Rivers and Tributaries

The Mighty Mississippi, The Nile, The Amazon, and The Yangtze are some of the longest rivers in the world, traveling thousands of miles, moving millions of gallons of water every day; critical components to commerce as millions of people, and billions of dollars of freight go up and down the rivers.

The names of significant rivers are known to most people, but what about tributaries? Tributaries are smaller rivers flowing into larger ones, and vital to the support of the more extensive river system. The Big Muddy, Chippewa, and Watab are a few rivers flowing into the Mississippi. Without smaller rivers, bigger ones can’t survive.

Open an atlas, and you’ll discover hundreds of little blue lines crisscrossing the map. These blue lines represent rivers and streams. The Rio Grande borders Texas to the south; the Red River is to the north. In between, thousands of tributaries pour into more significant rivers and the Gulf of Mexico. Some of these dry creek beds will lay dormant until the rain arrives, turning them into raging rivers.

In the investment world, the two leading indices are the Standard & Poor’s 500 and MSCI EFA. The S&P 500 includes the 500 largest companies in the United States. The MSCI EFA is the international index encompassing Europe, Australia, and Far East Asia and includes companies from 21 different countries.[1] These two indices cover the world, and most professional investors rely on them for their primary benchmarks. However, building a portfolio consisting of two broad-based indices isn’t prudent, especially ones so similar.

As small streams are essential to mighty rivers, small stocks are important to bigger ones. A globally diversified portfolio of different sized stocks and bonds will allow you to benefit from thousands of securities scattered around the world.

The past few years, small and international stocks have trailed large U.S. companies, but it won’t last forever. At some point, these sideshows will turn into the main attraction, just like small creeks turning into raging rivers. For the past three years, the S&P 500 has returned 47%, the S&P 600 Small-Cap Index 26.2%, and the MSCI EAFE International Index 19.2%. However, from 2000 to 2010, the Small-Cap Index returned 48%, and the MSCE EAFE International Index rose 30% while the S&P 500 lost 6.5%.[2]

Morningstar tracks over 83,000 global indices[3], so it’s possible to get carried away when building your portfolio. A narrow focus may limit your investment choices, too many, and your account will be overly diversified.

How many different asset classes should you include in your account? At a minimum, your portfolio should consist of large, small, and international stocks, bonds, cash, and an alternative class – so six. Of course, this number can vary dramatically depending on several factors, like your risk tolerance, assets, and time horizon. The broad categories can also include growth, value, developed, emerging, short-term, long-term, high yield, and so on.

Regardless of the number of funds, focus on owning a globally diversified portfolio of low-cost funds based on your financial goals.

If you’re not sure where to start, contact a Certified Financial Planner® who can help you navigate the treacherous waters of the financial markets.

A river is more than an amenity; it is a treasure. ~ Oliver Wendell Holmes

January 21, 2020

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.msci.com/documents/10199/822e3d18-16fb-4d23-9295-11bc9e07b8ba

[2] YCharts

[3] Morningstar Office Hypothetical

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

Funding Secured

On August 7, Elon Musk tweeted: “Am considering taking Tesla private at $420. Funding secured.” His tweet caused a storm on Twitter and in the stock market. At the time of his tweet, Tesla shares were trading around $343 per share before soaring to $387. Since the tweet, it has traded in a range of $345 to $380 as market participants and regulators focus on the “funding secured” part of his announcement. Does he have the financing? I hope so, because I’m rooting for him to succeed.

After he sent his tweet, I wondered how many individuals have secure funding for retirement.

What does it mean to be financially secure? In short, it means you have the resources to pay for your day to day expenses for the rest of your life. To find out if this is possible, I recommend taking an inventory of your personal assets, Social Security and pension benefits. Also, it’s paramount to keep tabs on your annual expenses, because this will determine the amount of assets you’ll need for a comfortable retirement.

