Financial Mystery Dinners

Murder mystery dinners are popular. At these dinners’ guests try to guess who committed the crime based on a series of clues. Guests are also part of the show and may be prime suspects. You might have attended one of these events in the past, but have you ever been to a financial mystery dinner?

Let’s say you’re invited to a financial mystery dinner to solve a financial crime. The storyline is that four of the guests will run out of money in retirement. Why four?

According to The Employee Benefit Research Institute, 40.6% of households are projected to run out of money in retirement.[1] They have been conducting this survey since 2003 and the numbers are grim, especially for single women.

In another study from the World Economic Forum, they found that men could outlive their savings by 8 years and 11 years for women.[2]

The Federal Reserve estimates the average retirement account balance is $60,000.[3]  If your IRA balance is $60,000, you can expect an annual income of $2,400 – before taxes!

If you depleted your savings and had to rely solely on Social Security, the average monthly benefit is $1,345 or $16,248 per year.[4]

Here are the guests. Can you identify which four will run out of money during their retirement?

Marty Millennial. He’s a young man living at home. He earns a decent salary but keeps his money in a low yielding savings account at a major bank. He reluctantly contributes 2% of his salary to his 401(k) plan.

Tammy Teacher. Tammy has been an elementary school teacher for several years. She contributes to a 403(b) plan and she’ll receive a pension payment from her state when she retires. Her husband is a firefighter who will also receive a state pension.

Sandy Salesman. Sandy is a hard charging salesman who drives a Ferrari and wears a gold Rolex watch. He’s self-employed, has a small IRA, and changes jobs every 1 to 3 years to pursue a larger sales territory with better leads.

Robby Retiree. Robby has been retired for a few years. He and his wife love to eat out and travel. They own a large home, live on a golf course, and drive a Range Rover. He has an IRA and a few investment accounts. He’ll receive Social Security in two years. His wife was a homemaker and she’ll receive spousal benefits from Social Security when Robby files for his benefits.

Donna Doctor. Donna is a surgeon at a huge hospital in a major city. She graduated from medical school with several thousand dollars’ worth of student loans. She is a high-income earner who works long, stressful shifts.

Peter Pilot. Peter is a pilot for a major airline. He’s been flying for about 15 years. His airline offers a pension, but he is concerned about the financial stability of his employer. He knows the sad history of airline carriers going bankrupt. He’s now a first officer. He has three kids and they all participate in club soccer.

Linda Lawyer. Linda is a trial lawyer. She and her husband have two daughters who are about to get married. Her firm has generous benefits including profit-sharing and cash balance plans. Her husband is a staff accountant for a local municipality.

Danny Developer. Danny is a computer programmer for a high-tech company. He’s paid handsomely for his coding skills and he’s been rewarded with stock options and restricted stock. His company will go public this year.

Ashley Athlete. Ashley is a professional soccer player for a team located on the East Coast. Her salary isn’t great, but she earns extra income from endorsements and coaching soccer clinics.

Frank Farmer. Frank owns a farm in Texas on several thousand acres. He grows corn and wheat and earns a decent living from his crops. He and his wife have four children and seven grandchildren. His family will have an estate tax issue when Frank and his wife pass away.

How did you do? Which four guests will run out of money? Of course, there’s no way to know with the limited clues given, so time will tell. However, here are a few things you can incorporate today to improve your odds of enjoying a successful retirement.

