Wednesday, August 5, 2015

Fidelity American Express is Padding My Retirement Account

Disclaimer: I receive a referral commission for the following link(s) and I greatly appreciate supporting the site:  Amazon

I use my Fidelity American Express card a lot.  If you don't have one and are interested, now is the time to apply considering there is a $50 sign up bonus available.

If someone is new to the credit card game, I tell them to get a Fidelity American Express since it is simple.  2% back on everything.  No gimmicks and no 5% categories.  Even better, they can be used to buy American Express Gift cards which adds up to 2% to your rewards if you buy them when they are 2.25% cashback from Top Cashback (like yesterday).

The points are worth one cent each when redeemed into your Fidelity account and that's how you can get the full value as cash.

The aspect I like the best about the card is something I haven't talked about yet.  You have to open a Fidelity account to have the card.  Most people find it annoying, but I love it and I'll tell you why.

I don't use my Fidelity account for anything else, it is completely separate and I make sure to keep it that way.

As you can see from the picture, I routinely deposit at least $100 of rewards each month into my account.  Many of you may deposit much less or much more than that, it doesn't really matter the number.

Fidelity has a list of Exchange Traded Funds (ETFs) run by a company called iShares.  These 70 ETFs are commission free.

Since they are commission free, I can routinely buy one share at a time and not pay any commissions.

I personally buy the ticker symbol IVV which aims to match the return of the entire S&P 500.

You can see from the chart that for the last 15 years IVV and the S&P 500 are almost indistinguishable.

Another good one is ITOT which aims to mimic the top 1500 stocks, instead of 500.  Its chart is also indistinguishable from the S&P 500 as a whole for the last 3 years.

I am personally a Boglehead.  I got hooked from one of his books:
The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns

Also recommended by Warren Buffet in his 2014 annual shareholder letter

There are a few investment managers, of course, who are very good – though in the short run, it’s difficult to determine whether a great record is due to luck or talent. Most advisors, however, are far better at generating high fees than they are at generating high returns. In truth, their core competence is salesmanship. Rather than listen to their siren songs, investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense Investing.
(bolding my own)

I don't believe in actively managed portfolios, but I digress.

My long term (think 30-40 yr horizon) hope is that if I invest in these ETFs, most likely I will have a return of ~8% yearly based on historical data.  Clearly that won't be true in the short term, but as long as I stay the course and buy at many different intervals (smooths out the hills and valleys), that is a good bet.  I've done much better than that the last couple of years but it has been a great market and everyone should have as well.  It doesn't really matter to me what happens short term (I consider 5 years to be short term in the stock market).

8% is not guaranteed at all, it may be higher or lower, but it is more than possible.

Fidelity American Express allows me to buy one of these shares at a time and build up my portfolio.  Since it is in a separate account and it is from credit card rewards it is easier for me psychologically to save that money.  I still put the same amount away towards my retirement in other accounts, I just end up saving more.

Here Comes the Math!

What happens when you put away $100 a month for 30 years and earn 8% back on that money?  Compounding!  It's worth over $145,000 in 30 years when your contributions were just $36,000 (just from credit card rewards!)

What happens over 40 years?  Even more compounding!   It's worth over $335,000 in 40 years when your contributions were just $48,000.

What happens if you are able to put away $150 a month from Fidelity American Express a month?  Goodness gracious it's worth over half a million dollars at 40 years from contributions of only $72,000!

Not too shabby indeed!

I don't think most people will be able to earn that much every month, but the point is that the rewards can really add up over time and I find it easier to sock away when it is automatically put in a separate account for me.  If I had an extra few hundred thousands at retirement because of credit card rewards, I certainly wouldn't be upset.

Please don't use this instead of planning for retirement,  but it can be used in addition to what you are already doing.