Let’s say your annual expenses are $100,000 and you’ll receive $25,000 in Social Security benefits per year. After subtracting your Social Security benefit from your expenses, you’re responsible for funding $75,000 per year. At a 4% distribution rate, you’ll need $1.875 million in assets to cover your expenses ($75,000/4%). If you also receive an annual pension of $25,000, it will lower your funding requirement to $50,000 and your asset goal to $1.25 million.

Today most companies don’t offer a pension plan, and this is putting a strain on retirees. In a recent Wall Street Journal article, the rate of individuals filing for bankruptcy age 65 or older has tripled since 1991.[1] One of the factors sited for the rise in bankruptcies is the reduction in corporate pension plans.[2] The responsibility for retirement has shifted from corporations and the government to the individual. When my wife’s grandfather retired from a large oil company in Texas, he received Social Security, a pension, and healthcare benefits. He made more money in retirement than he did while working. His safety net was so strong that he didn’t need to save money for retirement. Today’s workers aren’t as lucky.

How can you fortify your financial future? Here are a few ideas.

Safe early and often. The sooner you start investing, the more money you’ll have for retirement. If you start investing $200 per month at age 25, you’ll have $1.3 million at age 65[3]. If you wait until age 45, you’ll end up with a paltry $155,000 – a difference of $1.1 million!

Buy stocks. The stock market is the best way to create long-term wealth. Since the end of World War II, the S&P 500 has averaged 11.3% per year despite numerous dips, drops, and downturns.

Keep an eye on inflation. Inflation has historically averaged 3% per year. If your annual expenses are $100,000 today, in 30 years they’ll be $242,000. A dollar today will be worth 41 cents three decades from now. To avoid the erosion of your dollar, allocate a substantial portion of your assets to stocks.

Don’t retire your money. A “safe” portfolio of CDs, U.S. Treasuries, cash, and money market funds might appear attractive in the short term, but over time they’ll barely produce a positive return. The 91-year average annual return for U.S. T-Bills has been 3.4%, after subtracting inflation of 2.9% your net return would’ve been .5% – before taxes!

Plan. A current financial plan will keep you on the path towards a profitable retirement. It will help you quantify your financial goals and allow you to prioritize items that are important to you and your family.

As you rocket towards retirement, follow your financial plan, invest your money, and think long-term. If you do these things, you will have an electrifying future.

When something is important enough, you do it even if the odds are not in your favor. ~ Elon Musk

August 13, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm 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.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

[1] https://www.wsj.com/articles/bankruptcy-filings-surge-among-older-americans-1533641401, Anne Tergesen, 8/7/2018

[2] Ibid

[3] FV calculation at 10.2% interest, the 91-year average annual return for the S&P 500, before taxes and inflation.

The Silent Wealth Killer

If you drive a car or eat food you’ve noticed prices tend to rise more than fall.  Paying for childcare, healthcare, or college tuition has been a challenge as the rate of inflation for these items has soared.   College tuition, for example, has increased 197% since 1996![1]

Inflation is a metric not often tracked by investors. The stock market gets all the attention, but inflation may have more of an impact on your long-term wealth, especially if your assets aren’t invested properly. It can wipe out a generation of hard work without warning.

Inflation is defined as the rate at which prices increase.  The Consumer Price Index (CPI) is how the United States measures inflation. From 1926 to 2015 it averaged 2.9%.  However, there have been a few times when it spiked.  From 1917 to 1920 it averaged 16.4% per year and from 1970 to 1982 it averaged 7.7% annually.  Prices will double every 24 years at the historical rate.  Today, a Tesla Model X costs $80,700; in 50 years it will cost $353,781 if inflation averages 3%.Milk Inflation

Another way to look at inflation is the loss of purchasing power.  At a 3% inflation rate the value of the dollar will drop by 58% over 30 years, a dollar today will be worth 41 cents in the year 2048. In 1975 it was possible to purchase 10 stamps for a dollar; today it will only buy two!

Hyperinflation occurs when inflation spirals out of control.  The Weimer Republic of Germany experienced a bout of hyperinflation from 1918 to 1924.  It peaked in November of 1923 when inflation climbed 29,525%! Venezuela is currently ensnared by hyperinflation as prices have increased 4,000%.[2]    Hyperinflation has primarily been limited to developing countries like Venezuela, Vietnam, Iraq and Zimbabwe.  Countries can also experience hyperinflation during times of war like the United States did during the Civil War.

