I asked ChatGPT about the best Medicare benefits, and it gave me the response below.
As an AI language model, I cannot offer an opinion on the best Medicare benefits as the selection may vary depending on the individual’s health needs and personal preferences. However, I can provide you with an overview of some of the Medicare benefits that are available to help you make an informed decision.
Original Medicare (Part A and Part B) covers hospitalization (Part A) and outpatient services (Part B). Part A coverage includes inpatient hospital stays, skilled nursing facility care, hospice care, and some home health care. Part B coverage includes doctor visits, preventive services, durable medical equipment, and some outpatient procedures.
Medicare Advantage (Part C) is a private insurance plan that replaces Original Medicare and offers additional benefits such as vision, dental, and hearing care. Some Medicare Advantage plans may also include prescription drug coverage (Part D).
Medicare Part D covers prescription drug costs and is available as a standalone plan or as part of a Medicare Advantage Plan.
Medigap, also known as Medicare Supplement Insurance, is a private insurance policy that can help cover some of the costs that Original Medicare doesn’t cover, such as deductibles, coinsurance, and copayments.
In summary, the best Medicare benefits depend on your individual healthcare needs and budget. It’s essential to review all available options and compare them to determine which plan offers the best coverage for you.
Medicare IRMAA stands for Income-Related Monthly Adjustment Amount. It is an additional premium that some Medicare beneficiaries have to pay for their part B (medical insurance) and Part D (prescription drug coverage) benefits if their income exceeds certain thresholds.
The amount of the Medicare IRMAA is based on the modified adjusted gross income (MAGI) reported on the beneficiary’s tax return from two years prior. For example, the IRMAA for 2023 would be based on the MAGI reported on the beneficiary’s 2021 tax return.
The Medicare IRMAA is determined by the Social Security Administration (SSA) and is added to the beneficiary’s monthly premium for Part B and/or Part D. The IRMAA can range from $12.40 to $504.90 per month, depending on income.
It’s important to note that not all Medicare beneficiaries are subject to the IRMAA. Only those with higher incomes are affected.
April 29, 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. Prices and yields are for today only and are subject to change without notice.
October marks my twentieth anniversary as a Certified Financial Planner Practitioner™, and I’ve worked on thousands of financial plans and reviewed many more. I’ve concluded there are no good or bad plans, only your plan, because it’s unique, and its success depends on your goals – no one else! But does financial planning work?
The strength of a financial plan does not depend on the number of pages, whether one page or a thousand. A financial plan is not a finished product you put in a file or store on a shelf. It never ends because life is constantly changing and is regularly interrupted by births and deaths, marriage and divorce, promotions and terminations, and many factors too vast to list. The beauty of a financial plan is the discovery and journey of planning. The self-discovery of your goals is invaluable, and refining them over time is priceless.
Flexibility is a vital component of a successful financial plan. The ability to adapt and change as you grow older will allow your dreams to flourish. Your plan at age sixty-five will be unrecognizable from the one you completed at age twenty-five. The goal is to keep progressing and be persistent.
Growing up, I wanted to run the football like Billy Sims and throw it like Fran Tarkenton. I wanted to be an offensive juggernaut, but when I got to high school, I played the offensive line, far from the limelight.
In high school, I wanted a candy-apple red 1965 Mustang but drove a lemon-yellow Volkswagen Beetle with a top speed of fifty miles per hour.
I was interviewing for a job at a local beach resort during my last summer of college – sun, surf, and sand. Instead, I took a “business” job working for Bank of America doing data entry in a windowless office.
I fell in love with advertising after reading books by David Ogilvy, Jack Trout, and John Caples. I wanted to be a copywriter but landed in finance after taking an investment course during my final semester of college.
I was born and raised in Southern California and thought I’d live there forever, but now I live in Austin after a stint in Connecticut.
Financial planning is great until life gets in the way. My life experiences shaped who I am today, and I would not change anything for the world. My plans did not turn out as expected, but my planning kept me moving forward and allowed me to adjust and adapt to find open doors as others closed. If I did not have a plan with a bigger picture, I would have become discouraged and quit at some point, but I kept charging ahead.