  • Invest for growth. Over time, stocks outperform bonds and cash by a wide margin. Stocks do carry risk, but not bigger than the risk of running out of money in retirement. If you invested $10,000 in stocks ten years ago, it would be worth $26,220 today. The same amount invested in short-term bonds would be worth $10,060.
  • Save early and often. The sooner you start saving, the better. Even if you’re going to receive a pension, Social Security, or other guaranteed payouts, you still need to save your money. How much? A suggested amount is 10% to 15% of your annual income.
  • Contribute to your company retirement plan. A 401(k) plan is a great tool for creating wealth, especially if your company offers a match. If you contribute 5% of your income and your company matches 5%, your making 100% on your investment. 401(k) plans are efficient and easy to use. Invest for growth because you won’t be able to touch this money for 10, 20, 30 years or more.
  • Pay off debt. Eliminate high credit card debt, auto-loans, student loans and mortgages before you enter retirement. High levels of debt will be a hindrance to a successful retirement. According to one study, the average debt balance for individuals age 75 or older is $36,757.[5]
  • Create an emergency fund. A cash hoard will help you when trouble hits. It will also allow you to pay for things without using a credit card and accruing more debt. A recommended cash amount is three to six months of household expenses.
  • Develop a spending plan. A spending plan will help you identify how your money is being spent. It will give you an opportunity to reduce, or eliminate, your expenses.
  • Generate a financial plan. A financial plan solves a lot of financial mysteries. It will reveal the clues needed to produce a fruitful retirement. It will give you direction.

Don’t be caught short in retirement. Do all you can today to make sure you have financial assets when it matters most. It would be a crime not to!

Just the facts ma’am. ~ Joe Friday

June 14, 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.

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

 

 

 

[1] https://www.fool.com/retirement/2019/05/19/heres-how-many-us-households-will-run-out-of-money.aspx, Christy Bieber, May 19, 2019

[2] https://www.barrons.com/articles/outlive-retirement-savings-world-eonomic-forum-retiree-global-51560453625?mod=hp_DAY_6, Reshma Kapadia, June 13, 2019

[3] https://smartasset.com/retirement/average-retirement-savings-are-you-normal, Amelia Josephson, April 16, 2019.

[4] Ibid

[5] https://www.cnbc.com/2018/04/04/growing-debt-among-older-americans-threatens-retirement.html, Annie Nova, April 4, 2018

Do Investment Returns Matter?

The S&P 500 rose 13% in the first quarter.  Are you satisfied or frustrated if your investment portfolio “only” made 12%?

During the quarterly review season investors want to know how well their accounts performed. Did they make money? Did they outperform the market? Will the trend continue? These are common, and logical, questions investors ask their advisors – but are they the right ones to ask?

Of course, returns matter. However, rather than focusing solely on your investment returns, you should review your financial goals and savings target. Are you saving money? Are you investing for a purpose? Do you have written financial goals? If you aren’t saving any money, your returns won’t matter. Nor will they matter if you’re not investing for a purpose like buying a new home, saving for retirement, or funding an education.

Identifying your investment goals is paramount to determining if you’re on the right track. For example, if your goal is to retire with $1 million and your current account balance is $1.2 million, you don’t need to take aggressive risks with your money. A conservative mix of investments will help you grow and preserve your wealth. On the other hand, if your balance is $250,000, you’ll need to own a growth-oriented portfolio loaded with quality stocks.

Time is also a factor. A 25-year old who saves $500 per month needs to earn 6% per year to reach $1 million in assets by age 65. A 50-year old needs to earn 25% – an unrealistic rate of return.

Investment goals and time frames are linked. Will you need your money in one year or less? If so, invest in short-term investments like U.S. T-Bills, money market funds, or CDs. These low-yielding investments will underperform stocks over time, but your goal is not to generate the highest return because you’ll need the money in the near term.

Saving for college is also time dependent – 18 years or less. If you recently had a baby, then an all-stock portfolio makes sense. As your child approaches age 18, move the assets to safer investments. When my daughter was born her account was filled with individual stocks. When she entered college, I moved half her assets to U.S. T-Bills so I could pay for her tuition, rent and food. She’s graduating from college in December and this strategy worked well.

Retirement is a primary goal for most. Saving as much as possible for your retirement is recommended. You’re allowed to contribute $19,000 per year to your 401(k). If you’re 50 or older, you can add another $6,000. You can also contribute $6,000 to an IRA. You can contribute another $1,000 if you’re 50 or older

During your next quarterly review, focus on your goals rather than your returns. Here are a few suggestions to help you transition from returns to goals.

