We highlight all of the intelligent strategies we use to help protect you from market downturns as you approach the target dates for your goals—and discuss the actions you can take if your goals become off-track.
Anticipation is a powerful emotion. We’ve all felt the excitement that builds when we counted down the days to our birthday as children. As adults, we’ve felt our wedding day slowly inch closer and closer.
That same anticipation applies to our investing goals as well. Whether it’s buying a home, paying down debt, or retiring, the closer we get to achieving these goals, the more our enthusiasm grows.
But, unlike your 10th birthday, nothing in investing is guaranteed. That’s why the final months and years leading up to your goals are so important. During those final months, your investments require extra care to help make sure your goals don’t get thrown off-track at the last minute.
Betterment uses five strategies to help you protect your investments as your goal’s final date approaches. Additionally, there are other actions you can take on top of what we are already doing for you.
If you need a refresher first on how to set up your goals correctly, we offer advice.
1. We Make Automatic Allocation Adjustments
The amount of risk you should take with your investments depends largely on your time horizon. In general, the closer your goal is, the less risk you can afford to take, because there is less time to wait for the market to recover. This is why using our auto-adjust feature is so important.
Here’s how it works:
- When setting up a goal, you tell us your time horizon.
- We’ll recommend an initial risk level to start with.
- Auto-adjust will be on by default, which means we’ll decrease your risk level automatically as the end date of your goal gets closer.
By reducing your risk as your goal approaches, we can help shield your investments from dropping significantly in value right before you need the money the most.
To be clear, this feature doesn’t entirely eliminate risk from your portfolio. All investing includes some risk. But, auto-adjust does help protect your portfolio by gradually shifting away from riskier investments like stocks, and into safer investments, like bonds.
2. Our Recommended Savings Amounts Are Conservative
A solid financial plan must incorporate how much you need to be saving now in order to reach your future goals. For each goal that you set up, we’ll give you a recommended savings amount.
You’ll see your recommended savings amount when you first create your goal, and you can always find it again by selecting your goal, heading to the “Plan” tab, and clicking “See our recommendations.” This recommended savings number is based on our projections for how the market will most likely perform in the future.
To be conservative, we pick a below-average market outcome. The monthly contribution estimate is based on a 60% likelihood of the portfolio value reaching the goal target at the end of the investment term. This means that even if markets perform slightly worse than our expectations, you are still likely to reach your goal. We’d rather advise you to save more than what you’ll need, instead of less than what you’ll need.
3. Our Tools Help You Plan for the Worst Case Scenario
Sometimes you need to feel extra certain that you will reach your goal in your desired time horizon.
This might be the case when:
- The goal’s time horizon is not flexible (your child’s college).
- The goal is very important to you (adding a bedroom for your newborn).
- You choose to be conservative when it comes to your finances.
If one or more of these apply to you, it’s prudent to see how very poor markets might affect your goal. We make this easy with our projection graphs. You can hover your cursor over the graph to see not just average expected performance, but also how your goal will fare in very poor markets. These very poor market outcomes are indicated by the 90% and 97.5% outcomes below.
Many investors want to have a 90% chance for reaching certain goals. If that’s the case, you may want to consider increasing your savings amount—just in case.
4. If Your Goals Go Off-Track, We’ll Tell You
Betterment is able to make sophisticated projections about how we think your investments will perform. We do this by using the Black-Litterman model paired with estimates of future interest rates. However, our estimates are only estimates. Think of our advice more like a guided satellite, that you can adjust mid-flight if you need to—even after it’s been launched.
We make it easy to see check in on how your goals are doing, and whether any changes need to be made. Every time you create a goal, we’ll ask you to enter a time horizon (when you expect to need the money), and a target amount (an estimate of how much you will need). With that information, we can tell if your goal is on-track or off-track. If it’s off-track, we’ll show you what changes you can make to help fix it.
Betterment will monitor your goals every day. Whenever you want to check in, you can do so in just a few clicks. That way, you can catch things early on, correct your course, and not be caught by surprise at the last minute because your goal has been off-track.
5. We’ll Send You Reminders to Update Your Goals
We just discussed how market performance that is different from our original estimates may necessitate some adjustments to your goals over time. But even if markets behave as we project them to, your life might change, and your goal might need to change with it.
Maybe you’re having a baby, and that 1-bedroom house you were saving up for now needs to be a 2-bedroom house. Or, maybe your health isn’t great, and you might be forced to retire a few years ahead of schedule. We want to know those things so that we can update our advice.
We’ll send you periodic email reminders to check in on your goals and see if anything needs to be adjusted. This is a best practice amongst almost all financial advisors—not just Betterment—but it’s definitely something that can easily be overlooked in your busy schedule. That’s why we are proactive about reminding you to spend at least a few minutes every few months to review your goals. You should also review your financial profile and make sure your income level, tax bracket, marital status, and address are all correct.
What should you do if your goal ends up being off-track?
Despite all that, sometimes the stock market just doesn’t perform the way we want it to. You may find that the end date of your goal is fast approaching, and you realize you’re not on track to reach it. Unfortunately, there is no magic solution, but there are many things you can do to help towards reaching your goal.
Delay Your Goal
If your goal is flexible, delaying it slightly can be a great option that can give your portfolio time to recover, as well as give you extra time to save more. You can easily use the Preview Mode within your goal to see how big of an impact delaying your goal can have.
This strategy is best for goals with flexible timelines, such as vacations or home remodels.
Downsize Your Goal
Another option to consider is downsizing your goal. You can easily adjust the target amount for any goal to see what effect a smaller target amount has on whether or not you can realistically reach your goal.
For example, instead of buying this year’s Toyota Camry, maybe you aim for last year’s model instead.
Increase Your Savings
Increasing your savings amount is another option that can help you get back on-track. This may be easier said than done, but remember that this is only temporary. Cutting back on some discretionary items in your budget may be worth it if it helps you reach an important financial goal that you’ve set for yourself.
You can easily increase your auto-deposit amount within your account at any time.
Divert Money From Other Goals
You could divert money away from other financial goals you have, and towards the goal that has fallen off-track. The goals you divert from may be less important to you, or maybe they are goals that are further out into the future. Just be careful that you’re not robbing your future self in order to fulfill your current needs.
Money can be transferred between non-IRA/non-401(k) investment goals from within your account by performing a goal-to-goal transfer. Simply log in, choose the goal you want to move money out of, click on “Transfer or Rollover,” and then click “Transfer to another goal.”
All of the Above
The right solution for you may be a combination of more than one—or even all—of the above options.
For example, if you can save up an extra $100 per paycheck, delay your goal by three months, and also use some money from another goal, then that may be your formula to get back on-track.
Need More Advice?
The best financial plans have strategies that mitigate risk and are flexible enough to adapt to changes. Betterment takes both of those principles to heart with the advice that we give you. We can’t guarantee how the market will perform, but we can use technology to make our projections as accurate as possible. We can also make it easy for you to check your progress and make changes.
If you’d like extra help from one of our advisors when setting up your plan, you can book a Getting Started Call, and our advisors will walk you through every step.