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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