Retirement Planning Advice Disclosure

TABLE OF CONTENTS

1. Introduction
2. Estimating Retirement Spending
3. Determining Total Savings Needed
4. Calculating Required Savings
5. Prioritizing Retirement Savings by Account
6. Interpreting the Personalized Retirement Plan Projection Chart
   
   

Introduction

Betterment provides financial advice through our Digital service and our advisors who clients contact over the phone or via email (using the Betterment Premium plan or one-time support). In both cases, we have a standard methodology that incorporates research and economic circumstances.

Betterment permits clients to provide additional information relating to their retirement goals in order to set up a personalized retirement plan (“PRP” or “retirement plan goal”) and provide more complete retirement planning advice. This disclosure provides an overview of our financial planning methodology for PRP goals. Please note, retirement goals that are not part of a personalized retirement plan are not subject to these assumptions, and instead are treated the same as other Betterment advice goals, as described in Betterment’s Goal Projections and Advice Disclosure. For example, if a client has a Betterment IRA retirement goal that is not part of a PRP, the IRA retirement goal advice is consistent with Betterment’s projections and advice for other investing accounts, such as General Investing.

PRP goals have complex advice and assumptions. Betterment’s retirement planning advice factors in other variables, such as the impact of Social Security and other potential income streams such as rental real estate, as well as future spending, tax rates, and inflation, as described below.

Retirement Planning Considerations

There are several considerations clients should know when making retirement planning decisions. These include current and future federal tax benefits, account types, portfolio construction decisions, asset management strategies, economic forecasting, and insights from behavioral economics. Based on these considerations, Betterment’s PRP goals consider the following inputs in projecting your estimated retirement needs:

1. Projecting an estimate of your desired spending in retirement (“estimated retirement spending”)
2. Determining the total pre-tax savings amount you’ll likely need to achieve that spending level with confidence
3. Calculating how much you should save prior to retirement
4. Prioritizing which retirement savings vehicles are likely to be most efficient

Betterment updates its retirement planning methodology for PRP goals as regulations change or as Betterment’s retirement planning methods improve.

2. Estimating Retirement Spending

How much you would like to spend during your retirement is one of the most important drivers of your retirement plan, but it is often the hardest part to predict. Betterment’s retirement planning methodology focuses on your expected spending in retirement (your "consumption"). rather than your pre-­tax income, which can overstate the money actually available to maintain your lifestyle.

Betterment uses several factors to help you estimate your spending when you retire, including how your earned income could grow over time, what your local cost of living will be like, and what your spending habits look like before retirement. 

In the following section, we’ll describe our methodology for anticipating each of these factors when making client recommendations.

A. Growth of Real Earned Income

How much you spend is strongly related to how much you earn, but your income could change during your life for multiple reasons, including job promotions, inflation, or other macro events or unforeseen changes. Betterment models growth of your entered “annual pre-­tax income” as the first step to estimating consumption at retirement. A young worker with 40 years ahead of them will generally earn more just before they retire.

Betterment uses your current pre-­tax income based on the information you provide, and then, by default, estimates that the growth of your annual income will outpace inflation by 1% per year. You can modify this assumption if you’d like under "Edit additional assumptions > About your income".

B. Cost of Living for Where You Retire

While it’s common to retire where you lived during your working years, some people plan to retire somewhere else. By default, we assume you’ll continue to live where you do now (using the ZIP code you specify in your user profile), but if you’re expecting to move somewhere different, you can specify a ZIP code to help you estimate the cost of living in other areas. This can help you learn how much less you need to save if you move somewhere less expensive in retirement, or vice versa. We assume that the cost of living in that ZIP code (“value of money”) will be the same at the time you retire as it is now, adjusted for inflation.

C. Spending Prior to Retirement

It is not possible to predict exact expenses in retirement. We assume that, during retirement, you’ll want to maintain a similar standard of living as you had before you retired, which means consuming the same amount (adjusted for your new zip code, if different from your current one, and for inflation). Although you may no longer have a mortgage or be supporting children, we assume those expenses are typically replaced by new activities or hobbies, as well as travel and medical expenses. While you are saving, your finances can be described simplistically as:

Net Income = (Gross Income ­ - Pre-­tax savings) * (1 -­ Average Tax Rate)

Spending = Net Income - Post-tax Savings

In order to  estimate how much of your income you need to save, we also rely on consumption data. Generally at low income levels you consume a higher proportion of your income, but as net income rises that proportion falls. That relationship is modeled by a variable we refer to as Average Propensity to Consume (“APC”).

