Should Millennials Use Roboadvisors?

For whom would a robo-advisor be a good choice?

There are only a couple of situations where I think that robo-investors (I really call them robo-investors, as they’re not robo-advisors, such as myfinancialanswers.com) are appropriate for a millennial:

You are absolutely, positively, never going to rebalance your portfolio, and you want to put money into something and completely forget about it. I still would rather see someone invest in a low-cost target date fund, such as Vanguard’s target date funds, than see someone pay over the top for a robo-investor.

You have so much money in taxable brokerage accounts that you can take advantage of their tax loss harvesting to lower your taxable income. This is a situation where I’m more of a fan of letting a robo-investor do the work for you.

Conversely, in what scenarios would a robo-advisor not be an appropriate option?

I think for most all millennials, investing in low cost index funds and rebalancing annually, using dollar cost averaging is going to be a much more cost-effective way of saving money for retirement than using a robo-investor. The fees charged by the robo-investors just do not justify the minimal time that is saved. If you set up an automatic contribution each month, then it should take about 15 minutes every year to rebalance. If you don’t even want to do that, then just set up a monthly contribution to a target date fund.

How do robo-advisors compare to human financial advisors?

One benefit that a robo-investor has compared to a human financial advisor is that the robo-investor is not going to be subjected to the same behavioral biases that a human financial advisor is. For example, human financial advisors may be subjected to the Dunning-Kruger effect, where they think that they’re much better at a task (such as investing) than they actually are. Furthermore, robo-investors do not have conflicts of interest. Even if your advisor discloses a conflict of interest, psychologically, it does not help you. However, again, just contributing regularly to your investment and retirement accounts and going for low cost options will get you where you want to go. Instead, use a human financial advisor, or a roboadvisor such as myFinancialAnswers, to answer your financial planning questions and tell you how much and in what different types of accounts (e.g. taxable, Roth IRA, traditional IRA, 401k, etc.) to invest your money.

Jason Hull, CFP(R) is the owner of Dallas, Texas based Hull Financial Planning. He started and sold a software company as well as founding a private equity group. He hit FIRE at age 46.

