By Gary Zimmerman
Retirement means different things to different people. For some, it’s an opportunity to pursue existing hobbies with greater vigor, spend more time with grandchildren, or travel. For others, it affords the time and flexibility to pursue new passions, study new topics, or devote more time to non-profits. The common theme of retirement is that people migrate from living off their labor to living off their capital. For many, this is a profound change.
The uncertainty of employment is replaced by the uncertainty of investment returns. Retirees’ fixed amount of capital needs to last an uncertain number of years, which makes planning all the more difficult. But one thing is undeniably true: earning more is better than earning less.
Earning a higher return on investments enables retirees to do more, more often, for longer. More trips to visit grandchildren. More time on the golf course. More overseas adventures. But often higher returns come with higher risk. Retirees should look for ways to boost return without taking on incremental risk.
The challenge is that one of the strongest forces of nature is inertia. It’s easy to keep doing things the way that you’ve always done them. But what if the old way is holding you back? What if for decades you’ve been paying too much in fees and earning too little in interest from your bank? Retirement is a great time to revisit those habits and see how you can do better in the decades ahead.
If you’re working with a financial adviser, they can help create a comprehensive plan to help you meet your retirement goals, making sure you’re earning as much as possible without taking on too much risk.
One way to boost returns is to lower the fees you pay on your investments. Look closely at your investment portfolio. Are you paying 0.80% in fees on an equity mutual fund when you could accomplish the same thing with an exchange traded fund (ETF) that charges only 0.20%? That 0.60% differential may not seem like very much, but the average retiree will hold these funds for decades and the compounding effect of these higher fees is real money. After all, a retiree with a million dollars would save $6,000 every year simply by picking a fund that charges 0.60% less in fees. Multiply that by 20 years and — even without compounding — those savings would amount to $120,000 of extra money that could be spent on travel, leisure, or to fund a 529 plan for the grandchildren to go to college.
Beyond reducing fees, the simplest place to look for more investment return is the cash in your bank account. Most banks today pay next to nothing on cash. According to the FDIC, the average yield paid on a savings account nationwide is just 0.04%. While startlingly low, many Americans have just accepted near-zero interest rates as a given, rather than try to shop for a better rate. What makes this even worse is that, by earning next to nothing on cash, you are not keeping pace with inflation and your money is losing value each day.
But there is another option. Online banks, which have lower operating costs, currently pay up to 0.50%, 12 times the national savings average. These banks all offer FDIC insurance. The only difference between these banks and the more traditional banking options is the lack of a physical location. This is similar, in many ways, to buying a book online rather than in a bookstore. The book is the same book either way, but prices are better online due to the lower expenses associated with operating online, and these savings are passed on directly to the consumer in the form of lower prices, or in the case of banks, higher interest rates on savings.
Online banks are a smart choice, but they change their rates often, so picking a single bank may not get you the best return. Some websites can help you maximize what you earn on your cash by automatically helping you find the best rates on savings accounts so that you can be sure of earning the highest yields even as rates change. At today’s rates, they can help you earn up to 0.75% on cash that sits in your own FDIC-insured bank accounts. An extra 0.71% return on your cash enables you to earn more without taking on additional risk. That ‘found’ money can go towards an extra night out with your spouse each month, a nicer hotel or more comfortable first-class seat when you travel, or to make a bigger impact with the charities you support.
For retirees who are a bit more intrepid, there are other ways to pick up higher yield. For years, many retirees have helped young couples buy a new home by underwriting mortgages directly, rather than going through a bank. Alternative approaches to fixed income, such as agricultural lending or crowdfunding can also deliver a higher yield, albeit with higher risk. If you have a good financial adviser — ideally a registered investment advisor (RIA) who is bound by a fiduciary duty — they can help identify investments that fit within your broader retirement plan, weighing risks, returns, and your liquidity needs.
The financial industry thrives on inertia — the fact that many people don’t scrutinize their investments or bank statements and end up settling for whatever they’re given. You don’t have to settle. The privilege of retirement is that rather than having to work for money, your money gets to work for you. By making your money work just a bit harder, you can get more out of the retirement you’ve worked so hard to achieve.
Gary Zimmerman is the chief executive of MaxMyInterest, a cash management platform that helps Americans earn more on their cash .