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

My Uber Driver

My Uber driver was from Afghanistan. He moved to the United States with his wife and two young children to escape the atrocities and horrors of his former country. He was an animated character.

On my drive from the airport to my hotel, I learned much about this gentleman. He is attending school to become an aeronautical engineer. His goal is to make $150 a day from driving in between his other job and his studies. He has a plan and he’s driven to succeed so he can provide a better life for his family.

To succeed as an investor, you need goals – specific goals. Your plan should be unique to your situation and reflect your intentions.

Here are a few suggestions to help you get started with your plan so you can move closer to your goals.

  1. Define your goals. What items are vital to you and your family? Do you need to save for college? Retirement? Write your goals down and commit them to paper. Be specific.
  2. Take an inventory of your assets. List your investments by account and type. How much money do you currently have in stocks, bonds, or cash? What percentage of your assets are in retirement accounts? Taxable accounts? How much money are you saving monthly?
  3. Take an inventory of your liabilities. Do you have a mortgage? Credit card debt? Auto loans? Student loans? List how much you owe for each item, including the rate and term.
  4. Identify your insurance coverage. Life, disability, and long-term care insurance policies will help protect you and your family from unfortunate events. Don’t forget to include your home and auto policies. Also, do you contribute to a Health Savings Account? Your HSA can play an essential role in both your health and retirement planning.
  5. Do you have children? Setting up a 529 plan as soon as possible helps offset the cost of college. Automate your monthly savings and invest for growth because the cost of college continues to rise – unchecked.
  6. Update your estate plan. A Will or trust is paramount to help your family honor your wishes once you’re gone. What will happen to your family and assets? A Will or trust will also provide guidance to your families and doctors on medical issues if you’re incapacitated.
  7. Review your corporate retirement plan benefits. Do you have a 401(k) or 403(b) plan? Does your company offer a pension or cash balance plan? These accounts will probably constitute most of your assets so it’s essential you manage them correctly.
  8. Identify your beneficiaries. Your retirement plans and insurance policies will transfer to your loved ones by beneficiary designations. It only requires a few minutes of your time to check the beneficiary designations on your accounts, so do it today!
  9. Prioritize your goals. Your financial plan will list several items, so it’s imperative to identify those goals that are most important to your family.
  10. Contact the Social Security Administration to review your future benefits. Review your annual income amounts to make sure the data is correct because your income will determine your benefits.

The financial side of your plan is easy to compute because it’s just math – you either have the assets to achieve your goals, or you don’t. The emotional side of your plan is more challenging. What will you do in retirement? What are your hopes, dreams, and fears? How will you spend your days?

Before you’re ready to retire or pursue a goal, spend time thinking about the emotional side of your plan. You’ll be prepared to move forward when your financial and emotional plans are in sync.

I’m confident my Uber driver will succeed because he’s committed to his plan. If you follow his lead, you’ll probably thrive as well.

A dream without ambition is like a car without gas…you’re not going anywhere. ~ Sean Hampton

November 20, 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.

 

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.