Consumption Ratio = APC * (Net Income)

Spending = Net Income * Consumption Ratio

Our goal is to deliver the same amount of spending in retirement as just before retirement. Critically, once you're retired, you're no longer saving, so you don't need as much income to support the same level of consumption. Your APC goes to 100%.

Net Income = (Gross Income) * (1 - ­ Average Retirement Tax Rate)

Consumption = Net Income * 1

As a result, you enter a positive cycle — you need less gross income for the same amount of consumption because:

1. You aren't saving before tax.
2. As you take less gross income, your average tax rate falls, as well.

Net Income = (Gross Income) * (1 ­- Average Retirement Tax Rate)

This model estimates how much gross income (pre-­tax) you’ll need in retirement to sustain the same living standards as you had before retiring. If you’d prefer to specify your spending needs based on your own estimates, you can override our estimation.

D. No Specific Assumptions on Required Minimum Distributions

Required Minimum Distributions (“RMDs”) occur in tax-deferred retirement accounts after you reach a certain age. Distributions from these accounts are generally taxed at ordinary income rates in retirement.

Aside from planning that distributions will be taxed appropriately, we do not specifically calculate or handle RMDs in this retirement planning advice. We assume that your spending needs will meet or surpass your RMD requirements, if you have accounts subject to RMDs.

Unrelated to the PRP, Betterment calculates your RMD amount for your Betterment retirement accounts on an annual basis and provides this to you in your tax forms or through your 401(k) plan communication if the account was held with Betterment on Dec. 31st of the prior years.

3. Determining Total Savings Needed

After estimating your retirement spending, Betterment calculates how much you’ll need to have saved by your desired retirement date to achieve a 99% chance of not running out of money during retirement. 

If you’re already retired, Betterment suggests  automatic withdrawal amounts based on a 96% chance you will not run out of money before the end of your retirement period (see 3C “Preparing for Bad Scenarios”).

A. How long will your retirement be (the time until end of life)?

The length of your retirement,measured from your retirement age to your life expectancy, has a major impact on how much you’ll spend and how much you’ll need to save.

By default, we assume you’ll retire at your chosen age and live until 90.  You can adjust both your retirement age and life expectancy if you prefer.  

Note: Our projections are based on your personal life expectancy, even if you enter a longer one for your spouse.

B. Accounting for all sources of retirement income

Overview

Income in retirement can come from a variety of sources. To accurately estimate how much you need to save, we need to account for all known income streams. For most people, the key sources are:

• Social Security 
• Investment income or withdrawals from retirement accounts
• Additional sources such as rental income or defined contribution/benefit plans (as applicable).

Social Security Based on Retirement Age

Social Security is a major source of retirement income for many Americans. The amount you receive depends on your lifetime earnings and the age at which you begin claiming benefits.

We estimate Social Security income according to the U.S. Social Security Administration’s ("SSA")  rules. Our model includes inputs such as:

• Your (and your spouse’s) current income
• Assumed growth rate and earned income
• Assumed inflation
• Your selected retirement age

Unless you select otherwise, we assume you begin taking Security benefits the same year you retire.

Assumptions about Claiming and Timing:

• Earliest Eligibility: Social Security benefits cannot begin before age 62. If you  retire before 62, we assume you rely on portfolio withdrawals or other sources to cover income needs until benefits begin
• Between 62 and 70: If you retire in this range, we assume you claim benefits in your retirement year  unless you specify a different age. Delaying benefits generally increases monthly payouts. 
• After Age 70: There is no financial advantage to delaying claiming Social Security benefits past age 70. If you retire past age 70, we assume any benefits received before retirement are spent, not saved.
• Spousal Benefits: If your spouse retires earlier than you, we assume their benefits are spent rather than invested, meaning they don’t affect your plan or portfolio growth.

