2020

[2] https://www.cbsnews.com/news/thousands-line-up-in-dallas-texas-to-receive-food-ahead-of-thanksgiving-food-bank-donation/, by Danielle Garrand, November 16,2020.

[3] YCharts – 1/1/2020 to 12/03/2020, PWM ETF Moderate portfolio

A 1% World

Interest rates continue to fall. U.S. Treasury investments with maturities from one month to thirty years are now yielding below 2% as investors pursue safety. The Coronavirus is generating global economic uncertainty, and our government bonds are benefiting.

The ability to generate current income from bonds is challenging. In year’s past, you could rely on a steady stream of income from bonds to meet your needs. Bond interest, plus Social Security were usually enough for individuals to enjoy a comfortable retirement. In 1990, the yield on the 30-Year U.S. Treasury bond was 8%. If you needed $100,000 in income, you purchased $1.25 million worth of bonds. Today, you need $5.26 million, or four times as much. If rates drop to 1%, you’ll need $10 million to receive $100,000 in income!

With Interest rates at historic lows, where can you find income? Here are a few strategies you can employ today.

Dividend-Paying Stocks. Currently, 2,304 stocks are yielding more than a 30-year U.S. Treasury bond at 1.9%.[1] Johnson & Johnson, Intel, Coca-Cola, The Home Depot, Merck, McDonald’s, Pepsi, Lockheed Martin, Qualcomm, Target, Walgreens, and Clorox are some names on this list. Who knows what interest rates and the stock market will do over the next few days, but I’m confident the prices for most of these names will be higher in 30 years.

Systematic Withdrawal Plan: If you own mutual funds, a systematic withdrawal plan (SWP) allows you to generate monthly, quarterly, or annual income from your existing holdings. For example, if you invested $100,000 in the Vanguard S&P 500 Index Fund (VFINX) in 1980, 40 years ago, and withdrew 4% of the account balance each year, you received over $1 million in payments, and your account balance is now worth more than $1.5 million! In 1980, the income generated from this strategy was $4,000; this year, it will produce $62,956, an increase of 1,473%.[2]

Option Writing.  Writing options or selling calls on stocks you own is a great way to produce more income. Let’s say you own 1,000 shares of ABC company trading for $37 per share. If you want to sell your shares at $40, you can use a covered call strategy. A hypothetical option expiring in April may cost $1. You can write ten call contracts on your ABC holding because one contract equals 100 shares of stock. One thousand shares, or ten contracts, at $1 will generate $1,000 before fees and commissions. The $1,000 will credit your account when the trade is complete.  If ABC stock closes at $40 or higher on the April expiration, you must sell your stock at $40 regardless of how high it trades above your strike price. If ABC stock closes below $40 at expiration, you keep your shares, and you can write another ten contracts for May or June.[3]

Fixed Annuity. Normally, I’m not a fan of annuities, but desperate times call for drastic measures. A fixed annuity allows you to receive monthly income for a certain period, or the rest of your life. The annuity will enable you to receive the income generated from the investments, similar to a bond, or you can annuitize your investment and receive a guaranteed payout for life.  When you annuitize, you won’t be able to make any changes to your income stream. However, it will help you avoid longevity risk or the risk of outliving your money. An annuity is an insurance product, so your fees will be higher than most other products.

It’s tempting to chase rates, but do not be lured into a product offering an extremely high level of interest. A high yield may signal trouble with the underlying investment. Instead, as you hunt for yield, look for an investment that produces a consistent stream of income without taking on too much risk.

If you don’t find a way to make money while you sleep, you will work until you die. ~ Warren Buffett

February 24, 2020.

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.

 

 

 

[1] YCharts

[2] Morningstar Office Hypothetical Tool, 01/01/1980 to 1/31/2020.  Your rate of return may vary and your results may differ. The hypothetical does not include fees or taxes which will adjust the results.

[3] Options involve risk and are not suitable for every investor.

Want More Income?

Interest rates are falling, and investors are starving for income. Coupon rates on U.S. Treasuries are paying less than 2% except for the 30-Year U.S. Treasury bond, which is paying 2.25%. Corporate bonds, CD’s, and tax-free bonds aren’t paying much more. The Federal Open Market Committee recently lowered interest rates by a quarter of a point, and they’ll probably do it again at their next meeting. With rates falling, how is it possible to generate more income?