How to Spring Clean Your Finances

  1. Why is it important to check in with your finances quarterly or biannually?
I’m a fan of bucketing your check ins with your finances:
  • Monthly: Check your checking and credit card accounts. What you’re looking for are a couple of things. First, you want to make sure that you’re not spending beyond your budget, which I recommend making on a monthly basis. Second, you want to check to make sure that there are no unrecognized charges or transactions in these accounts. While you have limited liability on them, particularly with credit cards, you don’t want a hacked account to linger without reporting it to the proper financial institution.
  • Quarterly: Check your credit report. We’ll get into what you should look for in your credit report, but, you should be able to get a credit report for free once a quarter.
  • Annually: Look at your investment accounts. Once a year is the time to rebalance your asset allocation and make sure that you are setting enough aside on a regular basis to meet your retirement goals.
  • Is now a good time to consider refinancing student loans or mortgages, or consolidating credit card debt?
  • If you can get a better rate on your debts, then you definitely should refinance those debts. Be careful with refinancing your mortgage, as some lenders charge fees and points on the refinancing that may make it more expensive to repay the mortgage than if you had not refinanced. If you can, try to throw a little extra at your debts, as repaying your debts is a guaranteed rate of return.
    Shop around for rates. I look at bankrate.com and creditcards.com to see what rates are when I’m doing debt analyses. Your goal should be to get your debts paid off as soon as possible instead of kicking the can down the road, but lower interest rates will help you accomplish that goal.
    Additionally, if you have a home equity line of credit and you are experiencing financial hardship as a result of the coronavirus pandemic, you may want to think about drawing down that line of credit, as some banks are tightening credit currently.
  • If someone is reviewing their credit reports right now, what are the most important things to look for?
  • The most important thing to look for in your credit report is whether or not there are inaccuracies on your report. I don’t mean a difference of $200 on a credit card balance. What I mean is if there are incorrect reports of delinquencies, or there are accounts on your credit report that you did not open. If you find these, dispute them with all of the credit reporting agencies. If you find that there are accounts that you did not open, you’re also going to want to look into identity theft and make sure that has not happened to you.
  • What are your best tips for lowering bills? For example, how can someone get lower rates on utilities or save money on car insurance?
  • A lot of car insurance companies are providing refunds because people are driving less during the coronavirus pandemic. If you’re one of the people who is now working from home, log your mileage on your car. Take pictures so that you have documented proof that you’re driving less, and use that information to renegotiate your rates on your insurance. Also, shop around. Just like with your mortgage and credit cards, call around and see who can offer you the best deals. If you have cable, strongly consider cutting it and going purely streaming. For cell phone and home internet, see if you can get a bundle deal, or consider going to Google Fi (#aff) for your cell phone. Finally, if you are a renter, see if you can negotiate with your landlord to lower your rent in exchange for a longer term lease.
  • When reviewing savings and retirement accounts, what are the most important things to consider?
  • I like for people to think about a few things when they look at their accounts that will help them achieve their retirement goals:
    • Are they contributing as much as they can to them? To some extent, saving for retirement is a brute force exercise. The more money you can put into your retirement and investment accounts, the better off you’re going to be in the long run. Few people have the luck or acumen to invest in Google at the IPO and hang on for 20 years. So, rather than trying to pick the winning lottery ticket with our investments, we’re better off trying to save as much as possible.
    • Are they maxing out their retirement contributions when they can? If you’re under 50 and have earned income, you can contribute $6,000 to an IRA. If you’re 50 or older, you can contribute $7,000 to an IRA. If you have an employer sponsored retirement plan at work and you’re under 50, you can contribute $19,500; if you’re 50 or older, you can contribute $26,000.
    • Are they investing in low cost funds? Fees matter in your returns. Every dollar that you spend on a commission or on a 12b-1 fee in a mutual fund is a dollar that you don’t have. Avoid load mutual funds and funds with high 12b-1 fees. Go for low cost funds wherever possible. I’m a huge fan of Vanguard funds and am personally invested in their index ETFs.
    • Are they diversified appropriately? You want a broad exposure to stocks and some income generating investments. My general rule of thumb is that the percentage of your investments that you want in stocks is 110 – your age or 110 – the age of the older spouse if you’re a couple. I’m a fan of low cost index funds to try to cast as wide of a net as possible.
    Jason Hull is a Dallas, Texas based Certified Financial Planner and runs Hull Financial Planning.

    Why Should You Think About Updating Your Will During the Coronavirus Pandemic?

    Generally speaking, people are afraid to face their own mortality. We have a psychological trait called optimism bias that is often very beneficial – it’s what helps us to believe in a brighter future and to wake up in the morning and go to work. If we didn’t have optimism bias, we’d sink into depression and live like Eeyores.
    However, optimism bias also causes us to not believe that we could ever get hurt or to die. How many teenagers and young adults do you know who think that they are indestructible?
    As the coronavirus pandemic has come so bluntly into everyone’s lives, it is one of those few events that does cause us to contemplate our own mortality, particularly if we know someone who suffered from COVID-19.
    While it’s still very foremost in our minds, this is the time to really think about getting all of your paperwork in order just in case something bad happens to you and you do wind up finding yourself immortality-challenged.
    However, just having a will probably isn’t enough.
    • A will
    • Advanced medical directive
    • Medical durable power of attorney
    • HIPAA release form
    • Limited powers of attorney
    • Payable on Death/Transferable on Death orders for accounts
    • If you’re a parent, a trust for minors

    Furthermore, it’s important not to put these off. It appears that the coronavirus will be around for a long time. People are already starting to get tired of being quarantined and not being able to do what they want. We will start to experience a phenomenon called psychopathic numbing, which will make the possibility of death less and less tangible for us over time. That will put out the spark that is currently causing you to think about getting a will, which may cause a lot of problems for those whom you leave behind.