According to one report, Individuals who complete a financial plan have three times the assets of those who do little or no planning.[1] And according to Vanguard’s Advisor Alpha® study, an advisor can add 3% in net returns for clients. A few components in the study include rebalancing, behavioral coaching, asset location, and a spending strategy – critical ingredients for a financial plan.[2]
During the Great Financial Crisis, COVID Correction, and last year’s drubbing, our clients with financial plans were more at peace with their investment holdings, asset allocation, and goals than our clients without one. The clients with financial plans did not panic; some were opportunistic and bought the dip as the market fell. The financial plan gave us the courage and conviction to tell clients they would be fine if they stayed the course, and most did.
Our plans allow us to run several scenarios for clients when they call with questions, and we can quickly and efficiently give them answers to challenging questions and how the changes will impact their goals. In addition, we stress-test our plans against rising interest rates, sustained inflation, and stock market crashes to see how they perform under challenging situations. If needed, we can make changes.
A financial plan removes opinions from the equation because we can access reams of data through the software programs we use to help clients achieve their goals. The numbers give us confidence beyond a gut feeling of how a client’s future will fare. Of course, we have strong ideas and thoughts on how best to implement the plan.
Reflecting on the past twenty years, I’ve witnessed clients retire early, pay for their children’s college education, buy new cars, purchase vacation homes, travel the world, donate to charities, help loved ones, start a business, etc. At the heart of these life-altering decisions was the financial plan.
Last, investing without a financial plan is like flying an airplane without GPS, building a skyscraper without blueprints, or operating on a patient without going to medical school. I don’t know how people do it.
Does financial planning work? Yes, it does!
It takes as much energy to wish as it does to plan. ~ Eleanor Roosevelt
April 8, 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. Prices and yields are for today only and are subject to change without notice.
March Madness is in full swing, and first-timers from San Diego State, Miami, and Florida Atlantic are joining UCONN in the Final Four. The top seeds have NBA-caliber talent, and several players will be lottery picks in the upcoming draft, so it’s not surprising most people picked these schools to win the NCAA Tournament. However, Perennial blue-bloods like Baylor, Duke, UCLA, Kansas, and Kentucky are on the outside looking in, as there is not a single top seed in the Final Four.
According to ESPN’s Tournament Challenge, 19% of the people picked Alabama to win this year’s tournament, not Florida Atlantic. The tournament started with a bang as sixteen-seed Fairleigh Dickinson University beat one-seed Purdue, and it was only the second time in tournament history that a one-seed lost to a sixteen-seed. In 2018, the University of Maryland Baltimore County destroyed Virginia 74-54. The Fairleigh Dickinson victory busted brackets as 8% of the people picked Purdue to win the tournament, and only .01% chose Fairleigh Dickinson, likely their alumni and students.
Investors constantly hunt for one stock to buy that will propel their portfolio to new heights. In doing so, they ignore the efficiency and power of a diversified portfolio. A balanced portfolio can deliver solid results without relying on a stock. In other words, you don’t need a one-seed to win the investment game. Over 20 million people completed a bracket on ESPN. No perfect brackets remain because selecting a winner for each tournament game is impossible, almost as challenging as constructing a portfolio of individual stocks that never fall.
A balanced portfolio of stocks and bonds can produce exceptional returns over time. Vanguard’s Balanced fund is a mix of stocks and bonds, and for thirty years, it generated an average annual return of 8%, turning $10,000 into $101,700. This fund has no star power, but it’s a steady performer. Low-cost index portfolios shun high-profile money managers but provide shareholders with market-driven returns. They rely on diversification and conservative investment strategies and can reward those who invest for the long term.
In addition to quality players, a winning team needs a good coach, and working with a financial planner who acts as your coach is a wise investment. A Certified Financial Planner Professional™ can help you develop a game-winning strategy based on your hopes and dreams.
As you build your winning team, focus on a diversified portfolio of low-cost index funds and hire a fee-only, fiduciary Certified Financial Planner ®.