One strategy to incorporate is a systematic withdrawal plan (SWP). This approach allows you to receive income from your mutual funds while taking advantage of the long-term growth from the stock market. Your payout will be a combination of income, dividends, capital gains, and principal. For example, if you invest $100,000 in a globally diversified portfolio of mutual funds and instruct your advisor to send you a monthly check for $400, then your payout will be 4.8% of your principal.

Your payout can be fixed or variable. With a fixed payout you’ll receive the same dollar amount regardless of your account balance. A variable payout will pay you a percentage of your account balance annually, so if your account rises, you’ll earn more income.

Let’s look at a few real-world examples.

Since 1926, a 60% stock and 40% bond portfolio has produced an average annual return of 8.92% while inflation averaged 2.89%, so the real return was 6.03%.[1]  Starting an example in 1926 is not realistic, so let’s look at three different periods: 2000, 2007, and 2009.

Each example will begin with a value of $100,000 and an annual withdrawal rate of 4% of the account balance. The mutual funds are managed by Dimensional Fund Advisors, and they’ll be rebalanced annually. The asset allocation mix is 60% stocks, 40% bonds. Here is the list of funds:[2]

  • DFA Large Cap Value (DFLVX) = 20%
  • DFA Large Cap International (DFALX) = 20%
  • DFA Small Cap (DFSTX) = 5%
  • DFA International Small Cap (DFISX) = 5%
  • DFA Real Estate (DFREX) = 5%
  • DFA Emerging Markets (DFEMX) = 5%
  • DFA Intermediate Government (DFIGX) = 20%
  • DFA Two-Year Government (DFYGX) = 20%

Example 1: January 1, 2000 to December 31, 2010. During this stretch, the S&P 500 lost 14.4%. Your original investment of $100,000 grew to $106,667, and you received $66,471 in total income. The average annual return was 6.6%.

Example 2: October 1, 2007 to August 31, 2019. From October 2007 to March 2009, the S&P 500 fell 48% during the Great Recession, so your investment timing was horrible, one of the worst times to start investing in history. As a result of your poor timing, your $100,000 sunk to $77,640, but you received $58,512 in income. Your average annual return was 3.4%. Despite the initial drop, you still made money.

Example 3. March 1, 2009 to August 31, 2019. During this stretch, the S&P 500 soared 298% or 14.05% per year. As a result of your great timing, your $100,000 is now worth $137,036, and you received $90,071 in income. Your average annual return was 10.98% per year.

Example 4. January 1, 2000 to August 31, 2019. During this time, the S&P 500 averaged 2.25% per year. Your original investment of $100,000 is now worth $99,975, and you received $121,534 in total income. Your average annual return was 6.27%.

A globally diversified portfolio of low-cost mutual funds gives you an opportunity to receive above-average income. You probably won’t start investing at a market top, or bottom, so rather than trying to time the market or trade your way to wealth, focus on your long-term goals. A diversified portfolio will allow you to capture global market returns over time, and over time, stocks win.

Invest globally, receive locally.

Here is part of the tradeoff with diversification. You must be diversified enough to survive bad times or bad luck so that skill and good process can have the chance to pay off over the long term. ~ Joel Greenblatt

September 26, 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.

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

 

 

 

 

[1] Dimensional Fund Advisors Returns Web, 1/1/1926 – 7/31/2019.

[2] Morningstar Office Hypothetical, gross returns before taxes and fees.

How to Generate (more) Income in Retirement.

Do you want or need more income for your golden years?  With low interest rates and reduced pensions retirees have been on a journey to find alternative sources of income.  Retirees have historically relied on Social Security benefits, pension payments, or investment income to meet their needs during their retirement years.  These traditional income streams have been the source of survival for many in retirement.

The asset level of a retiree determines how much income she could receive.  For example, if an individual retired with $1 million, she could expect to receive about $40,000 in annual income. She’d collect this investment income, along with Social Security, to meet her living needs.  In year’s past these two items may have been her only choices.

However, through the Sharing Economy she can now generate multiple streams of income on her terms from items she already owns or possess.  She can now free herself from low yielding bank CD’s and expensive insurance products.

Another benefit to the Sharing Economy is owning fewer assets.  A car is a major expense.  In addition to monthly payments, there’s insurance, storage and maintenance.  These expenses will take a big chunk out of her monthly income, but thanks to Uber she doesn’t need to own a car.

Here’s a list of companies you can tap into today to start generating more income for your retirement.