However, a low rate of inflation is healthy for our economy if it can be contained to 1% to 3%. Companies will benefit from rising prices as the increase can flow to their bottom line in the form of higher earnings.

Investors who rely on fixed income investments like bonds or certificates of deposit will see the value of their investments eroded by inflation as evident in the chart below.  A $1 investment in bonds was worth $21 after 90 years.  After inflation, it dropped to $7.  Stocks, on the other hand, have benefited from inflation.  A $1 investment in small stocks grew to $22,985! Stock Growth DFA

Your retirement may last 30 years or more so it’s imperative to allocate a healthy portion of your assets to stocks.  Resist the urge to retire your money as well.  A portfolio of “safe” investments may leave you in dire straights toward the end of your retirement.

Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man. ~ Ronald Reagan

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.

3/1/2018

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.

 

[1] https://www.financialsamurai.com/the-inflation-interest-rate-paradox/, Posted by Financial Samurai, website accessed 3/7/2018.

[2] https://www.bloomberg.com/view/articles/2017-12-19/venezuela-is-living-a-hyperinflation-nightmare, by Noah Smith, December 19, 2017.

10 Ways to Improve Your 401(k) Plan!

Your 401(k) plan may be your largest asset, even larger than your home.  However, it appears most individuals pay little attention to this treasured asset.  In my experience working with 401(k) providers, companies and several employees sign up for their plan without giving much thought to their contribution amount or investment choices.   To increase your odds for a successful and confident retirement take time and get advice on setting up your plan.

According to the Employee Benefits Research Institute 18% of workers feel very confident about their ability to enjoy a comfortable retirement a number that hasn’t changed since 1993.[1]   What about the remaining 82%?  82% of the working population aren’t confident about the future of their retirement.

Here are few ideas to help you improve your 401(k) plan and your retirement.

Start.  Do not delay in signing up for your company retirement plan.  As soon as you’re eligible for your company 401(k), sign on the dotted line and start contributing to your plan.  The sooner you start contributing to your plan the larger your retirement nest egg will be.

Max Out.  You can contribute $18,000 to your plan each year.  If you’re 50 or older, you can contribute an extra $6,000 to your plan for a total of $24,000.  Contributing $18,000 for 45 years at 7% will grow to $5.1 million by the time you’re ready to retire.

Contribute.  If you can’t afford to max out your contribution, contribute 10% of your income to the plan.  If you can’t contribute 10%, then match your company match.  If your company matches 4%, your contribution level should be 4%.  If you earn $50,000 per year, your 10% contribution will be $5,000.  Contributing $5,000 to your plan for 45 years growing at 7%, will be worth $1.4 million at your retirement.

Escalate.  Your plan may include an auto-escalation button allowing you to increase your contribution percentage annually.  For example, if you start contributing 4% to your plan, you can sign up for an annual 1% increase forever or until it reaches a pre-determined percentage.  Your contribution this year will be 4% and next year it will increase to 5% and so on.

Diversify.  Your plan probably has six to seven investment categories like large companies, small companies, international companies, alternative investments, bonds and cash.  To be successful, you’ll need to own more growth investments than safe investments.  A 70%/30% allocation might look like this:  35% to large companies, 10% to small companies, 20% to international companies, 5% to alternative investments and 30% to bonds.  You don’t need to allocate any money to cash unless you’re retiring this year.

Be Aggressive.  Your working career may span 45 years or more so take advantage of the long-term trend of the stock market.  Also, you’ll be contributing to your 401(k) every two weeks giving you the opportunity to buy stocks when they’re up, down and sideways.  I once worked with a group of anesthesiologists in Austin and, not surprisingly, the doctors with the most aggressive investment profile had the largest account balances.  Some of the senior doctors I worked with had invested 100% of the 401(k)-balance invested in stocks when they were young and they never changed their asset allocation resulting in large nest eggs.

