Robo-Saving For Retirement
Regularly setting aside money for retirement or a rainy day is a good habit to form at any stage of life, but it’s especially effective if the habit begins as early as possible. An Internet-driven savings technique is implemented in different ways by several companies. Here I am going to explain how what I call “robo-saving” works and examine several firms that offer it... |
What is Robo-Saving?
The paradigm of robo-saving is easily grasped. Take a small, barely noticed bit of money from the user each time money is spent and put it into an investment account. The joy of buying distracts the user from the suffering of “losing” a bit of money to investment.
This algorithm can be implemented by giving a robo-savings service provider access to the same checking account that one’s debit card uses, granting it privileges to observe all of one’s expenditures paid for from that card, and allowing it to debit your account a specified amount, or according a specified formula.
Acorns, introduced in 2012, provides a good example of how robo-saving works. The service can be used via the Acorns.com website, or with an app installed on your phone. You give Acorns access to your checking account. Then, each time the account is debited the app takes the difference between the decimal portion of the debit and the next higher whole dollar, debits your account for that small amount, and invests that amount for you. For example,
Say you use your debit card (or Google Pay, or anything that can debit that checking account) to buy a cup of coffee for $2.60. Acorns will debit your account (3.00-2.60 = $0.40) and invest $0.40 for you.
The company has five investment programs with varying levels of risk and potential returns, giving user choices without overwhelming them with a confusing surfeit of decisions to make and investment strategies to learn.
The Acorns “round up” technique is just like tossing the spare change from a cash purchase into a piggy bank or jar, and later taking it to a bank for deposit into an interest-bearing account. But modern tech eliminates that idle time spent sitting in a pig or jar and puts your spare change to work right away.
Fees and Options
Acorns is an investment services firm; like most others, it charges a fee. The basic "Acorns Core" service has a fee of $1/month, but it's free for college students. Two other options are available. "Acorns Core + Acorns Later" costs $2/month and adds a managed IRA. The "Acorns Core + Acorns Later + Acorns Spend" option costs $3/month and adds a debit card, checking account with no overdraft or minimum balance fees, free bank-to-bank transfers, and unlimited free or fee-reimbursed ATMs nationwide. This option quickly pays for itself if you use ATMs often.
Even if you start Acorns at age 18, the legal minimum, your retirement will not get very comfortable on spare change alone. If you spend 50 times per month and each transaction yields an average of $0.50 in spare change, that’s only $25 per month that gets invested.
So Acorns offers incentives to save more. You can designate a flat “extra” amount to invest each month, say $25; that helps your investment account balance grow much faster than it will on spare change alone. You can earn extra cash by shopping in the Acorns catalog of partners’ products. You can also earn referral bonuses for sending friends and family to Acorns.
The average Acorns user invests around $60 per month, according to Acorns CEO Noah Kerner. Not too shabby for such a painless approach. At that monthly rate, an investment from age 18 to 67 would grow to about $1.7 million. (Historically, the 30-year return of the S&P 500 has been roughly 12%.)
Acorns had over $150 million invested on behalf of users in 2017. It has raised more than $97 million in venture capital. I read through the Acorns privacy policy and it looks pretty tight, regarding the protection of your personal information.
Acorns is aiming at the younger generation that is very skittish and skeptical of traditional Wall Street investing. These consumers also tend to be short on investable cash thanks to student loans, skyrocketing rents in their most desirable haunts, and rising commodity prices. Spare change is about all they are willing to risk and, in many cases, all they have to invest right now.
Wealthfront.com and Betterment.com are similar app-driven robo-savers, but they are for players with deeper pockets. Wealthfront, for example, requires a minimum of $500 to open a savings account. To my knowledge, Acorns is the only robo-saver targeting small-time savers.
What do you think about Acorns and other automatic investment services? Your thoughts on this topic are welcome. Post your comment or question below...
This article was posted by Bob Rankin on 9 Nov 2018
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Most recent comments on "Robo-Saving For Retirement"
Posted by:
Ralph
09 Nov 2018
The upside if very attractive, the downside very scary. First you give a, likely, legitimate company access to your bank account. So far, so good. Then they get hacked and your bank account is emptied. Not so good. It seems there is no place safe from hackers so I can see several problems. If the company is hacked, will they also get access to your investments and wipe those out too?