Talent wins games, but teamwork and intelligence win championships. ~ Michael Jordan
March 29, 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. Prices and yields are for today only and are subject to change without notice.
Retirement is exciting for many, but some people want to remain active and connected to the workforce or their communities. I was curious about the opportunities for active retirees, so I asked ChaptGPT, and here is what it (he/she/they) recommended.
There are many great job options for active retirees, depending on their skills, interest, and availability. Here are some ideas:
Consultant. If you have years of experience in a particular field, you can become a consultant and provide guidance to others in your area of expertise.
Freelancer: Many retirees choose to become freelancers and work on projects they enjoy. This could include writing, graphic design, or consulting.
Tour Guide: If you enjoy traveling and have a passion for sharing your knowledge with others, becoming a tour guide may be a good option for you.
Fitness Instructor: If you are physically active and have experience in fitness, you could become a fitness instructor and teach classes.
Retail Salesperson: Retail stores often need part-time workers to assist with customer service, restocking, and sales. This can be a great option for retirees who enjoy interacting with people.
Tutor: If you have a background in education or a particular subject area, you could become a tutor and help students with their studies.
Dog Walker or Pet Sitter: If you love animals, you could become a dog walker or pet sitter and help pet owners care for their furry friends.
Event Coordinator: If you enjoy planning and organizing events, becoming an event coordinator may be a good fit for you.
Volunteer: many retirees choose to volunteer their time and skills to organizations that align with their values and interests.
Overall, the best job for an active retiree will depend on their individual preferences and circumstances. It’s important to find a job that allows you to enjoy your retirement while also providing a sense of purpose and fulfillment.
ChatGPT has spoken!
I am completely operational, and all my circuits are functioning perfectly. ~ HAL, 2001 A Space Odyssey
March 23, 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. Prices and yields are for today only and are subject to change without notice.
What is financial planning? According to the Certified Financial Planner’s Board, it involves looking at a client’s entire financial picture and advising them on how to achieve their short- and long-term financial goals.[1] A comprehensive plan can help you make informed decisions about your future, giving you a baseline and roadmap based on your goals. It’s a living document that constantly changes and reacts to your needs and market conditions, and it is an invaluable tool.
A well-constructed financial plan encompasses your whole financial picture, touching on such topics as retirement, estate, education, investment management, budgeting, insurance, taxes, and giving. In addition to finances, a good planner addresses the emotional and psychological side of planning. It’s a two-piece puzzle – financial and emotional.
Here is a look at a few of the critical financial planning areas:
Retirement. Retirement is a primary goal for most of our clients. An analysis of your current assets, savings, spending, and goals will determine your retirement date and asset level.
Estate. Estate planning is essential for your loved ones, and a good one can ensure your assets are in your beneficiary’s hands, not the government’s. A valid will or trust is paramount to protect your resources, and the appropriate beneficiary designations on your investment accounts, retirement plans, and insurance policies are required.
Education. Do you have young children? If so, a 529 education account is an excellent way to save for college. The assets inside a 529 plan grow tax-free if used to pay for tuition, room, board, books, etc. Why save for college? The current annual tuition for a public college is $27,330.[2]
Investment Management. Prudently investing your money to achieve your goals requires skill, patience, and wisdom, especially in down markets. It’s vital to your success. Are your assets appropriately diversified and in line with your risk tolerance? Investing is not speculating, so don’t gamble your assets on risky investments that could derail your plans.
Budgeting. Do you know where your money is going? Budgeting provides valuable information on how you spend your dollars. A deep dive into your spending habits can free up assets for saving and investing. Also, a budget allows you to spend money without shame or guilt.
Insurance. An insurance policy can protect your family and possessions. Insurance premiums are expensive but necessary, and it’s foolish to plan for your future without proper coverage. Buying term insurance is acceptable; avoid whole-life policies or Maximum Premium Indexing contracts (MPI). And, yes, a non-working spouse should purchase life insurance too.
Taxes. Tax planning allows you to make tax-efficient decisions, especially when receiving funds from your investment and retirement accounts. It also ensures you’re making wise decisions about deductions and credits.