  • Establish goals. If you don’t have a target, you can’t measure your progress. Once you document your financial goals, you’ll know if you’re on track – or not. Set up a system to monitor your progress. You can create a savings thermometer like you see at fund raising events! If you’re on track, stay the course. If not, make the necessary adjustments.
  • Increase your savings. You can’t control the stock market and returns are fleeting, but you can control how much money you save. In 2017 the S&P 500 rose 21.8%. It fell 4.4% last year. Let’s return to our 25-year old investor. She needs to earn 6% per year to reach $1 million at age 65 if she saves $500 per month. If she increases her monthly savings to $1,000, she only needs to earn 3.32%.
  • Control your spending. To retire, you need to cover your expenses. The lower your expenses, the less money you’ll need to save for retirement. For example, if your annual expenses are $100,000, you’ll need at least $2.5 million to pay for your expenses. If you can lower them to $75,000, then the amount you’ll need to save is $1.875 million. Do you track your expenses? Creating a spending goal or budget plan will help you establish your asset target. Multiply your expenses by 25 to figure out how much money you’ll need for retirement. Are you on track?
  • Adjust your asset allocation. An allocation to 100% stocks will give you the best opportunity to create long-term wealth, but it will be a bumpy ride. In 2008 the S&P 500 fell 37%. A portfolio consisting of 50% stocks and 50% bonds fell 20%. Adding bonds to an all equity portfolio will reduce your risk. What is your appropriate asset allocation? It depends on your tolerance for risk, financial goals, and time horizon. You can click on this link to identify your risk tolerance: https://clients.riskalyze.com/risk-questionnaire/questionnaire-intro
  • Big wins. The largest investment in your account will have the biggest impact on your returns. My parents best performing stock has been Starbuck’s, it’s also their smallest position. It has little impact on their account. Denmark’s stock market has outperformed the U.S. market by 4% per year for the past 20 years. Denmark accounts for 1% of the global market capitalization while the U.S. accounts for 54%.[1] When U.S. stocks move it makes an impact, not so much with Denmark.

It’s important to generate positive long-term returns, but it’s more important to have financial goals. Take some time to identify your goals so at your next quarterly review meeting you can focus on your progress.

Risk comes from not knowing what you’re doing. ~ Warren Buffett

May 9, 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.

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

[1] Dimensional 2019 Matrix Book

More, More, More!

Retirement is a joyous occasion and a time for celebration.  After years of toil you’ve earned the right to enjoy the fruits of your labor.  You can travel the world, run on an uninhabited beach, read lengthy novels, watch movies, or volunteer your time.  Regardless of your goals it will take money to finance your dreams.

A person retiring today at age 65 may spend 35 years in retirement. How much money will she need to fund this stage of her life?  The answer is more, as in more than you think.  With a few key inputs like expenses or income it’s possible to calculate how much money she’ll need to fund her current lifestyle.  For example, if her annual expenses are $100,000 per year, then she’ll need at least $2.5 million.

As you approach retirement, if not sooner, I recommend calculating your annual expenses, so you can determine the amount of assets you’ll need to support your lifestyle.  A budget worksheet can help you determine your monthly and annual expenses.  Here’s a link to a budget worksheet: https://www.consumer.gov/content/make-budget-worksheet.

If the inputs are known, why should we plan for more income?   Two reasons: inflation and unexpected expenses.  Inflation has averaged 3% since 1926.  The value of a dollar in 1926 is worth 7 cents today.  Inflation will annihilate your cash and bond investments over time by reducing their purchasing power. However, you can offset this decline by owning stocks. Stocks have generated a real-return (net of inflation) of 6.8% since 1802.[1]  Stocks will allow you to maintain your purchasing power in retirement.

