Retirement planning mistakes fixed by credit cards

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Retirement planning mistakes
You already know I’ll be wearing that hat.

This post is only tangentially related to credit card rewards, but as I recently discovered some of my retirement planning mistakes and made some key changes, I thought the information may be useful to some readers — particularly those young readers newly getting started out of college and on career paths. It was a comment from reader Larry last week that really resonated with me:

I knew Larry was right of course, but I admittedly didn’t realize just how right he was. And if not for the chase of a credit card, I might not have realized how right for quite a while longer. The purpose of this post is to show how I’ve messed up so that younger readers can avoid it and to show how this miles and points game can be more rewarding in ways that compound well beyond the value of points or miles.

Questioning Larry

As I said above, when I first saw Larry’s comment, I knew he was right. Small differences add up over time and I’ve known for a while that I needed to do some maintenance on my retirement planning. But I’ll admit here that to some extent I had trouble buying this sentence: “The money you are making on these bonuses pales in comparison to what you are giving away each year by paying for investment advisors and high ratio funds”. I accepted that I was flushing some money that I shouldn’t have been, but did the relatively small amount really make other bonuses pale in comparison? After all, I’ve earned a lot of bonuses over the years from credit cards, bank accounts, and spending categories and I’ve also taken some incredible trips. I felt like this statement came from a place of good advice but might have been somewhat hyperbolic.

I was wrong.

Retirement planning mistakes compounded

Ten years ago, my wife and I began thinking about retirement — earlier than some folks, but as almost everyone ends up saying, not as early as we wish we had. Our small local bank had a financial advisor that would meet with us for free, so we met with him and discussed some options. He recommended A, B, and C — but when asked why he recommended those things, he almost seemed surprised by the question. It didn’t instill confidence that he knew what he was doing.

I knew that a former neighbor from my childhood years was a financial advisor and at that point had been for decades. He and my father had worked on some community projects together, so I trusted that he would likely not steer me wrong. We sat down with him and explained what we’d been told by the bank advisor and wondered what he thought. He picked up on the fact that the bank advisor was trying to sell us something that we didn’t need and said that while he could sell us the same, he wouldn’t for reasons X, Y, and Z. That gained my trust — and it was a mistake.

From there, we were handed off to another advisor who agreed about what we didn’t need and then steered us toward a particular set of mutual funds for a Roth IRA. Perhaps not so coincidentally, they were the same mutual funds recommended by the advisor at our local bank. The hindsight and wisdom of ten years tells me that should have been a red flag. Naive and young me thought that it was likely because these funds were clearly a good idea. I guess I was right — I just didn’t realize for whom they were a good idea.

Over the past ten years, our IRAs have consistently earned what looked like good percentages to me each year, so I thought we were doing pretty well. And indeed we were doing much better than we would have with that money in a bank account, so I’m thankful that we got on the retirement planning wagon even if it wasn’t without mistakes.

Fast forward to the present and a year or so of sort of “play” investing (I characterize it this way since I really didn’t know what I was doing, but I took an unexpected windfall and invested it, buying and selling a bit). With some reading and Youtube videos, I started learning about ETFs, index funds, and expense ratios. I began learning about popular index fund ETFs and other mutual funds from the likes of Vanguard, Fidelity, and iShares that track the total market or S&P 500 (therefore generally returning whatever the average market returns are fairly reliably) with expense ratios in the realm of 0.03% or 0.05% or some as high as 0.15%. My growing experience with those low fees finally made me curious as to the expense ratios on the mutual funds recommended to me for my Roth IRA a decade ago (and the several more funds recommended from the same fund family in the years since). I came to find that the lowest expense ratio on anything we owned was 0.59%. Some funds were as high as 1.3%. Those numbers may sound small, but at the high end that’s like paying $1,300 per $100K invested per year just for the honor of owning that mutual fund versus paying like $30 or $50 per year for the same level of investment with a number of different ETFs. There goes a third of this year’s bank bonuses (potentially) in expense ratios. Larry might be on to something.

But then it was months more before my heart really sunk. I began reading more and watching more videos on Youtube and I came to realize that some mutual funds have front-load fees — fees you pay for the honor of buying shares — and some add fees when you sell. I found that all of the funds in which we were invested charged a front-load fee of 5.75%. That means that it cost us 5.75% just to buy in on top of  the annual expense ratios (not surprisingly, when I look back now and see that everyone made money over the past 10 years, I realize that while our funds did OK, we earned about 5% less than the S&P 500 average each year thanks to these fees). The 2019 max Roth IRA contributions for a married couple making less than $193,000 would be $12,000 (that’s $6,000 per spouse assuming they earn at least $12K combined). The front load fee on the funds I’d purchased means that a couple depositing the max would pay $690 in load fees alone — only $11,310 of that money would actually get invested. Over ten years, that would be $6,900 in load fees alone (note that contribution limits have changed over time as have income limits, so that’s not exactly the amount that would have applied to us).

That is only the tip of the iceberg. Looking at it in terms of only the cost per year ignores the effect of compound interest. I took the time to figure out just how much those load fees have cost us each month since inception and I put it into a compound interest calculator figuring on the average growth of the S&P 500 for the past ten years to see how much money we would have today had that money instead gone into a simple S&P 500 Index Fund with no load fee. The answer was almost fifteen thousand dollars. And that is without figuring how much more we’ve spent in expense ratios. The high expense ratios and annual advisory fees makes an additional difference of thousands more — this has easily been a $20,000 mistake. That’s in today’s dollars. Put that into a compound interest calculator. If I averaged a 5% annual return on that money for the next 25 years, it would be more than $67,000 in 2045. I didn’t have the heart to check it at a rate of 7 or 8 or 10 percent return. I know it would be a lot more than that.

retirement planning mistakes

Larry was right. All of the credit card, bank account, and category bonuses I have ever earned pale in comparison to what I was losing by being stuck in high-fee retirement funds. It was high time to do something differently.

Bank of America Platinum Honors: A path toward better retirement planning (for me)

Greg has written before about how the Bank of America credit cards can be pretty awesome with their Preferred Rewards program, particularly the highest-level Platinum Honors. Greg recently wrote about how having that level of rewards with Bank of America means that his Premium Rewards card earns 2.62% cash back everywhere — and about how that makes it a great “everywhere else” card that prevents him from using his 2x-everywhere cards. See: Why there are no 2X everywhere cards in my wallet.