    You can also check out the FIRE playbook to learn more about what other estate planning actions you should take.
    Jason Hull is a Dallas-based Certified Financial Planner and owns Hull Financial Planning.

    Do Not Shortcut Your Retirement Planning Efforts

    When it comes to success, there are no shortcuts.
    –Bo Bennett

    I recently read an article extolling how easy it was to get started on the journey to financial independence.

    I’m sure the author is a good person and well meaning. He seems to be smart and motivated, having earned a CPA in 2018.

    Some of the advice is good, such as answering the question why about your financial goals and looking to reduce your unnecessary spending to tighten your budget.

    However, some of it was quite short-sighted.

    The crux of the article was “take your current spending, multiply by 25, and voila! There’s your target!”

    It’d be AWESOME if we could rely on rules of thumb to retire, but we can’t.

    Why Do We Need to Dig Deeper When Planning for Financial Independence and Retirement?

    If the world were a static place (which, as I’m writing this, it kind of is, due to coronavirus), then that advice might get you close, but, it isn’t, and that advice doesn’t.

    Your Expenses Will Change Over Time

    Unless you have a manic obsession on cost-cutting and cost management, chances are that, over time, you’re going to hop on the hedonic treadmill at some point in your life. You may have a kid. You may need to add more space.

    Even if you do manage to control all of your spending, there’s one ineluctable expense that will go up as you age: healthcare. It could be health care when you’re younger. It could be long-term care when you’re older. It could be a health shock.

    No matter how much you fight it, that balloon is going to keep expanding. If you simply assume that your current spending will hold on pace with inflation for the rest of your life, then you’re going to find your budget getting tighter and tighter as you age.

    The 25x Rule is for 30 Years of Retirement

    The author of this article talks about early retirement, so while the article was about financial independence, financial independence is the ability to not need to work for money for the rest of your life.

    Therefore, if you’re going to retire early, then the 4% safe withdrawal rate rule (the inverse of 25x your expenses) is unsufficient for you to achieve FIRE. It is too high. If you try to have a 50 year retirement with a 4% safe withdrawal rate, using the same methodology of the Trinity study used to generate the 4% rule, you have a pretty high chance of running out of money before that 50 year time period ends.

    How Does Social Security Play Into Your Plan?

    The earlier you retire, the less Social Security that you’re going to have earned for later down the road.

    That much is self-obvious.

    However, do you know how Social Security will plan into your income planning strategy when you are retired, how much you will earn, when to claim it, and how to manage asset location to minimze the impact of Social Security payments on your taxes (because the marginal increase is currently big)?

    Let me be clear. The aforementioned article is a great starter point. If you can get to a point somewhere down the road where you’ve saved up 25x times your current spending, you’re going to be better off than 80% of your peers, and you’ll be well on the road to retirement, whether it’s a traditional retirement in your 60s or FIRE – financial independence, retire early.

    Also, financial planning is not rocket science. Most of the coursework for my CFP had to do with esoteric, advanced concepts. Most of you will never need to know or care about Crummey provisions, CLATs, or top hat compensation plans.

    However, do yourself a favor and don’t engage in willful blindness and convince yourself that all you need is 4 simple rules on an index card, and you’re set forever and ever, amen.

    These are decisions that affect the rest of your life. They deserve a little more attention from you than planning your next vacation.

    Do Not Rely on a Rule of Thumb to Retire

    It’s kind of a rule of thumb for me to self-doubt going into any kind of project.
    –Heath Ledger

    When we made the decision to retire early, we went through a lot of analysis on whether or not we would have enough cash flow from our rental properties to meet our living expenses, as well as coming up with a very detailed contingency plan for what actions we would take in the event of realizing negative tail risk in early retirement. Fortunately, from a financial perspective (not from a life enjoyment perspective), the lockdown caused by the coronavirus pandemic has driven our expenses down much more, as a percentage, than our portfolio has dropped, meaning that we haven’t actively needed to take any steps in our contingency plan (particularly given that the first one, cut out discretionary spending, has been very amped up due to our inability to travel).