Posted by:
Jimmy
09 Nov 2018
We have a round up to the dollar program with our checking account. The amount goes to savings which is a very low-interest rate. I'm glad I read this as I will contact my bank first to see if they have or recommend a transfer to interest-bearing program.
Posted by:
Phil
09 Nov 2018
It sounds like it could be a good idea and I see that they've been around for 6 years, but, and maybe I'm being a bit pessimistic, IMO account safety, privacy and corporate honesty are not prevalent factors in today's digital world.
Two family members had their checking accounts hacked. One was a shopping binge in Florida, the other was entertainment in Canada. It took almost two months to get their money back.
Nope, no third party gets direct access to my financial accounts. I believe the risks completely outweigh the benefit.
Posted by:
Jeannie
09 Nov 2018
The old tried and true system of setting aside a certain amount of one's incomes still works best. Most people have their income already being deposited into a bank or credit union account. All they need to do is set up an automatic transfer to occur on a certain date or dates each month to transfer a set amount into a savings account (Heck, I'm retired and still do that as a hedge against inflation).
You never even see the money that way in the accounts you spend from but still have access to that money should you ever need it. There is no point in bringing in another party, adding another hackable access to your funds.
Posted by:
Fishpond
09 Nov 2018
The danger here is that this type of scheme is a bit complex in the implementation. That is one of the on-line scammers favourite ploys and I am sure they will start being creative now that you have awakened them. I suggest just open a savings account with your favourite banking institution, then commit a percentage of your monthly expenditure to being a deposit.
Posted by:
Tomzzz
09 Nov 2018
There is another (better?) way to save on a regular basis and maybe safer. I have a DiscoverBank Savings account that I set up to transfer a set amount from my Chase checking account every month. The frequency can be set to every 3 or 6 months instead. The nice thing is the DiscoverBank interest rate: 1.90%
Also, until 12/3/18 they will give you a bonus for new accts of $150 or $200 . It's a pretty sweet deal. Google: discover savings account bonus for info. Enjoy!
Posted by:
gene
09 Nov 2018
If you use Acorns, be prepared for your tax situation to suddenly be more complicated because you will be filing on investment income in the market. I'm not saying it doesn't work but if you are used to preparing a simple return - that changes with investment income.
Posted by:
Wild Bill
10 Nov 2018
Many years ago a friend lent me a book titled "The Richest Man In Babylon". Basically it suggested putting 10% of whatever you were paid into a compound interest account and living as if the 90% were all you had for funds. Not that I've done this but it seems like some outstanding advice. The trick these days is finding a savings account whose interest rate exceeds the rate of inflation.
Posted by:
Richard
10 Nov 2018
I give a third party access to my account?? A little crazy in this day and age.
Posted by:
Michael
10 Nov 2018
It seems to me a nice add on for less disciplined people to save at least something but as stated it won't be sufficient to cover retirement and needs additional savings.
However, it can be part of an overall retirement plan and the idea itself is great.
Posted by:
Michael
10 Nov 2018
It seems to me a nice add on for less disciplined people to save at least something but as stated it won't be sufficient to cover retirement and needs additional savings.
However, it can be part of an overall retirement plan and the idea itself is great.
Posted by:
Brian B
10 Nov 2018
"...giving a robo-savings service provider access to the same checking account that one’s debit card uses..." and then pay them a fee?????
NOT IN A MILLION YEARS
Posted by:
Peter G
10 Nov 2018
I agree with Brian B - I would not pay for this service! My bank in the UK (the Halifax) has recently started a similar idea, by rounding up sums spent on my bank card to the next £sterling and depositing it in my savings account, at no extra charge. As I already save regularly, this hardly-noticed boost is helping to increase my savings effortlessly. Great idea.
Posted by:
Barbara Frank
10 Nov 2018
One dollar a month charge on $50 a month average savings is 2%! That's pretty high!