I’ve been interested in that card and set of benefits for a while, and given the current environment and our total lack of travel plans, earning 2.62% cash back has been sounding better and better. Indeed, I recently argued on Frequent Miler on the Air that I think this opportunity to earn 2.62% cash back makes regular 2x credit cards feel obsolete as the opportunity cost of spending at 2x credit card rewards becomes 1.31c per point. That’s just more than I’m willing to consistently pay for points (particularly points that I’m not using at the moment).

The snag for me in getting the Premium Rewards card has been that I didn’t have any money on deposit or invested with Bank of America (and the card isn’t exciting without the Preferred Rewards program). However, given my newfound displeasure with my financial advisor combined with how much better 2.62% cash back is sounding in the current environment, I thought that this would finally be a good time to find out whether or not our transferred IRAs would count toward the $100K that needs to be on deposit to get Platinum Honors (spoiler alert: I already knew the IRAs should count based on Greg’s previous posts).

Unfortunately, neither my wife nor I have $100K in a single IRA, which means that we would need to supplement with a cash deposit. That wasn’t a non-starter for us because we had already planned to start contributing regularly to a taxable investment account in order to round out our retirement funds. We could make it work to get one of us over the required threshold.

One thing that had previously turned me off from the idea of this process has been that some readers had mentioned high fees from Merrill back when this opportunity first debuted. As it turns out, Merrill Lynch does indeed have what some would consider to be high fees. Coming from my situation, high fees don’t excite me. On the other hand, Merrill Edge is the self-directed investing arm of the brokerage, which features no fees on many types of trades and transactions (including the types I’d be looking to do). I found that I could switch custodians and move my IRA to Merrill Edge quite easily and I could even keep my expensive mutual funds if I wanted to (but of course I’d like to get out of the ones I’m in and simplify things with a couple of index funds). All of that is easy enough to do on my own.

At this point I should note that I’m sure there are some people for whom the self-directed route won’t work – this post isn’t meant to be financial advice but rather my take on my experience. I certainly couldn’t have gone with a self-directed retirement account ten years ago – I wouldn’t have known where to start. I don’t fault those who want to pay advisory fees for what they value as good advice and I recognize that some people need more hand-holding through the process (we certainly did in the beginning). That said, with the wealth of resources available on the Internet (and particularly the good reading that many readers pointed me to in the Bogleheads community, which simplified things a lot), I feel good enough about keeping it simple and doing it myself. I’m sure that some people have situations more complex than mine where more advice may be worth some price.

At any rate, I decided that self-directed would work for me and the process to move an IRA to a new custodian (Merrill Edge in this case) is really pretty simple.

Furthermore, Greg has noted in the past that Bank of America often has a bonus for moving money into Merrill Edge. When I first looked for information on that, I found the bonuses he’s mentioned before, which come with the following tiers (again, this is for deposits in Merrill Edge):

  • Deposit $20K, get $100 bonus
  • Deposit $50K, get $150 bonus
  • Deposit $100K, get $250 bonus
  • Deposit $200K, get $600 bonus
  • Link to this promotion (but keep reading for a better offer)

With a goal of depositing $100K, I’d thought we’d be hoping for a $250 bonus. However, I chatted with a bank rep and I was surprised to find that each account (IRA and “cash management”, which is the taxable self-directed brokerage account) is eligible for a bonus separately. The rep gave me as an example the idea that if I deposited $50K in an IRA, I’d get a $150 bonus and if I then put $20K in a cash management account, I’d get another $100 bonus. I found that kind of funny — someone who splits $70K over two accounts gets the same bonus as someone who puts $100K (or even up to $199K) in a single account. Greg later confirmed that the two accounts are indeed bonused separately, so that wasn’t a mistake.

However, I later found a link on an Internet forum for an even better offer to get an additional 50% on the bonuses above for people who join the Preferred Rewards program:

  • Deposit $20K, get $100 $150 bonus
  • Deposit $50K, get $150 $225 bonus
  • Deposit $100K, get $250 $375 bonus
  • Deposit $200K, get $600 $900 bonus
  • Link to this promotion

In other words, depositing $50K in an IRA (or rather just transferring my IRA from another brokerage to Merrill Edge) and depositing $20K in a cash management account would make me eligible for a bonus of $375. If you have the ability to do $50K in an IRA and $50K in a cash management account, that would be a total bonus of $450. While that isn’t amazing considering the many bank bonuses that exist in the world today (I recently wrote about several that I’ve done this year that are better deals), it certainly beats opening these investment accounts without bonuses. Note that the $900 bonus on $200K isn’t bad at all and probably isn’t out of reach for many readers who have been saving for retirement for many years. I was ready to change up our IRAs anyway — getting this bonus money (which is available if you sign up by July 15th) is icing on the cake. Note that you don’t need to get top-tier Platinum Honors in order to get those bonuses — you just need to qualify for the Preferred Rewards program (as a reminder, that means you need to also have a personal Bank of America checking account). The bottom tier of Preferred Rewards — the Gold tier — only requires $20K on deposit.

And it gets a bit better yet.

Fast track to Preferred Rewards thanks to retirement planning funds

A nice thing about the offer above (which, again, is currently available through July 15th, 2020) is that it creates somewhat of a fast track to Bank of America’s Preferred Rewards. Whereas the program ordinarily requires an average monthly balance of $100K or more for 3 months, new members have a bit of an easier path. This is from the terms of the offer noted above (bold type is mine):

Promotional Early Enrollment in Preferred Rewards: Until July 15, 2020, when you enroll in the 50% More offer, you consent to early enrollment in the Preferred Rewards Program. Once you satisfy the funding requirement for the offer, you will be enrolled in Preferred Rewards within 45 days based on your current balances at that time rather than the usual requirement of three month average combined balances. You also must have or open an eligible Bank of America personal checking Advantage Banking account to be enrolled in Preferred Rewards. All Preferred Rewards benefits available in the tier associated with your combined balance level will be active within 30 days of enrollment. You are eligible to enroll in the Preferred Rewards program if you have an active, eligible Bank of America&174; personal checking or Bank of America Advantage Banking account and maintain a three-month average combined balance in your qualifying Bank of America deposit accounts and/or your qualifying Merrill investment accounts of at least $20,000 for the Gold tier, $50,000 for the Platinum tier, or $100,000 for the Platinum Honors tier. The combined balance is calculated based on your average daily balance for a three calendar month period. Certain benefits are also available without enrolling in Preferred Rewards if you satisfy balance and other requirements. Your benefits become effective within one month of your enrollment, or for new accounts within one month of account opening, unless we indicate otherwise. For details on employee qualification requirements, please call Employee Financial Services or visit the Bank of America intranet site. Merrill Wealth Management clients with greater than $250,000 in assets with Bank of America and Merrill are eligible for additional banking benefits. Please speak with your Merrill Lynch Financial Advisor for details.

