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 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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Article information: AskBobRankin -- Robo-Saving For Retirement (Posted: 9 Nov 2018)
Copyright © 2005 - Bob Rankin - All Rights Reserved