The second reason you’ll need more money is because of unexpected expenses like a new roof, air-conditioning unit, or car.  In addition, the odds of incurring medical expenses increase as you age, unfortunately. Unexpected expenses can also come from benevolent decisions like charitable donations or gifts to loved ones.

How can you insulate yourself so you can enjoy a fruitful retirement? Here are a few ideas and suggestions.

  1. Save more. The more money you save today, the more you’ll have tomorrow.  Saving an extra $500 per month will put an additional $260,000 in your pocket over twenty years.
  2. Reduce your expenses. After reviewing your expenses are there items in your budget you can reduce or eliminate? Lowering your expenses will give you some margin in retirement if you’re confronted with unexpected expenses.
  3. Pay off debt. Reduced your debt obligations before you enter retirement.  This will lower your expenses and increase your cash flow at a time when you need it most.  If you have money in the bank, use it to pay off your debt obligations.
  4. Create a new expense category. If you follow a budget, create a line item for unexpected expenses.  I’ve added a “black swan” category on my spread sheet for items out of my control.  Why a black swan? A black swan is a rare, and often unexpected, sight. The amount of this category should be 1% to 2% of your total expenses.  For example, if your expenses are $100,000 per year, then 1% to 2% of this amount is $1,000 to $2,000.  This figure is now part of your budget and will help you deal with unexpected expenses.
  5. Defer Social Security. You’ll be eligible to receive Social Security at age 62, but for every year you defer your benefit, you’ll get an 8% raise.  A monthly benefit of $1,500 at 62 could rise to $2,776 at 70, an increase of 85%.

Retirement is a wonderful time, I’m told, which probably is the reason it’s called the Golden Years.  A proper retirement plan can help keep your golden years free of tarnish!

The question isn’t at what age I want to retire, it’s at what income. ~ George Foreman

In all toil there is profit, but mere talk tends only to poverty. ~ Proverbs 14:23

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

2/6/2018

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] Stocks for the Long Run, Jeremy Siegel, updated.

What Will You Do in Retirement?

Today you’re working.  Tomorrow you’re retired.   After eighteen years of schooling and forty years of working it’s now time for retirement.  For the first time in your life you don’t need to set your alarm clock for a Monday morning meeting.

A question I’m often asked is, “What will I do in retirement?”  Few people have a strategy for retirement.  In fact, only 22% of individuals feel confident about their retirement according to an article in the Chicago Tribune.[1]

Retirement has two sides: financial and emotional.  The financial equation is easier to deal with when compared to the emotional side.  A financial planner will give you a good estimate of how much income you’ll receive based on your current level of assets.  The emotional side of retirement, however, is more challenging and difficult to quantify.  Individuals aren’t likely to retire until their emotional house is in order regardless of their financial situation.

What will you do in retirement?  Here are a few suggestions to help you with the emotional side of retirement.

Give.  A suggestion to give your money away in retirement hardly makes economic sense.  Retirees want to know how much money they’ll receive; not how much they’ll give away.  Individuals who can afford to retire and live off their savings should be able to give some of their money away to help others.  A giving or charitable strategy will help define the who, what, when and where for your donations.  Giving money away can also make you happier and healthier according to a 2015 research report.[2]  As a child you probably were told it’s much better to give than receive but you didn’t believe it until you were older.  Giving is advantageous to all parties.

Volunteer.  Giving and volunteering are close cousins if not siblings.  Most individuals will tell you they’re busier in retirement than they were during their working years.   Non-profits are constantly looking for help.  A quick Google search for non-profits in Austin, TX produced over 825,000 results.   Volunteering your time will help fill your day with meaningful activity while doing good for others.   Your local church, school district or Chamber of Commerce can point you in the right direction and lead you to several serving opportunities.  Joining Rotary or Kiwanis will also give you instant access to serving opportunities.

Mentor.  You’ll retire with a wealth of knowledge stored in your mind and it would be a terrible thing to waste.   Helping a student with homework or learning to read will bear much fruit and can change their life trajectory.  Mentoring a new business, startup or incubator can be beneficial to the young owner and help them avoid several mistakes.   Your knowledge is invaluable and the lessons you pass on to the younger generation won’t soon be forgotten.