Giving. Philanthropic planning benefits your bottom line and helps those in need. A gift-giving program can help charities by correctly using donor-advised funds (DAF) or charitable remainder trusts (CRT). You can also give away $17,000 yearly to your loved ones without tax or estate issues.
Emotions. Are you ready to retire? What will you do, and how will you spend your time? Do you have hobbies? Are you prepared to donate your assets to charities or loved ones? Are you comfortable living without a paycheck? Will you move to a new state or country when you retire? Managing your emotions is just as important as managing your finances.
If you’re looking to hire a financial planner, ensure they are certified by the CFP Board. A Certified Financial Planner Participant has passed a rigorous test and years of study to obtain the valuable and powerful CFP® designation. In addition to the initial requirements, CFP® professionals must get thirty hours of continuing education credits every two years.
According to the CFP Board, 90% of consumers value an advisor’s credentials, and 86% prefer one who passed a certification exam and rigorous education program.[3] Once individuals obtain the CFP® designation, they’re now fiduciaries, required to act in your best interest. However, be warned of false prophets, especially on Tik Tok. I’ve seen several posts from financial coaches, insurance sales representatives, and influencers masquerading as financial planners. Before you commit to an advisor, check their credentials. Here is a link to find a CFP® professional in your neighborhood: https://www.letsmakeaplan.org/
Good luck and happy planning.
Let our advance worrying become advance thinking and planning. ~ Winston Churchill
February 10, 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.
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.
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.
Max out your contributions. The maximum amount is $22,500. If you’re fifty or older, you can add another $7,500.
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.
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.
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.
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.
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.
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.
Have you been wondering if you should have buried your money in the backyard or stuffed it under the mattress? After all, as you review the year and the performance of our recommendations, it seems evident that stocks and bonds would fall. In 2022, we experienced rising interest rates, inflation, the war in Ukraine, and China’s COVID woes, yet, with those same headwinds and thousands more, the S&P 500 produced an average annual return of 10.12% since 1926, turning $1,000 into $11.5 million. I have the utmost confidence in our models, investments, and financial plans because I have seen them work for over three decades, and I know they will perform well in the future. I’ve learned from more than thirty years in the business that clients who diversify their assets, invest regularly, follow their plans, and remain patient will reap benefits.
The Tortoise and the Hare
Warren Buffett, the CEO of Berkshire Hathaway, is the most successful investor of our generation, with a net worth of $107.6 billion, and his stock currently trades at $468,711 per share and finished last year up 4%. Despite his staggering net worth and stock market performance, he has experienced many down years since 1965. His stock fell 48% in 1974, 23% in 1990, and 32% in 2008. It also fell 30% during COVID and dropped more than 50% in the Great Recession, and from 2007 to 2013, it lost 4.3% per year. If investors panicked and sold the stock over the past thirty years, they would have missed returns of nearly 4,000%. Mr. Buffett believes in patience and said, “Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.” He prefers companies with earnings, revenues, cash flows, and dividends – a slow and steady model that we try to emulate.
In contrast, Cathie Woods ARK Innovation fund trades daily and is highly active. The fund owns growth companies that may pay off in the future, like Roku, Robinhood, and Coinbase. During the peak of COVID, her fund soared 152% and, at one point, outperformed Warren Buffett and Berkshire Hathaway by 200%! However, her fund hit a brick wall last year, losing 67%, as investors shifted their focus to companies with solid balance sheets. As a result, Berkshire Hathaway has outperformed ARK by 80% since the crazy days of COVID. The tortoise wins again!
Indices
The S&P 500, Dow Jones, and NASDAQ suffered terrible losses last year, falling 8.78%, 19.44%, and 33.10%, respectively. What’s interesting about the S&P 500 is that it peaked on January 3, 2022, and fell 12.4% from January to March before the Federal Reserve started raising interest rates. Since the middle of June, it climbed by 2.24%, so most of the damage occurred in the first two and a half months, and five days accounted for 100% of the losses – April 29, May 5, May 18, June 13, and September 13.