Cost of Living Adjustments (“COLA”)

Social Security payments include an annual COLA, which adjusts for inflation. We assume COLAs rise at the same rate as inflation unless you adjust this assumption in your Betterment account.

Adjusting for Social Security Shortfalls

Due to  projected deficits in the Social Security trust fund, some clients prefer to plan more conservatively.  SSA estimates suggest younger workers may only receive 75% of calculated benefits in your plan. You can adjust this assumption as part of your PRP goal settings. 

Additional Assumptions in the Social Security Calculations

We apply several key assumptions when estimating your Social Security income:

• Full Retirement Age: Determined using SSA rules based on your date of birth.
• Salary Growth: Defaults to 1% annually unless you specify a different rate. Note that SSA.gov’s benefits calculator assumes no income growth. We also use this rate in reverse to estimate your earnings history (i.e., lower income in earlier years). 
• Cost-of-Living Adjustments (“COLAs”):  Assumed to match your selected inflation rate, with a 2% default. 
• Custom Inputs: You can override your start age and benefit amount for both you and your spouse by going to:  Edit additional assumptions > About your income.
• Duration of Benefits: Social Security payments continue through each person’s life expectancy. However, if your spouse’s life expectancy extends beyond yours, we do not assume any benefits continue after death. No survivor or disability benefits are included in the projections.

Other Income Sources

You may also have other income in retirement, such as:

• Rental properties
• Pension payments
• Annuities. 

You can add these sources in your account under: Plan > Forecaster > Edit additional assumptions.  

Key Assumptions:

• These income sources begin at your retirement age.
• They are adjusted annually for inflation. 
• They end at your specified date of death. Your spouse's life expectancy is not considered. 
• We interpret these values in today’s dollars and adjust them for inflation during both accumulation and retirement phases.

Investment Income

If Social Security and other income sources  don’t fully cover your projected retirement spending, the shortfall is funded from withdrawals from your investment profile. 

Our model assumes:

• Withdrawals are made annually to fill the gap.
• Taxes are factored in.
• Market variability is taken into account to help adjust for long-term sustainability.

C. Preparing for Bad Scenarios

Running out of money in retirement is one of the most serious risks retirees face. Because markets can be unpredictable, Betterment uses conservative market return assumptions during retirement to help estimate how much you’ll need to have saved by the time you retire. 

These conservative assumptions also guide how we estimate retirement withdrawals or liquidations of investments. For PRP goals, Betterment assumes a gradual withdrawal strategy (unlike a lump-sum withdrawal for a Major Purchase goal, like a home). 

Safe Withdrawal Guidance

If you're already retired, Betterment provides guidance on a monthly “safe withdrawal” amount—the amount you can withdraw while maintaining at least a 96% likelihood of not running out of money by the end of your retirement time horizon.

This safe withdrawal amount is based on the following assumptions:

• You adjust your withdrawal rate and portfolio allocation according to our advice at least once per month.
• You do not live past your specified “plan-to-age.”
• Your investments follow Betterment’s current portfolio strategy. If your strategy changes, results may differ. Our calculations will always reflect your current portfolio.
• For external linked accounts (including cash or crypto holdings), we apply the assumptions described in the Goal Projection and Advice Disclosure. We reflect only the current balance plus any planned annual contributions, with no growth or loss projections.
• Withdrawal advice and related charts are presented in real (inflation-adjusted) terms, using a default 2% inflation rate.
• The default time horizon (“plan-to-age”) is:
  
  
  • Age 90, if you are currently between ages 40 and 80
  • Your current age + 50, if younger than 40
  • Your current age + 10, if older than 80
  • You may enter a different plan-to-age, and we’ll use your custom input.

D. Accounting for Taxes on Withdrawals in Retirement

Projecting future taxes is inherently uncertain. Betterment cannot predict future tax law, your exact retirement situation, or how your investments will perform. Still, completely ignoring taxes would lead to inaccurate planning.

Instead, we use reasonable, conservative assumptions to estimate your potential tax liability in retirement, so we can better calculate how much you need to save.

How We Estimate Your Retirement Tax Rate

Your estimated tax rate is based on:

• Your expected retirement spending (see Section I)

• Your state of residence 

• Standard deductions for your marital status

We apply this tax rate to withdrawals from your savings, whether they are:

• Existing account balances
• Future contributions
• Held at Betterment or external institutions

Each account type is handled differently based on what we know. 