In other words, if you sign up under the current “extra 50% bonus” offer for Preferred Rewards members and you are new to the program, it looks like you have 45 days to meet the funding requirements for bonuses and then your Preferred Rewards tier will be determined based on your balances at that time rather than being based on a 3-month average. Benefits will be active within 30 days of enrollment, which means that you could pick up a usable level of benefits (including the bonus on credit card earning) in less than 90 days.

From what Greg has said, this may be the standard-ish operating procedure for new accounts, but it is nonetheless great to see a fast track built into the program terms. Getting paid to switch brokerages and then fast-tracked to Platinum Honors sounds like a great deal.

In my case, a desire to pick up a rewarding credit card (the Premium Rewards card with Platinum Honors) combined with some good advice from readers is going to have a major positive impact on my retirement savings. I have to admit a lie above: Remember that $20K or so in squandered compound returns on the money I’ve thrown away in fees over the past decade? I did put it into the interest calculator at those higher rates of return — at an annual return of 9% each year, it would have been $172,000 in 25 years. I’m kicking myself (and not lightly) for my previous mistakes, but I’m also thankful that this hobby brought me to catch that before the number compounded further.

In this case, moving money I already saved for retirement with no cost to me is going to fast-track me for a more rewarding credit card and (hopefully) a larger nest egg thanks to the fee savings.

Bottom line

Retirement planning is something that most of us don’t think about until a time when we inevitably feel like it is later than we wish. I’m thankful that my wife pushed us to get the ball rolling on IRA accounts a decade ago (she has a good idea now and then: she’s also the one that pushed me to apply for the job here at Frequent Miler 3.5 years ago). Of course I wish I had sooner decided to invest time in learning more about retirement planning in addition to investing our money somewhat blindly. Still, better to have invested than to have held off for years more waiting to learn or else I may not have had the good fortune to have received that comment from Larry last week and several readers who led me to a fascinating community called Bogleheads.org which in turn led me to many more articles and Youtube videos that will hopefully help me do a better job of simplifying an investing strategy over these next ten, twenty, or thirty years. In the end, I hope I won’t have spent time on figuring out whether to use a Marriott or Hilton credit card at the grocery store and ignored the more important financial decisions in life. In this case, I’d love to say that it was retirement planning itself that led me to catch my mistakes. Rather, it was an interest in credit card rewards that helped me realize that it was high time to apply the same analytical approach in other areas — which is a key benefit that this hobby has brought to my life in many ways beyond points, miles, and retirement planning mistakes. Thanks to the readers who commented and to the hobby that has taught me to realize how fractions of a penny add up to a lot of dollars over the long term.

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[…] here is a brokerage bonus. Most brokerages offer a cash incentive to move investments. When I opened a Roth IRA at Merrill Edge last year and moved a Roth account to Merrill, I received a $225 bonus based on the amount transferred. That […]

[…] apps all that often. We’ve each opened Bank of America checking accounts this year (when we moved over retirement savings). She hadn’t installed the app and received this bonus credit offer. Activation was simple as […]

Oliver

Always look at how the financial advisor is compensated. The only thing worse than a bad financial advisor is a life insurance/financial advisor. They bundle those high fee mutual funds in a high fee insurance wrapper. The commissions are huge!

PS Term life and disability insurance are great products. Whole life is rarely/never worth the cost.

Last edited 1 year ago by Oliver

[…] now got Bank of America Platinum Honors thanks to moving retirement savings to Merrill Edge (See: Retirement planning mistakes fixed by credit cards), we wanted to have a Bank of America Cash Rewards card in the long-term (for more on why, see: […]

[…] Retirement planning mistakes fixed by credit cards woke me up and made me reevaluate my retirement accounts. […]

[…] my post about Retirement planning mistakes fixed by credit cards, I wrote about how I was unhappy with how my wife and I had invested our Roth IRA funds at another […]

[…] Retirement planning mistakes fixed by credit cards woke me up and made me reevaluate my retirement accounts. […]

Bill

You lost me when you claimed that transferring your $50k IRA and $20k in cash would get you $375. You needed $100k to get the $375. I have no idea where your claim of being able to get $450 for $100k comes from.

Bill

The Preferred Rewards program is excellent, especially at the Platinum Honors level. You should point out that if you don’t get to that level ($100k in assets between BofA and Merrill), you do not get the 2.625% rebate level on the credit card. Also, you seem to have forgotten to mention that the Premium Rewards card has a $95 annual fee, although it can be worth paying for many people (I pay it).

Bill

OK that makes sense, but I’d be surprised if you could do the deal twice at different levels on the same account at the same time since I think the deposit amount is cumulative. What you could do is activate it for yourself and your spouse and put the $20k under their name. Have you confirmed with Merrill that what you’re proposing will actually work?

veeRob

Great post and I started down a similar path at the end of 2019. Wasn’t happy with my advisor(s) at Ameriprise and jumped ship for Merrill Edge with a great bonus.

I did want to add, as well as the self-guided option with Merrill Edge which I believe has 0% fees, there is a guided investing option for 0.45%. I decided to give this a try for at least a year before I decide whether to do self-guided or not. This fee is much lower than the 1.25% I paid with Ameriprise, and you get the benefits of a roboadvisor type system. I don’t want to be an expert in investments, so I’m happy to pay a fee for someone else to manage my portfolio. So far I’m happy with the (short term) results of the ETF’s their roboadvisor selected for me after getting rid of my Ameriprise positions. We’ll see how I like it going forward.

