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Betterment Raises $160 Million in Growth Capital Sep 29, 2021 12:00:00 AM Today, we're announcing that Betterment has secured $160 million in growth capital comprised of a $60 million Series F equity round and a $100 million credit facility. This moment comes as Betterment is the largest independent digital investment advisor with $32 billion in assets under management and nearly 700,000 clients. The Series F round was led by Treasury, with participation from existing investors, including Kinnevik, Bessemer Venture Partners, Francisco Partners, Menlo Ventures, Anthemis Group, Globespan Capital Partners, Citi Ventures, and The Private Shares Fund, as well as new investors Aflac Ventures and ID8 Investments. The financing valued the company at nearly $1.3 billion. The $100 million credit facility was established with ORIX Corporation USA’s Growth Capital group and Runway Growth Capital. ORIX’s Growth Capital group acted as lead arranger and agent. The additional funding will be used to accelerate the record growth Betterment has delivered year-to-date across its core retail investment products and advisor solutions, and particularly its rapidly growing 401(k) offering for small and medium sized businesses. “From day one, Betterment’s mission has been to make people’s lives better with easy-to-use, personalized investment solutions. The record growth and demand for Betterment products and services proves how well we deliver,” said Sarah Levy, Betterment's CEO. “We are thrilled to have the support of new and existing investors who believe in our business model and are excited by the opportunity to support our growth. We’re using these funds to further cement our category leadership with rapid innovation on top of our already differentiated product suite and unique, multi-pronged distribution model that serves retail investors, advisors and small businesses.” “I’ve seen first hand the strength of Betterment’s business model since its founding over a decade ago. Participating in Betterment’s next chapter as an investor is an exceptional opportunity,” said Eli Broverman, a co-founder of Betterment and a founder of Treasury. “I believe in Betterment’s team and vision, and we are thrilled to support the company’s future success.” To all of our customers, we couldn't have achieved this without you. Thank you!

Buying A Home: Down Payments, Mortgages, And Saving For Your Future Sep 7, 2021 12:00:00 AM Your home may be the largest single purchase you make during your lifetime. That can make it both incredibly exciting and nerve wracking. Purchasing a primary residence often falls in the grey area between a pure investment (meant to increase one’s capital) and a consumer good (meant to increase one’s satisfaction). Your home has aspects of both, and we recognize that you may purchase a home for reasons that are not strictly monetary, such as being in a particular school district or proximity to one’s family. Those are perfectly valid inputs to your purchasing decision. However, as your financial advisor, this guide will focus primarily on the financial aspects of your potential home purchase: We’ll do this by walking through the five tasks that should be done before you purchase your home. 1. Build your emergency fund. Houses are built on top of foundations to help keep them stable. Just like houses, your finances also need a stable foundation. Part of that includes your emergency fund. We recommend that, before purchasing a home, you should have a fully-funded emergency fund. Your emergency fund should be a minimum of three months’ worth of expenses. How big your emergency fund should be is a common question. By definition, emergencies are difficult to plan for. We don’t know when they will occur or how much they will cost. But we do know that life doesn’t always go smoothly, and thus that we should plan ahead for unexpected emergencies. Emergency funds are important for everyone, but especially so if you are a homeowner. When you are a renter, your landlord is likely responsible for the majority of repairs and maintenance of your building. As a homeowner, that responsibility now falls on your shoulders. Yes, owning a home can be a good investment, but it can also be an expensive endeavor. That is exactly why you should not purchase a home before having a fully-funded emergency fund. And don’t forget that your monthly expenses may increase once you purchase your new home. To determine the appropriate size for your emergency fund, we recommend using what your monthly expenses will be after you own your new home, not just what they are today. Open your Safety Net Get Started 2. Choose a fixed-rate mortgage. According to 2020 survey data by the National Association of Realtors®, 86% of home buyers took out a mortgage. This means that most people have to choose which type of mortgage is appropriate for them, and one of the key factors is deciding between an adjustable-rate mortgage (ARM) and a fixed-rate mortgage (FRM). Betterment generally recommends choosing a fixed-rate mortgage. Here’s why: As shown below, ARMs usually—but not always—offer a lower initial interest rate than FRMs. Source: Federal Reserve Bank of St. Louis. Visualization of data by Betterment. But this lower rate comes with additional risk. With an ARM, your monthly payment can increase over time, and it is difficult to predict what those payments will be. This may make it tough to stick to a budget and plan for your other financial goals. Fixed-rate mortgages, on the other hand, lock in the interest rate for the lifetime of the loan. This stability makes budgeting and planning for your financial future much easier. Locking in an interest rate for the duration of your mortgage helps you budget and minimizes risk. Luckily, most home buyers do choose a fixed-rate mortgage. According to 2020 survey data by the National Association of Realtors®, 89% of home buyers who financed their home purchase used a fixed-rate mortgage, and this was very consistent across all age groups. Research by the Urban Institute also shows FRMs have accounted for the vast majority of mortgages over the past 2 decades. Source: National Association of Realtors®, 2020 Home Buyers and Sellers Generational Trends. Visualization of data by Betterment. 3. Save For The Upfront Costs: Down Payment And Closing You’ll need more than just your emergency fund to purchase your dream home. You’ll also need a down payment and money for closing costs. Betterment recommends making a down payment of at least 20%, and setting aside about 2% of the home purchase for closing costs. A 2020 National Association of Realtors® survey shows the median down payment amount for home purchases is 12%. As the chart below shows, younger buyers tend to make smaller down payments than older buyers. Source: National Association of Realtors®, 2020 Home Buyers and Sellers Generational Trends.  Visualization of data by Betterment. But is making an average down payment of only 12% a wise decision? It is true that you are often allowed to purchase a home with down payments far below 20%. For example: FHA loans allow down payments as small as 3.5%. Fannie Mae allows mortgages with down payments as small as 3%. VA loans allow you to purchase a home with no down payment. However, Betterment typically advises putting down at least 20% when purchasing your home. A down payment of 20% or more can help avoid Private Mortgage Insurance (PMI). Putting at least 20% down is also a good sign you are not overleveraging yourself. Lastly, a down payment of at least 20% may help lower your interest rate. This is acknowledged by the CFPB and seems to be true when we compare interest rates of mortgages with Loan-to-Values (LTVs) below and above 80%, as shown below. Source: Federal Reserve Bank of St. Louis. Visualization of data by Betterment. Depending on your situation, it may even make sense to go above a 20% down payment. Just remember, you shouldn’t put every spare dollar you have into your home, as that will likely mean you don’t have enough liquid assets elsewhere for things such as your emergency fund and other financial goals like retirement. Closing Costs In addition to a down payment, buying a home also has significant transaction costs. These transaction costs are commonly referred to as “closing costs” or “settlement costs.” Closing costs depend on many factors, such as where you live and the price of the home. ClosingCorp, a company that specializes in closing costs and services, conducted a study that analyzed 2.9 million home purchases throughout 2020. They found that closing costs for buyers averaged 1.69% of the home’s purchase price, and ranged between states from a low of 0.71% of the home price (Missouri) up to a high of 5.90% of the home price (Delaware). The chart below shows more detail. Source: ClosingCorp, 2020 Closing Cost Trends. Visualization of data by Betterment. As a starting point, we recommend saving up about 2% of the home price (about the national average) for closing costs. But of course, if your state tends to be much higher or lower than that, you should plan accordingly. In total, that means that you should generally save at least 20% of the home price to go towards a down payment, and around 2% for estimated closing costs. With Betterment, you can open a Major Purchase goal and save for your downpayment and closing costs using either a cash portfolio or investing portfolio, depending on your risk tolerance and when you think you’ll buy your home. 4. Think Long-Term We mentioned the closing costs for buyers above, but remember: There are also closing costs when you sell your home. These closing costs mean it may take you a while to break even on your purchase, and that selling your home soon after is more likely to result in a financial loss. That’s why Betterment doesn’t recommend buying a home unless you plan to own that home for at least 4 years, and ideally longer. Unfortunately, closing costs for selling your home tend to be even higher than when you buy a home. Zillow, Bankrate, NerdWallet, The Balance and Opendoor all estimate them at around 8% to 10% of the home price. Betterment’s research analyzed closing costs for both buying and selling, the opportunity costs of potentially investing that money, and more. It shows that the average expected breakeven time is about 4 years as shown below. Of course, this will depend on many factors, but is helpful as a general guide. Thus, if you do not plan to own your home for at least 4 years, you should think carefully on whether buying a home is a smart move at this point in your life. Source: Betterment, Is Buying A Home A Good Investment? Visualization of data by Betterment. Luckily, it appears that most home buyers stay in their homes beyond our 4-year rule of thumb. The chart below is built from 2020 survey data by the National Association of Realtors®. It shows how long individuals of various age groups stayed in their previous homes before selling them. Across all age groups, the median length of time was 10 years, which is more than double our 4-year rule of thumb. That’s excellent. However, we can see that younger buyers, on average, come in well below the 10-year median, which indicates they are more at risk of not breaking even on their home purchases. Source: National Association of Realtors®, 2020 Home Buyers and Sellers Generational Trends. Visualization of data by Betterment. Some things you can do to help ensure you stay in your home long enough to at least break even include: If you’re buying a home in an area you don’t know very well, consider renting in the neighborhood first to make sure you actually enjoy living there. Think ahead and make sure the home makes sense for you 4 years from now, not just you today. Are you planning on having kids soon? Might your elderly parents move in with you? How stable is your job? All of these are good questions to consider. Don’t rush your home purchase. Take your time and think through this very large decision. The phrase “measure twice, cut once” is very applicable to home purchases. 5. Calculate Your Monthly Affordability The upfront costs are just one component of home affordability. The other is the ongoing monthly costs. Betterment recommends building a financial plan to determine how much home you can afford while still achieving your other financial goals. But if you don’t have a financial plan, we recommend not exceeding a debt-to-income (DTI) ratio of 36%. In other words, you take your monthly debt payments (including your housing costs), and divide them by your gross monthly income. Lenders often use this as one factor when it comes to approving you for a mortgage. Debt Income Ratios There are lots of rules in terms of what counts as income and what counts as debt. These rules are all outlined in parts of Fannie Mae’s Selling Guide and Freddie Mac’s Seller/Servicer Guide. While the above formula is just an estimate, it is helpful for planning purposes. In certain cases Fannie Mae and Freddie Mac will allow debt-to-income ratios as high as 45%-50%. But just because you can get approved for that, doesn’t mean it makes financial sense to do so. Keep in mind that the lender’s concern is your ability to repay the money they lent you. They are far less concerned with whether or not you can also afford to retire or send your kids to college. The debt to income ratio calculation also doesn’t factor in income taxes or home repairs, both of which can be significant. This is all to say that using DTI ratios to calculate home affordability may be an okay starting point, but they fail to capture many key inputs for calculating how much you personally can afford. We’ll outline our preferred alternative below, but if you do choose to use a DTI ratio, we recommend using a maximum of 36%. That means all of your debts—including your housing payment—should not exceed 36% of your gross income. In our opinion, the best way to determine how much home you can afford is to build a financial plan. That way, you can identify your various financial goals, and calculate how much you need to be saving on a regular basis to achieve those goals. With the confidence that your other goals are on-track, any excess cash flow can be used towards monthly housing costs. Think of this as starting with your financial goals, and then backing into home affordability, instead of the other way around. Wrapping Things Up If owning a home is important to you, you can use the five steps in this guide to help you make a wiser purchasing decision. Have an emergency fund of at least three months’ worth of expenses to help with unexpected maintenance and emergencies. Choose a fixed-rate mortgage to help keep your budget stable. Save for a minimum 20% down payment to avoid PMI, and plan for paying ~2% in closing costs. Don’t buy a home unless you plan to own it for at least 4 years. Otherwise, you are not likely to break even after you factor in the various costs of homeownership. Build a financial plan to determine your monthly affordability, but as a starting point, don’t exceed a debt-to-income ratio of 36%. If you’d like help saving towards a down payment or building a financial plan, sign up for Betterment today. Save for your home with Betterment Get Started

Three LGBTQ+ Influencers Share Tips For Successful Financial Planning Aug 23, 2021 12:00:00 AM LGBTQ individuals and same-sex couples face unique financial challenges when it comes to family planning, healthcare, and more. Here’s how three individuals are preparing for a secure and meaningful financial future. We sat down with three influencers to pull back the curtain on some of the unique factors of LGBTQ+ financial planning, and what that planning, saving, and investing actually looks like. CHRISTOPHER RHODES What’s a financial goal that you’re currently working towards? Or, what’s a financial goal you’re proud of achieving? Saving for top surgery was probably the largest financial goal I've achieved thus far in my life. Top surgery is a huge part of many trans masculine people's lives, and that surgery was incredibly affirming for me and life changing. My insurance did not cover the procedure so I was left with the full amount to cover on my own, which can be quite daunting. What tools and habits helped you reach that goal? I am self-employed and so saving money can be difficult, but the company I run helps trans folks afford gender-affirming surgeries. By the time I was saving money for top surgery we had partnered with five individuals before me to help them reach their financial goals. My brand helped raise about half of the funds I needed for my surgery, and besides that I used my skills to help raise the funds—I did custom art, tattoo designs, and social media work for money. I also was just a lot more conscious about what I was putting away in savings at the time and for what. Nowadays, my biggest goal is saving for the future: Hopefully saving to buy a house, and I do so by having a specific goal and timeline for the amount of savings I have in my account. By dedicating certain paychecks specifically to paying off debt or savings, versus for spending. What would you tell your younger self about money? Money is stressful, and a little bit complicated. I don't think anyone when they're younger quite comprehends how expensive being an adult is. But I think I'd tell myself that it's possible to do what you love and still be able to afford a living— you just have to figure out how to make that work for you, and be responsible and smart about where and how and why you spend your money. Has your identity influenced your relationship with money in any way? Why or why not? I do think that in some aspects my relationship with money is definitely different than it would be if I wasn't trans. The costs of transitioning add up, between doctor's visits, blood work, weekly testosterone injections, surgeries, the legal costs of changing my name and gender marker, not even to mention the costs of family planning one day, etc. I had to account for saving up for things that felt very "adult" starting when I was in my young 20's. ZOE STOLLER What's a financial goal you are currently working towards, or what's one that you've already achieved and are really proud of? I’m officially going to graduate school! I’ve left my 9 to 5 marketing job, and am working more fully as a content creator. I’m saving for graduate school and it’s a lot of work, but I’m confident that I’ll achieve my financial goal. I had known before I decided to enroll that my full time job wasn’t as fulfilling as I wanted it to be, and I recently started making enough money as a content creator to leave. So all the stars aligned, where I was able to leave my job, do content creation full time, and go back to school for my graduate degree. What habits or tools are helping you reach that goal? I’ve gotten very into spreadsheets lately—even though I’m not confident with numbers or money. It’s been a year of transition for me to figure out exactly how to keep meticulous track of my income, my big expenses, and my savings. I’ve been trying to be really proactive, financially. What would you tell your younger self about money? I was very clueless about money, but I have a lot more knowledge now. Growing up, I didn’t understand saving, investing, or general money management. I’d tell my younger self that it’s okay not to know those things, but life is about learning and growing, and going on different journeys. Just because younger me wasn’t very financially aware, doesn’t mean that it’s always going to be that way. And now, I feel much more knowledgeable about money—I’m still learning a lot, but I’m much more confident. Has your identity influenced your relationship with money? Why or why not? As I’ve discovered my lesbian and non-binary identities, I’ve definitely thought about how money will play a role in my future. There are so many more expenses that come with having a family or getting pregnant when you’re LGBTQ. I want a family, but I’ll probably have to do fertility treatments or maybe adoption. There are so many added obstacles that require money when you can’t conceive with a partner, so I’ve been thinking about how to best prepare for that in my future. I want to be able to afford that, should I decide it’s in my future. Anything else you’d like to share with us? Wherever you are in your money and identity journeys, I have full confidence that you will make it through and achieve the goals you’ve set for yourself. GENVIEVE JAFFE What’s a financial goal that you’re currently working towards? Or, what’s a financial goal you’re proud of achieving? My wife and I are hoping to build our dream home next year, in 2022. We want to buy in a community around my home, and we want to be able to put down a lot of money. When we bought our first house, we only put down 10% and had to get a PMI. We’d like to not do that this time, so that’s a big financial goal right now. What tools and habits helped you reach that goal? We have two different investment accounts that we use for the house fund. One is super safe - not risky at all, because we want to be safe if anything should happen. I also have a moderately aggressive portfolio that I don’t manage myself. When COVID hit, it did take a downturn, so it’s important for us to have half in a safer type of investment. In terms of allocating my money, any time I have money coming in from my business, I put some aside into these accounts. My wife and I also have a 529 plan that we put money in for our kids at the end of every year. Additionally, my wife is very on top of our expenses and keeping track of our books. Almost every day she goes into all of our accounts to check balances, check for invoices, and double check our credit cards, student loans, etc. What would you tell your younger self about money? I grew up with working class parents. They traded money for hours, and that’s not a bad thing, but it’s not the way I wanted to live my life. So I actually got a job as a corporate lawyer and was miserable, but had a really great paycheck. I’d always learned that you work until you can retire and live off your 401K, and it wasn’t until I met my wife, who was an entrepreneur, that I realized that’s not how I had to live my life. So I’ve done a lot of mindset work around money, and getting rid of that old school belief that money doesn’t grow on trees. I try to really have a good relationship with money and remember that money is also an exchange of energy. I also just wanted to share that in 2015, I almost had to file for bankruptcy. I was not smart with my money at all. I’d been a corporate lawyer making a very nice, steady paycheck, and when I quit my job, the business that I started actually did very well. But it wasn’t this consistent substantial paycheck I was used to, and I hadn’t changed my habits or my lifestyle. SO I really had to learn quickly to be cognizant of the money that I have, and not rely on the money that I could potentially earn. I did not have to file bankruptcy, thank goodness. But, that fear is something that still lives within me—and now it’s really about being conscious of the money we have and the money we’re spending. Has your identity influenced your relationship with money in any way? Why or why not? We spent $50K+ having our children. I don't say this to freak anyone out but to help prepare you for potential costs that you could incur growing your family as an LGTBQ+ individual / couple / throuple, etc. We had no idea how much money we were about to drop when we started to grow our family. Our path to pregnancy wasn't super straightforward—we ended up doing 3 intrauterine inseminations (IUI), two egg retrievals, and three embryo transfers. Insurance didn't cover in vitro fertilization (IVF), stimulation meds (about $5K), egg retrieval ($11K), or transfer ($3K). We also had to buy sperm (they're about $1,000 per vial), go through tons of testing, and we each had to have surgery. Financially planning for a family is something that I stress people should start early. Seriously, ask for people to contribute to a baby fund for your engagement and wedding. Trust me, no one needs fancy dish-ware. Everyone loves babies and it's an incredible way to make everyone feel part of your journey!

How You Benefit Your Community By Investing Responsibly Aug 23, 2021 12:00:00 AM Betterment’s new Broad Impact Portfolio lets you invest in your community and the values you care about, while maintaining a diversified portfolio with low expenses. Most of the time, investing is talked about as an act of self-interest. “Earn more.” “Retire comfortably.” “Build your wealth.” But where does the money go? Those dividends and gains come from somewhere, don’t they? When you entrust your money to any bank or investment fund, it’s used to generate more value—either loaned out or invested in different companies, governments and other entities. The question for us as people who own those loans and investments is: Do those companies’ activities benefit our world and local communities or do they have a negative net impact? Investing responsibly is about steering cash to companies whose business practices are sustainable. Will you be giving your money to companies that extract profits from a community without benefiting society positively? Or, will you be fueling companies that have a positive social or environmental impact, that perhaps will help change our world for the better? We all know of companies we respect. Whether it’s the small construction firm that has grown with the small city it helped to build, or the Silicon Valley tech company that’s changing how we grow fruits and vegetables sustainably, socially responsible investing is about choosing these kinds of companies on a broader scale. How do you know companies are having a positive net impact? What’s challenging about building a sustainable investment portfolio is the reality that a large company’s impact on society is multi-faceted. One company may have excellent management, prioritizing diversity and giving back to their community, but whose operations still harm the environment. Another might be carbon neutral but has a poor record when it comes to how it treats its workers. That’s where targeting a broad impact can be a strong, balanced approach to socially responsible investing. Rather than prioritizing any one value over another, Betterment’s Broad Impact portfolio assembles funds with an ESG mandate (environmental, social, and governance) which equally weighs a company’s profile along all three pillars of ESG, and tilts towards companies with the best overall scores in each sector. We aim for the investments in your Broad Impact portfolio to represent the companies that have a broad positive impact across the global market. Cool, right? Having a broad impact is a way of accounting for the pros and cons of many different companies and making a balanced choice, while maintaining a diversified portfolio with low expenses. Start with the Broad Impact Portfolio to help grow your money responsibly. Regardless of how you choose to invest, Betterment aims to help you align your money with your values. That means not only offering a socially responsible investing portfolio, but also helping you identify your goals and invest for them appropriately. Learn more about our guidance and get started saving for your future. Higher bond allocations in your portfolio decreases the percentage attributable to socially responsible ETFs.

Why Exercising Your Power As An Investor Can Impact Climate Change Aug 23, 2021 12:00:00 AM Betterment’s new Climate Impact Portfolio lets you support areas of the economy that are working to mitigate climate change, while maintaining a diversified portfolio with low expenses. Climate change is arguably the paramount problem of our time. It can be overwhelming to think about how we, as individuals, can contribute to a solution beyond going to the polls. The reality is that we don’t have to rely solely on political figures to influence change: by being intentional about where we place our money, we collectively have a lot more power than we think. The purpose of climate-aware investing is to support areas of the economy that are working to mitigate climate change. That includes investing in companies with low carbon footprints, relative to their peers, and investing in global green bonds, which fund projects that advance alternative energy, energy efficiency, pollution prevention and control, sustainable water, green building, and climate adaptation. How Climate Investing Makes An Impact A financial plan with high investing fees and an undiversified portfolio isn’t a plan worth settling for. Nor is a plan that doesn’t align with your ideals. Today, the movement to combat climate change is no longer limited to public protests and petitions. Sustainable investing is a grassroots effort, driven by consumers who are steering support away from companies that aren’t part of the solution, in favor of ones that do. As more and more choose to invest this way, the collective effort can help accelerate the transition to a clean energy economy—not just in the U.S.—but worldwide. Here’s how: What does climate impact look like? Try reduced emissions and reliance on fossil fuels. Climate impact looks like offering more climate-aware alternatives. We know that increased carbon emissions caused by human activity directly contribute to global warming. Compared to the 100% stock Betterment Core portfolio, carbon emissions per dollar of revenue in the 100% stock Climate Impact portfolio are reduced by half. That means that our investment into portfolios with a climate focus helps grow companies committed to a low carbon economy, which can influence other companies to follow suit. By investing in the Climate Impact portfolio, you are actively divesting from some of the companies most reliant on fossil fuel, while actively favoring those who are best at cutting their carbon emissions. That’s why we at Betterment are building a future where investors don’t have to choose between their values and their performance goals of globally diversified market returns. Now, they can have both. Start with the Climate Impact Portfolio to help grow your money responsibly. Regardless of how you choose to invest, Betterment aims to help you align your money with your values. That means not only offering a socially responsible investing portfolio, but also helping you identify your goals and invest for them appropriately. Learn more about our guidance and get started saving for your future. Higher bond allocations in your portfolio decreases the percentage attributable to socially responsible ETFs.

How Investing In Gender and Racial Equity Is A Step Towards Social Change Aug 23, 2021 12:00:00 AM Betterment’s new Social Impact Portfolio lets you support companies who promote gender and racial equity, while maintaining a diversified portfolio with low expenses. When Breonna Taylor and George Floyd were murdered earlier this year, the U.S. entered a period of mourning and social reckoning not felt since the murder of Michael Brown and subsequent rise of the Black Lives Matter movement in 2014. Amidst the clamor for justice and accountability, there arose another distinct call-to-action for corporations to invest more in their Black and brown employees, to call out racism and discrimination, and commit funds to organizations working for social justice. Here at Betterment, we quickly realized that our highest impact action might be to allow investors to use their dollars to effect change. Investing in companies that care about equality, made easy. In light of this, we asked ourselves how we could create a new portfolio with equality for women and Black and brown Americans at the heart of its mandate, while also staying true to our fiduciary duty of low costs and global diversification. We found the answer by augmenting our Broad Impact portfolio to include two additional funds: Impact Shares' NAACP Minority Empowerment ETF (NACP) and State Street Global Advisors' Gender Diversity Index ETF (SHE). NACP allocates money towards companies that rank highly on their diversity policies and on how they engage with communities of color. SHE selects companies who lead their peers in terms of women in senior leadership positions. These two funds, alongside the other funds with an ESG mandate in our Broad Impact portfolio (applying Environmental, Social, and Governance scoring criteria), now make up Betterment’s new Social Impact portfolio. Sounds great, right? Wrong. Because believe it or not, these two ETFs are some of the only ones of their kind. In fact, the NACP fund is the only ETF of its kind. How can investing in these funds lead to gender and racial progress with such a limited sphere of influence? Using capital to influence positive social outcomes is vital to our democracy. Part of the answer to change lies in our collective, continued contribution, which can grow the relative power these leading companies have over time. By investing in NACP, investors are putting more of their money in companies with a proven track record of minority empowerment and diversity policies. By investing in SHE, investors are placing more of their money in companies that have demonstrated more of a commitment to gender diversity within senior leadership than other firms in their sector. As Betterment’s SVP of Operations & Legal Counsel, Boris Khentov says, we can “work to erase the gap by incorporating this focus into our investment strategy now. As our dollars flow into the funds, they’ll get bigger. This raises awareness of the funds, while driving down costs thanks to economies of scale, which will bring along even more investors.” Now more than ever—when the number of female CEOs has actually decreased over time and when there are only three Black Fortune 500 CEOs—we need to send a signal that there is demand for a variety of lower cost funds that focus on social equity, so that investors can increase their impact along the values that matter most to them. Ultimately, this is an aspirational portfolio. In the same way we want to see change in the world, change that will take time, the Social Impact Portfolio is a step towards aligning ourselves to that ultimate goal, and that of our customers. Start with the Social Impact Portfolio to help grow your money responsibly. Regardless of how you choose to invest, Betterment aims to help you align your money with your values. That means not only offering a socially responsible investing portfolio, but also helping you identify your goals and invest for them appropriately. Learn more about our guidance and get started saving for your future. Higher bond allocations in your portfolio decreases the percentage attributable to socially responsible ETFs.