Projecting Current Retirement Balances

Traditional IRAs and Employer 401(k) Plans

• No taxes are assumed during the saving phase.
• In retirement, we assume you’ll pay your average tax rate on the full withdrawal amount.
• We assume these accounts have zero cost basis, meaning all funds are taxable.

Taxable Accounts

• While saving, we assume a 0.92% lower return than for a tax-advantaged account to account for taxes on dividends and realized gains. Learn more in our guide to after-tax returns.
  
• Upon withdrawal, we assume zero cost basis and apply the long-term capital gains rate on the entire balance, based on your projected income.

Roth Accounts

• No taxes are assumed during saving or withdrawal, since taxes are already paid before contributing.

If your retirement planning goal incorporates a tax coordinated portfolio, please review our TCP disclosures. 

Linked or Connected External Accounts

You can also connect external accounts to your Betterment profile (such accounts, “connected accounts”) or to a specific goal (such connected accounts linked to a specific goal, “linked accounts”). To add a linked account to your PRP goal, you can go to your account and add them via Plaid or add them as manually synced accounts. With respect to any linked cash accounts or accounts that hold crypto (as to which we do not project growth or losses), we assume that you take withdrawals at an even pace over the course of your retirement, regardless of whether you retire before or after you are eligible to receive Social Security. For more information about external accounts, including connected accounts and linked accounts, please review our Goal Projections & Advice Disclosure. Some manually synced accounts are assumed to have no fund fees.

Projecting Future Retirement Contributions

For future retirement savings (e.g., deposits into Betterment IRAs or taxable accounts), we:

• Assume all withdrawals are taxed at your average tax rate during retirement.
• Recognize that this may overestimate taxes in some cases (e.g., all funds in a Roth IRA).

We apply the following formula to adjust your projected savings need:

After-Tax Balance Needed / (1 - Avg. Tax Rate) = Pre-Tax Balance Required

Example:
If you need $1,000,000 after-tax and your average tax rate is 25%, you'll need to save:

$1,000,000 / (1 - 0.25) = $1,333,333 

4. Calculating Required Savings

Once Betterment estimates your target retirement balance, our retirement planning calculator calculates how much you need to save – monthly or annually – to reach that goal.

The savings amount depends on three key variables:

• Time until retirement
• Your inherent risk level
• How certain you want to be that you’ll reach your goal.

Betterment’s default risk recommendation for your PRP goal is based on your time until retirement, but you can adjust your portfolio allocation to reflect your personal preferences.

If you follow Betterment's recommended allocation of stocks and bonds, you can opt to have your risk level automatically adjusted as you approach retirement.

Betterment’s default retirement savings advice for PRP goals is designed to provide you a 60% probability of reaching your target balance- more conservative than many basic retirement calculators, which often assume an average return (or a 50% chance of success).

Shorter ­time horizons, less risk tolerance, and greater certainty will all lead Betterment to recommend higher savings amounts. 

5. Retirement Account Savings (How to Save)

Saving intelligently for retirement can be boiled down to maximizing expected spending in retirement per dollar saved today. Prioritizing which accounts you save into depends on your specific tax situation and access to retirement accounts. Betterment provides clients with retirement savings guidance labeled “How to Save,” when reviewing your PRP goal. Betterment is not a tax advisor and does not cover all potential accounts, nor do we have your tax return and all details about your situation. So, Betterment’s guidance for PRP goals only incorporates the linked accounts synced to your PRP goal, as well as any Betterment accounts within your PRP goal. Betterment does not provide investment strategy recommendations related to opening a specific traditional or Roth retirement account type, but does provide guidance on eligibility. The retirement account type eligibility guidance should not be considered personal tax or investment advice. Contact a qualified tax advisor to understand your personal situation. 

A. Identifying Employer-Sponsored Retirement Savings

Our “How To Save” retirement account suggestions are based on your eligibility to take advantage of different retirement account types according to IRS rules, based on your income, your marital status, and your eligibility for certain employer plans—depending on if you have synced your employer plan (electronically or manually) as a linked account. If you do not add existing plans, we assume you do not have them available. 