Millennial Outrage

I’m glad I found this article via DoC yesterday with the 7/15 expiration date! That brokerage bonus was just too good to pass up given I can find the same no-load, low ER index funds in ME that I had in Fidelity. Was then also able to sign up and get approved for a new Premium Rewards card with the 50K bonus (there’s no longer any language about restricting the bonus to every 24 months!!), which will be my third round on that product. Beers on me if you ever find yourself in Denver!

Jared

Love to see the Bogleheads mention. Glad you’re hooked. Keep spreading the word Nick!

Josh

so it seems like no one here recommends an advisor?

Royal

If you can handle the nuances of the credit card points game you likely do not need a financial advisor. Read the Bogleheads wiki and go from there. Even the tax planning aspect is not overly complicated for most people and can be understood with a little reading. The financial industry, including advisors, likes to make things complicated but (for most people) it really isn’t.

When your go-to defense is to compare yourself to a Doctor, you know there is a little reaching going on.

Captain Greg

Agreed. If you can handle the points game, then you can handle this….especially if you use the simple index fund approach. The tax stuff is a little bit more complicated (like with traditional vs roth iras), but it is also manageable if you read into it enough. For example, I wait until after the financial year is over to donate to my and my wife’s iras since your income can affect how much of a tax break you get, and the tax bracket you are in might determine which IRA you want to contribute to.

Josh

Thank you @Royal and @Captain Greg

Last edited 2 years ago by Josh
Captain Greg

No problem. I also made a lengthy post above with some suggested articles. You might want to take a look at those to get started, and your curiosity will likely lead to lots of other articles. Before you know it, you’ll start feeling very confident in your ability to be your own (and best!) financial advisor.

CLEKid

Josh, plenty of people on this site recommend an advisor. What the Bogleheads are neglecting to tell you is that there is much more to an advisor than picking investments. Secondly, everyone’s financial situation is different. To tell someone who is 22 with few assets the same Bogleheads advice as someone who is 50 with kids, etc. is ludicrous. I know my advisor has done plenty of good for me. Setting me up with a DAF after the recent Tax Reform Act of 2017 was one of his best pieces of advice yet.

My advice is if you need help don’t be afraid to find an advisor you trust. If you think the Bogleheads “3 fund strategy” is too good to be true, than it probably is for you. Then, continually monitor your advisor’s performance. Every year I look at my guy’s results NET OF FEES and compare to the major indices. If he’s at least even, I am happy. Because I know how much other value he provides for my financial planning…at no extra charge.

I read all the time about how guys do better themselves simply by investing with ETFs, etc. More power to them. Because for every guy who does better, 2 other guys are doing worse. Know what you know…know what you don’t know. And I know what I don’t know: There’s more to putting together a portfolio than investing in 3 funds.
And, with the recent volatility of the market, not knowing what you don’t know makes the 3 fund strategy more risky in my opinion.

Finally, please do not think that if you can “handle the credit card points” game you can handle financial/investment planning as 1 commenter said. This has got to be the silliest thing I’ve ever read. Outside of involving numbers, they are totally different.

Just my two cents but wanted you to hear from “the other side”. Nick, thank you for the great initial post!

Last edited 2 years ago by CLEKid
WanderData

This series of posts is a great reminder that without “the joy of free,” The Hobby is essentially an extension of personal finance. Yes, we are essentially “paying for points,” and we need to be looking at the alternatives.

Just for fun, I started looking at the expense ratios for funds available through Merrill Edge versus other platforms. If some reasonable Boglehead wants to invest in a basic all-S&P 500 ETF at Edge, it appears the choice is the Spyder S&P 500 ETF Trust (SPY), which has an expense ratio currently of 0.09%. Which is great! However, the Vanguard equivalent (VOO) has an expense ratio of 0.03%. With a $50k investment over 10 years and average returns, SPY could cost approximately $500 more in fees than VOO. There goes most of the bonus for switching to Edge, just with one fund.

Obviously this an area of extreme YMMV, but switching investment platforms is an area for diligent research.

Greg The Frequent Miler

Why wouldn’t you just buy VOO through Merrill? I just logged in and confirmed that it’s an option.

Josh

No love for VTI? 🙂

Josh

Of course. VTI seems to not get as much love as VOO, but VTI is comprised of 90% VOO so no difference really ‍♂️

Andy

Great article! I too am a BofA PR member and at top tier there isn’t anything better for me (Schwab has some nice perks via cashing out MR for those with deeper pockets/higher spend but I am not there yet). For those just getting started, Fidelity is probably the best best. Great funds with no fees at all (0% ER), banking with reimbursed ATM fees, and a 2% back CC that can auto-deposit right into your investment accounts. If I were starting off today that is what I’d do, then “graduate” into BofA and then Schwab once I got closer to the $1M mark.

[…] Retirement planning mistakes fixed by credit cards by Frequent Miler. Really good article that goes to show why low fee funds for retirement are so important and potential issues with not using a fee only financial advisor. […]

rich

The financial advisor/management industry is really messed up and many take people to the cleaners. They can make some huge commission on products like variable annuities. Then you have the ones that charge you 1% every single year to manage your money.

Do something simple like buy a total market fund (VTI), a total bond fund (BND) and maybe a small amount in an international fund. Then once a year rebalance them to keep your preferred allocation.

Using a financial advisor/money manager is usually a way to lose to the market.

There is a rule of thumb that once you retire you can withdraw roughly 4% of your money every year and it should last at least 30 years (not foolproof but pretty good). Do you really want 1/4 of that 4% go to a financial advisor?

There are some easy reads out there that won’t take much time and will put you into a better place financially.

Pam

4% might work “pretty good” right up til the moment: your kid starts college at the same time your oldest daughter sets a wedding date just as your mother-in-law needs financial support (as well as other caregiving taking you away from your own work) in a LTC facility. A pro’s paid expertise might also look pretty good when staring down that (very real) scenario.

feelyabai

Great topic! I enjoy investing and trading as a hobby, but my mind was blown when I heard the statistics. Generally, people who bought a handful of different stocks and never sold made more money than almost anyone who trades or invests professionally. You will be in the top 1% if you just never thought about “selling”. That changed everything for me.

Listen to JL Collins on google talks (He advices against picking stocks, instead buy the index). Even though I know the best strategy is to buy and never ever look at it again until I’m at the stage to withdraw 4% a year during retirement…I still can’t resist trading sometimes.