  • Uber and Lyft. If you own a car and have some free time, you can drive for Uber or Lyft to generate income.  You can set your own schedule and drive as often as you wish. Of course, the more you drive the more money you’ll make.
  • Boat Bound. Do you own a boat sitting in dry dock?  Does your boat only see water on Memorial and Labor Day?  If so, you can use Boat Bound to rent it out rather than have it resting on a trailer in your driveway.
  • RV Share. Did you buy an RV on the day you retired with visions of driving across the country?  You may have made one or two trips but now your RV is stored on the side of your house and it’s being used as an extra storage room.  Through RV Share you can rent it out to generate income.  RV Share has an earnings calculator to give you an estimate of how much money you can make from renting your Class A RV, Fifth Wheel or Pop Up Trailer.
  • Turo. Through Turo you can turn your car into a rental.  Your car probably sits idle for most of the day so now you can let others drive it when you’re not using it, and this will put a few extra dollars in your pocket.
  • Just Park. A parking spot is a coveted asset if you live in San Francisco, New York or Boston.  If you own a parking spot, you can now rent it out through Just Park.  In addition to traditional parking spots, you can also rent your driveway.  You get paid by others to park in your spot!
  • Airbnb and HomeAway. Do you have a room to rent?  Do you own a second home?  If so, you can utilize Airbnb and HomeAway to rent out your room or the entire home.
  • Silvernest. Are you an empty nester?  Do you want a companion?  Silvernest lets you screen for roommates who are looking for a place to live and share expenses.  In addition to earning income you’ll make a friend.  This service is best suited for individuals in retirement and whose children are no longer living with them.
  • Rent the Runway. Do you have a closet full of clothes you haven’t worn in years?  You can rent them out and make some money.  You can also rent clothes reducing the need to buy clothes you may only wear once or twice.  Fewer clothes means a small closet.
  • Etsy. Are you creative? If so, you can sell your items on Etsy.
  • TaskRabbit. Are you handy?  Can you assemble Ikea Furniture?  TaskRabbit let’s you put your hands to work through assembly, installation, or yardwork.
  • UpWork. Can you design websites?  Create spreadsheets?  Write papers?  Do taxes? UpWork is a freelancer’s dream in the new economy because you can work from home and help others across the country.
  • DogVacay. Are you a dog lover?  DogVacay let’s you walk or board dogs for others. You can generate income while walking a few dogs around your block!

These companies, and many more like them, may help you produce more income during your retirement.  To generate this income, it might be time to examine your resources and talents to see if you can put them to good use.  Happy Sharing!

We keep moving forward, opening new doors, and doing new things, because we’re curious and curiosity keeps leading us down new paths. ~ Walt Disney 

Behold, the former things have come to pass, and new things I now declare; before they spring forth I tell you of them. ~ Isaiah 42:9 

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

2/7/2018

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed.

 

How to Generate More Income.

Interest rates remain stubbornly low and this is an issue for individuals looking for income.   How can you generate more income in this low interest rate environment?

Here are three simple strategies you can employ today to help you generate more income.

Systematic Withdrawal Plan:   If you own mutual funds, a systematic withdrawal plan (SWP) will allow you to generate monthly, quarterly or annual income from your existing mutual funds.   For example, in 1976 you decide to invest $100,000 in the Vanguard S&P 500 Index Fund (VFINX) and withdraw 4% of the account balance each year.   At the end of July, you would have received over $930,000 in total income and the fund balance grew to $1.34 million!   In 1976, your annual income was $4,000 and this year it will be $53,600, an increase of 1,240%.[1]

Option Writing.  Writing options or selling calls on stocks you own is a great way to pick up more income.  Let’s say you own 1,000 shares of ABC company trading for $37 per share.  If you decide to sell your shares at $40, you can employ a covered call strategy.   A hypothetical option expiring in October may be priced at .50 cents.  You can write ten call contracts on your ABC holdings because one contract equals 100 shares of stock.   1,000 shares, or ten contracts, at .50 cents will generate $500 before fees and commissions.  If ABC stock trades above $40 per share on the October expiration, you must sell your stock at $40 regardless of how high it trades above $40.  If ABC stock settles below $40 on expiration, you get to keep your shares and you can write another ten contracts for November or December.[2]

Charitable Remainder Trust.  If you own appreciated stock, land or some other asset, you can transfer the investment to a Charitable Remainder Trust to generate income.  Once your investment has been transferred to the trust, you can sell it and avoid all capital gains.  In addition to avoiding capital gains, you’ll get a tax deduction for your contribution.   After the asset has been sold, you can reinvest the proceeds into investments of your choice and withdraw 5% to 8% of the account balance each year.  At your death, the assets in the trust will transfer to your charitable beneficiary.   The CRT is a great way to avoid a capital gains tax, diversify your portfolio and benefit your favorite charity.