As a comparison, the Vanguard Balanced Fund, a low-cost index fund, fell 16.87% last year, and I tracked an unmanaged group of twenty indices, and they fell, on average, 16.5%. There was no place to hide in 2022, but when stocks have dropped by 20% or more since 1957, they returned 29% the following year.
Regardless of the poor performance last year, the indices have performed admirably over the past thirty years. Despite crashes, inflation, rising interest rates, recessions, wars, and pandemics, the Dow Jones soared 1,944%, the NASDAQ jumped 1,845%, and the S&P 500 climbed 1,484%. The average annual return for the big three has been 10.21%. A $100,000 investment in January 1993 is now worth $1.85 million. And, since 1993, stocks have risen 87% of the time. Again, patience rewards successful investors.
Bonds
Bonds produced their worst year ever as the Federal Reserve raised interest rates to try and combat inflation. The yield on the one-month US T-Bill soared 8,140%, rising from 0.00% to 4.12%, and when interest rates rise, bond prices fall. The iShares 20+ Year Treasury Bond Fund ETF (TLT) crashed by 31.24% last year, losing almost as much as the NASDAQ. For the past fifty years, long-term government bonds have averaged 7.20%.
Bonds could be one of the best-performing asset classes this year if the Federal Reserve lowers interest rates. In 1994, the Federal Reserve raised interest rates by 100%, only to start reducing them in 1995. In 1995, long-term bonds soared by 31.7%.
Despite the carnage in the bond market, it now benefits us because we can offer investments yielding 3%, 4%, 5%, or more, and some of the rates are guaranteed. We have not had the luxury of higher rates for some time. For example, the last time the one-month US T-Bill yielded more than 4% was in 2007.
Stay the Course
Few people like advice that says, “Stay the course.” It’s boring, 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 and could put your financial future at risk.
We recommend a buy-and-hold strategy when managing money which is easy when stocks rise but tough when they fall. It’s a prudent recommendation because stocks rise about three-quarters of the time, and no one can time the market.
When we recommend staying the course, we review multiple components like your financial plan, asset allocation, cash flow needs, and Riskalyze report. We do not make the recommendation lightly. If the data gives us a positive reading, we do not make any changes to your portfolio; if your goals change, we will adjust your plan and investment program accordingly.
Financial Planning
Since I started the firm seven years ago, we have completed more than one hundred and forty financial plans, covering $300 million in assets.
The top five retirement goals are travel, purchasing a new car, home improvement, buying a new home, and celebrations (weddings, anniversaries, etc.).
The most popular expectations for retirees are pursuing an active lifestyle, spending time with friends and family, and living less stressfully. However, don’t wait until you retire to enjoy your life.
The two most common retirement concerns are running out of money and suffering investment losses. Running out of money in retirement is not good, and we want to ensure clients can retire on their terms and, more importantly, stay retired. Running out of money and suffering investment losses are competing concerns, and you must choose between risk now or later. If your investments are too conservative early in your career, you may run the risk of running out of money. If your assets are too aggressive later in life, suffering a significant investment loss can have dire consequences. A financial plan will assist you in selecting the proper balance between risk and reward.
Last year, our clients with financial plans were calm and more confident about their financial future and did not panic. If you want to join this impressive group, give us a call to complete your financial plan.
Recession
Will there be a recession? According to media outlets, pundits, and influencers, the answer is yes. However, the consensus on Wall Street is mixed, and we won’t know if one occurred until long after it has passed. Countless analysts are trying to read the tea leaves and signals from the stock and bond markets to forecast the recession, and, as Paul Samuelson said, “The stock market has predicted nine of the past five recessions.”
The projected global growth for 2023 is 1.8%, and so long as unemployment remains low, job openings stay high, and wages rise, it will be challenging to enter a recession. Still, if the Federal Reserve continues to raise interest rates, we could face a mild recession. Since 1945 we have experienced thirteen recessions, lasting, on average, ten months. If we enter a recession, the Federal Reserve will lower interest rates, which is positive for stocks and bonds.