Last edited 2 years ago by feelyabai
Pam

The flip side are investors who hold onto losing positions too long because they are employees or otherwise emotionally invested (e.g. Enron, Pan Am, etc).

feelyabai

You’re right. I’ve made that mistake a few times, especially when you don’t want to “take a loss”.

It seems there are 3 variables: the stock you choose, the time you buy, and the time you sell. The more variables you eliminate, the higher likelihood of profit, so JL Collins recommends an ETF of the whole market and never selling until you’re actually in retirement.

TravelBloggerBuzz

I could do a whole blog post sharing my thoughts on so many things and comments about this post…but I am really trying hard to spend less time on my blog so I probably won’t.

Just a few things:

Bogleheads.org is great. John Bogle was a legend and his books are great.

Fee based is NOT Fee Only! Fee based allows compensation for selling products to earn sales commissions. Fee Only does NOT. You can NOT be a true fiduciary if you are getting paid to sell products and/or be compensated by an entity that is NOT the actual client.

Bank based investment advisors need to sell to eat. And so many other “advisors” out there, it is simply the system out there…it is entrenched and the current administration has reversed all progress that was made towards protecting consumers, sad!

Anthony Robbins is a as*hole. He “wrote” the books because he had an agreement to steer potential clients looking for advice to a specific company for a cut. Stay away from that dude, please!

As a fiduciary Fee Only advisor who is a CFP and CPA and takes a comprehensive view of finances for clients I would like to share a few observations over the years:

-Most people will be do it yourself types. They will never pay for advice.
-Some would like to get some validation how they are doing once in a while. There are networks of advisers out there who serve those.
-Some target a more comprehensive relationship and steer towards higher net worth clients. Who do not mind paying fees for advice so they can focus on what they do best. Most importantly, good advisors keep these clients on a solid plan, keep them from making mistakes due to so many biases (overconfidence being first) and just do not advise on investments alone. Paying for someone to help you pick investments is overkill.
-There will always be people out there pointing out how you can do it all alone, how real estate/crypto/gold/Teslastock/etc is THE way to go. This will never stop 🙂

There was a lot more I wanted to type but it is dinner time and I am starving…

Why are miles and points blogs moving more towards personal finance content lately? 🙂

TravelBloggerBuzz

One thing I forgot to mention that is important: If someone mentions life insurance when investing is the subject…run the other way.

Been busy running and trying to stay away from blogs lately 🙂

Randy

I’ve really enjoyed this post and all of the comments so far, and couldn’t help but thinking the whole time reading it…. “man, I’d love to see a TravelBloggerBuzz write-up this next week with some of his thoughts.” I know you’re trying to spend less time on the blog, but your perspective would be highly revered!

So….. please? 🙂

Ivan Yates

I am in my 30s now and 10 years ago I took all of mine 401k about 300k and bought 3 houses for investment. I have been renting them ever since and have been making $15k per month. All three houses have been paid off and are easily much better than some 401k independent on how the market is doing.

Moshe Grunhut

The returns on your investments are staggering, and I am glad they’re doing you well. That being said, the need to diversify cannot be stressed enough. Having even half of your money in real estate is extremely risky. You may think the real estate market won’t ever crash, but what if it does? There are many low risk, even near zero risk, options that you should consider to supplement your portfolio. The returns will most likely be less for now, but risk management is a huge part of financial portfolios.

[…] noted in this morning’s post about my retirement planning mistakes, Merrill Edge currently has increased new account bonuses for those who become “Preferred […]

Pam

Retirement Planning is more than the sum of selecting & holding individual product – it is an ongoing, time-consuming process that evolves with life goals. And unavoidable and unforeseen situations can undermine even the best-laid plans.

How you see the world and how you make decisions is personal. Professional, seasoned input can help with developing & maintaining a financial roadmap for you & your young family.

John

In this day and age people think they can do things themselves. They don’t realize how one decision affects another, especially regarding finances and taxes. I am amazed at how decisions affect other things. Then when you get toward retirement how you access funds from various accounts and when can have huge consequences – even more than the consequences of index funds or managed mutual funds.

Last edited 2 years ago by John
Pam

@ John – so true that just as much attention and effort must be focused on withdrawal strategies. Investors (rightfully) target savings through their working years but then really don’t know what to do when they have to actually live on them. It is a different skill set than accumulation (and a whole lot less enjoyable, therefore of mistakenly less concern). Looking at the end goals 40 years before funds are actually depleted can sure prevent a lot of costly mistakes, inefficiencies, and downright catastrophe along the way.

Information abounds everywhere on planning strategies and investment products – absolutely no shortage and everyone has an opinion! What IS in short supply, however, is selecting and tailoring the appropriate tools towards a given family’s situation, both now and in the future as it invariably changes. It’s like going to the ER because Google says you might be having a stroke, but the doctor says you are really only dehydrated. $1,000+ visit vs a .50 btl of water, let’s see let me choose . . .

DIY is always helpful for having a base knowledge of facts going in, but I personally don’t mess around to any great degree with my health/doctor, wealth/CPA, CFP, etc.or legal rights/attorney. In fact the best relationships with professionals I feel involve 2-way communication and some basic understanding. Ask around, in fact, and professionals will pay other professionals for objective advice, even within their own specialty. There is too much to know and no one person knows it all, of that I am certain. We see that even in the points and miles world, to bring it home.

If any professional can’t offer at least one valuable tip or aha moment than what you are currently doing on your own, after 1 visit, then it’s time to do better research & move on.

Cov

In “The Millionaire Next Door” the authors said that the millionaires they studied were consistently willing to pay for good tax and legal advice but did not pay for financial advisors. Providers of the first two can add real value while the value of financial advisors is dubious.

Last edited 2 years ago by Cov
S.M.

I really appreciate this. It made me question my situation and reach out to my financial advisor about fees. I have a managed account with them and then an unmanaged account with Vanguard (VFIAX) on my own, but the majority of my contributions goes to the managed account. They told me they don’t buy anything with a front-load fee (good), and there are almost no trading fees on the assets (they use TD Ameritrade), and I’m paying them 0.60% on all managed assets. After reading this post, I’m worried that’s crazy high. Thoughts? Better to just start putting more focus on the Vanguard funds?