Rebalance.  Rebalancing your 401(k) once per year will keep your desired risk level in tack.  The best time to rebalance your plan is in January.  A January rebalance will allow the dividends, interest payments and capital gains to be contributed to your plan from the previous year.  Your plan might have an automatic rebalancing button you can turn on when you log in to your plan.

Align.  It’s important for your contributions, asset allocation and rebalancing targets to be aligned.  For example, if you’re contributing 35% to large companies, your asset allocation and rebalancing options should also be set to 35%.

Stay.  In the gig economy workers are changing jobs every two to three years and, as a result, they may be hurting their retirement plan.  By moving from one company to the next you’re leaving valuable dollars on the table by missing a company match or two.  In addition, when you join a new company you may miss an enrollment window keeping you out of your new company plan for six months to a year.  These small misses will have major implications on your retirement.  If you’re employed by a good company with a solid retirement plan, then stay the course and let your retirement benefits accrue for you and your family.

Review.  You should review your plan and investment choices once per year.  You don’t need to spend much more time on your plan beyond your annual review.  In fact, the less you touch your plan the better.

Treat your treasured asset with respect by contributing what you can afford, investing for growth and rebalancing annually.   Allocating time and resources to your plan will allow you to have a much more bountiful retirement.

You can be young without money but you can’t be old without it. ~ Tennessee Williams.

Bill Parrot is the President and CEO of Parrott Wealth Management.  If you need help with your retirement planning, please visit www.parrottwealth.com.

September 30, 2017

 

 

 

 

 

 

 

[1] http://www.marketwatch.com/story/what-ive-learned-over-14-years-of-covering-the-depressing-but-crucial-topic-of-retirement-2017-09-29, Robert Powell, 9/29/17.

How Much Money Do You Need for Retirement?

Trying to identify how much money is needed for a comfortable retirement remains a mystery for most individuals.   As Baby Boomers, Gen X, Gen Y and Millennials march towards retirement, the retirement dream seems harder to obtain.  Individuals don’t have much faith in their retirement planning because they’re not sure how to calculate the amount of money needed for a sustainable retirement.

Do you know how much money you’ll need for your retirement?  Fear not because I’ll walk you through my three-minute retirement plan calculation.

The first step in determining how much money you’ll need for your retirement is to identify your annual household expenses.   If you’re not sure how much money you spend on your expenses, start today by reviewing your bank and credit card statements.

The second step in this process is to multiply your household expenses by 25.  If your household expenses are $100,000 per year, then multiply this number by 25 to arrive at $2,500,000.   Your retirement asset goal is $2.5 million and you can retire today if you’re blessed with this level of assets.  We can’t stop here, however, because you may have other sources of retirement income.

The next step is to subtract your Social Security benefit from your household expenses. If your annual Social Security benefit is $25,000, subtract this benefit number from your household expenses.  Your adjusted expense number is now $75,000.   Multiply $75,000 by 25 to get $1.875 million.   Your Social Security benefit has reduced your retirement asset goal from $2.5 million to $1.875 million.

Few workers today have the benefit of receiving a pension plan but if you do, subtract this number from your expenses and Social Security benefit number.   If you’re going to receive $20,000 in annual pension payments, subtract it from your $100,000 household expenses and $25,000 Social Security benefit.  Your net expense number is now $55,000. Multiplying $55,000 by 25 gives you $1.375 million.  Your new retirement asset goal is $1.375 million.

Here is the math:

Household Expenses = $100,000

Social Security Benefit = $25,000

Pension = $20,000

Household Expenses (A) Social Security Benefit (B) Pension Plan (C) Adjusted Expense Number

(A-B-C) = D

Multiplier (E) Retirement Asset Goal (D x E)
$100,000 $25,000 $20,000 $55,000 25 $1,375,000

Inflation, of course, will play a big part in your future retirement calculation.   $100,000 in expenses today will balloon to over $209,000 in thirty years with a 2.5% inflation rate.  As your expenses double because of inflation so, too, will the assets you need to retire.

Here is a chart to help you with your inflation adjusted retirement calculation.