B. Accurately Assessing Modified Adjusted Gross Income (MAGI)

By default, we assume that your MAGI for Individual Retirement Account (“IRA”) limit calculations are equal to the pre­-tax income you provide us with when setting up your PRP goal. You can adjust your Adjusted Gross Income (“AGI”) and add “above-­the-­line” deductions you take on page one of Form 1040, such as IRA deductions, student loan interest, Health Savings Account (“HSA”) contributions, and others. See IRS Pub 590a for details on what makes up MAGI for IRA qualification limits. You can enter these values under “Edit additional assumptions > About your taxes” when reviewing your PRP goal on the Plan tab in your Betterment account. You should keep these values up to date each year to get accurate guidance from Betterment. If these values change during the year but you do not update them, the guidance may not be applicable to your changed circumstances. Contact a qualified tax advisor or investment adviser if you have questions. 

C. Account Types Included in Prioritization Eligibility Determinations

Betterment’s retirement account eligibility guidance is limited to eleven account types that are typically available to most people: traditional IRA (deductible and non-­deductible contributions), Roth IRA, a spouse’s traditional IRA, a spouse’s Roth IRA, employer-sponsored defined contribution retirement plans (e.g., 401(k), 403(b)) or for those who qualify, Individual Solo 401(k) Plans, HSA, a spouse’s HSA, and taxable investment accounts. We do not consider the possibility of after-­tax contributions to employer plans, since relatively few plans offer them.

If you are a self­-employed individual, you should know that we do not include SEP IRAs in Betterment’s retirement eligibility guidance, though you can open a 5305 SEP IRA at Betterment. If you’d like to use a SEP IRA, this account can be put toward a PRP goal, but it will not be included in Betterment’s “How to Save” tool.

If you are a self-employed individual, you have access to various other types of retirement accounts. These include SIMPLE IRAs, SIMPLE 401(k)s, Defined Benefit Plans, and more. Betterment does not support these types of accounts, and thus they are not included in our prioritization of which accounts you are eligible to save for retirement.

HSAs are only available to IRS eligible individuals with qualifying high-deductible health insurance plans. HSAs allow for pre-tax contributions and tax-deferred growth. Additionally, if withdrawals from the account are used for qualified healthcare expenses, the withdrawal is also income tax-free. If you include your HSA in your PRP goal, Betterment makes the assumption that you will be using the account as a vehicle for long-term healthcare savings, and that any withdrawals from the HSA will be for qualified medical expenses. 

D. Prioritization Based on Matching Contributions and Tax-Advantaged Accounts

As mentioned above, our guidance seeks to maximize your expected spending in retirement per dollar saved today. 

We account for the potential positive impact of an employer match.

As long as you sync your external employer-sponsored retirement plan as a linked account or if you’re enrolled in a Betterment at Work 401(k) plan, Betterment will use the information we have on your employer match percentage and maximum contribution percentage. For Betterment at Work 401(k) plan participants, we prompt you to tell us your match information. If your 401k has a fixed match, we use a weighted average of your plan’s matching tiers. If you indicate you have a match but do not provide those details, we assume your employer matches 50% of your contributions up to 6% of your compensation.

If you specify that you have a “discretionary match,” meaning your employer may match, we also prioritize recommending that you contribute to the employer plan up to the amount needed to maximize the potential match, since there is some chance of match. Again we default to the most common matching scheme above (50% of 6% of compensation), unless otherwise specified by you.  

External linked retirement account assumptions.

We only prioritize account types we expect you to be eligible for.

We use the following assumptions to determine which account types you’re actually eligible to contribute to.