David T

Hey Nick, awesome article! I am also a fan of the Bogleheads forum and 3 fund approach! You might also want to check out the Frugal Professor blog (also a Bogleheads poster) on maximizing the BofA rewards program! He actually just posted an update article on his results so far!

cafesandalleyways

Great article. Thanks for sharing your mistakes. The article is a great resource for people looking to make a move toward a better investing path. Congrats on overcoming the inertia to make the change of funds and transfer funds to a new custodian.

toomanybooks

I am 61. If I could go back 45 years to talk to my younger self, I would give the following advice above all else:

Put every possible dime into a broad low-fee mutual fund like Vanguard Total Stock Market. Until it hurts. Reinvest dividends, but pull out a bit if needed to live on. You don’t want to save $20,000,000 and never do anything fun your whole life. Forget ups and downs. No one can predict them; if you could, in short order you’d own the world. Look at what Buffett did selling airline stocks at the bottom earlier this year. Looking back at a chart of the market since the 70s, those dips in 1973-4, 1987, 2000, and 2008 that freaked everyone totally out amount to nothing.

I know people still in CDs since 1987, drawing their ridiculous 1% taxable.

Putting your money regularly into a stock fund with 4000 holdings means that millions of smart people are working away in businesses and you get a piece of their action for almost nothing. And when one goes down, others go up. Every fluctuation works in your favor, as you buy more on the dips.

Warren Buffett has talked about this a lot. $1 invested in 1942 in the S&P when he started investing recently would have been $5300 with invested dividends. It’s pretty shocking actually.

Also second the opinion on Bogleheads. Read everything you can there, and read John Bogle’s books. He did more for average investors than any 100 other people you can name put together.

And don’t listen to “advisors and analysts.” Come to your own conclusions. If “advisors and analysts” knew what they were doing, they’d be rich and not have to work 10 hours a day as “advisors and analysts.”

100% stocks for life.

Last edited 2 years ago by toomanybooks
Captain Greg

Nick,

Thank you for writing this post. It is probably the most important one your fans could read. I have a very similar story, as I remember meeting with a financial advisor over a decade ago and having him ask me how I’d rank my risk tolerance on a scale of 1 to 5. When I asked him something like “well, what defines risk? Like what are the risks of being more aggressive vs. the potential gains?” and having him be unable to give me even the slightest intelligent answer (when what he should’ve said is, “in the long run, it’s almost certain that the market will keep going up. Since you’re in your 20s and probably won’t be thinking about retiring for several decades, it would probably make sense to be very aggressive since any loss is highly likely to be temporary.”). But instead I left that conversation with the impression that he didn’t know what he was talking about and my only knowledge of the market being scare stories about people losing everything. I was at least lucky enough to have a father who told me that I should try to put money in an IRA every year if I could. I didn’t always do it, and neither he nor I really knew what the money was being invested in, but at least I was putting money aside and letting it accumulate (granted, with expense ratios that turned out to be between 0.5% and 1.4%…..).

Anyway, about 4 months ago someone in the points community (I actually thought it was you, but can’t remember for sure…) mentioned J.L. Collins’ Stock Series. That opened up a whole new world to me, and for the past 4 months I have been absorbing everything I can about investing/frugality/FIRE (etc) and significantly changing my family’s financial habits and goals. We now keep a spreadsheet that shows where our money goes each month with projections of how long it will take to get to certain benchmarks (1 million, 2 million, retirement, etc) based on how much we save/spend each month.  As far as I’m concerned, this life changing information is all thanks to you, Greg and Stephen. I got into the points/miles game about a year ago, but I don’t know if it would’ve stuck without Frequent Miler. I was reading other blogs that either didn’t relate to me (would essentially ONLY talk about extravagant travel), were discussing totally irrelevant topics (what do flight attendants do on their days off??) or were blatantly pedaling credit cards for their own commission. But I latched on to the points/miles game thanks to Frequent Miler’s honest and relevant content, and that community has led me to discover the importance of investing and retirement. I’ve expressed this before, but thank you again for the incredible work from you, Greg and Stephen, and thank you for introducing me to the great benefits of points/miles. Frequent Miler is THE BEST! 

I wanted to share some additional thoughts/reading for you to consider. Of all the things I’ve read over the past few months, I’ve probably found these to be the most influential (in case you haven’t seen them). I’m not necessarily saying that I agree with all of these (though I mostly do), but I thought these were some of the most thought-provoking articles I’ve found that challenge the status quo:

The series that started it all for me 4 months ago: https://jlcollinsnh.com/stock-series/

The foundational FIRE/Mustachian Article: https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

Traditional vs. Roth IRA: https://www.gocurrycracker.com/roth-sucks/

Challenging the idea that owning a home is your best investment, or even a good one: https://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/

Another investment idea to consider: https://seekingalpha.com/article/4118717-much-maligned-leveraged-etf

With regards to the last article, I am now aiming to have a retirement portfolio of ~10% emerging/international markets index fund, ~45% U.S. Total Market or S&P index fund, ~45% 50/50 UPRO/TMF. This portfolio will be viewed as being very aggressive, and some people will surely push back on UPRO/TMF, but I spent a lot of time experimenting with the data and running simulations with the larger data set (as used in the article) with all sorts of different factors (allocation ratios, rebalancing rates, using different funds (UPRO/BND, UPRO/Cash, etc), incorporating expense ratios and dividends, different benchmarks to remove money, etc) and I’ve become very comfortable with allocating a significant portion of my portfolio to this. I’m sure it’s not for everyone, but I’d be happy to share my results with anyone on the FM team if interested (I assume you have my email).

Anyway, thanks again for all the great FM content. I point people to your site every chance I get (within the bounds of not coming across as a crazy zealot….I don’t think). I’m looking forward to the day we can all safely travel again, and the next FM 40k-like adventure!

Captain Greg

Last edited 2 years ago by Captain Greg
Jerry

I think you and I were sold the same bill of goods. I bought into Oppenheimer funds sold by the bank advisor which has the hefty 5.75% front loaded fee. The ongoing fees are not the highest in the industry, but eat away at the returns like you mentioned. years later I entered the life insurance, annuity and investments industry and it’s completely different than it was even 10 years ago. Compliance standards are everywhere and no more commissions spiffs to the advisors on recommending certain funds.