How To Save For Your First Down Payment Aug 20, 2021 12:00:00 AM Saving for a first down payment and building home equity can be a way to build wealth over time. Here’s what you need to know about saving before you buy. Buying a home is typically the largest single purchase a person will make in their lifetime. When you are preparing to make a big purchase in real estate, it is important to understand the complexities of what you can afford, what everything will cost, and how to prepare for your purchase. Your down payment is a one-time cash payment you provide at the closing. The size of this payment has a long-term effect on your finances, as it determines your monthly mortgage payment and your initial home equity. If you’re still on the fence about whether to rent or buy, consider your timeline. One widely accepted rule of thumb is that you must own the home for around 5 years or more to reconcile the closing costs and transaction fees paid. However, that period depends on where you live and other costs—this calculator on renting versus buying can provide more insight for your decision. To sweeten the deal, sellers can also agree to pay for a portion of, if not all of, your closing costs to help shorten the timeframe to make up for the portion of costs you're required to pay, if any. Calculate What You Can Afford Before you start looking at homes, your first step is deciding what you can afford and what you want from a home. List your basic requirements such as location, size, and other features (for example, a school district). When it comes to affordability, calculate what your monthly payment will be for the mortgage plus any homeowners association (HOA) fees, taxes, insurance, utilities, maintenance, and other bills. Also remember that, just because a mortgage lender approves you for a certain size mortgage, doesn’t mean you should borrow that much. If you need help figuring out what you can afford, try a home calculator like this one from Bankrate. From there, you can look on a site like Zillow or find an agent you trust to help you price home options in your real estate market. The cost of a house can range from less than $100,000 to many millions, and what you can afford is based on your income and savings. According to Zillow, the typical home value in the U.S. is now at $298,933, which is up 16.7% since June of 2020. In general, it is a best practice to put down 20% or more when buying a home. At 20% down, you will have an easier time getting approved for a mortgage and will be able to avoid Private Mortgage Insurance (PMI), which is an additional monthly cost for low-equity home owners. PMI can cost hundreds of dollars per month, so it is in your best interest to avoid it. If you don't have a 20% down payment, you can still buy a house with a lower down payment but you'll just have to pay monthly PMI. Many lenders and states offer loan programs geared toward first-time, low-income homeowners through the Federal Housing Administration (FHA) loan program, or military families through the U.S. Department of Veterans Affairs (VA) loan program. Some lenders and banks also offer loans requiring less down payment, but you will need to check with them to see if that is an option for you. The more you put down, the more likely you will be able to negotiate for the lowest possible mortgage rate. A higher down payment will lower your monthly mortgage payment, and there is no rule against putting down more than 20%. In fact, the more you put down, the more likely you will be able to negotiate for the lowest possible mortgage rate. Remember, you can also deduct mortgage interest payments on your income tax returns. If you are buying a $220,000 house with 20% down, your down payment will be $44,000. That is a big cash expense to pay all at once, so start saving as early as possible. Automate A Savings Plan Once you know how much you can afford to spend on your home purchase, it is time to start saving. The best option for most people is to save a portion of their paycheck automatically. You can choose a fixed amount or percentage of each paycheck to get directly deposited into your checking account into an appropriate account, such as a cash savings account or a Betterment investing goal. Save as much as you can so you can quickly build up your balance and make your purchase as soon as you are ready. At Betterment, you can save for your house using a cash portfolio or investing portfolio, depending on your risk tolerance and when you think you’ll need the money to buy your home. In addition to your automatic savings, do not forget to save any one-time income—which can further speed up your purchasing timeline. If you get an annual bonus, tax refund, large gift, or side income earnings, save as much as possible to build up your savings even faster. Building Your Equity After you have scrimped and saved and made your first home purchase, congratulations—not only are you a homeowner, you are also building equity in your home. As you pay your mortgage, each month you own more of the property. Over time, your property value may also increase, which adds to your equity as well. If and when you sell your first home, chances are your next down payment will be larger than the sum you started with. It’s just one way to build your wealth.

Our Customers Donated Over $2 Million Dollars To Charity in 2020 Aug 19, 2021 12:00:00 AM In 2020, our customers donated over $2 million dollars to charity through their appreciated shares. Let’s aim for even more in 2021. 2020 was an unprecedented year in many regards, with the COVID-19 pandemic leaving millions of Americans out of work as businesses were forced to close and many states issued shelter in place orders and other restrictive measures. It was also an unprecedented year for Betterment’s Charitable Giving feature, with new records in both the number of donations and the amount donated by our customers who chose to give back to those who are most in need. Many of our customers make generous gifts to charities in a variety of ways—whether it’s by spending their precious time, or by donating their hard-earned money. Our customers also have the choice to donate their invested securities to charities through their Betterment accounts. When securities are donated, the value of those assets is transferred directly to the charity. This is advantageous because the donor doesn’t pay taxes on the gain, and the recipient organization generally doesn’t pay taxes on the gain, either. In 2020, our customers donated over $2 million dollars to charity through their appreciated shares. Let’s aim for even more in 2021. Skip to the instructions for how to donate. Since launching our Charitable Giving feature in 2017, our customers have donated over $7.5 million dollars in appreciated shares to support causes near and dear to them. We are proud to support a community of smart investors with big hearts. This year, consider a smart giving strategy that can help you maximize your gifts while minimizing your tax liability. We’ll walk you through how it works. Donating securities should be as easy as donating cash. You’re trying to make a positive difference, so we believe you shouldn’t have to do any math or sign any forms. We want to keep it easy—as easy as giving cash. No snail mail, and no walking into an office. Here is a behind-the-scenes look at how we help make it easy. On your behalf, we track how much of your account is eligible to give to charity. You typically should only donate assets that you’ve held for more than one year, but we don’t expect you to sort through all the assets and pick which ones you can give. We’ll track those assets for you. We’ll estimate the tax benefits of your gift. Before you complete your gift, we’ll let you know the estimated tax benefits, including the expected deductible amount and potential capital gains taxes saved. We move assets from your account to a charitable organization’s account without any paperwork. With a traditional broker, a charitable gift has to move from your account to the organization’s brokerage account, which can take time and paperwork. Betterment is offering charities investment accounts without any advisory fees—on up to $1 million of assets—to make the gift process seamless. After the donation is complete, we provide a tax receipt. The receipt is emailed to you, and it will also be available in your Betterment account at all times. What’s more, we take much of the heavy lifting in reporting off of our partner charities. This means they can devote their resources more efficiently to the causes you are supporting, rather than to administrative tasks. Donating securities helps maximize your charitable impact. There are two tax advantages investors may be able to take advantage of when donating eligible shares. Eliminate capital gains taxes on donated shares. Deduct the value of the gift on your annual tax return. As long as you itemize your deductions, the entire value of your donated securities is deductible on your income tax return, just like any cash donation would be—as long as you’ve held the securities for more than one year. As an example, let’s say you make $150,000, are single, and live in New York. Your income places you into the current (2021) 15% long-term capital gains bracket, the 24% federal bracket, and the 6.41% state bracket.  If you donate $3,000 worth of shares to a charitable organization, and you bought those shares two years ago for $2,100, then you would save $192.69 in capital gains taxes. The full $3,000 could then be deducted on your tax return, saving you an additional $912.30. Overall, you end up with $1,104.99 in tax savings, which is about 21% more than if you had just donated the cash and taken the deduction. You can then use the extra tax savings towards future donations, helping to further maximize your impact. Value now Purchase value, two years ago Capital gains tax saved Deductible amount on tax return Total potential tax savings Donating shares $3,000 $2,100 $192.69 $3,000 $1,104.99 This is 21% more than a cash donation. Donating cash $3,000 n/a n/a $3,000 $912.30 The table above assumes the following about a hypothetical person donating to a charity: (1) The person itemizes the deductions on their tax return, and (2) The federal Alternative Minimum Tax does not apply to the person. Charitable giving works in tandem with our other tax-smart strategies. Our charitable giving capabilities automatically work in tandem with our other tax-smart strategies, such as Tax Loss Harvesting+. Imagine you started using Betterment two years ago. If any holdings in your portfolio took a loss in the first year—which is common—Tax Loss Harvesting+ (TLH+) would kick in, if you have it turned on. TLH+ would benefit you by harvesting those losses and selling the assets, which allows you to deduct up to $3,000 from your income at tax time. This practice essentially defers the tax liability from any future gains to a later date. If by the calendar year after the harvest, those same shares appreciated above the original purchase price, then they would be eligible to donate to charity. You could then avoid the taxes altogether because you will not owe the standard capital gains taxes you would otherwise be subject to. Donate while also keeping your financial goals on track. Once you donate shares from an investing goal, your goal’s overall account balance will naturally be lower. Immediately after you donate, we will ask you if you’d like to make a new cash deposit to promptly replenish your investment goal. If you redeposit, we can smartly rebalance your portfolio and help keep it on track to meet its goal. If you think of your replenishing deposit as the cash you otherwise would have given to charity, the process of giving and then redepositing ends up serving as a tax-optimized and cost-efficient cycle for transferring funds to charity. The graphic below, which visually represents this cycle, is for illustrative purposes only. If you do not redeposit after your donation, your account balance will, of course, remain lower—and we may rebalance your account as usual. Smart Investors + Big Hearts = Effective Altruism. You may already be familiar with effective altruism, which is the simple idea that you can increase how much value you create when you help others if you more thoughtfully apply your resources.   We offer access to a dozen charities, including GiveWell.org which carefully vets and directs donations to the most impactful causes, and Against Malaria Foundation, which protects low-income families from one of the largest killers in the world—mosquitos that carry malaria. See a full list of supported charities. Please note that we give no special preference to or endorse any one charity in particular, and the activities of each charity are not directly associated with or connected with Betterment. How to Donate Shares From Your Betterment Account To donate shares from your Betterment account, simply navigate to “Transfers” on the left and select “Give to Charity” under “Transfers from Betterment.” If your account has appreciated shares that have been held for more than a year, you can specify an amount to give, and then select which charitable organization(s) will receive your donation. Shortly after the transfer completes, you’ll receive a tax receipt via email. You can choose from the following charities: Against Malaria Foundation Big Brothers Big Sisters of NYC Boys and Girls Clubs of America Breast Cancer Research Foundation Brooklyn Community Bail Fund DonorsChoose.org Feeding America GiveWell Hour Children NAACP Empowerment Programs Save The Children The Trevor Project UNICEF USA World Wildlife Fund Wounded Warriors Family Support Don’t see your charity? See below... If you don’t currently see a charity you’d like to donate to, you can request a new charity be added. When you’re instructed to select a charity, there is an option to request a new one at the bottom of the page. In time, we will work with the requested charities to try to add them as an option.  Qualified Charitable Distributions Qualified charitable distributions can be made from most IRAs (excluding SEP and SIMPLE) if the owner is age 70½ or over. These distributions can be used to satisfy part or all of your required minimum distribution and these donations will not be counted as taxable income. Betterment can support QCDs from IRAs if you meet certain criteria. Please reach out to our team for further instructions. 2021, Here We Come Let’s maximize our ability to give back together, and help support those who are most in need this year. Our altruistic and tax-smart customers have donated over $7 million dollars to charity, with over $2 million dollars donated in 2020 alone. Can we beat that for 2021? For more information, see IRS Information for Charitable Contributions. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

Funding a Safety Net: Calculate Your Target Amount Aug 17, 2021 12:00:00 AM Don’t know how much to set aside for emergencies? Don’t let uncertainty stop you from saving. We’ll help you figure out how much you should save so that you can feel more prepared. How much do you actually need to set aside for emergencies? No one can predict the exact timing or cost of future emergencies any of us will face. However, we’ll provide recommendations to help you be as prepared as possible, based on what we know about you. How much do you need? Calculating how much you’ll likely need in your Safety Net might seem difficult. Luckily, we can help. We’ll recommend a target savings amount for you when you set up your Safety Net goal in your account, based on the formula below. You can also use this formula on your own to determine a target amount for your emergency funds. 1. Estimate your monthly expenses. Your expenses are the starting point of our calculation. Unfortunately, many individuals are unaware of their average monthly spending. That’s why we use research from the American Economic Association and the National Bureau of Economic Research to estimate your average monthly spending based on your gross income. The data shows that, on average, lower income households tend to spend a higher percentage of their income. As your income increases, both your taxes and savings will generally increase. Even though you will now likely spend a higher dollar amount, that amount represents a smaller percentage of your overall income. The graph below shows how the percentage of your spending generally decreases as your income increases. Data: Betterment analysis of self-reported income and estimated tax rates; American Economic Association; National Bureau of Economic Research. The chart shows assumed rates of spending, savings, and effective taxes for a single individual with no additional information about location, actual savings, or Social Security benefits. The default location is Colorado, which is roughly equivalent to the U.S. national average for cost of living and state taxes. Knowing this information, we can easily estimate your monthly expenses as a percentage of your income. For example, if your gross income is $100,000, we can estimate that your expenses will be about $55,000 per year, or in other words, $4,600 per month. 2. Decide how many months you want to cover. Once we estimate how much money you spend per month, the next question is—how many months of expenses should your emergency fund be able to cover? One of the reasons to build a Safety Net is to prepare for the chance that you may unexpectedly lose your job. We looked at data from the United States Bureau of Labor Statistics, which shows that the median duration of unemployment is about three months. This is why we recommend that you save enough to cover expenses for at least three months. Continuing our above example, $4,600 of monthly expenses x three months = $13,800. Of course, there are other potential uses for your Safety Net aside from just losing your job—such as medical bills, auto repairs, etc.—but this provides us with a reasonable baseline number. 3. Last but not least—add a buffer. The third and final step in our Safety Net formula is adding a buffer for market downturn protection. Rather than holding on to cash, we believe you should invest your Safety Net in a low-risk, globally-diversified portfolio of 30% stocks and 70% bonds. The reason behind this is that holding too much cash usually means your money isn’t working as hard for you as it could be. And because the national average interest rate for savings accounts is only 0.04%, holding too much cash could mean you’re actually losing money because of inflation, which generally can be around 2% per year. Investing always comes with risk, and that means your Safety Net could fluctuate up and down in value. To account for this known fact, we recommend that you add a buffer to the target amount you’re trying to reach in your Safety Net. Our recommended buffer amount is 30% above your original target amount. Continuing the same example from above, if three months of expenses = $13,800, then you would take $13,800 x 130%, which would give you a final target amount of $17,940 for your Safety Net. Reasons to Adjust Your Safety Net Target Amount For many customers, the above formula is more than detailed enough to meet their needs. However, we allow you to adjust your Safety Net target amount, if you choose to do so. Below are a few reasons for why you may consider adjusting our default Safety Net target amount recommendation. You don’t want to invest your Safety Net. Some investors may not be comfortable with our advice to invest emergency funds. Instead, you may prefer to keep your Safety Net in cash, or a savings account alternative like Betterment’s high-yield cash account, Cash Reserve. Choosing to keep your Safety Net in cash or in Cash Reserve may reduce the need for the 30% buffer amount we discussed earlier, but remember that it might also mean lower expected returns over the long run. Whether you choose to invest your emergency funds or keep them in cash is up to you. The most important thing is that you are working towards having any type of emergency savings at all. Your income isn’t stable. Our default calculation uses three months of expenses because that’s the average length of unemployment in the U.S. However, sometimes you may need to dip into your emergency fund, even if you haven’t lost your job. If your income varies and isn’t the same from month to month, it’s possible that even though you’re still employed, you need to use your emergency savings due to a rough month or two. This may be the case for those who work in sales or another commission-based type of job. An unsteady income stream may cause you to tap into your Safety Net more often than someone who is a salaried employee with paychecks that occur regularly. This can be particularly tough if a few bad months occur close together, before you have time to refill your Safety Net. This is why, if your income is unstable, you may want to increase your Safety Net to cover 5 or 6 months worth of expenses. You are the sole/primary income earner. If you are the sole breadwinner in your family, losing your job could be catastrophic to your family’s finances. The loss of your job could mean that your family has no income at all. Compare this scenario to that of a family where both spouses work and earn similar salaries. If one of them loses their job, it would be tough, but at least they have another source of income to help weather the storm until the unemployed spouse finds another job. If your family only has one income earner, you should consider having a slightly larger Safety Net. Your expenses may not be adjustable. If you had a large medical bill or necessary car repair, would you be able to cut back on your expenses temporarily? If a large portion of your monthly spending is discretionary, this might be fairly easy for you to do. Maybe you won’t go out to eat for the next couple of weekends, or you delay that vacation you were planning. It wouldn’t be fun, but you could get by. If this sounds like the case, maybe instead of saving for three months of total monthly expenses, you could consider saving up only enough for three months of your fixed and unavoidable expenses, such as utilities and rent. However, if the majority of your monthly expenses are fixed, you won’t have this option. You can’t temporarily cut back on student loan payments, rent, or utilities. If these unavoidable expenses make up most of your spending, you may need a larger Safety Net. Your personal risk tolerance varies. Lastly, don’t forget your personal risk tolerance. Some customers are comfortable with 1-2 months of expenses in their Safety Net, and others can’t sleep without having a full 12 months worth of expenses tucked away. To each their own. While we caution against going too small with your Safety Net, ultimately the decision is yours and comes down to how you prioritize your financial goals. Let’s get prepared. Having emergency savings is a critical component for your financial health. We help make it easy by estimating how much you should have in your Safety Net, so you don’t have to. Since there are reasons why you may need more or less emergency savings, you can adjust your target to better match your individual needs. One last piece of advice: Make sure you only use your Safety Net for true emergencies. Try not to dip into it unless absolutely necessary.

Investing in Your 40s: 4 Financial Goals You Should Prioritize at Mid-Life Aug 2, 2021 12:00:00 AM In your 40s, your priorities and investing goals become clearer than ever; it’s your mid-life opportunity to get your goals on track. It’s easy to put off planning for the future when the present is so demanding. Unlike in your 20s and 30s when your retirement seemed like a distant event, your 40s are when your financial responsibilities become palpable—now and for retirement. You may be earning more income than ever, so you can benefit far more from planning your taxes carefully. Perhaps you have increased expenses as a result of homeownership. If you have kids, now may also be the time that you’re thinking about or preparing to pay for college tuition. When all of these elements of your financial life converge, they require some thoughtful planning and strategic investing. Consider the following roadmap to planning your investments wisely during these rewarding years of your life. Here are four ways to think about goals you might prepare for. Preparing for Your Next Phase: Four Goals for Your 40s You may have already made a plan for the future. If so, now is a good time to review it and adjust course if necessary. If you haven’t yet made a plan, it’s not too late to get started. Set aside some time to think about your situation and long-term goals. If you’re married or in a relationship, it’s best to include your spouse or partner in identifying your goals. Consider the facts: How much are you making? How much do you spend? Will your spending needs be changing in the near future? (Perhaps you're paying for day carte right now but can plan to redirect that amount towards savings in a few years instead.) How much are you setting aside for savings, investments, and retirement? What will you need in the next five, 10, or 20 years? Work these factors into your short- and long-term financial goals. 1. Pay off high-interest debt. The average variable-rate credit card charges more than 16% a year in interest, so paying off any high-interest credit card debt can boost your financial security more than almost any other financial move you make related to savings or investing. Student loans may also be a high-cost form of debt, especially if you borrowed money when rates were higher. For instance, even federally subsidized loans taken out in the 1990s may carry interest rates as high as 8.25%. If you have a high-interest-rate student loan (say more than 5%), or if you have multiple loans that you’d like to consolidate, you may want to consider refinancing your student debt. These days, lenders offer many options to refinance higher-rate student loans. There’s one form of debt that you don’t necessarily need to repay early, however: your mortgage. This is because mortgage rates are lower than most credit cards and may offer you a tax break. If you itemize deductions, you may be able to subtract mortgage interest from your taxable income. Many people file using the standard deduction, however, so check with your tax professional about what deductions may apply to your situation come tax time. 2. Check that you’re saving enough for retirement. If you’ve had several jobs—which means you might have several retirement or 401(k) plans—now is a good time to organize and check how all of your investments have performed. Betterment can help you accomplish this by allowing you to connect and review your outside accounts. Connecting external accounts allows you to see your wealth in one place and align different accounts to your financial goals. Connecting your accounts in Betterment can also help you see higher investment management fees you might be paying, grab opportunities to invest idle cash, and determine how your portfolios are allocated when we are able to pull that data from other institutions. There could also be several potential benefits of consolidating your various retirement accounts into low-fee IRA accounts at Betterment. Because it’s much easier to get on track in your 40s than in your 50s since you have more time to invest, you should also check in on the advice personalized for you in a Betterment retirement goal. Creating a Retirement goal at Betterment allows you to build a customized retirement plan to help you understand how much you’ll need to save for retirement based on when and where you plan on retiring. The plan also considers current and future income—including Social Security income—as well as your 401(k) accounts and other savings. Your plan updates regularly, and when you connect all of your outside accounts, it provides even more personalized retirement guidance. 3. Optimize your taxes. In your 40s, you’re likely to be earning more than earlier in your career–which may put you in a higher tax bracket. Review your tax situation to help make sure you are keeping as much of your hard-earned income as you can. Determine if you should be investing in a Roth (after-tax contribution) or traditional (pre-tax contribution) employer plan option, or an IRA. These days, more than half of employer-sponsored plans like 401(k)s offer a Roth option, and unlike Roth IRAs, it’s not limited by a maximum income threshold. The optimal choice usually depends on your current income versus your expected income in retirement. If your income is higher now than you expect it to be in retirement, it’s generally better to use a traditional 401(k) and take the tax deduction. If your income is similar or less than what you expect in retirement, you should consider choosing a Roth if available. Those without employer plans can generally take traditional IRA deductions no matter what their taxable income is (as long as your spouse doesn’t have one, either). You can use Betterment’s 401(k) vs. IRA calculator to help decide which one you should be contributing to, or if you’re a Betterment customer, consult your Retirement Goal’s “How To Save” section, after ensuring that you have connected any external retirement accounts. You’ll also want to make sure you take advantage of all the tax credits and deductions that may be available to you. For instance, if you work and pay for childcare, you may be eligible for a dependent care tax credit. Depending on your income, this credit may be worth anywhere from 20% to 35% of what you spend on childcare, and the expenses are capped at $3,000 for one qualifying individual, and $6,000 for two qualifying individuals. Check also to see whether your company offers tax-free transportation benefits—including subway or bus passes or commuter parking. The value of these benefits isn’t included in your taxable income, so you can save money. You can also save money on a pre-tax basis by contributing to a Health Savings Account (HSA) or Flexible Spending Account (FSA). You might not think using these accounts is worth the time, but for a couple making $100k in taxable income per year, you should receive a 29.65% return on investment in the federal/social security/medicare income tax break.1  You may not have that much in expenses, but even if you only pay $200 a month for commuter parking and/or transportation passes and only contribute $500 annually to your FSA, paying those costs pre-tax is the equivalent to paying yourself over $850 in tax savings - it’s worth the time it takes to sign up!  Health Saving Accounts (HSA) Health savings accounts (HSAs) are like personal savings accounts, but the money in them is used to pay for health care expenses. Only you—not your employer or insurance company—own and control the money in your HSA. The money you deposit into the account is not taxed. To be eligible to open an HSA, you must have a special type of health insurance called a high-deductible plan. Your 401(k) may be tied to your employer, however your HSA is not. As long as your health plan meets the deductible requirement and permits you to open an HSA, and you’re not receiving Medicare benefits or claimed as a dependent on someone else’s tax return, you can open one with various HSA “administrators” or “custodians” such as banks, credit unions, insurance companies, and other financial institutions. You can withdraw the funds tax-free at any time for qualified medical expenses. Flexible Spending Accounts (FSA) A Flexible Spending Account (FSA) is a special account that can be used to save for certain out-of-pocket health care costs. You don’t pay taxes on this money—this is a tax-favored program that some employers offer to their employees. If you have an FSA, remember that in most cases your spending allowance does not carry over from year-to-year. It’s important to find out whether your employer offers a grace period into the next year (typically through mid-March) to spend down your account. Before you waste your tax-free savings on eyeglasses, check what you can buy with FSA money—with and without a prescription. Any unused funds will be forfeited, so it’s a good idea to use up what you can. If you find yourself with more than you can spend, then you might want to adjust how much you’re allocating to your FSA. 4. If you have children, start saving for college—just don’t shortchange your retirement to do it. If you have children, you may already be paying for their college tuition, or at least preparing to pay for it. For 2020-2021, the average annual costs of college tuition and fees in the United States were $10,560 for in-state public colleges, $27,020 for out-of-state public colleges, and $37,650 for private education, according to the College Board. This doesn’t include the cost of room and board, so you can see why paying for college is something many people have to plan strategically for. Kids grow up fast, so if you haven’t started thinking about college costs, here’s some information to get started. According to the College Board’s College Cost Calculator, today’s fifth grader today will need approximately $268,8832 to graduate from an average four-year private college by the year 2033. Scholarships, grants and federal loans can help, but many parents feel it is up to them to make sure that their kids can get the education they deserve. It is a mistake to save for your kids’ college costs while neglecting your own financial security. Plenty of parents submit a final tuition payment only to realize that they’ve saved nothing for retirement—without any time left to save more. It is a mistake to save for your kids’ college costs while neglecting your own financial security. So, first things first, make sure you’re saving enough for your own retirement. Then if you have money left over, think about tax-deferred college savings plans, such as 529 plans. A 529—named for the section of the tax code that allows for them—can be a great way to save for college because earnings are tax-free if used for qualified education expenses. Some states even allow you to deduct contributions from your state income tax, if you use your state’s plan. (While each state has its own plan, you can use any state’s plan, no matter where your child will go to college.) An alternative is to put money away in your own taxable savings accounts. Some investors prefer this method since it gives them more control over the money if things change, and may be more beneficial for financial aid. Your 40s are all about taking stock of how far you’ve come, re-adjusting your priorities, and getting ready for the next phase of life. By working on your financial goals now, you can gain peace of mind that allows you to concentrate on important things like family, friends, work, and the way you want to spend this rewarding decade of your life. Get a better handle on your 40s with Betterment. Betterment handles your investments so you don’t have to. We make it easy to roll over your retirement accounts (or get new accounts set up), and much of what we do is designed to help you save money on taxes. Our customer support team is available to answer questions, and we have licensed experts available to help you plan. Get started today. 1 Assuming taxable income of 100k, married filing jointly, the tax bracket of 22% applying to the 2021 taxable income Bracket of 22% for $81,051 to $172,750, 1.45% medicare tax (2.9% split evenly by employees/employers), and 6.2% Social Security tax (12.4% split evenly by employees/employers). 2 Assuming 8 years remain until college, 4 years of attendance, 5% education inflation, average 4-year private college as of June 2021 ($42,224), full tuition covered by savings. The information in this article is provided solely for marketing and educational purposes. It does not address the details of your personal situation and is not intended to be an individualized recommendation that you take any particular action, including rolling over an existing account. When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. Specific factors that may be relevant to you include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account, consult tax and other advisors with any questions about your personal situation, and review our Form CRS relationship summary and other disclosures. If you currently participate in a 401(k) plan administered or advised by Betterment (or its affiliate), please understand that this article is part of a general educational offering and that neither Betterment nor any of its affiliates are acting as a fiduciary, or providing investment advice or recommendations, with respect to your decision to roll over assets in your 401(k) account or any other retirement account. Betterment’s Licensed Concierge Team offers support for individuals transferring assets to Betterment of $100,000 or more, and receives incentive compensation based on assets brought to or invested with Betterment. Betterment’s revenue varies for different offerings (e.g., Betterment Digital and Premium) and consequently Team members have an incentive to recommend the offering which results in the greatest revenue for Betterment. The marketing and solicitation activities of these individuals are supervised by Betterment to ensure that these individuals act in the client’s best interest. Disclosure: Any links provided to other server sites are offered as a matter of convenience and are not intended to imply that Betterment or its writers endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise.