Age Inflation Factor Expenses Today Future Value Calculation Multiple Assets Needed
40 1.85 $100,000 $185,000 25 $4,625,000
45 1.64 $100,000 $164,000 25 $4,100,000
50 1.45 $100,000 $145,000 25 $3,625,000
55 1.28 $100,000 $128,000 25 $3,200,000
60 1.13 $100,000 $113,000 25 $2,825,000
65 1 $100,000 $100,000 25 $2,500,000

Once you’ve identified your retirement number you can adjust your planning and investing to help get you closer to your retirement goal.  Now that you know your target retirement number you can compare it to your current level of assets.  If you have more assets than you need, you can retire at any time.  If your assets are currently below your retirement number, keep saving and investing so you can surpass your goal.

I hope this simple, three-minute financial plan gives you a better picture of your retirement planning needs.

There’s never enough time to do all the nothing you want. ~ Bill Watterson, Calvin and Hobbes.

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

September 28, 2017

 

 

 

 

 

 

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.

What to Do When a Loved One Dies?

Losing a loved one is tragic.  The loss leaves a void that may take years to recover.   During your grief, it will help to have a checklist to guide you through this difficult time.

Several estate planning tools can assist you during the grief period.  The most common estate planning items are the family will and family trust. I’d also recommend creating an estate planning file listing important data, contacts and passwords.  A “love letter” is also encouraged for the file.  The love letter is written to family members with last rites and other suggestions.   The estate planning file should bright red so it’s easy to find.

Here are more suggestions to help you during your difficult transition.

  • Contact family members, friends and your spiritual leader to surround yourself with those who love you most. Your family members and friends can help with arrangements.
  • Contact your local funeral home so they can schedule the funeral. The funeral home will help you obtain certified copies of the death certificate.
  • Identify important documents like the family will or trust. The deceased may have also left a letter of instruction or signed power of attorney.  These documents will help settle the estate.
  • If the deceased was employed, contact the company to notify them of the death. The human resource department will assist you with any benefits which may include company owned life insurance and a retirement account.
  • Arrange for dependent care If young children are still living at home. A family member or friend may be your best option to take care of the children while you handle the details for the deceased.
  • Pets also need to be tended to during this time. Arranging for your local vet or kennel to keep the pets for a few days is recommended.  Reaching out to a neighbor to help feed and water large animals, like horses, is preferred.
  • Locate important documents like the driver’s license, birth certificate, marriage license and passport.
  • Contact the local VA office If the deceased served in the military.
  • Contact the Social Security Administration.
  • Contact the DMW.
  • Monitor the mail for bills and notices. Contact the post office to notify them of the death.
  • Reach out to the credit reporting services so you can monitor accounts and to close the accounts that can be closed like credit cards.
  • Identify and protect all valuables. Keep them on your person, get a safe deposit box or leave them with a trusted confidant.
  • Contact the local utility companies to transfer services into your name or have them shut off.
  • Shut down social media accounts like Facebook, Instagram, Twitter, Snap or LinkedIn. Closing email accounts is also recommended.
  • Reach out to the CPA, attorney and financial advisor so they can transfer assets and file tax returns.
  • Contact your local bank to set up an account in the name of the estate so you can write checks to pay bills and settle debts. Check with the bank to see if there is a safe deposit box for the deceased.
  • Identify the executor of the estate so they can start the process of settling the estate.
  • Identify any notes payable or debts to settle.
  • If the deceased was a renter, contact the landlord.
  • Contact the life insurance company so they can distribute life insurance proceeds to loved ones and beneficiaries.
  • If the deceased was your spouse, update your beneficiary information for your investment accounts or life insurance policies. If you have a family will or trust, make sure these are updated as well.

This list may help you get through your difficult time.   I’d encourage you to print this list or create your own to include in your important files.

Of course, if you don’t have an estate plan in force, I’d recommend contacting an attorney today so your loved ones can benefit from your proper planning.