Last edited 2 years ago by Jerry
abey
Larry K

Great article, Nick. I am happy to have given you a nudge and when you and Mrs. Nick are relaxing on a beach somewhere a year or two earlier than you would have been, raise a glass to me! 🙂

Seriously, though, I was older than you when I finally got my retirement under control and while it was hard to learn about the money I had frittered away the truth is it is never too late. Take a look at the book “A Random Walk Down Wall Street.” It dovetails with many of the concepts you are working through and you might like it.

dale m

Not quite there, I’d say. All that wise analysis of truly consequential expense ratios and fees impacting hundreds of thousands (perhaps more) over your working years, and in the end it’s still a “chase the credit card bonus” and do this and this within x number of days to qualify for the promotion silliness. Hang in there.

dale m

Yeah, that sounded snarkier than I meant it, tho I’ve learned some hard lessons with the amount of time you can spend jumping though endless hoops for pretty modest promotion amounts (I’m lookin’ at you, CitiBank).

Clearly tho you’ve turned up a lot of great interest in this topic, and it’s heartening to know that so many that follow the points and miles are also wise in the ways of investing.

Josh

I would highly recommend giving Tony Robbins’ books “Money: Master the Game” and “Unshakeable” a read. He interviews the kingpins of the investment community and distills the advice down to actionable tasks. These books changed my retirement investing life. The BIG takeaway (as mentioned above) – high fees kill your retirement! Also, if you’re looking into a financial advisor, hire a fiduciary financial advisor. The big difference is that you PAY them directly and they get no commission off of what they recommend to you. They have your interests at the forefront, not how they can pad their commissions by selling you a high-fee product.

TravelBloggerBuzz

No, he was not.

Frank

If he was then I would immediately speak with a lawyer as there’s no possible way a 5% load fund could have been in your best interest. That would be a fast way to make back all the lost fees

More likely he just brushed over the fact that he wasn’t

Derek

Interestingly enough, I read the “Money: Master the Game” book years ago. I found that many of the products aren’t widely available anymore or are a hassle to deal with, a perception that I didn’t have reading the book. As I researched and asked around I started to think even more, if there were products that protected principal and gave solid returns wouldn’t more people be using them. Then I thought how would they provide that return, it’s that you must keep the principal in for a certain amount of time while the money is being invested. When I looked back in March, Feb, I saw that many of those products were holding principal because of the losses they received. They couldn’t afford to pay back investors.

I currently have a fiduciary that works with me, explains and teaches. He manages my rollover IRA, but advises me on my 401K while I (just started to) personally manage my HSA. I started getting into the use of index funds as well (in the HSA) to get a better understanding of self managing and the various options. Rather than just doing the S&P there are other options (emerging markets, fixed income, etc.)

I say all of that to say I feel in an ideal world a mix of professional investing and personal investing would probably be ideal for most. You can learn some things and in the future possibly have a greater understanding of how to take advantage of volatility. While the market is good, just do the index. Like all things this is simply diversification, not just with your allocations and portfolios but of your account management and understanding of finance.

Jane

For twenty years I paid 1-2.5% in mutual fund fees. That’s up to 30% of my returns up in smoke. Now I’m invested in asset allocation ETFs. You can get them from Vanguard etc. Pick your fund and then never worry about rebalancing ever again. Fees are 0.2%.
Also highly recommend a fee based financial advisor. You pay them a flat fee for financial / investment advice. More likely to be unbiased. Everyone else is essential just a salesperson for stocks / mutual funds. Would you rather chose a car with advice from Consumer Reports or from a Chevy salesperson?

Jane

That’s a great point. Getting average market returns at very low fees will nearly always win compared to trying to beat the market. If hedge fund managers can only beat the market half the time what hope to we mere mortals have? Invest in broad index type funds or etfs as long as the fees are low and don’t pay management fees works for most people. Bogglehead 3 fund series sound like they would do the trick.
As for the financial planner I also agree ( sort of ). I don’t need help in choosing an investment. I don’t need an INVESTMENT advisor. But a FINANCIAL advisor could help with tax planning strategies as you approach retirement. Not answer the question of which new car to buy but whether I should even buy a car right now at all. Should I take the bus for awhile? Should I fix up my old car? Lots to learn on blogs etc but some additional tax info could be useful.
Btw – VW GTI. Best all around car – no contest.

John

Great article. But don’t get too carried away with expense ratios for mutual funds. Much more relevant is the total return. Some managed mutual funds have higher expense ratios but their net total return is better. But definitely steer clear of loaded mutual funds!

HoKo

That’s a fair point but I believe most research shows two things: (1) Very few high-expense-ratio mutual funds beat a comparable market index over the medium-to-long term and (2) It’s very difficult to identify in advance which funds are going to beat the market because as the famous saying goes “Past performance is no guarantee of future results”

John

With online tools it isn’t that hard to find funds that outperform the market over the long term. Kind of like Nick said in his article. A little more research yields bigger rewards.

I am not talking about “high” expenses but higher than index funds however still reasonable.

The past performance does not guarantee future results is obviously a legal disclaimer. And of course it can’t guarantee future results. But if you find a fund that has outperformed the market over several decades it’s probably a good bet

voyager

I think the point was that such tools show funds that have outperformed in the past, not that they will outperform in the future. Funds have a wide distribution of performance, so it’s always possible to cherry pick whatever you want to match your criteria in the hindsight, it’s just a fact of statistics. That’s not a reason though to make a bet on that pick for the future. If it were, we wouldn’t have hundreds of funds, we’d just have a few and everybody would invest in them.

Brian

Like Legg Mason Value Trust which beat the S&P 500 every year for 15 straight years and then got hammered? https://www.reuters.com/article/us-legg-mason-miller/legg-masons-bill-miller-leaves-firm-amid-faded-glory-idUSKCN10M1DV

Thinking that you, a regular Joe (or John), has the ability to select a mutual fund management team who will get you outsized risk-adjusted returns after fees is preposterous on the face of it.

If 1,000 people flip coins 15 times, there will be a select few who got heads 12 times or more. That does not make them more likely to get heads in the future.

Don’t pay money to buy a glorified coin flipper.*

*Obviously these folks are not coin flippers. They are highly skilled stock pickers. But so are the people they are competing against. They have to net out to the total stock market returns on average by definition. And that’s before fees. So just save the fees and get the market average with an index fund.