Portfolio Optimization: Our Secret to Driving Better Performance Jul 30, 2021 12:00:00 AM We optimally blend funds to deliver higher expected investor returns for each asset class and ensure you get the best possible performance from your investments. Many investors use a combination of tactics to get the best performance they can from their portfolios, including asset allocation, diversification and other risk management techniques. But the difference between Betterment and individuals who are trying to navigate this alone, is the complexity and the scale on which we can do this for you. When you invest with Betterment, you’re getting a professional portfolio that has fully integrated these tactics, delivering you an investment vehicle that's already been optimized. We integrate a number of sophisticated strategies that few people can implement on their own as part of our portfolio optimization, including maximizing upside potential and minimizing the downside risk for each of your investment goals. Building the portfolio We know any DIY investor can choose a bunch of funds with enough personal time spent on research, whether it's through Fidelity or Vanguard or some other platform. In fact, DIY investors can and do apply the lessons of many years of research with respect to picking funds, like only sticking with index funds, or favoring a value tilt. But for many people, spending a couple of days a month on investment research and management is either not of interest or a practical use of their time. The alternatives are paying for an advisor, or using a basic target date fund. The former is expensive, while the latter is inflexible to your needs, and can also be unnecessarily pricey. That's where our portfolio and service are ideal. At Betterment, we offer 101 customizable allocations to customers, ranging from 100% stocks to 100% short-term Treasuries. First, it's helpful to understand how we built our overall portfolio and what's inside. We started with a practical foundation based on Nobel prize-winning research from the past seven decades. We began with the concept of diversifying as much as possible (Markowitz, Modern Portfolio Theory, 1950s), and then tilted toward value and small-cap stocks (Fama & French, 1970s). Since we know that most active mutual-fund managers tend to underperform, we then picked low cost, index-tracking, high liquidity ETFs for our portfolio. And because people often worry about potential losses about twice as much as potential gains (Kahneman, Prospect Theory, 2002), we worked on minimizing downside risk. Lastly, we assembled those funds in a way that gives you better performance by adding another level of analysis, or portfolio optimization. To do that, we used some of  the most recent quantitative models for asset allocation and downside risk to squeeze even more performance—or diversification alpha—out of these assets. a href="https://www.betterment.com/investments/">Learn more about the funds in our portfolio. Driving performance The two modern techniques we used are the Black-Litterman model and a downside-risk optimization model. These two models complement each other like yin and yang—one model helps us optimize for the upside, while the other helps us see what the downside might look like. The Black-Litterman Model: This model allows us to generate forward-looking returns estimates —the upside—based on actual data that includes the collective intelligence of all investors around globe. To be sure, this is a general description of this model; there is also an academic view as well. This complex formula has a very basic insight at its core: it looks at how all investors around the world behave, and based on that information, creates a kind of global asset allocation model. This makes it a very good anchor of where all the world’s money is invested in the aggregate at any given time. The model was introduced in 1990 and refined over the next decade, and also helps make up for some of the shortcomings in the classic Modern Portfolio Theory, which can underestimate the diversification benefits of some asset classes. Read more about our diversification strategy. In addition, Black-Litterman is the way to avoid a so-called home bias in investing. This refers to the preference investors have for favoring assets that are “close to home”, contra evidence that would suggest a more global allocation. In other words, it's a tool for using empirical evidence to make investing decisions, with no reference to regional likes or dislikes. U.S. stock markets are only about 48% of the world stock market—the remainder is international developed (43%) and emerging markets (9%). You can see this breakdown in the MSCI All-Country World Index. Minimizing potential for loss Downside Risk and Uncertainty Optimization: Modeling for worst-case scenarios allows us to generate forward-looking views of potential downside risk and uncertainty based on the combination of the historical returns of our chosen assets. When we model our future expected returns we want to know two things — what is the frontier for expected outcomes and what is the frontier for worse than expected scenarios (e.g. everything from a mild downturn to a massive drawdown). With this model, we can evaluate a full range of future outcomes.  We can also stress-test our allocations through negative market scenarios to get an idea of how severe a drawdown could be, and what duration. We can also factor in the role our continuous, algorithm-based investment management will play, primarily via automatic rebalancing. The results An easy way to see the value-add of our strategies is to look at the difference between our efficient frontier and that of a so-called "naive" portfolio, one that is made up of only the S&P 500 and an index tracking all U.S. bonds (AGG). The expected returns of Betterment's portfolio significantly outperform a basic two-fund portfolio for every level of risk. This result is a function of portfolio optimization, along with our well-crafted selection of assets and funds. Even if it's clear that these strategies are out of reach for virtually all DIY investors, you might ask: why doesn't every advisor do portfolio optimization? There are several reasons. One is the issue of quantitative capacity—these methods are mathematically complex with multiple moving parts (that's why our investing team includes experts in mathematics, statistics and economics.) Second, portfolio optimization is time consuming—whenever a new asset class become available (FX-hedged international bonds, for example), or funds change their expense ratios, an advisor needs to rerun the optimization. Lastly, there's the cost of updating portfolios—we have built a sophisticated proprietary trading platform that automates these calculations on an ongoing basis, meaning that if we update our optimization, all our customers can instantly benefit. A traditional advisor would have to process many of these changes by hand. As you can see, investing well is not just a matter of picking the right funds—it's also a matter of applying some serious computing power to squeeze out optimal performance. For you, the result of this portfolio optimization is the security of knowing that for any level of risk you select, we've done a careful evaluation to provide the optimal risk-adjusted performance, and your portfolio is re-optimized on an ongoing basis.

Betterment’s Retirement Advice Tools Explained Jul 29, 2021 12:00:00 AM Betterment aligns our investment advice with what it’s really like to pursue your financial goals. Learn about our retirement planning advice and how it can help you. TABLE OF CONTENTS Define What Retirement Means To You Setting Up Your Retirement Projections At Betterment Understanding Betterment’s Recommendations Taking Action Savings towards retirement is one of the most popular reasons people use Betterment. This makes sense, since almost everybody dreams of retiring some day (or at least having the option to quit working or switch careers, if they choose). That’s why Betterment offers retirement tools in your account that allow you to define what retirement means to you, and then run projections that give guidance on whether your goal is on-track or off-track. Our advanced projections include key inputs like Social Security, inflation, life expectancy, and even investment accounts not held at Betterment. Once you have your retirement projections setup in your retirement goal, Betterment will give you personalized advice on how much you should be saving towards retirement, which accounts are most optimal for you, and how you should be invested. You can even run different “what-if” scenarios to see how things like retiring earlier, or saving more, affect your projections. Of course, we make it easy for you to then take action and make your money work for you. For example, you can open various types of retirement accounts. You can also enable our many automated tools to help you save more, manage your investments, and manage taxes. We even work to make rolling over other retirement accounts as easy as possible. Let’s walk through each of these areas in more detail, so you can learn how to make the most of Betterment’s retirement planning tools. Define what retirement means to you. Each person’s retirement plan is unique. That’s why we allow you to tell us how and when you’d like to retire, and then we shape our advice around those inputs. Afterall, our advice will be very different if you plan on retiring at age 55 vs. age 75. This is what we call goal-based investing, where you tell us your various financial goals, and we give you advice on how to achieve them. For many individuals, the initial step of defining retirement can be difficult. This is understandable. We often hear questions like “how do I know how much money I’ll spend in retirement?” or “can I retire tomorrow?” Don’t worry. Betterment built tools to help you answer these tough questions. Once you open a retirement goal in your Betterment account, our retirement planning tool will walk you through how to estimate both your retirement spending and retirement age in order to set up your plan. Estimating Retirement Spending How much you would like to spend during your retirement is the most important driver of your retirement plan, but it is often the hardest part to predict. Maybe your kids will be independent by then, but health care may cost more. Maybe your house will be paid off, but you’ll also want to travel more. These are just a few examples of how some spending categories may decrease, while others may increase. If you’re one of the few who happen to have a good idea of what you’d like to spend during retirement, we allow you to simply input that number. For those who are unsure, we have a helpful calculator that will automatically estimate a spending number for you. This number can serve as a starting point, but you can always override it. We then estimate your retirement spending by running key data points through a spending estimate formula. This formula includes expected wage increases (which tend to be higher than general inflation), cost of living data for your particular zip code, and an estimated percentage of income used to support your lifestyle (i.e. spent on goods and services) based on data from individuals with similar income to you. While not an exhaustive list, these data points provide a useful spending overview that are factored into our advice. Estimating Retirement Age When you’ll retire is also difficult to predict. The choice isn’t always yours to make either, as can be the case with unexpected health issues or being forced out of work. As with your retirement spending, if you have a particular retirement age in mind, you can simply enter it into our system. For those who are unsure, we default you to age 68, which is just beyond Full Retirement Age (FRA), as defined by the Social Security Administration, for many of our customers. Making Changes And Updates We know that life happens, and things change. The retirement plan you set up in your 30’s or 40’s may become outdated. That’s why we build flexibility into our retirement projections, and allow you to make changes to your plan. You can easily update your desired retirement spending or desired retirement age at any time. When you do, we will automatically update our projections based on your new inputs. This way, you can ensure your retirement plan is always up-to-date. In fact, we encourage you to review your retirement projections periodically for this exact reason. As a general guideline, you should review your retirement projections once per year, or after any major life event like a promotion, change in marital status, birth of a child, or other similar event. Setting Up Your Retirement Projections At Betterment Now that you’ve defined what retirement means to you, it’s time to run some projections and determine if you seem on-track or off-track to meet your retirement goal. Betterment will calculate this for you, but first we need to gather some information about your situation. The more information you tell us, the more accurate our corresponding projections can be. Existing Savings: Tell us which accounts you already have for retirement, so we can give you credit for the savings you already have. This should not include accounts that are set aside for other purposes, like emergency funds, buying a house, or your kid’s college. But it should include retirement accounts, even if they are not held at Betterment. Common examples of this are 401(k)s and your spouse’s retirement accounts as well. We recommend syncing these accounts to your Betterment account. Planned Future Savings: We can also factor in future retirement savings that you expect to make. Under each account, you can tell us how much you plan to contribute per year. You can even include employer matches, if applicable, to your workplace retirement accounts. Social Security Benefits: Social Security plays a key role in retirement for millions of Americans. We use your current income to estimate Social Security benefits according to the U.S. Social Security Administration’s benefit rules. We also adjust expected Social Security benefits based on projections from the Trustees Report. However, this is just an estimate, and you may prefer to instead login to your online Social Security account to view your official estimate and use that instead. Other Retirement Income: Some individuals may have other sources of retirement income, such as a pension or rental income. If this applies, you can enter that information into your projection inputs as well. Life Expectancy: We default your life expectancy to age 90, which is a conservative estimate compared to average life expectancies. Women tend to live longer than men, so keep this in mind as you adjust your retirement plan. You can always override our default age, if you’d like. With all of these inputs, your retirement plan should be personalized to your situation. We then use our Goal Projection and Advice methodology to estimate if you appear to be on-track to reach your retirement goal or not. If you’re off-track, that’s okay. We’ll give you recommendations to get on-track, and make it easy to take action on those recommendations. We don’t expect change to happen overnight, and even knowing where you stand is a great first step. Understanding Betterment’s Recommendations With your retirement projections in place, Betterment can now give you personalized recommendations to help you get on-track, or even if you are already on-track, to help maximize your savings and investments. The recommendations we give should answer many common questions we hear from customers, such as: How much should I be saving? Which accounts should I contribute to? How should I be invested? How much should I be saving? One of the most important recommendations we can give is telling you how much we estimate you should be saving per year to be on-track for retirement. Betterment will give you this top line number so that you have a target in mind to strive towards. Which accounts should I contribute to? For many people, you will need to combine multiple accounts to reach your goals and optimize your savings. Once you know how much you should be saving, we will also tell you which mix of accounts you should be putting those savings into, and show that to you in a prioritized list. This list includes things like tax bracket, employer match info, account fees, contribution limits, and more. This helps make sure your money is working as hard as possible for you. In particular, the use of tax-advantaged retirement accounts are an important benefit to consider when saving for retirement. Contributions to Traditional 401(k), Traditional 403(b), and Traditional IRA accounts are typically tax-deductible, which means you contribute on a pre-tax basis and normally don’t pay taxes until you make withdrawals. Contributions to Roth 401(k), Roth 403(b), and Roth IRA accounts are not tax-deductible, which means you contribute on an after-tax basis but they grow tax-free. How you contribute to your retirement accounts now can make a big difference over time. The earlier you invest, the more possibility there is for your investments to appreciate. This is especially true for retirement savings, because when you use tax-advantaged retirement accounts, such as IRAs or 401(k)s, all that time spent in the market can lead to benefits in tax-free growth. How should I be invested? Another critical component of your retirement plan is making sure you are invested appropriately. Betterment’s tools will give you feedback on key areas of your investments, even on your non-Betterment accounts. Our tools will give you feedback on how risky your investments are and if that risk level is appropriate given your time horizon to retirement. As a default for our recommended actions, if you have 20 or more years until you retire, we recommend 90% stocks. Then, our investment advice reduces your risk over time until your retirement date, when it hits 56% stocks. Finally, it glides down to 30% stocks during retirement. Our tools will also analyze your external accounts to determine if you seem to be paying more fees than you have to, and if you have too much cash sitting in your retirement accounts. Taking Action Even the best retirement plan won’t do you much good if you don’t take action. With Betterment’s smooth interface and powerful automation, taking action has rarely been easier. Open multiple retirement accounts: Many people can benefit from having multiple retirement accounts, like Roth and Traditional accounts. This can help you optimize for taxes and save beyond the contribution limits that some accounts have. Enable tax management algorithms: Optimizing for taxes can help your money work harder for you. Betterment is known for our advanced tax strategies like tax loss harvesting and tax coordination, which can both be put on autopilot in your Betterment accounts at the flip of a switch. Select a portfolio strategy: Betterment offers multiple portfolio strategies, which allow you to customize your investments and choose the strategy that best fits your needs and preferences. Enable investment management algorithms: Betterment allows you to automate many areas of investment management like rebalancing and auto-adjusting your investments over time. Roll over retirement accounts: Consolidating your investment accounts into Betterment may help you ensure your retirement portfolio is working together in a seamless, automated manner. Enable automatic deposits: Making retirement savings automatic can help you save more, and make maxing out your retirement accounts easier. Add beneficiaries: Adding beneficiaries can help ensure your money goes where you want it to, even after you pass away. All of these actions are important in setting up a comprehensive retirement plan that incorporates savings, investments, taxes, and more. Generally speaking, the earlier you start, the better off you’ll be. Start taking the above actions to set up your retirement plan at Betterment today.