Work.  Work?  Who wants to work in retirement?  I want to work in a fly fishing shop or outdoor adventure store.   If I’m able to work in a fly fishing shop in Colorado during retirement, I wouldn’t consider it work.   What hobbies do you have?  Can you convert your hobby into employment?  If you like gardening, work in a nursery.  If you’re an artist, work in an art store.   Seasonal work may be another opportunity for you during your golden years.  Working at a ski resort in the winter and a beach resort in the summer may be your ticket.  Working part or full-time in retirement will also help with your finances.  The longer you defer your withdrawals from your investment accounts, the more money you’ll have as you mosey through retirement.

School.  First work and now school?  What the heck?  Most universities will allow retirees to audit a class or two.  Did you miss taking quantum physics as an undergrad?  You now can go back to school and devote yourself to a subject of your choosing.   Your local university or junior college offer hundreds of courses giving you the opportunity to study almost anything.

Hobbies.  Do you have a hobby you can convert to cash?  Do you have paintings or pottery to sell?  Your hobby may give you an opportunity to generate income.  Since you’re not working 9 to 5 you can allocate more time to hone your hobby or craft.  What if you don’t have hobbies?  Retirement is a great time to study the guitar or learn to scuba dive.

Travel.  Distant lands are calling.  Travelling by land, sea or air is good for the soul.  In addition to seeing our big blue planet, you’ll experience different cultures and meet amazing people.   A trip to New Zealand, China, Greece or Peru will expand your horizons.  Local travel is also captivating.  Visiting our National Parks is breathtaking.  A hike through Yellowstone or Yosemite will leave you speechless.   Sailing the seven seas will allow you to discover two-thirds of our earth.  It’s also possible to turn your travel into extended stays.   How would you like to live in Sardinia for a few months?

Fitness.  If you take care of your body, it will take care of you.  Yoga, walking, swimming, cycling or lifting weights are low impact activities that provide numerous benefits.  Regular exercise can improve sleep and reduce your risk of diabetes and heart disease.[3]  Twenty to thirty minutes a day is all you need to maintain or improve your health.

Fish.  Fishing for trout with a Purple Haze Parachute fly while floating the Bitterroot may be in your future. Fishing, of course, is a popular retirement hobby.   Most people live near a pond, stream, river or ocean so finding fishable water should be easy.  Fishing can also be a lifelong sport enjoyable for the entire family.

Golf.  Golf may be the ultimate retirement prize.  Workers will endure forty years of employment so they can spend the rest of their life golfing.  Florida, Arizona and other sunbelt states benefit greatly from retirees.  If you’re going to spend the rest of your life on the golf course, make sure you dip yourself in sunscreen regularly.

Nothing.  Of course, doing nothing is an option.  You may want to sit on the couch all day and watch TV but I doubt it.  Retirement is an exciting time so I’d encourage you to get off the couch and enjoy your retirement.

The golden years will be the best years of your life.  The ability to do what you want, when you want is peaceful.   Your retirement will give you a chance to live life on your terms.   Retirement can be a life of leisure but I’d encourage you to use your resources (physical, spiritual and financial) to help others and yourself!

Happy Retirement!

Men do not quit playing because they grow old; they grow old because they quit playing. ~ Oliver Wendell Holmes

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

June 2, 2017

[1]http://www.chicagotribune.com/business/yourmoney/ct-marksjarvis-0422-biz-20150421-column.html, Gail Marksjarvis, April 22, 2015.

[2] http://nypost.com/2015/09/03/people-who-donate-to-charity-are-much-happier-and-healthier/, Reuters, September 3, 2015.

[3] https://www.mindbodygreen.com/0-29265/does-exercise-help-reverse-the-effects-of-aging.html, By Leigh Weingus, May 20, 2017.