Why seniors can benefit from Robo Advisors?
Research is starting to show that elderly and middle-aged investors don’t have enough saved for retirement – in many cases, they haven’t even started. The recession of 2008 spooked a lot of people, and many lost complete faith in the market’s ability to generate wealth. For anyone coming of age during that time, the reality of market volatility might have pre-empted them from ever getting started.
But earning a respectable wage just isn’t enough to carry you into retirement, and consumers too afraid to invest will find themselves working well past retirement age – maybe for the rest of their lives. Thankfully, investment firms have addressed this issue with something that takes uncertainty and human error out of the equation. They’re called robo advisors, and they’re making investing easier – and more affordable – for just about anyone.
Robo advisors use algorithms to invest your money, factoring in things like your risk preference and retirement timeline. You can then be as hands-on or hands-off as you want, making it perfect for beginning investors looking to learn, or those who would rather not be involved at all.
Why Robo Advisors are associated with Millennials?
Robo advisors have become synonymous with millennials because they’re cheap, easy to use and simple to set up. Millennials are a generation who have been scarred by downturns in the market, but robo advisors make it easy for them to invest worry-free.
Plus, many robo advisors have few minimum requirements – perfect for millennials who are just starting to invest and who don’t have a lot of extra money to save every month. Most have a sleek interface that’s more appealing to young people used to doing everything on an app.
But every generation, from Baby Boomers to Gen X, can benefit from using a robo advisor as their main retirement tool. Dave Grant CFP® of Retirement Matters said he has a friend who considered hiring him as a financial planner, but chose to go with a robo advisor instead. Even though this man has a portfolio worth seven figures, he chooses to use a robo advisor.
“He cites the cost and passive approach as being the main factors in why he uses them,” Grant said. “He knows I would do something similar – both in portfolio design and fund selection – but as the price is lower, he has decided to use a robo advisor instead of a human.”
A huge portion of the population that would benefit from robo advisors are seniors saving for retirement. Robo advisors can sync all your retirement accounts into one and calculate how much you need to keep saving. Not only can you use them to start a new IRA, you can also use them as a one-stop shop for all your retirement accounts.
Comparing Robo Advisors
Minimum deposit: $500
Fees: Wealthfront customers pay no commissions, no advisory fee on the first $10,000 under management and 0.25% on amounts of more than $10,000.
Notes: The minimum deposit of $500 isn’t large, but it can be hard for some beginning investors to save up. Still, low fees make it an attractive option for people who can pony up $500.
Minimum deposit: $0
Notes: While having no fees or minimum deposit is an attractive structure for beginning investors, there are some caveats. This is a bare-bones robo advisor, and many services that are offered for free at other firms come with a price tag.
Minimum deposit: $0
Fees: Per their website, Betterment has a four-tier pricing structure. The annual fee spread is:
- $0 – $10,000 account balance: Flat $3 per month fee if you don’t set up auto-deposit;
- $0 – $10,000 account balance: 0.35% annual fee if you have an auto-deposit of at least $100 per month;
- $10,000 – $100,000 account balance: 0.25% annual fee, no auto-deposit required;
- $100,000+ account balance: 0.15% annual fee, no auto-deposit required;
Notes: Betterment rewards users who invest a hefty sum with them, but even a beginner can benefit from using Betterment. Betterment rebalances accounts for their investors, which takes the pressure off those who want to invest, but don’t have to the time to check on their accounts regularly.
Minimum deposit: $0
Fees: WS uses a 0.50% – 0.35% management fee based on account size.
- $25,000: $125 (.50%)
- $100,000: $500 (.40%)
- $250,000: $1,000 (.40%)
- $500,000: $2,000 (.40%)
Notes: WealthSimple has some of the higher fees on this list, but the $0 minimum deposit is attractive to new investors.
Schwab Intelligent Portfolios
Minimum deposit: $5,000
Fees: Investors pay no advisory fees or commissions, but the recommended portfolios include cash allocations of 6% to 30%.
Notes: While Schwab does offer low fees for its robo advisor services, they also require a steep $5,000 minimum deposit. That’s far greater than most robo advisors, though you can always roll over an already existing 401k or IRA if you’re having trouble scraping up $5,000.
Minimum deposit: $0
Fees: 0.5% (0% on emergency funds)
Notes: Ellevest was recently created to fill a very specific niche – female investors who feel uncomfortable with the male-dominated investment scene. They do this by factoring in the difference in female risk preferences and lifespans.
Who shouldn’t use a robo advisor?
While many people see robo advisors as a natural replacement for financial planners, there are some key differences. The main factor is that a robo advisor won’t hold your hand when the market is in a slump and you’re tempted to sell off half of your stocks. A financial planner can stop you from making bad financial decisions in a way that a robo advisor can’t.
- If you’re the type of person who is impulsive or has made poor investment decisions in the past, a robo advisor might not be good for you. A robo advisor won’t be there to explain why you should ignore whatever the news channels are saying about today’s stock drops.
- Also, if you have a complicated financial situation a robo advisor might not be able to provide the personalized financial advice you really need. This includes divorced families, people with complicated trusts or military veterans. Think of a robo advisor as a suit you’d buy off the rack. Sure, it might look fine, but if you really want to look spiffy, you should get it tailored.
Financial planner & robo advisor
The best part is that you can combine a financial planner with a robo advisor. A financial planner can meet with you once a year to get an overview of your finances, point out your weak spots and explain what you need to do to reach your goals. Many will even help you set up an account with a robo advisor and show how much to invest and where.
If you’re feeling unsure about your financial situation and are worried you don’t have enough to retire on, then a financial planner is your best bet. They can look at your finances in a holistic way to determine where you stand. They can also examine your budget to see if you need to make some changes before you can retire comfortably.
While a robo advisor can tell you if you’re falling short of your retirement goals, it won’t feel as powerful as coming from a real person.
Another major retirement issue that seniors will face is when they have to start taking social security. The longer seniors wait to file for social security benefits, the more they’ll get each month. However, many don’t want to wait to retire and would rather take a smaller payout now. This is another area where a personal financial planner is more helpful.
Retirees also have to be mindful if they have any accounts with required minimum withdrawals or RMDs. RMDs are withdrawals that seniors have to take every year or pay a penalty. Many robo advisors are not set up to remind seniors to do this or how much to take out, leaving them vulnerable to unnecessary fees.
The bottom line
Robo advisors have garnered a reputation for primarily servicing millennials, but there’s no reason why people of all ages couldn’t benefit from these services. It’s an excellent situation for anyone looking to invest with as little fuss as possible – and possibly save some money on fees.
Once you set up your account, you can sit back and relax in the knowledge that your investments are being handled with care. You’re probably not going to strike it rich investing with a robo advisor, but the consistency and precision of these digital investment tools won’t let you down.