Tax Loss Harvesting+ Methodology Jul 27, 2021 2:19:00 AM Tax loss harvesting is a sophisticated technique to get more value from your investments—but doing it well requires expertise. TABLE OF CONTENTS Navigating the Wash Sale Rule The Betterment Solution TLH+ Model Calibration TLH+ Results Best Practices for TLH+ Conclusion Disclosure Tax loss harvesting is a sophisticated technique to help you get more value from your investments—but doing it well requires expertise. There are many ways to get your investments to work harder for you—better diversification, downside risk management, and the right mix of asset classes for your risk level. Betterment does all of this automatically via its low-cost index fund ETF portfolio. But there is another way to get even more out of your portfolio—using investment losses to improve your after-tax returns with a method called tax loss harvesting. In this white paper, we introduce Betterment’s Tax Loss Harvesting+™ (TLH+™): a sophisticated, fully automated service for Betterment customers. Betterment’s TLH+ service scans portfolios regularly for opportunities (temporary dips that result from market volatility) to realize losses which can be valuable come tax time. While the concept of tax loss harvesting is not new for wealthy investors, TLH+ utilizes a number of innovations that typical implementations may lack. It takes a holistic approach to tax-efficiency, seeking to optimize every user-initiated transaction in addition to adding value through automated activity, such as rebalances. TLH+ not only improves on this powerful tax-saving strategy—between 2000 and 2013, it would have provided an estimated 0.77% to a typical customer's after-tax returns, annually—but also makes tax loss harvesting available to more investors than ever before. What is tax loss harvesting? Capital losses can lower your tax bill by offsetting gains, but the only way to realize a loss is to sell the depreciated asset. However, in a well-allocated portfolio, each asset plays an essential role in providing a piece of total market exposure. For that reason, an investor should not want to give up the expected returns associated with each asset just to realize a loss. At its most basic level, tax loss harvesting is selling a security that has experienced a loss—and then buying a correlated asset (i.e. one that provides similar exposure) to replace it. The strategy has two benefits: it allows the investor to “harvest” a valuable loss, and it keeps the portfolio balanced at the desired allocation. How does it lower your tax bill? Capital losses can be used to offset capital gains you’ve realized in other transactions over the course of a year—gains on which you would otherwise owe tax. Then, if there are losses left over (or if there were no gains to offset), you can offset up to $3,000 of ordinary income for the year. If any losses still remain, they can be carried forward indefinitely. Tax loss harvesting is primarily a tax deferral strategy, and its benefit depends entirely on individual circumstances. Over the long run, it can add value through some combination of these distinct benefits that it seeks to provide: Tax deferral: Losses harvested can be used to offset unavoidable gains in the portfolio, or capital gains elsewhere (e.g., from selling real estate), deferring the tax owed. Savings that are invested may grow,  assuming a conservative growth rate of 5% over a 10-year period, a dollar of tax deferred would be worth $1.63. Even after belatedly parting with the dollar, and paying tax on the $0.63 of growth, you’re ahead. Pushing capital gains into a lower tax rate: If you’ve realized short-term capital gains (STCG) this year, they’ll generally be taxed at your highest rate. However, if you’ve harvested losses to offset them, the corresponding gain you owe in the future could be long-term capital gain (LTCG). You’ve effectively turned a gain that would have been taxed up to 50% today into a gain that will be taxed more lightly in the future (up to 30%). Converting ordinary income into long-term capital gains: A variation on the above: offsetting up to $3,000 from your ordinary income shields that amount from your top marginal rate, but the offsetting future gain will likely be taxed at the LTCG rate. Permanent tax avoidance in certain circumstances: Tax loss harvesting provides benefits now in exchange for increasing built-in gains, subject to tax later. However, under certain circumstances (charitable donation, bequest to heirs), these gains may avoid taxation entirely. Navigating the Wash Sale Rule Summary: Wash sale rule management is at the core of any tax loss harvesting strategy. Unsophisticated approaches can detract from the value of the harvest or place constraints on customer cash flows in order to function. If all it takes to realize a loss is to sell a security, it would seem that maintaining your asset allocation is as simple as immediately repurchasing it. However, the IRS limits a taxpayer’s ability to deduct a loss when it deems the transaction to have been without substance. At a high level, the so-called “wash sale rule” disallows a loss from selling a security if a “substantially identical” security is purchased 30 days after or before the sale. The rationale is that a taxpayer should not enjoy the benefit of deducting a loss if he did not truly dispose of the security. The wash sale rule applies not just to situations when a “substantially identical” purchase is made in the same account, but also when the purchase is made in the individual’s IRA/401(k) account, or even in a spouse’s account. This broad application of the wash sale rule seeks to ensure that investors cannot utilize nominally different accounts to maintain their ownership, and still benefit from the loss. A wash sale involving an IRA/401(k) account is particularly unfavorable. Generally, a “washed” loss is postponed until the replacement is sold, but if the replacement is purchased in an IRA/401(k) account, the loss is permanently disallowed. If not managed correctly, wash sales can undermine tax loss harvesting. Handling proceeds from the harvest is not the sole concern—any deposits made in the following 30 days (whether into the same account, or into the individual’s IRA/401(k)) also need to be allocated with care. Avoiding the wash The simplest way to avoid triggering a wash sale is to avoid purchasing any security at all for the 30 days following the harvest, keeping the proceeds (and any inflows during that period) in cash. This approach, however, would systematically keep a portion of the portfolio out of the market. Over the long term, this “cash drag” could hurt the portfolio’s performance. More advanced strategies repurchase an asset with similar exposure to the harvested security that is not “substantially identical” for purposes of the wash sale rule. In the case of an individual stock, it is clear that repurchasing stock of that same company would violate the rule. Less clear is the treatment of two index funds from different issuers (e.g., Vanguard and Schwab) that track the same index. While the IRS has not issued any guidance to suggest that such two funds are “substantially identical," a more conservative approach when dealing with an index fund portfolio would be to repurchase a fund whose performance correlates closely with that of the harvested fund, but tracks a different index.1 Selecting a viable replacement security, however, is just one piece of the accounting and optimization puzzle. Manually implementing a tax loss harvesting strategy is feasible with a handful of securities, little to no cash flows, and infrequent harvests. However, assets will often dip in value but recover by the end of the year, so annual strategies leave many losses on the table. The wash sale management and tax lot accounting necessary to support more frequent (and thus more effective) harvesting quickly become overwhelming in a multi-asset portfolio—especially with regular deposits, dividends, and rebalancing. Software is ideally suited for this complex task. But automation, while necessary, is not sufficient. The problem can get so complex that basic tax loss harvesting algorithms may choose to keep new deposits and dividends in cash for the 30 days following a harvest, rather than tackle the challenge of always maintaining full exposure at the desired allocation. An effective loss harvesting algorithm should be able to maximize harvesting opportunities across a full range of volatility scenarios, without sacrificing the investor’s precisely tuned global asset allocation. It should reinvest harvest proceeds into closely correlated alternate assets, all while handling unforeseen cash inflows from the investor without ever resorting to cash positions. It should also be able to monitor each tax lot individually, harvesting individual lots at an opportune time, which may depend on the volatility of the asset. And most of all, it should do everything to avoid leaving a taxpayer worse off. TLH+ was created because no available implementations seemed to solve all of these problems. Existing strategies and their limitations Every tax loss harvesting strategy shares the same basic goal: to maximize a portfolio’s after-tax returns by realizing built-in losses while minimizing the negative impact of wash sales. Approaches to tax loss harvesting differ primarily in how they handle the proceeds of the harvest to avoid a wash sale. Below are the three strategies commonly employed by manual and algorithmic implementations. After selling a security that has experienced a loss, existing strategies would likely have you... Existing strategy Problem Delay reinvesting the proceeds of a harvest for 30 days, thereby ensuring that the repurchase will not trigger a wash sale. While it’s the easiest method to implement, it has a major drawback: no market exposure—also called cash drag. Cash drag hurts portfolio returns over the long term, and could offset any potential benefit from tax loss harvesting. Reallocate the cash into one or more entirely different asset classes in the portfolio. This method throws off an investor's desired asset allocation. Additionally, such purchases may block other harvests over the next 30 days by setting up potential wash sales in those other asset classes. Switch back to original security after 30 days from the replacement security. Common manual approach, also used by some automated investing services. A switchback can trigger short-term capital gains when selling the replacement security, reducing the tax benefit of the harvest. Even worse, this strategy can leave an investor owing more tax than if it did nothing. The hazards of switchbacks In the 30 days leading up to the switchback, two things can happen: the replacement security can drop further, or go up. If it goes down, the switchback will realize an additional loss. However, if it goes up, which is what any asset with a positive expected return is expected to do over any given period, the switchback will realize short-term capital gains (STCG)—kryptonite to a tax-efficient portfolio management strategy. To be sure, the harvested loss should offset all (or at least some) of this subsequent gain, but it is easy to see that the result is a lower-yielding harvest. Like a faulty valve, this mechanism pumps out tax benefit, only to let some of it leak back. An algorithm that expects to switch back unconditionally must deal with the possibility that the resulting gain could exceed the harvested loss, leaving the taxpayer worse off. An attempt to mitigate this risk could be setting a higher threshold based on volatility of the asset class—only harvesting when the loss is so deep, that the asset is unlikely to entirely recover in 30 days. Of course, there is still no guarantee that it will not, and the price paid for this buffer is that your lower-yielding harvests will also be less frequent than they could be with a more sophisticated strategy. Examples of negative tax arbitrage Let’s look at how an automatic 30-day switchback can destroy the value of the harvested loss, and even increase tax owed, rather than reduce it. Below is actual performance for Emerging Markets—a relatively volatile asset class that’s expected to offer some of the biggest harvesting opportunities in a global portfolio. We assume a position in VWO, purchased prior to January 1, 2013. With no harvesting, it would have looked like this: No Tax Loss Harvesting Emerging Markets, 1/2/2014 - 5/21/2014 https://d1svladlv4b69d.cloudfront.net/src/d3/tlh-switchbacks/no-tlh.html A substantial drop in February presented an excellent opportunity to sell the entire position and harvest a $331 long-term loss. The proceeds were re-invested into IEMG, a highly correlated replacement (tracking a different index). By March, however, the dip proved temporary, and 30 days after the sale, the asset class more than recovered. The switchback sale results in STCG in excess of the loss that was harvested, and actually leaves the investor owing tax, whereas without the harvest, he would have owed nothing. TLH with 30-day Switchbacks Emerging Markets, 1/2/2014 - 5/21/2014 https://d1svladlv4b69d.cloudfront.net/src/d3/tlh-switchbacks/thirty-day-switchbacks.html Under certain circumstances, it can get even worse. Due to a technical nuance in the way gains and losses are netted, the 30-day switchback can result in negative tax arbitrage, by effectively pushing existing gains into a higher tax rate. When adding up gains and losses for the year, the rules require netting of like against like first. If any long-term capital gain (LTCG) is present for the year, you must net a long-term capital loss (LTCL) against that first, and only then against any STCG. In the scenario above, the harvested $331 LTCL was used to offset the $360 STCG from the switchback; long can be used to offset short, if we assume no LTCG for the year. Negative tax arbitrage when unrelated long-term gains are present Now let’s assume that in addition to the transactions above, the taxpayer also realized a LTCG of exactly $331 (from selling some other, unrelated asset). If no harvest takes place, the investor will owe tax on $331 at the lower LTCG rate. However, if you add the harvest and switchback trades, the rules now require that the harvested $331 LTCL is applied first against the unrelated $331 LTCG. The harvested LTCL gets used up entirely, exposing the entire $360 STCG from the switchback as taxable. Instead of sheltering the highly taxed gain on the switchback, the harvested loss got used up sheltering a lower-taxed gain, creating far greater tax liability than if no harvest had taken place. Tax Strategy STCG Realized LTCG Realized Taxes Owed No TLH $0 $331 $109 TLH with 30-day switchbacks $360 ($331-$331) $0 net $187 In the presence of unrelated transactions, unsophisticated harvesting can effectively convert existing LTCG into STCG. Some investors regularly generate significant LTCG (for instance, by gradually diversifying out of a highly appreciated position in a single stock). It’s these investors, in fact, who would benefit the most from effective tax loss harvesting. However, if their portfolios are harvested with unconditional 30-day switchbacks over the years, it’s not a question of “if” the switchbacks will convert some LTCG into STCG, but “when” and “how much.” Negative tax arbitrage with dividends Yet another instance of negative tax arbitrage can result in connection with dividend payments. If certain conditions are met, some ETF distributions are treated as “qualified dividends”, taxed at lower rates. One condition is holding the security for more than 60 days. If the dividend is paid while the position is in the replacement security, it will not get this favorable treatment: under a rigid 30-day switchback, the condition can never be met. As a result, up to 20% of the dividend is lost to tax (the difference between the higher and lower rate). The Betterment Solution Summary: Betterment believes TLH+ can substantially improve upon existing strategies by managing parallel positions within each asset class indefinitely, as tax considerations dictate. It approaches tax-efficiency holistically, seeking to optimize every transaction, including customer activity. The fundamental advance of Betterment’s TLH+ is that tax-optimal decision making should not be limited to the harvest itself—the algorithm should remain vigilant with respect to every transaction. An unconditional 30-day switchback, whatever the cost, is plainly suboptimal, and could even leave the investor owing more tax that year—unacceptable for an automated strategy that seeks to lower tax liability. Intelligently managing a bifurcated asset class following the harvest is every bit as crucial to maximizing tax alpha as the harvest itself. The innovations TLH+ seeks to deliver, include: No exposure to short-term capital gains in an attempt to harvest losses. Through our proprietary Parallel Position Management system, a dual-security asset class approach enforces preference for one security without needlessly triggering capital gains in an attempt to harvest losses, all without putting constraints on customer cash flows. No negative tax arbitrage traps associated with less sophisticated harvesting strategies (e.g., 30-day switchback), making TLH+ especially suited for those generating large long-term capital gains on an ongoing basis. Zero cash drag at all times. With fractional shares and seamless handling of all inflows during wash sale windows, every dollar is invested at the desired allocation risk level. Dynamic trigger thresholds for each asset-class, ensuring that both high- and low-volatility assets can be harvested at an opportune time to increase the chances of large tax offsets. Tax loss preservation logic extended to user-realized losses, not just harvested losses, automatically protecting both from the wash sale rule. In short, user withdrawals always sell any losses first. No disallowed losses through overlap with a Betterment IRA/401(k). We use a tertiary ticker system to eliminate the possibility of permanently disallowed losses triggered by subsequent IRA/401(k) activity.2 This makes TLH+ ideal for those who invest in both taxable and tax-advantaged accounts. Harvests also take the opportunity to rebalance across all asset classes, rather than re-invest solely within the same asset class. This further reduces the need to rebalance during volatile stretches, which means fewer realized gains, and higher tax alpha. Through these innovations, TLH+ creates significant value over manually-serviced or less sophisticated algorithmic implementations. TLH+ is accessible to investors —fully automated, effective, and at no additional cost. Parallel securities To ensure that each asset class is supported by optimal securities in both primary and alternate positions, we screened by expense ratio, liquidity (bid-ask spread), tracking error vs. benchmark, and most importantly, covariance of the alternate with the primary.3 With those four measures in place, we assumed annual portfolio turnover of 10% and aggregated them into a single number representing the total annual cost of ownership. While there are small cost differences between the primary and alternate securities, the cost of negative tax arbitrage from tax-agnostic switching vastly outweighs the cost of maintaining a dual position within an asset class. For a 70% stock portfolio composed only of primary securities, the average underlying expense ratio is 0.136%. If each asset class consisted of a 50/50 split between primary and alternate, that cost would be 0.152%—a difference of less than two basis points. Of the 12 asset classes in Betterment’s core taxable portfolio, nine were assigned alternate tickers. Short-term Treasuries (SHV) and Inflation-protected Bonds (VTIP) are insufficiently volatile to be viable harvesting candidates (and disappear entirely above a 57% stock allocation). There is currently no suitable alternative available for International Bonds (BNDX). Take a look at the primary and alternate securities in the Betterment portfolio. Additionally, TLH+ features a special mechanism for coordination with IRAs/401(k)s that required us to pick a third security in each harvestable asset class (except in municipal bonds, which are not in the IRA/401(k) portfolio). While these have a higher cost than the primary and alternate, they are not expected to be utilized often, and even then, for short durations (more below in IRA/401(k) protection). Parallel Position Management As demonstrated, the unconditional 30-day switchback to the primary security is problematic for a number of reasons. To fix those problems, we engineered a platform to support TLH+, which seeks to tax-optimize every user and system-initiated transaction: the Parallel Position Management (PPM) system. PPM allows each asset class to be comprised of two closely correlated securities indefinitely, should that result in a better after-tax outcome. Here's how a portfolio with PPM looks to a Betterment customer. PPM provides several improvements over the switchback strategy. First, unnecessary gains are minimized if not totally avoided. Second, the parallel security (could be primary or alternate) serves as a safe harbor to minimize wash sales—not just from harvest proceeds, but any cash inflows. Third, the mechanism seeks to protect not just harvested losses, but losses realized by the customer as well. PPM not only facilitates effective opportunities for tax loss harvesting, but also extends maximum tax-efficiency to customer-initiated transactions. Every customer withdrawal is a potential harvest (losses are sold first). And every customer deposit and dividend is routed to the parallel position that would minimize wash sales, while shoring up the target allocation. PPM has a preference for the primary security when rebalancing and for all cash flow events—but always subject to tax considerations. This is how PPM behaves under various conditions: Transaction PPM behavior Withdrawals and sales from rebalancing Sales default out of the alternate position (if such a position exists), but not at the expense of triggering STCG—in that case, PPM will sell lots of the primary security first. Rebalancing will always stop short of realizing STCG. Taxable gains are minimized at every decision point—STCG tax lots are the last to be sold on a user withdrawal. Deposits, buys from rebalancing, and dividend reinvestments PPM directs inflows to underweight asset classes, and within each asset class, into the primary, unless doing so incurs greater wash sale costs than buying the alternate. Harvest events TLH+ harvests can come out of the primary into the alternate, or vice versa, depending on which harvest has a greater expected value. After an initial harvest, it could make sense at some point to harvest back into the primary, to harvest more of the remaining primary into the alternate, or to do nothing. Harvests that would cause more washed losses than gained losses are minimized if not totally avoided. PPM eliminates the negative tax arbitrage issues previously discussed, while leaving open significantly more flexibility to engage in harvesting opportunities. TLH+ is able to harvest more frequently, and can safely realize smaller losses, all without putting any constraints on user cash flows. Let’s return to the Emerging Markets example from above, demonstrating how TLH+ harvests the loss, but remains in the appreciated alternate position (IEMG), thereby avoiding STCG. Smarter Harvesting - Avoid the Switchback Emerging Markets, 1/2/2014 - 5/21/2014 https://d1svladlv4b69d.cloudfront.net/src/d3/tlh-switchbacks/tlh-plus.html Better wash sale management Managing cash flows across both taxable and IRA/401(k) accounts without needlessly washing realized losses is a complex problem. Some automated tax loss harvesting services recommend that their customers make infrequent deposits (e.g., quarterly), since more frequent schedules would render their algorithms ineffective. TLH+ operates without constraining the way that customers prefer contributing to their portfolios, and without resorting to cash positions. With the benefit of parallel positions, it weighs wash sale implications of every deposit and withdrawal and dividend reinvestment, and seeks to systematically choose the optimal investment strategy. This system protects not just harvested losses, but also losses realized through withdrawals. IRA/401(k) protection The wash sale rule applies when a “substantially identical” replacement is purchased in an IRA/401(k) account. Taxpayers must calculate such wash sales, but brokers are not required to report them. Even the largest ones leave this task to their customers.4 This is administratively complicated for taxpayers and leads to tax issues. At Betterment, we felt we could do more than the bare minimum. Being equipped to perform this calculation, we do it so that our customers don't have to. Because IRA/401(k) wash sales are particularly unfavorable—the loss is disallowed permanently—TLH+ goes another step further, and seeks to ensure that no loss realized in the taxable account is washed by a subsequent deposit into a Betterment IRA/401(k). In doing so, TLH+ always maintains target allocation in the IRA/401(k), without cash drag. No harvesting is done in an IRA/401(k), so if it weren't for the potential interaction with taxable transactions, there would be no need for IRA/401(k) alternate securities. However, on the day of an IRA/401(k) inflow, both the primary and the alternate security in the taxable account could have realized losses in the prior 30 days. Accordingly, each asset class supports a third correlated security (tracking a third index). The tertiary security is only utilized to hold IRA/401(k) deposits within the wash window temporarily. Let’s look at an example of how TLH+ handles a potentially disruptive IRA inflow when there are realized losses to protect, using real market data for the Developed Markets asset class. The customer starts with a position in VEA, the primary security, in both the taxable and IRA accounts. We then harvest a loss by selling the entire taxable position, and repurchase the alternate security, SCHF. Loss Harvested in VEA Two weeks pass, and the customer makes a withdrawal from the taxable account (the entire position, for simplicity), intending to fund the IRA. In those two weeks, the asset class dropped more, so the sale of SCHF also realizes a loss. The VEA position in the IRA remains unchanged. Customer Withdrawal Sells SCHF at a Loss A few days later, the customer contributes to his IRA, and $1,000 is allocated to the Developed Markets asset class, which already contains some VEA. Despite the fact that the customer no longer holds any VEA or SCHF in his taxable account, buying either one in the IRA would permanently wash a valuable realized loss. The Tertiary Ticker System automatically allocates the inflow into the third option for developed markets, IEFA. IRA Deposit into Tertiary Ticker Both losses have been preserved, and the customer now holds VEA and IEFA in his IRA, maintaining desired allocation at all times. Because no capital gains are realized in an IRA/401(k), there is no harm in switching out of the IEFA position and consolidating the entire asset class in VEA when there is no danger of a wash sale. The result: Customers using TLH+ who also have their IRA/401(k) assets with Betterment can know that Betterment will seek to protect valuable realized losses whenever they deposit into their IRA/401(k), whether it’s lump rollover, auto-deposits or even dividend reinvestments. Smart rebalancing Lastly, TLH+ directs the proceeds of every harvest to rebalance the entire portfolio, the same way that a Betterment account handles any incoming cash flow (deposit, dividend). Most of the cash is expected to stay in that asset class and be reinvested into the parallel asset, but some of it may not. Recognizing every harvest as a rebalancing opportunity further reduces the need for additional selling in times of volatility, further reducing tax liability. As always, fractional shares allow the inflows to be allocated with perfect precision. TLH+ Model Calibration Summary: To make harvesting decisions, TLH+ optimizes around multiple inputs, derived from rigorous Monte Carlo simulations. The decision to harvest is made when the benefit, net of cost, exceeds a certain threshold. The potential benefit of a harvest is discussed in detail below ("Results"). Unlike a 30-day switchback strategy, TLH+ does not incur the expected STCG cost of the switchback trade. Therefore, “cost” consists of three components: trading expense, execution expense, and increased cost of ownership for the replacement asset (if any). All trades are free for Betterment customers. TLH+ is engineered to factor in the other two components, configurable at the asset level, and the resulting cost approaches negligible. Bid-ask spreads for the bulk of harvestable assets are extremely narrow. Expense ratios for the major primary/alternate ETF pairs are extremely close, and in the case where a harvest back to the primary ticker is being evaluated, that difference is actually a benefit, not a cost. A harder cost to quantify could result from what can be thought of as an "overly itchy TLH trigger finger." Without the STCG switchback limitation, even very small losses appear to be worth harvesting, but only in a vacuum. Harvesting a loss “too early” could mean passing up a bigger (temporary) loss—made unavailable due to wash sale constraints stemming from the first harvest. This is especially true for more volatile assets, where a static TLH trigger could mean that the asset is being harvested at a fraction of the benefit that could be achieved by harvesting just a few days later, after a larger decline. Optimizing the thresholds to maximize loss yield becomes a statistical problem, ripe for an exhaustive simulation. There are two general approaches to testing a model’s performance: historical backtesting and forward-looking simulation. Optimizing a system to deliver the best results for only past historical periods is relatively trivial, but doing so would be a classic instance of data snooping bias. The maturation of the global ETF market is a relatively recent phenomenon. Relying solely on a historical backtest of a portfolio composed of ETFs that allow for 10 to 20 years of reliable data when designing a system intended to provide 40 to 50 years of benefit would mean making a number of indefensible assumptions about general market behavior. The superset of decision variables driving TLH+ is beyond the scope of this paper—optimizing around these variables required exhaustive analysis. TLH+ was calibrated via Betterment’s rigorous Monte Carlo simulation framework, spinning up thousands of server instances in the cloud to run through tens of thousands of forward-looking scenarios testing model performance. TLH+ Results Summary: In backtesting performance between 2000 and 2013, we found Betterment's TLH+ produced twice as many tax offsets as a commonly used 30-day switchback strategy. While forward-looking simulations are a far better approach to design and calibration, pure backtesting allows us to observe model performance during familiar market conditions.4 The precise value of harvesting depends on many variables that are unknown at the time of the trade (and could remain unknown for decades)—in particular, assumptions about liquidation or other disposition of assets in the portfolio. Other key assumptions include when the loss will be used, and which type of gain the loss will offset, since in the absence of matching gains, a short-term loss could offset a long-term gain, and vice versa. Tax alpha and IRR It is relatively simple to evaluate the immediate benefit of tax loss harvesting for a single year, ignoring any offsetting future costs. The task becomes more difficult when a number of these years are strung together, and when subsequent events (i.e. taxable liquidation) significantly impact overall performance. A measure called the Internal Rate of Return (IRR) is well-suited for the task, in particular when assuming ongoing deposits into the portfolio. To properly measure tax alpha, we used IRR to calculate the excess return that a TLH+ portfolio would have generated relative to the baseline Betterment portfolio over the last 13 years. For both portfolios, we assumed a constant 70% stock allocation, an initial $50,000 investment on 1/1/2000, and twice monthly auto-deposits of $750, escalated 5% annually (to account for inflation and salary growth). All dividends were reinvested to rebalance the portfolio (buying underweight assets rather than all assets pro-rata) and taxed under the current rules over the entire period. For tax rates, we assumed a single California resident (where Betterment has the most customers) making $100,000/year (federal: 28% on income, 15% on LTCG; state: 9.3%). Please note that these tax rates were the tax rates in effect during the backtest period which was between 2000 and 2013. For fees, in backtesting performance from 2000 to 2013, we assumed 25 basis points assessed quarterly. Savvy investors avoid STCG, and Betterment will never trigger it on behalf of customers, so we assumed that there is never any STCG to offset. Instead, we assumed that harvested losses are offset against ordinary income up to $3,000, and the excess, if any, against LTCG outside the portfolio. This mimics a typical scenario where the investor waits until the end of the year, when he knows exactly how much LTCG he can realize tax-free, and still leave enough losses to fully utilize the more valuable ordinary income offset (for example, if harvested losses add up to $8,000 by year-end, he would trigger $5,000 in LTCG). All tax savings were reinvested into the portfolio the following year. Finally, to factor in liquidation of embedded gains, we calculated IRR for three scenarios: (1) full liquidation on 1/1/2014, (2) liquidation of 50% of the portfolio on 1/1/2014, and (3) no liquidation. Note that the comparison is like-for-like: the non-TLH+ portfolio is also liquidated, and taxes paid. Even with full liquidation, TLH+ would have delivered tax alpha of 0.62%. Tax alpha for investor earning $100,000 (2000-13) A few words on top of standard disclosure are in order. No reliable data was available prior to 2000 that could adequately represent the performance of the full Betterment portfolio, constraining our ability to backtest over a longer period. The annualized results benefit from the fact that much of the value of harvesting came in the first few years of the period (the bear market of 2000-02). That allowed maximum time for the reinvested savings to compound, thus maximizing the benefit of tax deferral. The next 13 years may look nothing like the last 13. On the other hand, 13 years is brief compared to a lifetime of tax deferral—an investor in his thirties can reasonably expect his tax savings to compound for 30 years before liquidating. To strike a balance, we believe that a tax alpha of 0.77% (50% liquidation after 13 years) is a reasonable estimate of what TLH+ can deliver to a typical Betterment customer. These assumptions apply to many, but not all Betterment customers. Higher earners will likely see more benefit. To further demonstrate how tax loss harvesting adds value, we changed just one assumption: using the maximum California tax rates (federal: 39.6% on income, 23.8% on LTCG; state: 12.3%). Please note that these tax rates were the tax rates in effect during the backtest period which was between 2000 and 2013. As expected, the tax alpha under all liquidation scenarios jumps significantly. Tax alpha for investor earning $500,000+ (2000-13) While passive investors should be able to avoid STCG entirely, deferring these highly taxed gains with harvested losses is especially valuable. To layer on this benefit, we ran the backtest again, this time assuming that no matter how much STCL is harvested in a given year, there is always sufficient STCG available for offset. Tax alpha climbs higher, reaching nearly 1% with full liquidation. Tax alpha for investor earning $500,000+, with STCG available (2000-13) Annual Tax Offsets While IRR is the correct way to measure after-tax returns over a multi-year period, it can be useful to examine how a tax loss harvesting strategy behaved in a given year, ignoring the uncertainty of liquidation. The expected value of a loss is calculated by multiplying the amount of the loss by either the short-term or long-term rate, whichever is applicable. This approximates the direct tax savings from the loss in the year it is harvested, without accounting for the future liability that the harvest embeds into the portfolio. The total tax offset for the year's harvesting activity is calculated via this formula: Assuming the maximum California tax rates, and the same initial deposit and auto-deposit schedule as above, we calculated the annual tax offsets that a Betterment portfolio with TLH+ would have generated over the last 13 years. TLH+ was able to provide positive tax offsets in 11 out of 13 years, though as one would expect, most of the value came during the years of the 2000-03 bear market, and the 2008 financial crisis. Because TLH+ avoids tax-indifferent switchbacks, it never caused negative tax offsets over the period, even though the portfolio was regularly rebalanced. The mean annual tax offset was 1.94%.  It is very important to emphasize that an annual tax offset is not a true "after-tax" measure, because it does not take into account that some of the benefit will be clawed back. It assumes that tax deferral is synonymous with permanent tax avoidance, which is misleading. By definition, it will be a higher number than any measure that attempts to factor in liquidation. However, because it is sometimes erroneously referred to as "tax alpha", it can be useful for apples-to-apples comparisons between various strategies. We also ran the same 70% Betterment portfolio, with all the same assumptions, but with a strategy utilizing the 30-day switchback. It is not surprising that TLH+ would outperform the 30-day switchback approach, given the discussion of the latter’s limitations. The extent of the advantage, however, is striking—the mean annual tax offset is double. Best Practices for TLH+ Summary: Tax loss harvesting can add some value for most investors, but high earners with a combination of long time horizons, ongoing realized gains, and plans for some charitable disposition will reap the largest benefits. This is a good point to reiterate that tax loss harvesting delivers value primarily due to tax deferral, not tax avoidance. A harvested loss can be beneficial in the current tax year to varying degrees, but harvesting that loss generally means creating an offsetting gain at some point in the future. If and when the portfolio is liquidated, the gain realized will be higher than if the harvest never took place. Let's look at an example: Year 1: Buy asset A for $100. Year 2: Asset A drops to $90. Harvest $10 loss, repurchase similar Asset B for $90. Year 20: Asset B is worth $500 and is liquidated. Gains of $410 realized (sale price minus cost basis of $90) Had the harvest never happened, we'd be selling A with a basis of $100, and gains realized would only be $400 (assuming similar performance from the two correlated assets.) Harvesting the $10 loss allows us to offset some unrelated $10 gain today, but at a price of an offsetting $10 gain at some point in the future. The value of a harvest largely depends on two things. First, what income, if any, is available for offset? Second, how much time will elapse before the portfolio is liquidated? As the deferral period grows, so does the benefit—the reinvested savings from the tax deferral have more time to grow. While nothing herein should be interpreted as tax advice, examining some sample investor profiles is a good way to appreciate the nature of the benefit of TLH+. Who benefits most? The Bottomless Gains Investor A capital loss is only as valuable as the tax saved on the gain it offsets. Some investors may incur substantial capital gains every year from selling highly appreciated assets—other securities, or perhaps real estate. These investors can immediately use all the harvested losses, offsetting gains and generating substantial tax savings. The High Income Earner Harvesting can have real benefit even in the absence of gains. Each year, up to $3,000 of capital losses can be deducted from ordinary income. Earners in high income tax states (such as New York or California) could be subject to a combined marginal tax bracket of up to 50%. Taking the full deduction, these investors could save $1,500 on their tax bill that year. What’s more, this deduction could benefit from positive rate arbitrage. The offsetting gain is likely to be LTCG, taxed at around 30% for the high earner—less than $1,000—a real tax savings of over $500, on top of any deferral value. The Steady Saver An initial investment may present some harvesting opportunities in the first few years, but over the long term, it’s increasingly unlikely that the value of an asset drops below the initial purchase price, even in down years. Regular deposits create multiple price points, which offer continuous harvesting opportunities. (This is not a rationale for keeping money out of the market and dripping it in over time—tax loss harvesting is an optimization around returns, not a substitute for market exposure.) The Philanthropist In each scenario above, any benefit is amplified by the length of the deferral period before the offsetting gains are eventually realized. However, if the appreciated securities are donated to charity or passed down to heirs, the tax can be avoided entirely. When coupled with this outcome, the scenarios above deliver the maximum benefit of TLH+. Wealthy investors have long used the dual strategy of loss harvesting and charitable giving. Even if an investor expects to mostly liquidate, any gifting will unlock some of this benefit. Using losses today, in exchange for built-in gains, offers the partial philanthropist a number of tax-efficient options later in life. Who benefits least? The Aspiring Tax Bracket Climber Tax deferral is undesirable if your future tax bracket will be higher than your current. If you expect to achieve (or return to) substantially higher income in the future, tax loss harvesting may be exactly the wrong strategy—it may, in fact, make sense to harvest gains, not losses. In particular, we do not advise you to use TLH+ if you can currently realize capital gains at a 0% tax rate. Under 2021 tax brackets, this may be the case if your taxable income is below $40,400 as a single filer or $80,800 if you are married filing jointly. See the IRS website for more details. Graduate students, those taking parental leave, or just starting out in their careers should ask “What tax rate am I offsetting today” versus “What rate can I reasonably expect to pay in the future?” The Scattered Portfolio TLH+ is carefully calibrated to manage wash sales across all assets managed by Betterment, including IRA assets. However, the algorithms cannot take into account information that is not available. To the extent that a Betterment customer’s holdings (or a spouse’s holdings) in another account overlap with the Betterment portfolio, there can be no guarantee that TLH+ activity will not conflict with sales and purchases in those other accounts (including dividend reinvestments), and result in unforeseen wash sales that reverse some or all of the benefits of TLH+. We do not recommend TLH+ to a customer who holds (or whose spouse holds) any of the ETFs in the Betterment portfolio in non-Betterment accounts. You can ask Betterment to coordinate TLH+ with your spouse's account at Betterment. You'll be asked for your spouse's account information after you enable TLH+ so that we can help optimize your investments across your accounts. The Portfolio Strategy Collector Electing different portfolio strategies for multiple Betterment goals may cause TLH+ to identify fewer opportunities to harvest losses than it might if you elect the same portfolio strategy for all of your Betterment goals. The Rapid Liquidator What happens if all of the additional gains due to harvesting are realized over the course of a single year? The federal LTCG rate for the majority of taxpayers is currently 15%, but goes as high as 23.8%. In a full liquidation of a long-standing portfolio, the additional gains due to harvesting could push the taxpayer into a higher bracket, potentially reversing the benefit of TLH+. For those who expect to draw down with more flexibility, smart automation will be there to help optimize the tax consequences. The Imminent Withdrawal The harvesting of tax losses resets the one-year holding period that is used to distinguish between LTCG and STCG. For most investors, this isn’t an issue: by the time that they sell the impacted investments, the one-year holding period has elapsed and they pay taxes at the lower LTCG rate. This is particularly true for Betterment customers because our TaxMin feature automatically realizes LTCG ahead of STCG in response to a withdrawal request. However, if you are planning to withdraw a large portion of your taxable assets in the next 12 months, you should wait to turn on TLH+ until after the withdrawal is complete to reduce the possibility of realizing STCG. Other Impacts to Consider Investors with assets held in different portfolio strategies should understand how it impacts the operation of TLH. To learn more, please see Betterment’s SRI disclosures, Flexible portfolio disclosures,  the Goldman Sachs smart beta disclosures, and the BlackRock target income portfolio disclosures for further detail. Clients in Advisor-designed custom portfolios through Betterment for Advisors should consult their Advisors to understand the limitations of TLH with respect to any custom portfolio. Additionally, as described above, electing one portfolio strategy for one or more goals in your account while simultaneously electing a different portfolio for other goals in your account may reduce opportunities for TLH to harvest losses due to wash sale avoidance. Due to Betterment’s new monthly cadence for billing fees for advisory services, through the liquidation of securities, tax loss harvesting opportunities may be adversely affected for customers with particularly high stock allocations, third party portfolios, or flexible portfolios. As a result of assessing fees on a monthly cadence for a customer with only equity security exposure, which tends to be more opportunistic for tax loss harvesting, certain securities may be sold that could have been used to tax loss harvest at a later date, thereby delaying the harvesting opportunity into the future. This delay would be due to avoidance of triggering the wash sale rule, which forbids a security from being sold only to be replaced with a “substantially similar” security within a 30-day period. See Betterment’s TLH disclosures for further detail. Conclusion Summary: Tax loss harvesting can be a highly effective way to improve your investor returns without taking additional downside risk. Tax loss harvesting may get the spotlight, but under the hood, our algorithms labor to minimize taxes on every transaction, in every conceivable way. Historically, tax loss harvesting has only been available to extremely high net worth clients. Betterment is able to take advantage of economies of scale with technology and provide this service to all qualified customers while striving to: Do no harm: we regularly work to avoid triggering short-term capital gains (others often do, through unsophisticated automation). Do it holistically: we don't just look for opportunities to harvest regularly—we seek to make every transaction tax efficient—withdrawals, deposits, rebalancing, and more. Coordinate wash sale management across both taxable and IRA/401(k) accounts as seamlessly as possible. 1 TLH+ is generally designed around this index-based logic, although it cannot avoid potential wash sales arising from transactions in tickers that track the same index where one of the tickers is not currently a primary, secondary, or tertiary ticker (as those terms are defined in this white paper). This situation could arise, for example, when other tickers are transferred to Betterment or where they were previously a primary, secondary, or tertiary ticker. Additionally, for some portfolios constructed by third parties (e.g., Vanguard, Blackrock, or Goldman Sachs), certain secondary and tertiary tickers track the same index. 2 Certain asset classes in portfolios constructed by third parties (e.g., Vanguard, Blackrock, or Goldman Sachs) do not have tertiary tickers, such that permanently disallowed losses could occur if there were overlapping holdings in taxable and tax-advantaged accounts. 3 Covariance is a measure of co-movement, which takes into account not only correlation, but also whether or not the two securities have similar absolute levels of risk. A covariance of 1 indicates that the two securities not only move together, but also have a similar range of returns. 4 "Vanguard doesn't track wash sales across accounts with different registrations—for example, between your individual account and your joint account or between your individual account and your IRA/401(k). However, you're still obligated to correctly account for all wash sales when filing your income tax return.” (See “What are wash sales?” ) 4 Learn how we backtest performance.  

