Portfolio Strategies Advice and Projection Methodology
Betterment’s Advice tool provides allocation, savings and withdrawal advice alongside a projection graph. The graph is intended to show the possible future investment values in order to illustrate the general impact of different contribution and withdrawal choices, investment time horizons, and portfolio allocations. Actual individual investor performance has and will vary depending on market performance, the time of the initial investment, amount and frequency of contributions or withdrawals, intra-period allocation changes and taxes. An indication of “On Track” is not a guarantee of achieving a goal in the future. Acting on savings and withdrawal advice is not a guarantee that goals will be met or that the investment will meet cost of living needs throughout one’s life. Also see our Terms and Conditions.
Projection methodology and assumptions
- The expected portfolio returns used in the portfolio value projection results are based on the expected returns and risk free rate assumptions for your target portfolio allocation. This portfolio is set by the user-selected allocation to “stocks” and “bonds”. The allocation choice corresponds to weights of the underlying Exchange Traded Funds (ETFs), as defined in your chosen portfolio. The recommended allocation mix is based on user investment profile including age, the goal type and time horizon.
- The returns used are net of the Betterment fee assessed on that user’s account (0.25%), and assume that fee holds throughout the investment.
- Monthly Contributions or Withdrawals, if specified, are assumed to be made at the end of the month.
Savings advice methodology and assumptions
- The monthly contributions estimate is based on a 60% likelihood of the portfolio value reaching the goal target at the end of the investment term.
- Calculations assume the current portfolio. If the portfolio changes over time or has different expected returns, outcomes may be adjusted. Calculations will always be updated based on the current portfolio held.
- Savings advice and graphs are in nominal terms.
Withdrawal advice methodology and assumptions
- The monthly safe withdrawal is based on a 99% likelihood of having $0 or more at the end of the time horizon, assuming the following assumptions hold true.
- The safe withdrawal amount assumes the user adjusts the withdrawal rate and allocation according to our advice at least once per year
- The safe withdrawal amount assumes the user does not live past the specified time horizon (“plan-to-age”)
- Calculations assume the client’s portfolio unless otherwise disclosed in the client application. If the portfolio changes over time or has different expected returns, outcomes may be adjusted.
- Calculations will always be updated based on the current portfolio held.
- Withdrawal advice and graphs are in real terms, using an inflation rate of 3%
- The default time horizon (“plan-to age”) is 90 years of age, or age + 50 years if younger than 40, or age + 10 if older than 80. The model will use this value or the value entered by the user.
The Graph exhibits the possible range of projected portfolio values using color.
- The lighter shaded region indicates the range within which there is 95% likelihood of the projected portfolio value. This means that there is a 2.5% likelihood of portfolio values greater than the top of this region, and a 97.5% likelihood of portfolio values at least as high as the bottom of this region. Portfolio values outside the 95% region may occur under extreme market events.
- The darker inner shaded region indicates the range within which there is 80% likelihood of the projected portfolio value. This means that there is a 10% likelihood of portfolio values greater than the top of this region, and a 90% likelihood of portfolio values at least as high as the bottom of this region.
- All regions and lines are graphed based on monthly data for the entire time period selected, summarized to 50 evenly spaced points with B-spline interpolation.
Goal Status (Savings Goals) – On Track or Off Track
The Betterment Savings Advice tool constantly tracks the portfolio performance and indicates the ability of the portfolio to reach the Goal target, assuming average market performance. The portfolio performance is categorized as “On Track” or “Off Track”, and Betterment makes recommendations to increase the likelihood of reaching the Goal target. The portfolio performance is “On Track” when the total projected portfolio value exceeds the Goal target assuming average market performance. This is equivalent to a likelihood of 50% and above of reaching the Goal target. The portfolio performance is “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 average market performance. This is equivalent to having less than 50% likelihood of reaching the Goal target. Betterment provides advice for bringing the goal back on track in three areas – either increasing the amount of future monthly contributions, or increasing the term of the investment or increasing the current balance in the account by making a one-time deposit. These recommendations are based on a relatively conservative stance, e.g. a 60% likelihood of projected portfolio value to reach the Goal target, compared to the 50% chance used by other models.
- The Goal target is a user input and may not be sufficient to provide income for actual spending or retirement income needs.
- The model does not account for any taxes. All values are assumed to be pre-tax.
- The model does not account for forced withdrawals such as Required Minimum Distributions that must be taken from Traditional IRAs after age 70.5.
- The model does not account for auto-deposits that are skipped.
- The savings model is in nominal terms and therefore does not have a direct inflation assumption. (The withdrawal model is in real terms, and uses a 3% inflation assumption).
- The withdrawal model does not take into account other sources of income outside the Betterment account. A full income plan should include all sources of income and a spending needs analysis.
- Past performance is not indicative of future results. These projections do not guarantee investment performance.
- Extreme market conditions, sustained high inflation, or other unforeseen events may reduce portfolio value and withdrawals. Income is not guaranteed.