Hedgefundie

There are exceptions to the “lower expense ratios are always better” argument. For example PSLDX is designed to beat the S&P 500 as long as the yield curve is not inverted:

https://www.bogleheads.org/forum/viewtopic.php?t=305950

jeph36

Nick, great article overall. I am fortunate that my father learned (the hard way) and taught me about loaded funds and higher expense ratios starting back in the 80s. By the time I was on my own I had some pretty good guidelines about what to target and what to avoid in general.

Your note about IRA contribution limits is a little off. Due to “spousal IRA” rules, the combined earned income of a married couple needs to be enough to cover both people’s contribution, but the individual breakdown of that income does not matter. As one of our recent hires commented about staying home to raise kids for the last ~7 years: “The pay is lousy and the hours are terrible” … but if the spouse earned at least $12K income in 2019 then they could each contribute the max of $6K to an IRA.

Dee

I can highly recommend The Only Investment Guide You’ll Ever Need by Andrew Tobias.

We have an advisor we adore & trust, who writes the tax section of Andy’s book. He’s done very well for us for over 20 years. We’ve been retired for four years now.

Barry

For retirement planning, I really like the target date mutual funds that many companies offer. They aren’t flashy, but they get you all the diversification that you need in one investment product and you don’t need to do any portfolio rebalancing. Just pick the fund with the year closest to your projected retirement year and start putting money away. These type of funds are more aggressive when you’re younger and automatically adjust to a more conservative mix as you approach your retirement date. The downside of the target date fund is that many companies aren’t good at investing in all categories. Some companies may be good at stock investing, but may not do well at bond investing or vice versa. If you’re just getting started, I’d take a look at the target date funds available from Vanguard, T. Rowe Price, and American Funds.

A Stad

The issue with target date mutual funds is that there’s a rebalancing cost usually associated with them, and they inherit whatever fees and costs the underlying assets have as well. Because of this, they can actually be slightly more expensive than balancing yourself (but still a great idea for investors who want a more hands off approach).

voyager

They can be costly too, I’ve used American target funds for years, finally pulled out into S&P index, couldn’t look at those fees any more. Makes a difference when you’re trying to save on your travel and credit cards reading this blog and then looking at hundreds of dollars paid in fees on a yearly basis. Who knows if that’s a smart decision in the end, but it makes me feel better, and that matters.

Barry

Not too many actively managed funds can beat the index. Vanguard’s 2035 target date fund is passively managed and has fees at .14%. T. Rowe Price’s 2035 fund’s fees come in at .68% and American Funds 2035 fund comes in at .73%. I suggested T. Rowe Price and American Funds because they are a few of the rare funds that beat Vanguard over the long haul.

Moshe Grunhut

Wow that’s a great read! I think the only thing you need is an advisor that you can really trust. That isn’t always easy, but once you do, it changes from them trying to sell you something to them helping you choose the best option FOR YOU. They can also help you diversify your retirement planning, which is essential. You should look at IRA, Roth IRA, life insurance, and possibly more! Hit me up if you want any more info.

Jay

“I think the only thing you need is an advisor that you can really trust.”

The point is that there really is no advisor that you can really trust. The best, simplest, and most effective option is to self-manage your retirement and brokerage accounts. A three-fund portfolio or any variation of one is the simplest. You don’t need a financial advisor. Many people, like financial advisors and insurance salespeople, are fully invested in separating you from your money, even though themselves they may be very nice and well meaning.

Moshe Grunhut

If your sibling was a financial advisor, or someone who worked in the sector, you would trust them 100%. There are many people that you can trust that much, it just takes weeding out the wrong ones. For people who have the time and interest in handling their own retirement funds, they should 100% do it themselves. Many people, however, don’t feel confident or interested in doing it themselves. That’s where a trustworthy advisor can help. They should ideally be someone you already know, or at least a referral from someone you know.

Frank

That’s simply not true. If you’re going to use one, you need a FIDUCIARY financial advisor — by law they must act in your best interest and could not have offered the non-sense Nick was invested in. Buying a three-fund portfolio is fine advice for a single 20-40 something making an average wage but real life is more complicated so having a resource to ask questions can be important. Greg probably could use some financial advice given what seems to be his lack of experience and the fact his primary source of income is a high risk business (blogging is hard). With a wife and kids there are a lot of things to plan for and at his (hopefully) high income levels, there are ways to do better than “IRA/401k/brokerage”

Last edited 2 years ago by Frank
Jay

I disagree, as do the legions of Bogleheads and, as well, Jack Bogle, and numerous others with the interest of the consumer in mind. You do not need a financial advisor, fiduciary or otherwise. You simply don’t. A three fund portfolio is sufficient for a married couple in their 20s, 40s, or 70s. If anyone is uncomfortable managing their own portfolio, then I would suggest using Vanguard’s personal advisor services, which charge a flat .3% fee. If you’re paying more than that, you’re paying too much. In my experience, people who are financial advisors or who have family or friends who are advisors or who themselves rely on advisors will defend the utility of advisors. But just browse Bogleheads.org, and do a bit of research, and you may find it persuasive that an advisor is a drag on returns, in the vast majority of cases. Like I said, if one is uncomfortable handling their own money, then Vanguard personal advisory service at .3% is the highest one should pay. All in my opinion, of course.

Alex L

This is literally the exact script used to ensnare many people into the situation described above. Implying it “isn’t easy” and that they are looking out FOR YOU, then claiming they can be trusted like a family member – the ideal scenario for a FA like this is to ensnare an entire family’s wealth, constantly sucking away a percent every year, eventually costing them hundreds of thousands of dollars in lost returns.

To other readers, the big red flag from this is “life insurance, and possibly more!” – this implies a desire to earn big fat commissions from selling less-than-ideal policies.

The very best way to weed out advisors is to straight up ask them to show you how they make money from you and ask what the commission/front-load fees are. A one-time, fee-based advisor will say exactly what they charge for the time spent, and can even offer alternative funds. Any other advisor will dodge the question.

Moshe Grunhut

You make some good points about financial advisors. I would like to defend myself about the red flag that you pointed out in my comment. That quote you made is clearly out context. I was stressing the importance of having multiple retirement avenues. If you don’t feel that way, you seem to be knowledgeable enough to handle it in a different way. I wish you nothing but the best