How We Built 3 New Socially Responsible Investing Portfolios Jul 27, 2021 12:00:00 AM Betterment is moving the category forward for socially responsible investors by offering three SRI portfolios that are fully diversified and keeps costs low. It makes sense that some investors try to align their investments with the values and social ideals that shape their worldview. The way you live, the career you choose, and the people you care about align with your personal values; shouldn’t your investments do the same? Socially responsible investing (SRI) is an approach to investing that reduces exposure to companies that are deemed to have a negative social impact—e.g., companies that profit from poor labor standards or environmental devastation—while increasing exposure to companies that are deemed to have a positive social impact—e.g., companies that foster inclusive workplaces or commit to environmentally sustainable practices. The Betterment SRI portfolio strategy aims to maintain the diversified, low-fee approach of Betterment’s Core portfolio while increasing investments in companies that meet SRI criteria. Betterment has constructed three SRI portfolios, each with a different focus within the realm of Environmental, Social, and Governance (ESG) investing. Betterment’s Broad Impact portfolio offers increased exposure to companies that rank highly on all ESG criteria equally, while Betterment’s Climate and Social Impact portfolios focus on increasing exposure to companies with positive impact on a specific subset of ESG criteria. To learn more about how and why we’ve built the Betterment SRI portfolios, read on to the following sections. The technical details of our approach can be found in our full portfolio methodology as well as in our SRI disclosures. Why Did Betterment Develop SRI Portfolios? Betterment is dedicated to offering a personalized experience for our customers. This means providing options that help customers align our advice to their personal values. We decided to develop SRI portfolios because, currently, there are three major ways that investors attempt to execute an SRI strategy, and none meets an investor’s full needs: Some investors buy SRI mutual funds, settling for unreasonably high fees compared to performance and often losing out on important tax and cost optimization opportunities. Others opt for one of several SRI-specific investment managers whose SRI portfolios may fulfill the investors’ desire for SRI screening but do not always provide proper diversification against risk. Still others try to pick their own basket of SRI investments—a challenging, time-intensive, and inaccessible approach for most everyday investors. We set out to do better for SRI investors. You should not have to choose between holding an SRI portfolio and following a low-cost, diversified investment strategy with tax optimization in order to make sure your investments reflect your personal values. The Betterment SRI portfolio strategy is designed to achieve this balance. We allow socially conscious investors to express that preference in their portfolios without sacrificing the aspects of Betterment’s advice that protect their returns the most: proper diversification, tax optimization, and cost control. What Is Betterment’s Approach To SRI? While SRI has been around for decades, especially for institutions like churches and labor unions, the SRI funds available to individual investors have only emerged in the last 20 to 30 years. And most of these SRI products have been actively-managed mutual funds with high fees. Only recently have lower cost options, like ETFs for SRI, emerged in the market. As we developed each of Betterment’s SRI portfolios, we analyzed all low-cost ETFs available which align with the SRI mandate of each portfolio, searching for products that could replace components of our core strategy without disrupting the diversification or cost of the overall portfolio. In each of our SRI portfolios, some bond asset classes are not replaced with an SRI alternative either because an acceptable alternative doesn’t yet exist or because the respective fund’s fees or liquidity levels make for a prohibitively high cost to our customers. Broad Impact Portfolio In 2017, we launched our original SRI portfolio offering, which we’ve been steadily improving over the years. With this release, our original SRI portfolio benefits from a number of additional enhancements, and becomes our “Broad Impact” portfolio, to distinguish it from the new specific focus options, Climate Impact and Social Impact. As we’ve done since 2017, we continue to iterate on our SRI offerings, even if not all the fund products for an ideal portfolio are currently available. Figure 1 shows that we have increased the allocation to funds screened for ESG criteria each year since we launched our initial offering. Today all primary stock ETFs used in our Broad Impact, Climate Impact, and Social Impact portfolios are screened for some ESG criteria. 100% Stock Allocation in the Broad Impact Portfolio Over Time Figure 1. Calculations by Betterment. Portfolios from 2017-2019 represent Betterment’s original SRI portfolio. The 2020 portfolio represents a 100% stock allocation of Betterment’s Broad Impact portfolio. As additional SRI portfolios were introduced in 2020, Betterment’s SRI portfolio became known as the Broad Impact portfolio. As your portfolio allocation shifts to higher bond allocations, the percentage of your portfolio attributable to SRI funds decreases. Additionally, a 100% stock allocation of the Broad Impact portfolio in a taxable goal with Tax Loss Harvesting enabled may not be comprised of all SRI funds because of the lack of suitable secondary and tertiary SRI tickers in the developed and emerging market stock asset classes.  Betterment’s Broad Impact portfolio is Betterment’s general ESG investing option. The portfolio seeks to give investors greater exposure to all of the different dimensions of social responsibility, such as lower carbon emissions, ethical labor management, or greater board diversity. By investing in funds that consider all aspects of ESG investing, we create a portfolio that grades well with respect to a number of dimensions that socially responsible investors consider when making investment decisions. When creating the Broad Impact portfolio, the asset classes (i.e., portfolio component) that we can confidently replace with an SRI alternative are: U.S. Stocks Emerging Market Stocks Developed Market Stocks U.S. High Quality Bonds U.S. Investment Grade Corporate Bonds Five asset classes use SRI-specific funds—the rest remain similar to the Betterment Core portfolio—and that difference has an impact on the social responsibility of your overall portfolio. For one, many investors are most concerned about the social responsibility of the largest U.S. companies in their portfolios, which often set standards for acceptable corporate behavior that other companies try to emulate. In our Broad Impact SRI portfolio, stocks of companies deemed to have strong social responsibility practices, such as Microsoft, Google, Proctor & Gamble, Merck, CocaCola, Intel, Cisco, Disney, and IBM may make up a larger portion of the SRI portfolio than they do for Betterment’s Core portfolio. In addition, a major reason why there are no acceptable SRI alternatives for other asset classes is that the demand for these products has not been sufficient to encourage fund managers to create them. By electing to use the Betterment SRI portfolio strategy, you signal to the investing world that there is a demand for high quality SRI investment options and may help to encourage the development of well-diversified, low-cost SRI funds in a wider variety of asset classes. If you’re interested in a more quantitative understanding of how the Broad Impact portfolio compares to our Core portfolio in terms of social responsibility, you can review the SRI ratings published by MSCI, shown below. MSCI’s ratings for the SRI funds used in Betterment’s SRI portfolio are higher than the ratings for the funds used in the Betterment portfolio. For more information on what the numbers mean, read our full whitepaper. MSCI ESG Quality Scores U.S. Stocks Betterment Core Portfolio: 5.94 Betterment Broad Impact Portfolio: 7.31 Emerging Markets Stocks Betterment Core Portfolio: 4.22 Betterment Broad Impact Portfolio: 6.31 Developed Markets Stocks Betterment Core Portfolio: 6.81 Betterment Broad Impact Portfolio: 8.33 US High Quality Bonds Betterment Core Portfolio: 6.13 Betterment Broad Impact Portfolio: 6.91 Sources: MSCI ESG Quality Scores courtesy of etf.com, values accurate as of August 25, 2020 and are subject to change. In order to present the most broadly applicable comparison, scores are with respect to each portfolio’s primary tickers exposure, and exclude any secondary or tertiary tickers that may be purchased in connection with tax loss harvesting. Climate Impact Portfolio Betterment’s Climate Impact portfolio offers investors an SRI portfolio that is more focused on being climate-conscious rather than focused on all ESG dimensions equally like the Broad Impact portfolio. The portfolio achieves this objective by investing in ETFs with a specific focus on mitigating climate change. When compared to the Core portfolio, all of the stock positions have been replaced with more climate-conscious alternatives. Half of the stocks in the portfolio are invested in a global low-carbon stock ETF, which systematically overweights companies with lower carbon emissions, while also underweighting their high-carbon emitting peers. The other half of the stocks in the portfolio are invested in fossil fuel reserve free ETFs. These ETFs replicate broad market indices, while divesting from owners of fossil fuel reserves, defined as crude oil, natural gas, and thermal coal. By investing in the Climate Impact portfolio, investors are actively divesting assets away from holders of fossil fuel reserves while cutting their investments’ carbon emissions. Carbon emissions per dollar of revenue in the 100% stock Climate Impact portfolio are half of those in the 100% stock Betterment Core portfolio, based on weighted average carbon intensity data from MSCI. The other change from the Core portfolio, is that the Climate Impact portfolio replaces our International Developed Bond and US High Quality Bond exposure by investing in a global green bond ETF. Green bonds, as defined per MSCI, fund projects that support alternative energy, energy efficiency, pollution prevention and control, sustainable water, green building, and climate adaptation. Social Impact Portfolio Betterment’s Social Impact portfolio offers investors an SRI portfolio that is more focused on supporting social equity and minority empowerment compared to the Broad Impact portfolio. The portfolio achieves this objective by augmenting the ESG exposure achieved in the Broad Impact portfolio with two additional ETFs each with a unique focus on diversity, NACP and SHE. NACP is a U.S. stock ETF offered by Impact Shares that tracks the Morningstar Minority Empowerment Index. The National Association for the Advancement of Colored People (NAACP) has developed a methodology for scoring companies based on a number of minority empowerment criteria. These scores are used to create the Morningstar Minority Empowerment Index, an index which seeks to maximize the minority empowerment score while maintaining market-like risk and strong diversification. The end result is an index which provides greater exposure to US companies with strong diversity policies that empower employees irrespective of race or nationality. By investing in NACP, investors are allocating more of their money to companies with a better track record of social equity as defined by the NAACP. SHE is a US Stock ETF that allows investors to invest in more female-led companies compared to the broader market. In order to achieve this objective, companies are ranked within each sector according to their ratio of women in senior leadership positions. Only companies that rank highly within each sector are eligible for inclusion in the fund. By investing in SHE, investors are allocating more of their money to companies that have demonstrated greater gender diversity within senior leadership than other firms in their sector. Let’s Make Investing More Socially Responsible As you review our SRI portfolios, you might ask yourself, “Is it more important that my portfolio is well-diversified with reasonable costs, or should my money be exclusively invested in SRI funds, regardless of the cost or level of diversification?” These are insightful questions that get at the heart of the tradeoffs involved in socially responsible investing today. Currently, most accessible SRI approaches make investors choose between a well-diversified, low-cost portfolio and an inadequately diversified and/or higher cost portfolio comprised of SRI funds. Diversification and controlled costs are investing fundamentals that all investors—SRI or not—deserve. They’re principles that live at the heart of fiduciary advice. The only reason other SRI solutions settle for higher costs and less diversification is because the industry isn’t challenged to offer something better. We at Betterment believe we can create a future that does not ask SRI investors to choose. We are committed to achieving more socially responsible investing through our research over time and are tracking the availability of better vehicles for these purposes. Since originally launching the legacySRI portfolio in 2017 (and now the Broad Impact portfolio) with ESG exposure to only U.S. large cap stocks, we’ve been able to expand the exposure to now cover also developed market stocks, emerging market stocks, and US high quality bonds. We’ve also been able to launch the Climate and Social Impact portfolios which add exposure to focused ESG issues by allocating to assets such as green bonds or gender-diverse U.S. Stocks. As always, we will continue to monitor additional ways to improve our portfolios. In the future, we will improve our SRI portfolio even further, iterating and adding new SRI funds that satisfy our cost and diversification requirements as they become available. Get started with the Betterment SRI Portfolio. Get started with our approach to SRI today, and join us as we work to expand our SRI approach together. If you don’t yet have a Betterment account, open an account to explore the portfolio options available to you. If you already have a Betterment account, you can enable a SRI portfolio when adding a new goal or by updating your existing goal’s portfolio strategy via the “Portfolio Analysis” tab of your Betterment account. Once on your “Portfolio Analysis” tab, you will see an “edit” option under the “Portfolio Strategy” section. Once you select “edit” you will be sent to the “Portfolio Strategy” flow where you can opt into a SRI portfolio.

Stop Worrying and Learn to Love Rising Interest Rates Jul 27, 2021 12:00:00 AM A diversified bond basket can actually benefit from rising interest rates. Contrary to conventional wisdom, rising interest rates can be good for a bond portfolio. Investors might think otherwise because of the mechanics of basic bond math (‘when rates go up, yields go up and prices go down’). But, that’s not the whole story: A diversified bond basket can actually benefit when rates rise. Interest Rates and Bond Fund Returns As an example, the light blue line on this graph is the return of VBMFX, a very close proxy of Betterment’s U.S.Total Bond Fund (BND) over the subsequent two years from the date on the x-axis. This allows us to map the performance of the bond fund to the interest rates represented by the dark blue line. The dark blue line is the risk-free rate, or the Effective Federal Funds Rate, which is what banks charge each other based on their deposits at the Federal Reserve, and the primary benchmark for interest rates. The gray periods highlight when interest rates were rising. Over the past 25 years, the two-year rolling return of the U.S.Total Bond Fund—a bond fund diversified by maturity, credit quality and geography—actually increases, not decreases, after interest rates rise. Why? It’s because of how the bond market really works, beyond the simplistic bond math in investing 101. What is that? Bond prices today have as much to do with expectations for the future as the actual level of interest rates today. So a rate rise can be ‘priced in’ for a long time before it happens. The element of time, or what might happen over the duration of the bond fund, and what other investors in the market expect over the long term. Yes, very short-term rates reflect the policy set by the Federal Reserve. However, for most bonds, current yields and prices also reflect market participants’ beliefs about future changes to that policy. Bond yields can jump on the expectation of a rate rise, even if it doesn’t happen for a while. As we have written about before, market expectations are already reflected in prices. The fact that interest rates will rise at some point isn't exactly secret knowledge, so how are active managers going to beat the market? Critically, the market usually moves slowly and before the Fed announces changes. The Fed is getting better and better at transparently communicating its likely future decisions, specifically to keep bond market operating smoothly. As a result, rate moves are often smoothly reflected in prices before they actually happen. That makes it tougher for an active manager to earn their fees. Long-term rates factor in a variety of different expectations, including inflation and long-term economic growth. All those factors alter the calculus for long-term bonds that can have maturities of up to 30 years. So, for the diversified portfolio of bonds shown in the graph, the impact of an interest hike could have hit some of its bonds before the actual rate change. For the long-duration, high-quality bonds, the broader trend for total return is tracking the interest rates, earning a maturity premium, and reflecting market expectations for the future. Acknowledging that market expectations affect bond prices is a more holistic way to think about how a diversified bond fund will likely perform. Just doing the bond math oversimplifies. Bond Market: Myth and Reality The bond market is very sophisticated and very liquid, meaning that the vast majority of factors that impact prices are ‘priced in’ at any given moment, as investors constantly react to perceptions of a changing scenario. When bonds react suddenly and sharply, it’s because news that impacts the price was unexpected (i.e., market expectations were wrong). But, most of the time, market expectations are accurate, so the changes are ahead of time and gradual. The Federal Open Market Committee (FOMC) is a group that meets about eight times a year to talk about U.S. interest rates. Looking closely at notes from a meeting in June 2015, the committee explains carefully in the official statement that interest rates aren’t decided in a vacuum, but based on the country’s reported economic data. It spells out exactly what it expects so market expectations can be on the same page. Many investors never take the time to actually read the statement, but it’s probably the most instructive few paragraphs to help answer the question of where bond prices will go. For example: The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. What should strike any investor reading that is that if bond prices today perfectly reflect market expectations, the FOMC just spelled out the exact parameters of each of the factors that would compel the Federal Reserve to raise interest rates. If you want to know when the Federal Reserve might raise interest rates, the answer is really clear: after more job growth and signs of rising inflation. All of which are public data released ahead of FOMC meetings. Because bond investors knew the Fed’s framework for increasing rates, market expectations are status quo. You could read into the statement that rates might rise slightly in the medium term, which is what the prices for bonds are already reflecting could happen. You Can’t Time Bonds The lesson of all this is that trying to be tactical about interest rates and your bond portfolio is really a fool’s errand.  If ‘when rates go up, yields goes up and prices go down’ leads an investor to think that now is a good time to sell bonds, look at the chart again. The dark blue line, representing the Effective Federal Funds Rate, has been at this low level for five years, and the FOMC could have decided to raise rates after any of its meetings based on the conventional wisdom that ‘interest rates have to go up eventually.’ But it didn’t. You can be wrong for a long time. Meanwhile, over that same time period, the U.S.Total Bond Fund, the blue line, generated a strong return for investors in the first half of that period, and then a weaker return, but still positive, as interest rates remained at these lower levels. If it’s reasonable to think, based on reading the FOMC statement, that the market expectations are already on the same page for a gradual rise to begin around the end of 2015 or early 2016, then what the first chart will probably look like it did during the previous three periods of rising interest rates, in gray, where the U.S.Total Bond Fund returned gains for its investors. An investor who tried to time the market during this period by selling the bonds and holding cash, let’s say, would have actually lost money. Because of the impact of inflation, the investor’s real return would have been in negative territory. Cash Often Loses (Real) Money Back to Your Betterment Bond Basket The bond portfolio at Betterment is the most diversified I'm aware of. We include both international developed bonds (BNDX) and emerging market bonds (EMB) bonds in our portfolio. This is aimed at reducing your exposure to pure U.S. interest rate risk considerably. Diversification is the key to creating long-term wealth in the market, and a position in resilient bond funds is an important part of that, whether interest rates are rising or falling. Remember these are the tenets of Betterment’s approach: Diversify: Every Betterment allocation is designed to diversify risks so that you’re not over-exposed to any one of them. Lower Stock Allocations and Risk: We take the risk of different duration bonds into account in our allocations, but purely from a risk-as-uncertainty view. Our bond allocations are based on long-term views, not any short-term moves. Always Stocks and Bonds: With the exception of 100% bonds, every Betterment portfolio has allocations to both stocks and bonds, international and domestic. Lower Duration Within U.S. Bonds: As you decrease the stock slider beneath 40% stocks, Betterment uses ultra-short duration Treasuries to help de-risk the portfolio, which is aimed at removing your portfolio’s sensitivity to interest rate changes, for better or worse. Diversified Interest Rate Exposures: We invest in both international developed (BNDX) and emerging market bonds (EMB) to help diversify our interest rate risk. This is designed so that neither of these bond funds expose the investor to currency risk. This article originally appeared on ETF.com.