    We went through a TON of evaluation on our decision, and even afterwards, we still had the wine-fueled “I don’t know if this is going to work” discussion a couple of months into early retirement. We also didn’t blindly assume away other expenses and take a reckless approach to FIRE.

    We measured a whole bunch of times before cutting (hopefully) once.

    Yet, as we saw in “Beware the Rules of Thumb,” we’d much rather live our lives by simple rules of thumb. Thinking is hard, and our limbic systems would rather live by heuristics than having to put in the intellectual effort and mental energies to come up with answers specific to our personal situations.

    Math is hard, right?

    That’s why personal finance gurus want you to believe that there are financial secrets to achieving the life that you want. It’s the personal finance version of the magic weight loss pill.

    For having already been FIREd for five months, then, I sure get my dander up when I see inane article simplifying retirement and have my mind blown that people would actually rely on simple rules of thumb when making a decision that has some pretty devastating negative effects if you get it wrong (hello, Walmart greeter at age 95).

    How Many Different Rule of Thumb Mistakes Do We Make When We Make Retirement Decisions?

    The 80% Spending Rule

    The first one I found was research by Texas Tech’s Dr. Michael Finke, CFP (whom I respect highly), debunking the idea that you should expect to spend 80% of your pre-retirement income during retirement.

    I have no idea where 80% even came from, aside from thin air or someone’s backside.

    Every family’s situation is unique. Some people are able to save 77% of their income. Others struggle to make ends meet, and will have to rely on Social Security for their post-retirement income.

    Furthermore, research from the Employment Benefits Retirement Institute shows that 34% of retirees find themselves spending more in retirement than they thought that they would, which is a pretty sure sign of not doing sufficient preplanning on retirement spending before actually retiring.

    So, if your financial planner is telling you to rely on 80% of your income as a rule of thumb, fire your planner.

    If you’re relying on that number, do a little more digging (I have an entire course on determining when and how you can retire.

    Four Simple Rules for Retirement

    This one was the biggest head shaker of the articles I saw.

    The Motley Fool apparently believes that if you can master four basics of personal finance, you can retire. It’s pretty easy to take away from this article that if you can:

    1. Make a budget
    2. Don’t impulse spend
    3. Have an emergency fund, and
    4. Have no debt

    …then you are good to go to retire.

    Those are necessary but not sufficient conditions for you to be able to retire, but there are probably another 50 gates to go through before you really can retire. If you don’t know what they are, you can check out my FIRE playbook to get you a bunch of the answers you need.

    Giant Round Numbers

    An article in the Motley Fool shows some research from “people who have run the numbers” on how much they think that they’ll need for retirement. It turns out that 40% of workers think they’ll need $1 million, and 16% of workers think that they’ll need $2 million to retire.

    While I’m not a fan of fake false precision, that you need $1,753,487.39, not a penny more, not a penny less, rounding off to the nearest million is not going to help you. If you need $1.49 million, then undershooting by $490,000 means that you’re facing a 32.8% shortfall in retirement. That’s a mighty big miss.

    What Should I Do to Determine My Retirement Needs?

    I really didn’t mean to make this an advertisement for my my FIRE playbook, but it has, since that’s the type and level of intellectual rigor you need to go through before you make the decision.

    In the alternative, if you’re not the do-it-yourself type when it comes to personal finance, then go get an hourly, fee only Certified Financial Planner to go through your entire financial plan. There’s a reason that you have to go through a curriculum, a standardized (and by no means easy) exam, and need, in most cases, at least three years of practical experience before you can become a CFP.

    Why?

    Because financial rules of thumb do not work.

    Don’t fall into the trap. If you do, digging out might be really hard and come at a time when the shovel feels awfully heavy.