Cash
The one-month US Treasury Bill is a proxy for cash and is considered the safest investment in the world. It currently yields 4.1%, above its 96-year average annual return of 3%. The S&P 500 closed down 19.4% last year, so a positive 4% return looks appealing.
Cash is a short-term haven if you need liquidity or safety, but it’s a poor investment. The current inflation rate is 7.11%, and the dollar will lose more than half its value over ten years; at the historical inflation rate of 3.25%, the dollar loses 60% of its purchasing power over thirty years. The S&P 500 has risen 1,484% over the past thirty years, averaging 9.65%. Cash always loses the inflation battle, but stocks offer a hedge.
Another negative for cash is that it never grows. Stocks are volatile but allow you to recoup your losses over time; cash won’t. Once you sell stocks to buy T-Bills, you never recover your losses. For example, if you bought the S&P 500 Index in January 2007, you lost more than half your investment (56%) by March 2009. If you panicked and sold, you never recouped your original investment, but if you remained invested through the end of 2022, you could have earned 274%, turning $10,000 into $37,410. In addition to the Great Recession, stocks fell 20% in 2018, lost 30% during COVID, and dropped 20% last year. Even though the market suffered four significant corrections in fifteen years, it almost tripled. The one-month T-Bill returned 0.84% per year before taxes and inflation during the same time frame.
ESG
Environmental, social, and corporate governance (ESG) remain hot topics for investors. Through Morningstar, we can offer direct indexing allowing you to avoid investing in particular companies or industries that do not align with your beliefs. Also, if you work for a company like Apple, we can exclude it from your portfolio, so you’re not adding to your concentrated position. The minimum investment for this service is $250,000.
Expectations
How will the stock market perform in 2023? I don’t have a clue, but I like what JP Morgan said, “It will fluctuate.” Over the past thirty years, the S&P 500 has averaged 9.65% per year, turning $10,000 into $158,400, and was positive 80% of the time. The index experienced consecutive negative years once – from 2000 to 2002. The best one-year stretch occurred from April 2020 to March 2021, when it jumped 56%. The worst one-year period happened from March 2008 to February 2009, when the index dropped 43%.
Inflation has probably peaked, and interest rates should stabilize, benefiting stocks and bonds. A weaker dollar will boost international investments, while lower inflation and interest rates could spell trouble for commodities like gold and silver.
Cash remains attractive for short-term needs. The one-month US T-Bill currently yields 4.25%, significantly higher than rates available from money-center banks like Wells Fargo or Bank of America. The interest rates on US Treasuries could remain at these levels for the foreseeable future.
We continue to shun Bitcoin and other cryptocurrencies and avoid them at all costs. It’s an asset class that continues to fail on several fronts.
Janet Jackson
Janet continues to support our firm with excellence by working directly with our clients helping them open accounts, transfer funds, or handle the required minimum distribution. In addition, she is leading our efforts to join the Schwab platform. Though the merger won’t close until Labor Day, we joined Schwab early through a pilot program, and she has been instrumental in our smooth transition.
Spencer Engelke
Spencer has been a fantastic addition to our team this past year, and he handles most of our financial planning duties and directs our weekly podcasts. He continues to flourish at PWM, and his future is bright.
He completed his coursework for the Certified Financial Planner® designation and will sit for the exam in July.
Starbucks
Our firm continues to grow; we now work with more than 160 households across fourteen states. As a result, our Starbucks growth indicator remains strong, as we increased our card mailing this year by 11%.
Thank You
I know it was a challenging year, and my heart aches for your pain, but markets always recover. We appreciate your loyalty, faith, and trust in our firm.
Sincerely,
Bill Parrott
Bill Parrott
President and CEO
Parrott Wealth Management
Austin, TX
January 7, 2023
Rejoice in hope, be patient in tribulation, be constant in prayer.
~ Romans 12:12
Note: The Financial data is from YCHARTS, TD Ameritrade, Dimensional Funds, and Yahoo! Finance. Past performance does not guarantee future performance,
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.
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.
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.