Why the S&P 500 Is a Bad Benchmark Jul 27, 2021 12:00:00 AM Using a regional indicator to look at your portfolio of global holdings doesn’t provide an accurate picture. Here’s why. Using a regional benchmark to look at your portfolio of global holdings doesn’t provide an accurate picture. Here’s why. Are you tall? Your answer to that will likely depend on your own personal context. For example, if you’re a 5’9” American male, and you're comparing yourself to your American male peers, then you might say no. Why? Many of your friends are likely taller than you are, given that you're a half-inch shorter than the average American male.1 But what happens when you compare your height to all other men in the world? The global average height of men is 5'8 1/2". So let's ask again: Are you tall? The lesson here is that we can’t let where we live play an overly important role when we’re trying to provide an objective, evidence-based answer. Applying this concept to investing, let’s examine the importance so many investors attach to the S&P 500 or the Dow Jones Industrial Average. U.S investors tend to heavily measure their portfolio performance against American indices, even though they have been proven not to be the best benchmarks. The S&P 500 is an index of the largest 500 publicly traded U.S. companies, such as Apple, Microsoft, and Ford, weighted by their market capitalization. As such, it’s often used by casual investors as a gauge of stock market performance. In 2014, it did very well—up almost 14%—significantly better than non-U.S. equity markets. Performance Relative to Global Stock Portfolio In other years, however, the opposite was true. From 2002 to 2007, the S&P 500 underperformed not only the U.S. stock market as a whole, but also a diversified portfolio and international markets. As American investors, we look to the S&P 500 because it’s familiar and it’s what’s in the headlines. We can’t resist using it as a benchmark for a diversified portfolio. This phenomenon is called home bias. Betterment’s portfolio avoids home bias by reflecting global stock market weights. U.S. stock markets make up roughly half of the world’s investable stock market—the remainder is international developed (43%) and emerging markets (9%).2 It’s important to keep in mind that the S&P 500 represents just over one-third of all the world’s stocks. That means comparing your performance to it is a bit like to comparing your height against only 37% of the world’s people who all come from the same place—say, comparing your height only to the average height of the American male, which is 5’ 9 1/2.” While you might be able to fudge a little with your height, your money is a different story. Using the right evidence—rather than the most convenient context—is the smarter way to invest. Diversification Is a Smarter Investment By using the world’s markets as its baseline, the Betterment portfolio diversifies risk on a number of levels, including currency, interest rates, credit risk, monetary policy, and economic growth country by country. Even as economic circumstances may drag down one nation, global diversification decreases the risk that no one geographic area alone will drag down your portfolio. In short, diversification is a fundamental way to manage risk—it keeps your investment performance more consistent. That’s why we pay so much attention to asset class correlation. The result for you, the investor, is that you get the average performance of all the asset classes in which you are invested. If you had only selected one of these asset classes for your portfolio—say, the S&P 500—then you would be at the mercy of that sole index’s performance. By diversifying, you avoid extremes in both gains and losses, and you achieve the same average returns with less uncertainty. Diversification does not guarantee higher returns as compared to each constituent of the portfolio. Rather, diversification is about ensuring average returns—never the best, and never the worst. So, what can you use to compare your performance? The concept of a benchmark basically does not apply to an all-index portfolio. When you’re an index-fund investor—which is what you are when you have a Betterment portfolio—there is no under- or over-performance. You are the average performance. However, it can be useful to have some external yardstick to get a general sense of how you are doing. To do that, you’d need a fund that is similar to your Betterment portfolio with respect to allocation, costs, and diversification. While imperfect, Vanguard’s LifeStrategy Funds could be a point of comparison. If you choose to compare the two, make sure it’s apples-to-apples: Be careful to not equate a 90% stock fund with an 80% stock Betterment account, for instance. But keep in mind that the additional benefits of a Betterment account—general tax efficiency, including tax loss harvesting, free trading, goal-based advice, and more—are likely not included in the performance metrics of a similar non-Betterment diversified portfolio. And next time someone asks you if you are tall, remember that, to be accurate, you need to use the global average before you can say yes or no. 1  AverageHeight.co 2 MSCI All-Country World Index

9 Reasons Goal-Based Investing Leads to Success Jul 27, 2021 12:00:00 AM What exactly are you saving and investing for? This is a serious moment of self inquiry. Defining goals enables better wealth management. Here's why. Before you start putting money into the market, ask yourself one question: What exactly are you saving and investing for? This is a serious moment of self inquiry. In order to invest for the future you are cutting back on spending your wealth now. There must be some future purpose for this sacrifice—some goal of tomorrow's spending which outweighs the pleasure of today's spending. Goal-based wealth management is not just a cute way to help you manage your investments as easily as you manage your Gmail account—it is necessary for maximizing how effectively you manage your money and investments, including knowing when you can afford to spend more than you might think today. For those who are new to goal-based wealth management, goals allow you to bucket your money according to  its purpose and when you will need a given amount. Each goal you select has its own portfolio of stocks and bonds customized for the time horizon you set. "Goals" are a kind of budgeting methodology that have been used for decades (one old version is called the envelope system). Betterment has elevated the framework to apply it to good savings and investment strategy as well.  Why? Because research shows it improves outcomes by encouraging optimal behavior and more precise wealth management (see the reference list below). Below are some of the behavioral and financial reasons why goal-based wealth management is better. 1. Avoid under-saving. Goal-based wealth management forces you to think about and enumerate your goals, often far in advance. This prevents you from underestimating how much money you'll need at any point in the future—or misaligning your expectations with your savings ability. It means that present-day you and future you have more common ground. 2. Plan ahead, save less, achieve more. Using goal-based wealth management, you'll likely see future liabilities coming down the road. And the further in advance you start saving for a goal, the less you'll actually have to save. Why? The power of returns. The earlier you start saving , the more time you give the market to grow your savings for you. For example, imagine you know you will want cash to buy a new car—let's say $65,000 for a very cool Tesla Model S. Being smart, you are not going to finance it (where you pay interest), but rather save up ahead of time. Below you can see the recommended monthly savings required depending on how far in advance you start saving. If you save monthly for one year, you're essentially saving dollar for dollar for your new car. But if you plan ahead, and start saving five years out, the market can help you—and you only need save $54,720. 3. Use a data-driven target. When you set up an investment goal at Betterment—for example, saving $150,000 for a home down payment in 10 years—we give you several pieces of advice: The first is a suggested allocation based on your time horizon and the second is advice on how much you need to save on a monthly basis to reach that goal. We also suggest an initial deposit. When you take guesswork out of your plan, it means you are more likely to hit your target. 4. Save for a tangible outcome. Goals make it far more likely you'll save for—and achieve— every one of your goals. When you can attach a real outcome to the purpose of your saving, you're more likely to actually work toward that goal rather than blind saving. In behavioral psychology, this is called affect—or the concept that we are more motivated by real things than abstract numbers. 5. Guilt-free spending. While some might find it surprising, there are people who actually feel guilty and are uncomfortable with spending large amounts of money. This is true even when it's for a planned, known expenditure. When it comes time to spend your savings, if it comes from an account specifically earmarked for that purpose, you're not overspending. Goals also make it more likely you only spend the amount saved in the goal, rather than scooping out a lump sum from a general savings account. 6. Benefits to an automated plan. For most people, it’s much easier and more practical to invest $125 a week, or $500 a month, than summon up a one-time deposit of $6,000 each year. Automating your saving makes it effortless to do the right thing—save the right amount every month. This kind of of drip-system is not only useful for budgeting and saving on an ongoing basis—it’s also great investment strategy. First, it ensures your money has maximal time in the market. Second, it is a form of dollar-cost averaging, which diversifies your cost-basis entry points over time compared to a lump-sum purchase. With Betterment, regular auto-deposits also provide an opportunity for rebalancing and tax-loss harvesting, which are investing practices that can improve returns and lower your tax bill over time. 7. Turn a bias into a strength. Goal-based wealth management makes use of 'partitioning' and leverages mental accounting to improve your savings behavior. Mental accounting means that you make decisions based on the red or black of each individual account, rather than view them in the aggregate. While this could lead to unwise decisions as it may limit a holistic view of your finances, you can also use mental accounting as a strength. By creating many different mental accounts, you ensure that you are saving optimally for each of them—and do not rely on one account to cover all your required future liabilities. 8. Better match assets and liabilities, avoid debt. Goals makes it easier to close the gap between the money you can afford to spend and the money you want to spend. In investing, we call this matching assets to liabilities. By clearly earmarking the assets of today to the liabilities of tomorrow, we ensure that we aren't going to go into debt or fail at those goals. This can also help determine if you're in danger of paying interest on something you cannot afford. For example, if you fall short of target or goal, like saving $25,000 for a luxury vacation, you have to decide whether to make up the shortfall with credit—or cut back on what you can afford. When you use credit or unexpectedly downsize, you are using a form of debt. The first is financial and the second is psychological. Goals help you manifest your intentions without incurring debt of any kind. 9. Achieve optimal returns. Goal-based wealth management matches your time horizon to your asset allocation, which means you take on the optimum amount of risk. When you misallocate, it can mean saving too much or too little, missing out on returns with too conservative a setting, or missing your goal if you take on too much risk. Occasionally, critics of goal-based investing claim that it causes users to deviate from an optimal allocation because they don't look at their portfolio holistically. In fact, it has has been shown through a series of papers (see below) that when done correctly, goal-based investing is just as efficient as holistic portfolio management. Betterment’s algorithms are smart enough to avoid these hazards of goal-based investing. For example, we look across all your goals when utilizing tax-lot information—for example, using TaxMin to withdraw—to ensure that one goal is not mis-coordinated with others. You get all the benefit of goal-based wealth management, and none of the downside. A reading list If you would like to get into the nitty-gritty on any of these points, here are my references: Rha, J.-Y., Montalto, C. P., & Hanna, S. D. (2006). The Effect of Self-Control Mechanisms on Household Saving Behavior. Journal of Financial Counseling and Planning. Shefrin, H. M., & Thaler, R. H. (1992). Mental accounting, saving, and self-control. In G. Loewenstein & J. Elster (Eds.), Choice over time (pp. 287-330). Russell Sage Foundation. Shafir, E., & Thaler, R. H. (2006). Invest now, drink later, spend never: On the mental accounting of delayed consumption. Journal of Economic Psychology,27(5), 694-712 Thaler, R. H. (1990). Anomalies: Saving, Fungibility, and Mental Accounts. Journal of Economic Perspectives. Fox, C. R., Ratner, R. K., & Lieb, D. S. (2005). How subjective grouping of options influences choice and allocation: diversification bias and the phenomenon of partition dependence. Journal of experimental psychology. General, 134(4), 538-55 Das, S., Markowitz, H., Scheid, J., & Statman, M. (2010). Portfolio Optimization with Mental Accounts. Journal of Financial and Quantitative Analysis. Brunel, J. L. (2006). How Suboptimal—if at all—is goal-based asset allocation?. The Journal of Wealth Management, 9(2), 19-34.

Using Investment Goals At Betterment Jul 27, 2021 12:00:00 AM Goal-based investing. The idea is prized among financial advisors—and our team at Betterment—but to the everyday investor, it’s often difficult to put into practice. TABLE OF CONTENTS What is goal-based investing? Goals and Investment Accounts at Betterment Retirement Savings Retirement Income Safety Net Major Purchase General Investing How to Set Effective Goals Using Betterment Mapping Out Your Financial Picture Goal-based investing. The idea is prized among financial advisors—and our team at Betterment—but to the everyday investor, it’s often difficult to put into practice. After all, being clear about the purpose of one’s savings can be a challenge. You might start saving for one reason, then decide halfway through your progress that the money is really for something else. Or, you might have so many goals you want to save for, you don’t know where to start. Often, people are stuck in a single-savings-account mentality, where your figurative pot of gold is for any and all savings goals—with no distinct purposes articulated. For many investors, goal-based investing takes a lot of discipline and even more introspection. Without the right tools in place, it can be difficult to keep your goals on track. At Betterment, we’re working to make setting and attaining your financial goals a natural and straightforward experience. In this article, we’ll guide you through how goal-based investing works at Betterment and how we’ve designed Betterment accounts to put your goals into action. What is goal-based investing again? Goal-based investing is the best way we know to help you set a personalized financial plan with investments that are aligned to help you fulfill that plan over the long-term. You can think of goals as the building blocks of a plan. When you set goals for your investments, you’re identifying what personal purpose you have for your money, and what you want to achieve. As your advisor, Betterment uses this information to recommend the right level of savings and proper mix of investments to help you reach your goals. The best investment plans consist of a prioritized set of personal goals, so you decide on which goals to focus on first to inform your investment behavior. Goal-based investing is based on a technique used by institutional investors called “asset-liability management,” which aims to match future assets with future expenditures. In other words, goal-based investing seeks to ensure that you have enough money when you plan to spend it in the future. The trouble with this notion of goal-based investing is that you may not think of your money in terms of goals, and even if you do, it’s likely that your goals aren’t always clearly defined. A goal like, “I want to buy a boat or house sometime in the future” isn’t specific enough to inform good numerical planning. If you were an advisor, imagine how challenging it would be to help somebody plan when he or she isn’t quite sure what they want or when they want it. It’s not unlike helping a friend or family member stick to a budget: If they never set a clear cap for their budget, it’s hard to say how much spending is too much spending. From our perspective as your advisor, the best way to help you set a good plan is to help you give your goals as much definition and detail as possible, then determine how they stack up together. What does an investing goal look like at Betterment? When you really think about it, the essence of a goal is your intention to make a future expenditure. For example, you want $50,000 for a future down payment on a house. Or, $300,000 for future payments on your child’s college tuition. Or $100,000 of annual retirement income for 30-40 years. Any future expenditure can be an investment goal. Our Investing Goals At Betterment, we aspire to help you build a personalized financial plan built on goals that reflects what it really feels like to save and spend money. Within your Betterment account, every investment goal you set has a target amount and target date(s) for which you desire to meet your goal. Within each goal is at least one investment account, depending on the type of goal you set. Investment accounts at Betterment include a variety of legally-defined account types, like taxable accounts (what other investment companies might call brokerage accounts), individual retirement accounts (both Roth and traditional), SEP IRAs, joint taxable accounts, and trusts. Different goal types may contain different investment account types. Currently, we have five types of goals: Retirement Savings – for those saving for retirement Retirement Income – for retirees making withdrawals Safety Net – for growing an emergency fund Major Purchase – for making a future expenditure General Investing – for investing when you’re not sure of the specific future expenditure When you sign up with Betterment, you can set up one or more of these goals for your investments. For any existing goal, you can change your goal type in the Plan tab of your Betterment account. You will see an option on the right that reads “Advice type: Edit” that leads you to the option to update your goal type. What we try to do—and we’re constantly working to improve—is to help you set your goals well while also advising you on the right accounts and investments you’ll use to help reach your goals. We recommend customizing the names of each of your goals to set your personal purpose for each. Here’s a breakdown of the default range of stock allocation advice, by goal type: Type of investing goal Most Aggressive Recommended Allocation (typical start of term, depending on age) Most Conservative Recommended Allocation (typical end of term, depending on age) Anticipated term Cash-out assumptions Retirement 90% Stocks, 10% Bonds 56% Stocks, 44% Bonds Up to 50 years Shift to a Retirement Income goal at the target date Retirement Income 56% Stocks, 44% Bonds 30% Stocks, 70% Bonds Up to 30 years Steady drawdown with dynamic withdrawal rate until target date Safety Net 30% Stocks, 70% Bonds 30% Stocks, 70% Bonds Targets date of achieving desired balance Up to full liquidation at any time General Investing 90% Stocks, 10% Bonds 55% Stocks, 45% Bonds Recommendation is based on investor age No liquidation Major Purchase (House, Education, Other) 90% Stocks, 10% Bonds 0% Stocks, 100% Bonds Between 1 and 35 years Full liquidation at target date Each of these investment goals requires a different strategy—that is the quintessence of smarter investing. Betterment’s automated advice and technology builds a unique investment portfolio for each type of goal. Underpinning each type of goal is a customized stock-to-bond allocation recommendation, which is designed to automatically adjust (in most cases) to help you reach your goal without taking on unnecessary risk. For each of these goal types, we provide a recommended maximum and minimum stock allocation, based on your term, while making certain cash-out assumptions. But we also give you the tools to adjust the dial, if desired, for a more aggressive or more conservative allocation in any goal type. You can also select additional portfolio strategies that are not generally recommended but may be more personalized to your views. Retirement Savings Goals For retirement savings goals, our . In addition, retirement savings goals can utilize Tax Coordination™, Betterment’s approach to asset location, which aims to lower your taxes on retirement savings by keeping the highest-tax assets in tax-advantaged account types and the lower-tax assets in taxable accounts. When you have 20 or more years until you retire, we recommend 90% stocks. Our advice reduces your recommended risk level over time until your retirement date, where it shifts to a 56% stock allocation. Then, when you have arrived at your retirement age, you can make the shift to the next goal type, Retirement Income, which we developed to serve your needs in retirement. Example of Allocation Advice for Customer Retiring at Age 65 Figure above shows an example that assumes the customer is planning to live until age 90. Retirement Income Investing Goals Once you reach retirement and start making withdrawals, Betterment’s smart retirement withdrawal process recommends an appropriate allocation for where you are in retirement and recommends a regular withdrawal amount from your goal. Our methodology considers a number of factors to suggest a safe liquidation target or withdrawal amount: Current balance Desired monthly income amount Minimum acceptable income level Desired certainty about not falling beneath minimum income level Conditional life expectancy For example, a 65-year-old male has a remaining life expectancy of nearly 18 years, according to projections used by the Social Security Administration.1 That is 18 years over which he will be both liquidating his portfolio but also growing his assets to support future years of consumption. With regards to the stock allocation, we seek to: Continue to grow your portfolio while in retirement Lower portfolio risk as you are further into retirement Safety Net Investing Goals A Safety Net goal is one of the highest priority goals we recommend for investors. It’s slightly different from other goals because we assume the money may never be needed—but when it is, we assume a substantial portion of the balance will be liquidated all at once. Currently, a goal for your “safety net” or “emergency” fund contains just one account at Betterment. Your account in a Safety Net goal will be taxable, as there are no tax-advantaged accounts for general personal savings. Juxtaposed to this goal, you may also sync an external savings account if you would like to see this account included in your balance. Betterment’s allocation advice for Safety Net goals is conservative and does not adjust automatically over time, holding at 15% stocks, 85% bonds continuously. We recommend you add a 15% buffer to the balance to help preserve the minimum balance you need to have available. Allocation Advice For A Safety Net Goal Major Purchase Investing Goals For a major purchase—such as saving for a car, a house, or even your child’s education—Betterment enables one account for each goal. With any major purchase, an investor usually anticipates liquidating all at once when they reach their goal, usually for a short- or medium-term period of investing. Transaction Timeline Table Thus, Betterment’s allocation advice is more conservative for these goals than that of retirement goals. Since we expect you to fully liquidate your investment at your intended goal date, Betterment automatically shifts your allocation to low stock percentages as you near your goal date in line with our advice, unless you set your own allocation or turn off automatic allocation adjustment. Allocation Advice For A Major Purchase Goal General Investing While Betterment is designed to help you execute goal-based investing, we understand that there are plenty of investors who aren’t sure about their goals, and might have part of their savings invested with no clear purpose. Many investors have a clear understanding for some of their goals, but haven't yet sorted through the precise purposes for all other investments. For these investors, Betterment offers goals that are classified as “general investing” and contain just a single account. Since you can still personalize the name, allocation, and portfolio strategy in these situations, we still call them goals within your account, but our allocation advice on these goals has fewer assumptions than the advice for the distinct goal types above. You can consider general investing goals to be the utility players within your account, where the priority is wealth creation because you have no specific plans for a liquidation event in the future. This makes goals of the “general investing” type generally appropriate for objectives like long-term savings where you might plan to transfer wealth to the next generation or convert your assets into a trust account at a later date. While you can have multiple general investing goals, we often find that Betterment customers who might be using general investing goals could decrease unnecessary risks by using a more precise goal type. In general investing goals, our automated advice recommends a range of allocations from a maximum of 90% stocks to a minimum stock allocation of 55% stocks, depending on your age and how close you are to age 65. Allocation Advice For General Investing How To Set Effective Investing Goals Using Betterment As explained above, Betterment works hard to help you set goals in realistic ways that match your actual savings habits. To align with our research on goal-based investing, it’s important to understand what makes for an effective goal. One framework to thoughtfully determine a prioritized set of goals is called the S.M.A.R.T. approach. S.M.A.R.T. stands for: Specific Measurable Attainable Realistic Time-limited Make your goal specific. A specific goal is one with a clear description and a well-articulated set of circumstances. For example, if you’re saving for a child’s college education, a goal that is specific might look like the following on paper: “My goal is to pay for my child’s total higher education costs (including graduate school if chosen, room and board, social events/clubs, and any other fees).” By stating how many of the possible education costs you’re planning to pay for (i.e. “total”), the goal statement above provides much more information about the size and shape of the future expenditure. Make your goal measurable. Making a goal measurable means that you can tell how close you are to achieving the goal using numbers. Generally, this means quantifying the specific information you know about—setting an accurate estimate of the total of the expenditure you expect to make. Here’s what a measurable goal looks like using our example: “My goal is to save a total of $800,000 to pay for all three of my children’s total higher education costs.” The total expenditure should account for all the factors that went into making your goal specific, but it should turn the various social and philosophical decisions you’ve made about your goal into a numerical sum. You should also account for taxes in setting a precise, measurable goal. Ensure your goal is attainable. As you define a specific and measurable goal, you should make sure it’s actually attainable. Attainable goals are future expenditures you actually have the capability to achieve. For instance, if you make $80,000 in a year, saving $800,000 over five years is not attainable because even if you could save 100% of your income, you’d still come up short of your goal amount. However, if you have more time to save or if you make more money each year, then perhaps the goal could be attained. Consider whether your goal is realistic A goal is realistic if you have the time, resources, and discipline to achieve it. Generally, your goals will only be realistic if you take into account the other goals you have in your life. For example, when saving for college education, you probably will also need to invest for your retirement. If you don’t align and prioritize your goals, you may end up being less able to save as regularly or as much as you’d like—which lowers your chances of achieving either goal. Any goal should be time-limited. The last step in developing a S.M.A.R.T. goal is to make sure the goal is time-limited—i.e. Every goal needs a deadline or target date. Just as measurable goals quantify the total expenditure you expect to make, time-limited goals quantify the time you have to reach that expenditure amount. In most cases, you should try to set goals as far in advance as possible. For instance, rather than waiting until you have three children that will be going to college, it’s a good idea to start saving as soon as you start planning a family. A time-limited goal should also consider how frequently you can plan to contribute to the goal. Will you save a portion of every paycheck? Or will you save just once a year? An effective time-limited goal might read like the following: “My goal is to save a total of $800,000 over 18 years (by [due date]) to pay for all three of my children’s total higher education costs by putting aside at least $1,500 per paycheck per month.” Use Investing Goals to Map Out Your Financial Picture By using a framework like the S.M.A.R.T. approach to set each of your investment goals, you’ll push yourself to think broadly about all the factors of life that affect your financial future while ensuring each and every goal is quantifiable and feasible. Remember that it’s okay to use estimates or set educated guesses when creating goals you’re not quite sure of. In many cases, such as retirement or college savings, you might need additional research and external resources to predict how much money you’ll actually need to reach all the specific criteria of your goal. In getting started saving for a goal, it’s always better to be approximately right than to have no goal at all. If you set reasonable, customizable goals using the goal types available to you in your Betterment account, you’ll get savings and investment advice on each of the building blocks of a solid financial plan. Additional assistance with identifying your goals is available to Betterment Premium customers.