• We utilize IRS guidelines for the most current tax year for contribution limits and income phaseouts. We do not consider contributions  made in the calendar year following the current tax year.
• We factor in cost of living adjustments using an estimate of 2% per year.
• We estimate your marginal federal income tax rate based on your gross income, marital status, standard deduction, age, and age of spouse. If you itemize deductions or have dependents, you can provide these values to make the estimate more accurate by selecting “Edit additional assumptions.” We include state income tax for the state on your account profile, but we do not include local tax. We assume you are not eligible for the increased standard deduction associated with being legally blind or otherwise disabled. You can also override this estimation entirely by adjusting the “Federal Tax Bracket” selection in Settings under “Financial Information.”
• We estimate your tax rate during retirement from the desired income you specify, leaving out wage deductions for Social Security and Medicare. This conservatively assumes you will be paying full taxes on all income sources, but may not be true if your Social Security is not taxable, or if your income needs are met from tax­-free sources like Roth IRA withdrawals.
• We do not factor in early withdrawal penalties, and as a result we may not fully maximize expected spending in retirement per dollar saved.

We do not factor in super catch-up contributions for those who are 61-63 as part of SECURE ACT 2.0. 

E. Advantages of Employer Plans that Are Not Considered in Betterment’s Retirement Tool

While not an input into our guidance for any individual, there are other potential features of employer-sponsored plans, 401(k) accounts in particular, that are not incorporated into Betterment’s recommendations. Here’s a brief list that may be worth considering depending on individual circumstances:

• 401(k) accounts offer greater protection from creditors in the case of bankruptcy.
• You may have the ability to take penalty­-free distributions at an earlier age or to defer minimum required distributions.
• Some 401(k) accounts allow for loans or distributions in a broader set of circumstances.
• Some 401(k) plans offer specific educational and advisory services to participants. The desirability of contributing to a 401(k) may also depend on the range of investment options offered within the 401(k).

To learn more about these various benefits, you should contact your plan administrator about whether such features are relevant to your personal situation. In our retirement advice, we assume that the fees applicable to Betterment at Work 401(k) plans apply, and do not consider the actual fees on investment options available in externally synced employer-sponsored plans. 

6. Interpreting Your Personalized Retirement Plan Projection Chart

As described above, for PRP goals, Betterment’s retirement planning advice factors in other variables, such as the impact of Social Security, other income streams like rental real estate, as well as future spending, tax rates, and inflation. When viewing your PRP goal and our advice on retirement saving and spending, you should note several assumptions and aspects of our visualization.

• The PRP goal projection graph shows pre-tax investment growth, in real dollars.
• PRP goals recommended monthly contributions estimate is based on a 60% likelihood of the portfolio value reaching the goal target at the end of the investment term and is shown in nominal (i.e., not inflation-adjusted) terms.
• For a client’s first retirement goal, the goal will be shown as “On Track” when the total projected portfolio value exceeds the goal target assuming slightly below average market performance. This is equivalent to a likelihood of 60% and above of reaching the goal target. The goal is shown as “Off Track” when the future projected portfolio value (i.e. current balance plus future contributions, plus investment growth) is not sufficient to reach the goal target assuming slightly below average market performance. This is equivalent to having less than 60% likelihood of reaching the goal target.
• Goal projections are assumed to be net of Betterment’s management fee, and if you are a client on Betterment for Advisors, any management fee charged by the third-party Advisor. For more details about the fee assumptions made for advised clients, please review Betterment’s Goal Projection Disclosure.
• All current investments and recommended additions to your accounts from present day forward assume the expected returns of your selected portfolio strategy according to your current target allocation. This includes external linked accounts, regardless of whether they have the same allocation as your current target allocation, with the exception of linked cash accounts or accounts that hold crypto assets, which are assumed to have a flat balance based on currently available balance information, plus any planned annual contributions. For more details about the assumptions and limitations of our projections, please review Betterment’s Goal Projection Disclosure.
• If you have opted in to having Betterment automatically adjust your allocation, our goal projections will include adjustment over time.
• The contributions line on the graph (shown in Forecaster), reflects pre-tax dollars and is not inflation-adjusted.
• Personalized retirement plan goals also include a present value calculation for Projected Spending Power that reflects the present value of the future projected balance, and Desired Spending Power, each of which is adjusted for taxes and inflation (i.e., the calculation reflects after-tax and inflation-adjusted dollars). All other assumptions in our Goal Projections & Advice Disclosure
• Projected withdrawals during retirement assume that you would follow Betterment’s safe withdrawal advice and assume a cost of living adjustment (“COLA”) in line with inflation^[1].

^[1] https://www.federalreserve.gov/economy-at-a-glance-inflation-pce.htm