These strategies are easy to incorporate and may benefit your family.  If you want to learn more about income producing ideas, please give me a call.

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.  For more information on financial planning and investment management, please visit www.parrottwealth.com.

August 24, 2017

 

[1] Morningstar Office Hypothetical Tool, 8/31/1976 to 7/31/2017.  Your rate of return may vary and your results may differ.  They hypothetical does not include fees or taxes which will adjust the results.

[2] Options involve risk and are not suitable for every investor.

Need More Income?

Can you use a few extra dollars?  A Google search for “how to generate more income” produced 11.3 million results.  A few sites suggested selling your gear on EBay, craigslist or Etsy.   Other sites recommended a part time job, asking your boss for a raise or getting a side hustle.  More sites advised flipping homes or renting a room in your house via Airbnb.

I searched EBay for items I might sell from my youth.  A 1980s Rawlings baseball glove was selling in a range of $10 to $25.   Boogie Boards were listed at prices between $50 to $150.  1975 Schwinn Stingrays’ were offered from $450 to $1,200.  Rather than selling your Chia Pets or working a second job, I want to introduce you to two income generating strategies.

If you own individual stocks, you can leverage your holdings to generate more income.  The two income producing ideas are writing a covered call and selling a cash covered put.

The covered call is probably the most popular option strategy.   A covered call allows you to generate income on stocks you already own.   For example, if you own 1,000 shares of Apple (AAPL) you can sell ten $150 June calls for $1.98.   What does this mean?  It means the 10 calls will generate income in the amount of $1,980 before trading commissions.  The math is 10 x 100 x 1.98 = $1,980.  This option will expire on June 16, 2017.   If AAPL closes at $150 or higher on June 16, you’re obligated to sell your 1,000 shares at $150.   If AAPL closes below $150 on June 16, you keep your shares.   If it’s not called away, you can write another option on AAPL for July or August.

A cash covered put is like the covered call except you might not own the underlying stock.  It’s named cash covered because you’ll need to have cash in your account to purchase the underlying stock position.   Let’s say you want to buy 1,000 shares of AAPL at $140 per share.  You can sell ten $140 June puts for $1.74.  The 10 put contracts will generate income of $1,740 before fees.  You’re obligated to purchase 1,000 shares of AAPL at $140 if it closes at or below $140 on June 16, 2017.

A few things to keep in mind when you’re selling options.

  1. The option premium is what you will receive for selling a call or a put.
  2. When you sell a call or a put, the money is credited to your account at the time of the trade.
  3. One option contract equals 100 shares of stock. If you sell 10 contracts, this equates to 1,000 shares of stock.
  4. Options expire on Fridays and maturities can range from a few days to a few years. My recommendation is to sell options with an expiration from four to six weeks.
  5. The delta of an option will give you the approximate probability of your option expiring in the money. An option with a delta of 40 means you have about a 40% chance of your option expiring in the money.  If your option expires in the money, you’re obligated to buy or sell the stock.
  6. The more volatile your stock, the more option premium you’ll receive.  You can check the implied volatility on most investment websites.  The higher the volatility, the greater the risk.   The higher the risk, the greater the income.

 

Options involve risk and aren’t suitable for every investor.   As the market continues to scramble higher you can use options to generate income and sell stocks hitting your price target.  You can also use options to purchase stocks at lower prices if the stock were to correct.   If you want a few extra nickels in your pocket, give these two option strategies a try.

Money won’t create success, the freedom to make it will. ~ Nelson Mandela.

Bill Parrott is the President and CEO of Parrott Wealth Management.  For more information on financial planning, investment management, or option writing please visit www.parrottwealth.com.

May 1, 2017

Disclaimer.  Options involve risk and are not suitable for every investor.   The price and data is for May 1, 2017 only and is subject to change without notice.   Your actual trading results may be more or less than those posted in this blog.  This blog is not a recommendation to buy or sell securities mentioned in this report.  For more information on trading options please visit www.cboe.com.