ETF Selection For Portfolio Construction: A Methodology Jul 27, 2021 12:00:00 AM Betterment seeks to maximize investor take-home returns, which drives our criteria and process for selecting ETFs (the funds in your portfolio). TABLE OF CONTENTS Why ETFs ETF Selection Total Annual Cost of Ownership Mitigating Market Impact Conclusion One of Betterment’s central objectives is to help investors achieve the best possible take-home returns. At the most fundamental level, we do this through the allocation advice we provide for every portfolio. However, another key component of performance is the investment vehicles we use in our portfolio. They are an essential—but often overlooked—element in maximizing the risk-adjusted, after-tax, net-of-costs return for our customers. In the following piece, we detail Betterment’s investment selection methodology, including: Why we use exchange-traded funds (ETFs) Why expense ratios are not the whole story How Betterment estimates an investment vehicle’s total annual cost of ownership (TACO). Why Do We Invest in ETFs? An ETF is a security that generally tracks a broad-market stock or bond index or a basket of assets just like an index mutual fund, but trades just like a stock on a listed exchange. By design, index ETFs closely track their benchmarks—such as the S&P 500 or the Dow Jones Industrial Average—and are bought and sold like stocks throughout the day. Betterment only uses open-ended ETFs (which carry no restrictions around issuing or redeeming shares) as they have many embedded structural advantages when compared to mutual funds. These include: Clear Goals and Mandates Unlike many actively managed mutual funds, the ETFs we use have definite mandates to passively track broad-market benchmark indexes. A passive mandate explicitly restricts the fund administrator to the singular goal of replicating a benchmark rather than making active investment decisions constituting market timing, building concentration in either a single name, group of names, or themes in an effort to beat the fund’s underlying benchmark. Adherence to this mandate ensures the same level of investment diversification as the benchmark indexes, makes performance more predictable, and reduces idiosyncratic risk associated with active manager decisions. Intraday Availability ETFs are transactable during all open market hours just like any other stock. As such, they are heavily traded by the full spectrum of equity market participants including market makers, short-term traders, buy-and-hold investors, and fund administrators themselves creating and redeeming units as needed (or increasing or decreasing the supply of ETFs based on market demand). This diverse trading activity leads to most ETFs carrying low liquidity premiums (or lower costs to transact due to competition from readily available market participants pushing prices downward) and equity-like transaction times irrespective of the underlying holdings of each fund. This generally makes ETFs fairly liquid, which makes them cheaper and easier to trade on-demand for activities like creating a new portfolio or rebalancing an existing one. In comparison, mutual funds transact only once per day, which introduces significant lag between desired and filled price. Moreover, certain portfolio management strategies like tax loss harvesting require liquid securities that trade more than once a day. Low and Unbiased Fee Structures Below is the expense ratio for the 70% stock Betterment IRA portfolio in 50% primary and 50% secondary tickers and the asset-weighted average expense ratio for all ETFs. Expense Ratio Comparison The chart above compares the asset-weighted expense ratios of the Betterment Portfolio Strategy versus the average ETF, based on data collected by the Investment Company Institute in their 2018 Factbook. The range for average expense ratios of Betterment’s recommended portfolios at the time of this 2018 comparison was 0.07% to 0.15%, depending on allocation. Note that the range is subject to change depending on current fund prices. Because most benchmarks update constituents (i.e., the specific stocks and related weights that make up a broad-market index) fairly infrequently, passive index-tracking ETFs also register lower annual turnover (or the rate a fund tends to transact its holdings) and thus fewer associated costs passed through to investors. In addition, ETFs are generally managed by their administrators as a single share class that holds all assets as a single entity. This structure naturally lends itself as a defense against administrators practicing fee discrimination across the spectrum of available investors. As an example, some index-tracking mutual fund administrators segment their funds into several share classes where institutional and high net-worth investors can secure lower fees and more lenient terms in exchange for investing a higher amount upfront. Retail investors with lower available investment balances are funneled into higher fee share classes with more stringent terms. By comparison, with only one share class, ETFs are investor-type agnostic. The result is that ETF administrators provide the same exposures and low fees to the entire spectrum of potential buyers. The fund and administration structure of ETFs also eliminates concerns stemming from potential conflict of interest in the standard sales and access channels utilized by mutual funds. While mutual funds can be sold directly to investors by their administrators, most investments in mutual funds are recommended and placed through a multi-tiered sales and distribution network. Each layer of the network tacks on a host of opaquely documented fees. These fee amounts are entirely non-standard across funds and networks, and are largely the result of negotiations between marketing and sales executives who are divorced from the investment functions of the fund administrators. These network fees come in the form of front and back loaded costs, or immediate one-time fees assessed for initial investment or redemptions. Sales channels are subject to compensation incentives that tend to favor investment recommendations that yield allocation to funds where they can collect more fees over selections that might ultimately be in the best interest of their clients. Tax Efficiency In the case when a fund (irrespective of its specific structure) sells holdings that have experienced capital appreciation, the capital gains generated from those sales must, by law, be accrued and distributed to shareholders by year-end in the form of distributions. These distributions increase tax liabilities for all of the fund’s shareholders. With respect to these distributions, ETFs offer a significant tax advantage for shareholders over mutual funds. Because mutual funds are not exchange traded, the only available counterparty available for a buyer or seller is the fund administrator. When a shareholder in a mutual fund wishes to liquidate their holdings in the fund, the fund’s administrator must sell securities in order to generate the cash required to satisfy the redemption request. These redemption-driven sales generate capital gains that lead to distributions for not just the redeeming investor, but all shareholders in the fund. Mutual funds thus effectively socialize the fund’s tax liability to all shareholders, leading to passive, long-term investors having to help pay a tax bill for all intermediate (and potentially short-term) shareholder transactions. Because ETFs are exchange traded, the entire market serves as potential counterparties to a buyer or seller. When a shareholder in an ETF wishes to liquidate their holdings in the fund, they simply sell their shares to another investor just like that of a single company’s equity shares. The resulting transaction would only generate a capital gain or loss for the seller and not all investors in the fund. Mutual fund distributions are generally decided by the fund administrator and can introduce material variability in an investor’s tax profile. ETF tax profiles are fairly static with most of the tax realization/deferral control being held by the individual investor. In addition, ETFs enjoy a slight advantage when it comes to taxation on dividends paid out to investors. After the passing of the Jobs and Growth Tax Relief Reconciliation Act of 2003, certain qualified dividend payments from corporations to investors are only subject to the lower long-term capital gains tax rather than standard income tax (which is still in force for ordinary, non-qualified dividends). Qualified dividends have to be paid by a domestic corporation (or foreign corporation listed on a domestic stock exchange) and must be held by both the investor and the fund for 61 of the 120 days surrounding the dividend payout date. As a result of active mutual funds’ higher turnover, a higher percentage of dividends paid out to their investors violate the holding period requirement and increase investor tax profiles. Investment Flexibility The maturation and growth of the global ETF market over the last two decades has led to the development of an immense spectrum of products covering different asset classes, markets, styles, and geographies. The result is a robust market of potential portfolio components which are versatile, extremely liquid, and easily substitutable. ETFs Have Seen Significant Growth   Source: Investment Company Institute 2016 Investment Company Fact Book, Chapter 3: Exchange-Traded Funds, Figure 3.2 Selecting Across the ETF Universe Despite all the advantages of ETFs, it is still important to note that not all ETFs are exactly alike or equally beneficial to an investor. The primary task of Betterment’s investment selection process is to pick the set of funds or vehicles that provide exposure to the desired asset classes with the least amount of difference between underlying asset class behavior and portfolio performance. In other words, we attempt to minimize the “frictions” (the collection of systematic and idiosyncratic factors that lead to performance deviations) between ETFs and their benchmarks. The principal component of frictions between tracked asset classes and investor returns is the fund’s expense ratio: The higher the expenses charged to the investor, the lower the resulting returns that pass through. However, relying on just expense ratio to make an instrument selection could yield to a less efficient portfolio. There are other material frictions that factor in that Betterment also considers, discussed below. Betterment’s measure of these frictions is summarized as the total annual cost of ownership, or TACO: a composition of all relevant frictions used to rank and select ETF candidates for the Betterment portfolio. Total Annual Cost of Ownership The total annual cost of ownership (TACO) is Betterment’s fund scoring method, used to rate funds for inclusion in the Betterment portfolio. TACO takes into account an ETF’s transactional and liquidity costs as well as costs associated with holding funds. TACO is determined by two components, or frictions as mentioned above, and they are a fund’s cost-to-trade and cost-to-hold. The first, cost-to-trade, represents the cost associated with trading in and out of funds during the course of regular investing activities, such as rebalancing, cash inflows or withdrawals, and tax loss harvesting. Cost-to-trade is generally influenced by two factors: Volume: A measure of how many shares change hands each day. Bid-ask spread: The difference between the price at which you can buy a security and the price at which you can sell the same security at any given time. The second component, cost-to-hold, represents the annual costs associated with owning the fund and is generally influenced by these two factors: Expense ratios: Fund expenses imposed by an ETF administrator. Tracking difference: The deviation in performance from the fund’s benchmark index. Let’s review the specific inputs to each component in more detail: Cost-to-Trade: Volume and Bid-Ask Spread Volume Volume is a historical measure of how many shares may change hands each day. This helps assess how easy it might be to find a buyer or seller in the future. This is important because it tends to indicate the availability of counterparties to buy (e.g., when Betterment is selling ETFs) and sell (e.g., when Betterment is buying ETFs). The more shares of an ETF Betterment needs to buy on behalf of our customers, the more volume is needed to complete the trades without impacting market prices. As such, we measure average market volume for each ETF as a percentage of Betterment’s normal trading activity. Funds with low average daily trading volume compared to Betterment’s trading volume will have a higher cost, because Betterment’s higher trading volume is more likely to influence market prices. Bid-Ask Spread Generally market transactions are associated with two prices: the price at which people are willing to sell a security, and the price others are willing to pay to buy it. The difference between these two numbers is known as the bid-ask spread, and can be expressed in currency or percentage terms. For example, a trader may be happy to sell a share at $100.02, but only wishes to buy it at $99.98. The bid-ask currency spread here is $.04, which coincidentally also represents a bid-ask percentage of 0.04%. In this example, if you were to buy a share, and immediately sell it, you’d end up with 0.04% less due to the spread. This is how traders and market makers make money—by providing liquid access to markets for small margins. Generally, heavily traded securities with more competitive counterparties willing to transact will carry lower bid-ask spreads. Unlike the expense ratio, the degree to which you care about bid-ask spread likely depends on how actively you trade. Buy-and-hold investors typically care about it less compared to active traders, because they will accrue significantly fewer transactions over their intended investment horizons. Minimizing these costs is beneficial to building an efficient portfolio which is why Betterment attempts to select ETFs with narrower bid-ask spreads. Cost-to-Hold: Expense Ratio and Tracking Difference Expense Ratio An expense ratio is the set percentage of the price of a single share paid by shareholders to the fund administrators every year. ETFs often collect these fees from the dividends passed through from the underlying assets to holders of the security, which result in lower total returns to shareholders. Since expenses are a principal component in reducing investor returns, ETFs with higher expenses generally tend to perform worse. For context, a Betterment 70% equity tax-advantaged portfolio contains ETFs with expense ratios that average to 0.11%. Tracking Difference Tracking difference is the underperformance or outperformance of a fund relative to the benchmark index it seeks to track. Funds may deviate from their benchmark indexes for a number of reasons, including any trades with respect to the fund’s holdings, deviations in weights between fund holdings and the benchmark index, and rebates from securities lending. It’s important to note that, over any given period, tracking difference isn’t necessarily negative; in some periods, it could lead to outperformance. However, tracking difference can introduce systematic deviation in the long-term returns of the overall portfolio when compared purely with a comparable basket of benchmark indexes other than ETFs. Finding TACO We calculate TACO as the sum of the above components: TACO = "Cost-to-Trade" + "Cost-to-Hold" As mentioned above, cost-to-trade estimates the costs associated with buying and selling funds in the open market. This amount is weighted to appropriately represent the aggregate investing activities of the average Betterment customer in terms of cash flows, rebalances, and tax loss harvests. The cost-to-hold represents our expectations of the annual costs an investor will incur from owning a fund. Expense ratio makes up the majority of this cost, as it is the most explicit and often the largest cost associated with holding a fund. We also account for tracking difference between the fund and its benchmark index. In many cases, cost-to-hold, which includes an ETF’s expense ratio, will be the dominant factor in the total cost calculations. Of course, one can’t hold a security without first purchasing it, so we must also account for transaction costs, which we accomplish with our cost-to-trade component. Minimizing Market Impact Market impact, or the change in price caused by an investor buying or selling a fund, is incorporated into Betterment’s total cost number through the cost-to-trade component. This is specifically through the interaction of bid-ask spreads and volume. However, we take additional considerations to control for market impact when evaluating our universe of investable funds. A key factor in Betterment’s decision-making is whether the ETF has relatively high levels of existing assets under management and average daily traded volumes. This helps to ensure that Betterment’s trading activity and holdings will not dominate the security’s natural market efficiency, which could either drive the price of the ETF up or down when trading. We define market impact for any given investment vehicle as the Betterment platform’s relative size (RSRS) in two key areas. Our share of the fund’s assets under managements is calculated quite simply as RS of AUM = ('AUM of Betterment' / 'AUM of ETF') while our share of the fund’s daily traded volume is calculated as RS Vol = ('Vol of Betterment' / 'Vol of ETF') Minimizing investor frictions is one of the core goals of the Betterment investment methodology. ETFs without an appropriate level of assets or daily trade volume might lead to a situation where Betterment’s activity on behalf of customers moves the existing market in the security. In an attempt to avoid potentially negative effects upon our investors, we do not consider ETFs with smaller asset bases and limited trading activity. Any market impact measure that does not satisfy our criteria disqualifies the security from consideration. Betterment Portfolio ETFs Account Type: Taxable Asset Class Ticker ETF Fund Name Index Expense Ratio U.S. Total Stock Market Primary VTI Vanguard Total Stock Market ETF CRSP U.S. Total Market 0.03% Alternate ITOT iShares Core S&P Total U.S. Stock Mkt ETF Dow Jones U.S. Broad Stock Market 0.03% U.S. Large-Cap Value Stocks Primary VTV Vanguard Value ETF CRSP U.S. Large Value 0.04% Alternate SPYV SPDR® Portfolio S&P 500 Value ETF S&P 500 Value 0.04% U.S. Mid-Cap Value Stocks Primary VOE Vanguard Mid-Cap Value ETF CRSP U.S. Mid Value 0.07% Alternate IWS iShares Russell Mid-Cap Value ETF Russell Midcap Value 0.24% U.S. Small-Cap Value Stocks Primary VBR Vanguard Small-Cap Value ETF CRSP U.S. Small Value 0.07% Alternate IWN iShares Russell 2000 Value ETF Russell 2000 Value 0.24% International Developed Stocks Primary VEA Vanguard FTSE Developed Markets ETF FTSE Developed ex U.S. All Cap Net Tax (U.S. RIC) Index 0.05% Alternate IEFA iShares Core MSCI EAFE ETF MSCI EAFE IMI 0.07% Emerging Market Stocks Primary VWO Vanguard FTSE Emerging Markets ETF FTSE Custom Emerging Markets All Cap China A Inclusion Net Tax (U.S. RIC) Index 0.10% Alternate IEMG iShares Core MSCI Emerging Markets ETF MSCI EM (Emerging Markets) IMI 0.11% Short-Term Treasuries Primary GBIL Goldman Sachs Access Treasury 0-1 Year ETF FTSE US Treasury 0-1 Year Composite Select Index 0.12% U.S. Short-Term Bonds Primary JPST JPMorgan Ultra-Short Income ETF N.A. 0.18% Inflation Protected Bonds Primary VTIP Vanguard Short-Term Infl-Prot Secs ETF Bloomberg Barclays U.S. Treasury TIPS (0-5 Y) 0.05% U.S. Municipal Bonds Primary MUB iShares National Muni Bond ETF S&P National AMT-Free Municipal Bond 0.07% Alternate TFI SPDR® Nuveen Blmbg Barclays Muni Bd ETF Bloomberg Barclays Municipal Managed Money 1-25 Years Index 0.23% U.S. High Quality Bonds Primary AGG iShares Core U.S. Aggregate Bond ETF Bloomberg Barclays U.S. Aggregate 0.04% International Developed Bonds Primary BNDX Vanguard Total International Bond ETF Bloomberg Barclays Global Aggregate x USD Float Adjusted RIC Capped 0.08% Emerging Market Bonds Primary EMB iShares JP Morgan USD Em Mkts Bd ETF JP Morgan EMBI Global Core Index 0.39% Alternate VWOB Vanguard Emerging Mkts Govt Bd ETF Bloomberg Barclays USD Emerging Markets Government RIC Capped Bond 0.25%   Account Type: IRA Asset Class Ticker ETF Fund Name Index Expense Ratio U.S. Total Stock Market Primary VTI Vanguard Total Stock Market ETF CRSP U.S. Total Market 0.03% Alternate SCHB Schwab US Broad Market ETF™ S&P TMI 0.03% U.S. Large-Cap Value Stocks Primary VTV Vanguard Value ETF CRSP U.S. Large Value 0.04% Alternate SCHV Schwab US Large-Cap Value ETF™ Dow Jones U.S. Total Stock Market Large-Cap Value 0.04% U.S. Mid-Cap Value Stocks Primary VOE Vanguard Mid-Cap Value ETF CRSP U.S. Mid Value 0.07% Alternate IJJ iShares S&P Mid-Cap 400 Value ETF S&P Mid Cap 400 Value 0.18% U.S. Small-Cap Value Stocks Primary VBR Vanguard Small-Cap Value ETF CRSP U.S. Small Value 0.07% Alternate SLYV SPDR® S&P 600 Small Cap Value ETF S&P Small Cap 600 Value 0.15% International Developed Stocks Primary VEA Vanguard FTSE Developed Markets ETF FTSE Developed ex U.S. All Cap Net Tax (U.S. RIC) Index 0.05% Alternate SCHF Schwab International Equity ETF™ FTSE Developed ex US Index 0.06% Emerging Market Stocks Primary VWO Vanguard FTSE Emerging Markets ETF FTSE Custom Emerging Markets All Cap China A Inclusion Net Tax (U.S. RIC) Index 0.10% Alternate SPEM SPDR® S&P Emerging Markets ETF S&P Emerging Markets BMI 0.11% Short-Term Treasuries Primary GBIL Goldman Sachs Access Treasury 0-1 Year ETF FTSE US Treasury 0-1 Year Composite Select Index 0.12% U.S. Short-Term Bonds Primary JPST JPMorgan Ultra-Short Income ETF N.A. 0.18% Inflation Protected Bonds Primary VTIP Vanguard Short-Term Infl-Prot Secs ETF Bloomberg Barclays U.S. Treasury TIPS (0-5 Y) 0.05% U.S. High Quality Bonds Primary AGG iShares Core U.S. Aggregate Bond ETF Bloomberg Barclays U.S. Aggregate 0.04% International Developed Bonds Primary BNDX Vanguard Total International Bond ETF Bloomberg Barclays Global Aggregate x USD Float Adjusted RIC Capped 0.08% Emerging Market Bonds Primary EMB iShares JP Morgan USD Em Mkts Bd ETF JP Morgan EMBI Global Core Index 0.39% Alternate PCY PowerShares Emerging Markets Sov Dbt ETF DB Emerging Market USD Liquid Balanced Index 0.50% Source: Cost information is from Xignite. Last updated May, 2021. Conclusion We are constantly monitoring our investment choices. Our selection analysis is run quarterly to assess the following: validity of existing selections, potential changes by fund administrators (raising or lowering expense ratios), and changes in specific ETF market factors (including tighter bid-ask spreads, lower tracking differences, growing asset bases, or reduced selection-driven market impact). We also consider the tax implications of portfolio selection changes and estimate the net benefit of transitioning between investment vehicles for our customers. The power of this methodology is how quickly it arrives at a total cost figure that synthesizes several dissimilar factors across many different candidate securities. The ability to quickly assess candidate suitability across the wider universe of potential options for each asset class is novel and incredibly useful in fulfilling our objectives of constantly providing a robust investment product, platform, advice, performance, and process control. We will continue to drive innovation when trying to improve investor take-home returns by finding ways to lower costs and frequently re-evaluating our portfolio choices. We use the ETFs that result from this process in our allocation advice that is based on your investment horizon, balance, and goal. ETFs are subject to market risk, including the possible loss of principal. The value of the portfolio will fluctuate with the value of the underlying securities. ETFs may trade for less than their net asset value (NAV). There is always a risk that an ETF will not meet its stated objective on any given trading day.

What To Do After A Market Drop Jul 27, 2021 12:00:00 AM Seeing a market dip is scary. We feel it, too. But it’s important to remind yourself that market drops are an expected, unavoidable part of investing. A sharp fall in stock prices, as we’ve seen recently, is usually accompanied by scary news headlines and red numbers. Modern media wants clicks and attention, and, unfortunately, fear sells. It’s hard to stay calm. We feel it, too. But our advice is simple and straightforward: Stay calm and make smart decisions to  support your longer-term goals. We knew there would be days like this, and we planned for it. Betterment portfolios are optimized for your time horizon. They’ll stay that way. If you’re tempted to take action, remember that this is why we created Betterment—to automatically plan for and handle market drops so that you wouldn’t have to worry about them. When you opened your Betterment account, we based our portfolio-allocation advice on the time horizon for each of your goals. That means each of your portfolios is properly adjusted for risk and takes into account the likelihood and magnitude of a downturn or below-average returns. We’ve planned on seeing some dips, and adjusted accordingly. Also remember that, as with many things in life, making decisions in the heat of the moment is probably not a good idea. Investing is no different. The more you check your account, the more likely  you are to see losses, and subsequently do something in reaction to a near-term drawdown. And reacting to market drawdowns is likely to  hurt your returns over the long term. Other experts agree: stay calm, do nothing. You don’t have to take my word for it. Listen to some of the most respected consumer advocates in personal finance. Jason Zweig, an esteemed columnist for The Wall Street Journal, put together a 2015 list of what not to do. Read it for yourself, but here’s an overview, put more positively: Turn off the news. Stay calm; don’t panic and sell. Use this as an opportunity to diversify. Remember that what matters is the outlook for the future, not a “correction.” Ignore most commentary; no one knows what will happen next. Ron Lieber of The New York Times knows what this feels like and puts forward six excellent points to consider: You are more diversified than just the S&P 500 and (should) have bonds. This drop is nothing compared to the gains the market has seen in the past six years. These portfolios were constructed when you weren’t anxious. You (should) have plenty of time to recover. If you’re worried about panicking, it’s better to reduce your risk (say, by 20% stocks) than to move to cash. Just know this likely means you’ll need to save more. This is completely normal. This is what markets do. Cass Sunstein, author of Nudge and an experienced investor in his own right, recommends to "have a diversified portfolio, consisting in large part of low-cost index funds, weighted toward equities; add money as you get it, and diversify it as well; keep the cash you need; and otherwise hold steady (and spend a lot of time with the sports pages)." Finally, legendary investor Warren Buffett gives perhaps the most concise advice about how risky markets feel, and what you should do: "The stock market is a device for transferring money from the impatient to the patient." Stay focused on the future, not the past. Let’s answer the key question on many people’s minds: How much worse have markets performed after a bad week (a 5% or worse drop in markets) historically? The answer: If anything, they appear to perform slightly better. Recent performance is simply not informative about what will happen next. The graph below shows the subsequent returns of the S&P 500, split by if the preceding week was “bad." We defined “bad” as any week with a loss of 5% or more. We have 48 of such weeks starting from the 1950s. (Analysis from 2015) Bad Weeks and Future Returns https://d1svladlv4b69d.cloudfront.net/src/js/returns-following-bad-weeks/index.html While it might seem like future returns are more variable after a bad week, this is likely because of the smaller sample size (there are 3,376 weeks that were not bad, for comparison). Indeed, if anything, it seems like bad weeks are followed by slightly better weeks. But we don’t recommend you bet on it; the odds of it going well are the same as the odds of it going poorly. Following 4 Weeks’ Return After Normal Weeks After Bad Weeks < -20% 0% 0% -20% to -10% 1% 8% -10% to 0 39% 30% 0 to 10% 59% 51% 10% to 20% 1% 8% 20% or More 0% 2% What We’re Doing to Help You Reach Your Goals We’re in an era of uncertainty; we always have been, and we always will be. Even if people say otherwise, no one knows what will happen, so there’s no use in projecting. We understand that it might feel necessary to try to correct what’s happened, but it’s just a distraction. The more important thing to do is focus on the future and staying properly invested. Tax Loss Harvesting+ Our Tax Loss Harvesting+ can help you capture any losses in your portfolio and use them to help lower your tax bill at the end of the year. You can offset up to $3,000 of ordinary income every year with tax losses, which can be a substantial savings. Tax-Aware Rebalancing Each of your goals has its own target asset allocation. We monitor every goal daily, and will rebalance when your goal’s allocation drift passes above our thresholds. This helps to maintain your selected allocation level and buys depreciated assets at a lower price. Rest assured, Betterment will never cause short-term capital gains tax to rebalance your portfolio. Keeping Your Goals on Track When your goals start to go off track, we’ll alert you. We may suggest either a one-time deposit or a slightly higher auto-deposit amount to make up for any market losses. However, it’s important to note that most people with longer-term goals will not fall off track. If you have to do something, do something productive. There are plenty of things you can do in response to a drop in markets that can have a positive effect on your portfolio, risk management, and chance of hitting your goals. Revisit your goals and plans. A good action to take would be to make sure your goals are properly aligned with your time horizon. For example, let’s take a 30-year retirement goal (target $1 million) with $85,000 rather than $100,000 due to a 15% drawdown. The drop has increased the monthly savings amount to $647, up $10 from $637 before the crash—hardly a game changer. But, that $10 makes a difference over the following 30 years, so check to see if any of your goals have gone off track and need to be replenished. Opportunistically Deposit to Fund Rebalancing A market drawdown is one of the most frequent causes of rebalances. The losing assets (often stocks) become underweight relative to the stable assets (bonds). Sell-based rebalances are an automatic and systematic way to buy lower and sell higher. However, in taxable accounts, selling can trigger capital gains and thus taxes, even if the asset is substantially below its all-time high. Betterment will never cause short-term capital gains tax to rebalance your portfolio. But you can avoid generating long-term capital gains by making opportunistic deposits during volatile times. This allows us to buy underweight assets without selling. On the Portfolio page of your account, you can see the minimum deposit necessary to avoid a sell-based rebalance. Liquidate losses in external accounts. One of the most commons barriers to switching over entirely to Betterment is incurring capital gains in external investments. Take advantage of a short-term market drawdown and let go of an underperforming mutual fund, or diversify away from a single stock position. What can you do today? Prepare a short list of investments you would like to liquidate, and the price at which you are willing to sell them. Our tax-switch calculator can help with that. If you can’t stand the heat… turn it down. While the best investment strategy is usually to stay invested, some people could find the stress simply to be too much. If you think you might make an extreme decision—such as moving to 100% bonds—if the drawdown continues, then it’s OK to reduce your risk temporarily. Just make it less extreme than you’re inclined to. Adjust from 90% stocks to 60% stocks, for example. Make sure you set a reminder to revisit your portfolio after a month. While we don’t believe it will improve your performance from a pure investment returns point of view, it means you’ll be less likely to make an emotional decision, and you’ll have a higher return per night’s lost sleep. Take a vacation from your portfolio. My own research has shown that people are more likely to monitor portfolios during volatile periods. The only problem is that the more you monitor, the riskier your portfolio will seem to you. A better strategy is to log in less during volatile periods. When stress drives bad decisions, it pays to be the ostrich, not the meerkat. When Fidelity looked at which investors had the highest returns, it was those who never logged in. Still unsure? Get a second opinion. Our dedicated team of CFP™ professionals are here for you. If you need additional guidance and personal recommendations for your financial plan, book an advice package today. Ultimately, the best thing to do in a market downturn is nothing. Our advice takes an underperforming market into account, so trying to correct a drop could end up hurting your returns over the long term.