“Come to me, all you who are weary and burdened, and I will give you rest. Take my yoke upon you and learn from me, for I am gentle and humble in heart, and you will find rest for your souls. For my yoke is easy and my burden is light.” ~ Matthew 11:28-30.

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.

July 26, 2017

Ready for a New Retirement?

Do you love new things?  Do you like driving a new car off the dealer’s lot?  How about getting a new pair of shoes?   We like getting new gifts but how about a new retirement?  Are we ready for a new retirement?

Corporations continue to scale back on pensions and benefits.  In 2015, 99 companies in the Fortune 500 offered a pension plan down from 292 in 1998, a drop of 66%.[1]  Only 9% of the Fortune 100 offer full healthcare benefits for their employees a drop from 34% in 2001.[2]

My wife’s grandfather worked his entire career for a large oil company in Texas.  He retired with a pension allowing him to receive a lifetime income stream for him and his lovely bride.   The payments from his former employer would continue for as long as one of them was living.  In addition, they didn’t have any out of pocket expenses for health and medical benefits, including drug prescriptions, as these items were covered by the company.   His pension, coupled with his Social Security payments, allowed him to enjoy a substantial retirement income.

Today, workers will have 10 to 15 jobs over their working career with an average of 12.[3]  A college graduate who retires at age 65 may switch jobs every three to four years.  By switching jobs often, a worker won’t accrue much in the way of company retirement benefits.  If you join a company with a 401(k), you may have to wait a year to join and if you leave before year end you might forfeit an employer contribution to your retirement plan.   By repeating this process over time, a lot of money will be left on the table.

Living longer is also causing heartache for the retiree.  A long, happy retirement can be enjoyable especially if you have money but longevity risk is making this a challenge for some.  According to the Motley Fool, Social Security will cover about 40% of your retirement income and the average monthly benefit will pay $1,350.[4]  This means you’re responsible for the other 60% of the financial pie.  According to the Social Security life expectancy tables an individual aged 65 today will live another nineteen years to age 84.  Will your assets generate income for nineteen years?

What does this mean for today’s worker?  We have entered a brave new world for retirement.  The responsibility for retirement is now on your shoulders and you must bear the weight of making your money last a lifetime.   However, you’re not alone.  With the right help, you can achieve your goals.

To start on your new journey, you’ll need a plan.  A financial and retirement plan will give you a financial target and this will be your guiding light as you journey through your working career.   Your financial plan will outline the amount of money you’ll need to save to achieve your goal.  To achieve your goal, you’ll need to commit to it as well.  I met with a friend recently who was bemoaning the fact he didn’t have enough money saved for retirement.  We talked about a few ideas but he wasn’t willing to commit – yet.   He likes to eat out often and his Facebook page shows him on elaborate treks with his family.  At some point, he’ll need to bear down and get serious about his financial future.

In addition to your new plan, you must save money.  Contributing to your company retirement plans, IRAs and investment accounts is paramount.   Saving money today will pay dividends tomorrow.  A worker who starts saving a $1,000 a month at age 25 will have $6.3 million at age 65.  Her nest egg will be worth $759,000 If she waits until age 45 to start saving money, a drop of 87%![5]   Automate your savings to help accumulate assets by establishing a draft between your bank to your investment accounts.

You can control your spending and saving.   The less you spend and the more you save will be a winning formula for your new retirement so start today and put your plan into action!  I know you can do it!

All hard work brings a profit, but mere talk leads only to poverty. ~ Proverbs 14:23

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

July 13, 2017

 

 

 

[1] https://www.businessinsurance.com/article/20160222/NEWS03/160229986, by Jerry Geisel, 2/22/2016.

[2] http://fortune.com/2016/03/30/employer-paid-health-insurance-is-dying-off/, by Lauren Lorenzetti, 3/30/2016.

[3] https://www.thebalance.com/how-often-do-people-change-jobs-2060467, by Alison Doyle, May 1, 2017.

[4] https://www.fool.com/retirement/2016/10/23/can-you-live-on-social-security-alone.aspx, by Chuck Saletta, 10/23/2016.

[5] FV calculation with assets growing at 10% before taxes and fees.