According to Consumer Reports the average cell phone bill is $600 a year. If you ask me that sounds a little low, but let’s go with it.
We all know you pay your cell phone bill once a month, but for the sake of simplicity let’s assume we pay our bill once a year ($600). This will allow us to focus on annual yields instead of comparing compounding rates and help you better visualize the dollar amounts in your head.
How much would you have to invest in various investment vehicles to cover this $600 cost? I’m going to cheat a little to help keep this simple. I’m going to take the APY for these investments and determine how much principle I would need for each to make the cell phone bill payment at the end of the year. You will clearly see how much a difference various investment rates of return have on your ability to help pay for retirement.
If you were going to use your high yield checking account to pay for this, we can reasonably assume your APY would be around 0.85% (0.0085 decimal form). To cover this $600 dollar a year expense you would need $70,588.20 in your checking account to earn $600 a year in interest. Ouch!
If you are the average American worker, this is over a year’s salary you’d need in savings just to cover the cell phone bill using interest. This thought is enough to make anyone feel sick about expenses in retirement and living off life savings. Many people living in fear of stock market investing turn to checking accounts. Many people can’t expose themselves to the volatility of the stock market at this point.
Now if you were willing to invest in something other than a checking account, your outlook starts to improve. What about if you invest in a 3 year CD paying 1.650% (current rate at Ally)? Well, in this case you would need $36,363.60 to cover your $600 dollar cell phone bill. Things are looking better.
Surely you can do better though. With some online searches you’ll find A rated 10 year municipal bonds that you can expect to yield 4.05%, now you only need $14,814.80. But that means you have to let your money be tied up for 10 years. And who knows, maybe it’s a zero coupon bond!
In retirement, any investment advisor is going to tell you to weigh your portfolio more toward fixed income. There is a reason for this. If you have 5 million in retirement invested in equities, and the stock market loses over 20% in one day (see crash of 1987) it can take years to recover. For someone expecting to draw on retirement gains to pay for life this can pose a serious problem.
There are difficult financial waters you must navigate in these times.
Consider Peer-2-Peer lending. Companies like Lending Club are producing returns over 9.64% on average. With the cell phone bill example, you can cover this expense with $6,224.07. This is a much better scenario than with your checking account and beats the 10 year municipal without breaking a sweat. If you are looking for a place to put your capital in retirement, consider placing 10% of your net worth in a Lending Club account.