How Tax Impact Preview Works to Help Avoid Surprises Jul 27, 2021 12:00:00 AM Betterment continues to make investing more transparent and tax-efficient, and empowers you to make smarter financial decisions. Two words that don’t belong together: taxes and surprise. But all too often, a transaction made in your investment account has unexpected, costly consequences many months later. Selling securities has tax implications. Typically, these announce themselves the following year, when you get your tax statement.  Today, we are changing that, with Tax Impact Preview. Betterment’s Tax Impact Preview feature provides a real-time tax estimate for a withdrawal or allocation change—before you confirm the transaction. Tax Impact Preview shows you exactly the information you should be focusing on to make an informed decision—potentially lowering your tax bill. Tax-Aware Investors Can Consider: Do the benefits outweigh the costs? Should I wait to avoid short-term capital gains? Is there another source of funds I could use that might have a lower or no tax impact? “Customers can become overly focused on short-term returns and change allocations or make withdrawals in reaction to fluctuations in the market,” says Alex Benke, CFP®, product manager for this new feature, “Tax Impact Preview will help these customers stay focused on the big picture and avoid unpleasant surprises on their tax bill.” Tax Impact Preview: An Industry First Betterment is the only investment platform to offer this kind of real-time tax information—and it joins a suite of tools which already helps investors minimize their taxes, including Tax Coordination™, Tax Loss Harvesting+, TaxMin, and more. Tax Impact Preview is available to all Betterment customers at no additional cost. Learn more about the suite of tax-efficiency features available for your portfolio. How It Works When you initiate a sale of securities (a withdrawal or allocation change), our algorithms first determine which ETFs to sell (rebalancing you in the process, by first selling the overweight components of your portfolio). Within each ETF, our lot selection algorithm, which we call TaxMin, will select the most tax-efficient lots, selling losses first, and short-term gains last. Transaction Timeline Table With Tax Impact Preview, you will now see an “Estimate tax impact” button when you initiate an allocation change or withdrawal, which will give you detailed estimates of expected gains and/or losses, breaking them down by short and long-term. Using this timely information, you can better decide if the tax result makes sense for you.  If your transaction results in a net gain, we estimate the maximum tax you might owe. Why Estimated? The precise tax owed depends on many circumstances specific to you: not just your tax bracket, but also the presence of past and future capital gains or losses for the year across all of your investment accounts. We use the highest applicable rates, to give you an upper-bound estimate. You might ask—why are the gains and losses about to be realized not exact, even if the resulting tax is only an estimate? The gains and losses depend on the exact price that the various ETFs will sell at. If the estimate is done after market close, the prices are sure to move a bit by the time the market opens. Even during the day, a few minutes will pass between the preview and the trades, and prices will shift some, so the estimates will no longer be 100% accurate. Finally, while we are able to factor in wash sale implications from prior purchases in your Betterment account, the estimates could change substantially due to future purchases, and we do not factor in activity in non-Betterment accounts. That is why every number we show you, while useful, is an estimate. Tax Impact Preview is not tax advice, and you should consult a tax professional on how these estimates apply to your individual situation. Why You Should Avoid Short-Term Capital Gains Smart investors take every opportunity to defer a gain from short-term to long-term—it can make a substantive difference in the return from that investment. To demonstrate, let’s assume a long-term rate of 20% and a short-term rate of 40%. A $10,000 investment with a 10% return—or $1,000—will result in a $400 tax if you sell 360 days after you invested. But if you wait 370 days to sell, the tax will be only $200. That’s the difference between a 6% and 8% after-tax return. Until now, making the smart choice meant doing your own calculations for every trade you were about to make. This is the kind of stuff most people hate doing, and automation excels at, so we built it into our product. A Sample Scenario Betterment customer Jenny, 34, has been watching the recent market news and feels nervous about her "Build Wealth" goal, which has a balance of $95,290. She is currently at 90% stocks—the optimal allocation for an investor with more than a 20 year horizon. Jenny decides to temporarily move her allocation to 10% stocks to minimize her exposure to the roller coaster on Wall Street. What Jenny may not realize is that changing allocation will cost her very real money—in the form of a tax bill. And even if she suspects it, she cannot appreciate the extent of the cost. The taxes are abstract, but the anxiety from the rocky market is real. Before finalizing the allocation change, Jenny clicks “Estimate tax impact” and sees that she is about to realize $4,641 in capital gains, with $4,290 of that short-term, which could incur up to $2,304 in taxes if she goes through with the trades. Putting a real dollar cost on knee-jerk reactions to market volatility is exactly what we as investors need at the critical moment when we are about to deviate from our long-term plan. Market timing is not a good idea, and most of us know this. However, emotions can get the better of even the most sophisticated investors, and we can all use some help in making the right decisions. Smarter Design for Better Decisions, Lower Taxes We believe that unhelpful emotion can be mitigated by good product design, which emphasizes the right information at just the right time. For instance, we never show you the individual daily performance of the ETFs in your portfolio—you are more likely to see losses that way, even if your overall portfolio is up. Seeing losses causes stress, which leads to emotional behavior, which can hurt your long-term returns. And yet, every other investment platform shows you individual asset performance front and center. On the other hand, showing you the estimated tax impact of a transaction before you commit to it encourages better decisions, and yet nobody except Betterment shows you this information. This distinction is at the core of our mission. Building the perfect investment service is not just about a pretty web interface, or a slick mobile app (though these are nice too!). It means rethinking every convention from the ground up. We are very excited about Tax Impact Preview, because it’s already helping our customers make better choices, and lessen their tax burden.

Why Comparing Returns Is a Bad Way to Choose an Investment Manager Jul 26, 2021 12:00:00 AM Short-term or recent returns give little information about future returns, and they increase the odds you’ll make a bad decision. The greatest trick the stock market ever pulled was convincing investors that historical returns are predictive. They aren’t. In fact, historical returns not only give you very little information about future returns, but they can also increase the odds you’ll make a bad decision. We often see this bias in investors. Both reporters and prospective customers often ask us, “What are your returns?” I cringe when I hear this. Out of all the questions you should be asking, this one should be low on the list. There are far more informative and useful questions to ask, once you know what's in our portfolio. To be fair, there are aspects of the answer that can be helpful. Returns can give you an idea of the size of upswings and drawdowns, and how the portfolio relates to other asset classes. But in a passive, index-tracking portfolio, such as Betterment’s, you shouldn’t expect to see market alpha in our performance. When properly benchmarked, we are the benchmark. The other common mistake people make is comparing our portfolio to another over a short period of time. If, after six months, our portfolio has a lower return, they’ll often ask, “Why should I use you if your returns are worse?” Far too often, investors put too much weight on small sample, recent historical performance, choosing the investment with the highest investment return. How deceptive can this be? How the Data Deceives You might not realize it, but when you look at historical returns, you’re doing a statistical analysis. Any set of historical returns comprises a sample of behavior over a certain period. Any inferences you make about what they tell you of the future should be balanced by placing them into context of how variable they are. And when you do that, two clear issues arise. Fooled by Randomness The first is being “fooled by randomness,” a phrase coined by Nicholas Nassim Taleb, a risk analyst and statistician. When you choose the highest returning of two correlated investments using a small sample of historical data, the odds are incredibly high that you picked the wrong fund. The randomness of small samples overwhelms the truth. Let’s work through some examples. We’ll use hypothetical portfolios with return probabilities we know for certain, because we’ve created them through simulation, and see how well the short-term data mimics the long-term truth. These are not Betterment portfolios. Portfolio A will have a mean annual return of 6% and a volatility of 14%. Portfolio B has a mean return of 6.5% and annual volatility of 13%. The portfolios will also have a 0.90 correlation to each other—most stock funds have higher correlations. By both measures of absolute return and risk-adjusted return, Portfolio B is better. Yet over the first randomly simulated six-month period, Portfolio A came out ahead. One 6-Month Simulation How often does the worse portfolio come out ahead over a short time period? In this case, we’ll call them C and D, with the same parameters. Let’s look at running 1,000 of such simulations over a six-month period. How often does Portfolio D, who should be the winner, come out ahead? Many Simulations Over 6 Months The answer is so close to 50% as to be indistinguishable from it. In fact, we can increase the differences in expected returns and this remains true. Let’s give Portfolio D a mean return of 8% and Portfolio C a mean return of 6%. Both have 14% volatility. The significantly higher return Portfolio D will still lose over 40% of the time over a six-month period. Many Simulations Over 6 Months While the odds are just better than 50/50 in the short term, they have big consequences in the long term. Here are the distributions of 20-year outcomes for those same portfolios: Many Simulations Over 20 Years The randomness in half-year returns results in choosing the wrong portfolio about half the time, even with large difference in return. You might as well save yourself the time and expense and flip a coin. Over long periods of time (20 years), and with large differences in average returns, the odds of picking the correct choice do increase. But you may be surprised how long it can take. For portfolios with a 1% return difference, by 20 years you still have about a one-in-four chance of picking the portfolio that will have worse underlying returns over even longer periods of time. Chance of Choosing Worse Portfolio Based on Performance Return Difference 3 months 6 months 1 Year 5 Years 10 Years 20 Years 0.50% 49% 48% 48% 42% 40% 37% 1.0% 47% 46% 44% 36% 32% 26% 2.0% 44% 43% 37% 26% 16% 9% Each cell based on 3,000 simulated cumulative returns of better portfolio (8% return) versus a benchmark portfolio with a mean return of 6% and 14% volatility. Correlation of 0.90 between portfolios. To be clear, there are statistical tools you can use to improve your odds of picking the right portfolio, but most investors aren’t professional statisticians. They just go by the cumulative returns over a short period of time. Performance Chasing Is Worse Than Random If the low odds of correctly choosing a better portfolio above didn’t convince you, it’s even worse than that. Empirically, choosing the best funds, a strategy called performance chasing, is likely to reduce your returns. The graph below comes from an excellent research paper from Vanguard. It shows the returns achieved by investing in the best fund in each asset class, compared to a buy-and-hold strategy. Performance chasing—picking investment based on recent performance—produced worse returns of about -2% to -3.5%. Buy-and-Hold Superior to Performance Chasing, 2004-2013 If every year, you picked the investment manager with above average returns over the past 12 months, you’d end up underperforming an investor who stuck with the passive index-tracking manager. The Right Things to Consider If recent investment performance is such a poor way to choose an investment manager, how should you select one? Use a set of clear principles that are likely to be true in the future: Monetary Cost: A certain drag on returns, if the service doesn’t deliver value above cost. Consider commissions, trade fees, and assets under management (AUM) fees. Non-Money Costs: How much time and and effort does it take for you to use it well? Does it have a high time or stress cost for you to get the most out of it? Services Offered: Do the services offered make you better off? Does it do things for you which you wouldn’t do yourself? Does it help you make better decisions? Does it make some of those decisions for you, automatically? Experience: Is it easy to use? Do you enjoy using it? Philosophy Fit: Consider its investment philosophy, and if it is parallel to yours. Some funds seek to deviate from the index and cost more, some seek to track it passively. Tax Management: Returns will likely not take into account actual value-adds, such as tax loss harvesting. You won’t have received a comparison tax bill that allows you to compare after-tax returns across services; it will be up to you to compare them. Behavior Management: Does the service have a proven track record of reducing the behavior gap? When choosing an investment manager, the key isn’t to focus on investment performance; it’s to focus on service, fit, and investor returns.

6 Tax Strategies That Will Have You Planning Ahead Jul 22, 2021 12:00:00 AM Here are six tax tips you can follow now to help save money on your taxes now—and for years to come. Most people tend to think about taxes just once a year—usually March or April. But investors can save more in taxes each year by thinking ahead and strategizing about their taxes on an ongoing basis. Today, savvy investors aren’t beating the market day-to-day; instead, they’re focused on taking home more of their earnings by lowering taxes and fees across their portfolio. That means thinking about all of your tax-advantaged options—accounts you have now and selections you’ll make in the future—to make every move as tax-efficient as possible. You can think of accounts like IRAs, 401(k)s, 529 accounts, and HSAs as unique opportunities that if implemented strategically, can help you earn more over time. In this article, we’ll introduce six tax strategies that require ongoing planning, but if taken into consideration, can help you keep more of what you earn. 1. Shelter dividends in retirement accounts. By reorganizing your investments, you can shelter many dividends from being taxed. This strategy, called asset location, can not only reduce your annual tax bill, but also help to increase your after-tax investment returns by an average of 0.48% per year. Over 30 years, this can amount to around 15% in additional after-tax returns. At Betterment, we have a service called Tax Coordination that does this automatically. It works by placing investments that are taxed more into traditional and Roth IRA accounts, which have big tax advantages. It places investments that are taxed less, such as municipal bonds, in your taxable accounts. This is a great way you can use your current investments to help reduce your taxes. Here’s a simple animation solely for illustrative purposes: Asset Location in Action 2. Start tax loss harvesting earlier. Another way to use your investments to help reduce your taxes is through tax loss harvesting. By selling investments at a loss, you can generate a tax deduction. You can use this deduction to offset other investment gains you earned during the year, or even to decrease your taxable income by up to $3,000. Most investors only view tax loss harvesting as a year-end strategy to get some last-minute deductions, and thus won’t be able to benefit from any other losses throughout the year. A better strategy to consider is monitoring your portfolio throughout the entire year for opportunities to harvest losses. This is especially effective if you are in a high tax bracket or have large capital gains this year.  We automatically monitor for you on a daily basis here at Betterment if you use our Tax Loss Harvesting+ feature. 3. Contribute earlier to retirement accounts. It’s true that you have until each year’s tax filing date to contribute to your IRA for the previous year. However, if you’ve already maxed out your the previous year’s IRA contributions, consider maxing out this year’s IRA contributions as early in the year as possible—this can give you up to 15 extra months (January of this year to April of next year) in the market. Waiting until the last minute could cost you more than you think. In fact, funding your IRA in January every year could provide you with an average of $8,800 more over a ten-year period. So if you still haven’t funded your IRA for last year, consider doing it now instead of waiting until mid-April. 4. Execute Roth conversions in January, not December. A Roth conversion moves money from your traditional IRA to your Roth IRA and is sometimes referred to as a backdoor Roth IRA conversion. You may pay taxes when converting, but once inside your Roth IRA, future earnings and qualified withdrawals will be tax-free. You can convert your IRA at any point throughout the year, but most people wait until the last minute. Just like with procrastinating on your retirement account contributions, by waiting until December to convert, you’ll miss out on 11 months of potential tax-free growth. For this reason, consider doing your conversions early in the year to help maximize your tax-free growth. It may be worth speaking with a tax advisor if you’re worried about converting in January because you don’t have a clear enough picture of what your taxes for the year will look like, as the IRS recently removed the ability to undo Roth conversions. The tax code has been updated to reflect this change, which became effective January 1, 2018. This information is for educational purposes only and is not a substitute for the advice of a qualified tax advisor. Roth conversions can have significant tax implications and you should consult a tax professional to discuss any questions about your personal situation and whether a Roth conversion is right for you. 5. Put your tax refund to good use. If you’re like 72% of Americans, you receive a tax refund averaging around $2,825. That refund may sound great, but really that means, in this example, that you overpaid your taxes each month by about $236. That is money that could have been invested and growing for you throughout the year. To adjust how much money is withheld from each paycheck for taxes for the following year, you could consider resubmitting your Form W-4 to your employer. Making the change early in the year will allow it to take full effect, and filling it out properly can ensure the correct amount is taken out. The IRS has provided a Tax Withholding Estimator to help you set or adjust your W-4 to get your refund closer to $0 (meaning you aren’t giving Uncle Sam an interest free loan).  Then, consider putting that money to work throughout the year. After adjusting your W-4, consider increasing your 401(k) contribution by that same amount. You won’t notice a difference in your paycheck, and that money will go toward your retirement instead of loaning it to the IRS. 6. Make tax-smart investment switches. You can likely benefit from reviewing your investment portfolio, but it’s important to minimize the tax consequences of making any adjustments. Rebalance your portfolio tax-efficiently. One example of a change you might consider is rebalancing your portfolio. Here’s how it works: As markets move up and down, your portfolio can drift away from its target allocation. Rebalancing allows you to realign the weight of stocks and bonds so that your asset allocation is appropriate for your goal’s time horizon. However, rebalancing by selling existing investments should generally be a last resort because this can cost you in taxes. Instead, consider using cash flows to rebalance; use new deposits, dividends you earn, and proceeds from tax loss harvesting to rebalance your portfolio on an ongoing basis. This will minimize the need to sell investments and thus can help reduce your taxes. At Betterment, we automate this entire process to help keep your portfolio properly balanced with every cash flow. Get out of high-cost investments. Another tax-smart change you might consider is getting out of high-cost investments. Look for losses you can use to offset any gains associated with swapping a high-cost fund for a low-cost one. Even if switching out of the high-cost fund will cause you taxes, consider doing a breakeven analysis to see if it still makes sense. For example, if selling a fund will cost you $1,000 in taxes, but you will save $500/year in fees, you can break even in just two years. If you plan to be invested for longer than that, it can still be a savvy investment move. Our calculator can help you with this decision. Rebalancing and reducing fees are both important, but make sure you don’t ignore taxes while executing these strategies. Think About It Now—And Later We all talk about tax season, but really, taxes are a topic we should think about throughout the year as we invest our savings. Sheltering your tax-inefficient investments in your retirement accounts can reduce dividend taxes and help keep more money in your pocket. Tax loss harvesting throughout the year, not just in December, can reduce your taxes and help increase your after-tax investment returns. Retirement contributions and conversions done early in the year are more effective because they allow your investments to grow for longer. Correcting your tax withholdings can allow you to save more throughout the year, instead of having to wait for your tax refund. Lastly, don’t ignore possible tax implications while rebalancing or adjusting your investment portfolio. Together, these strategies may significantly reduce your tax bill. And by automating them by using a service like Betterment, you can take advantage of these strategies without adding stress during tax season. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

The Fiduciary Rule Is on Life Support – We Must Act Now Jul 22, 2021 12:00:00 AM Whether or not the fiduciary rule survives could directly impact you. Because if it dies, and your money manager is no longer required by law to act in your best interest...are they going to anyway? You give your retirement money to a money manager. You expect them to look at all the investment options out there and make decisions based on what’s best for you, your portfolio, and your money’s growth over time. You expect them to act in your best interest—to do the right thing for you. You expect them to charge reasonable fees, try to minimize taxes, and make decisions that are going to get you the returns you deserve. You expect all of this because it’s their job. It’s what they’re paid to do. They’re the expert, the professional. Surely they’re going to advise you on the best investment decisions for you...right? I wish it were that simple, and I can’t believe it isn’t. But today, many money managers are not doing what’s best for you. They recommend funds because they make money selling them. They charge confusing fees that you can’t see. They push you into investments that are in their best interest—not yours. And the one thing that was going to help stop it might not survive. President Donald Trump on Feb. 3 signed a memorandum directing the Department of Labor (DOL) to reconsider its fiduciary rule, which would require money managers who provide retirement advice to act in their clients’ best interests. The rule was set to go into effect on April 10, but the DOL on Feb. 10 reportedly filed for a 180-day delay, putting the rule at risk of being diluted beyond recognition or, worse, thrown out completely. Whether or not this rule survives could directly impact you. Many companies were planning to make positive changes in response to the rule and publicly supported it, back when they were going to be required by law to do what was best for their clients. But now that the Trump administration is threatening the rule’s existence, we expect many of those institutions to remain silent, indicating that their former support was solely for public display. We believe that, in some ways, silence from those institutions is as bad as lack of public support. Because if your money manager is not openly supporting the rule, then they may not be willing to fight for you. And once the rule is gone for good, it could mean reverting to business as usual. We encourage you to reconsider your money manager or, at the very least, push them to clarify their stance. Because if the rule dies, and they’re no longer required by law to act in your best interest...are they going to anyway? The State of the Industry (Also Known As “Why This Rule Must Live”) The fiduciary rule’s six-year history has coincided with a secular shift in the industry that has felt promising and good. We’ve seen positive evolutions, like easier access to low-cost investments (e.g., exchange-traded funds) and heightened awareness of how financial providers are compensated. As the Washington Post’s Barry Ritholtz put it, “The fiduciary rule is not shaping investor behavior, it is now catching up with it." But now that the rule has the potential to be thrown out, we have to reexamine the conflicts of interest that are costing American workers and their families $17 billion a year—and that could persist without the proper regulations in place. Many money managers (brokers) are not currently required to make investment recommendations based on your best interests, and instead only need to pick “suitable” investments. They are allowed to consider whether a particular recommendation will result in a higher commission or kickbacks to them. As a result, you are likely to end up in a less-than-ideal portfolio—one that’s higher-cost and lower-return than it should be. This Is What Firms Are Allowed To Do. Is It Happening to You? Here’s the Way It Should Be We believe in low, transparent fees. We believe that when you give your money to a money manager, they should choose funds based on what’s best for you, the customer—not your money manager. A Defective Argument: The Fiduciary Rule “Limits Investors’ Choice” There have been various arguments opposing the fiduciary rule. The most recent came from Gary Cohn, the White House National Economic Council Director, who said that the rule would limit investors’ rights to choose their investments. He told The Wall Street Journal in an interview: “We think it is a bad rule. It is a bad rule for consumers…. This is like putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.” It’s an interesting analogy, but it’s flawed. The rule isn’t about limiting choice (all the choices are still there); it’s about empowering consumers with information to make better decisions and forcing advisors to give straightforward advice. The right analogy would be both options are still on the table—you want to eat a cheeseburger instead of a salad, you can still do that—but you’ll know exactly how many calories are in it and how much it’ll cost you. In the case of financial services, if you want to put your money in a worse investment product, you can still do that—and the advisor has to disclose all the fees associated with it, and can’t tell you it’s the best option for you (unless it truly is). The text of the rule itself is clear on this point; it simply requires advisors to make an investment recommendation that they can demonstrate is in an investor’s best interest. Sure, that may be the lowest-cost option, but not necessarily. If advisors are not able to defend the investment products they are recommending, including their cost, investors will not suffer from their absence. If you want a good analogy for what this rule could do for financial services, consider the medical industry. Doctors aren’t allowed to get paid by drug companies for pushing drugs on you. That would be ridiculous, right? Why should it be different in financial services? Why should so-called financial advisors be allowed to be compensated for pushing certain products on you? It’s ridiculous! They shouldn’t. And, if we have our way, they won’t. Former Rule Champions, Where Are You Now? We’ve been closely following which big financial firms are committed to the positive changes represented by the fiduciary rule. Last fall, when it was expected that the rule would go into effect this April, many firms publicly trumpeted their support. Merrill Lynch came out with an ad campaign that declared, “We’re committed to your best interest. Not the status quo.” Other firms, like J.P.Morgan and Commonwealth Financial Group, announced they’d be cutting commissions in their retirement accounts to comply with the rule. Now that the rule’s future is in doubt, Merrill Lynch is retreating from its support of the rule and has indicated it may not complete the changes it previously committed to making. Many other firms have likewise gone silent on their support for the rule and their intent to follow through on earlier commitments. Some firms are even gloating over the fact that they didn’t take a position on the rule or commit to changes. AdvisorHub.com quoted UBS Chief Financial Officer Kirt Gardner saying, “There is some indication that [the DOL Rule] will, at a minimum, be delayed and potentially not be implemented at all. And because we delayed our announcement…that’s proved to be very effective given some of the commitments that our competitors have made.” It’s become extremely difficult to get individual firms to commit to a clear public position on the fiduciary rule. In January, Sen. Elizabeth Warren, D-Mass., a longtime supporter of the rule, sent a letter to 33 financial institutions that had already begun making changes designed to satisfy the rule’s regulations. She warned them that the rule was under attack, while also questioning whether they supported it and would continue to work toward implementing changes. This was an opportunity for these firms to speak out in support of the rule. Twelve firms ignored the letter. Of the 21 that responded, many provided a general statement about the importance of the rule's objectives, but declined to make a clear commitment to its actual implementation. Make no mistake, though, the fiduciary rule is the only realistic hope for prompt action to improve the quality of retirement advice. If firms genuinely support the rule's objectives, they should also support the rule. In the coming weeks, we encourage you to watch closely to see which firms are willing to take a clear public stand on behalf of investors, and which are silent or hide behind trade groups. What You Can Do to Protect Your Right to Honest Financial Advice Today, I’m sad for retirement savers. I’m disappointed that so many of us have trusted people we’ve chosen to manage our money, to prepare us for the future, and yet we still can’t be sure if they’re doing the right thing for us. I’m angry that the one ruling that could make us feel confident again is under attack. Why would anyone want to get rid of something that could do so much good? We encourage you to advocate for yourself and your future by submitting a public comment in support of the fiduciary rule here. You can also contact your elected representative and/or financial provider to share your support for the rule. Then it might be time to ask your money manager these questions: Why are your services and investments right for me and my situation? Who makes money from my account—and how much? Do you make more money recommending some investments over others? Are you committed to acting in my best interests for all my accounts, at all times? We’re not giving up on this. We stand for our customers and their best interests, and we always will. We don’t take political sides, but we are fighting for this rule until all investors receive advice they can trust. Because if the rule dies, whether it’s quick or slow, it’s sure to be painful. A version of this article originally appeared on CNBC.

How to Estimate Your Tax Bracket When Investing Jul 21, 2021 12:00:00 AM Knowing your tax bracket opens up a huge number of planning opportunities that have the potential to save you taxes and increase your investment returns. If you’re an investor, knowing your tax bracket opens up a number of planning opportunities that can decrease your tax liability and increase your investment returns. Investing based on your tax bracket is something that good CPAs and financial advisors, including Betterment, do for customers. Because the IRS taxes different components of investment income (e.g., dividends, capital gains, retirement withdrawals) in different ways depending on your tax bracket, knowing your tax bracket is an important part of optimizing your investment strategy. In this article, I’ll show you how to estimate your tax bracket and begin making more strategic decisions about your investments with regards to your income taxes. First, what is a tax bracket? In the United States, federal income tax follows what policy experts call a progressive tax system. This means that people with higher incomes are generally subject to a higher tax rate than people with lower incomes. Currently there are seven different tax brackets, ranging from 10% up to 37%. Below are the 2021 federal tax brackets if you are single or married filing jointly. 2021 Federal Tax Brackets Taxable Income Bracket: Filing as Single Taxable Income Bracket: Filing as Married, Filing Jointly Tax Rate $0 to $9,950 $0 to $19,900 10% $9,951 to $40,525 $19,901 to $81,050 12% $40,526 to $86,375 $81,051 to $172,750 22% $86,376 to $164,925 $172,751 to $329,850 24% $164,926 to $209,425 $329,851 to $418,850 32% $209,426 to $523,600 $418,851 to $628,300 35% $523,601 or more $628,301 or more 37% For example, if you are single and have taxable income of $75,000 this year, you fall into the 22% tax bracket. However, that does not mean that all $75,000 of your income will be taxed at 22%. Instead, tax brackets apply to each portion of your income, building up like a staircase. Here’s a visual to help explain. U.S. Federal Tax Brackets for Single Filers If you are a single individual with a taxable income of $75,000, the first $9,950 of your income will be taxed at 10%, then dollars $9,951 - $40,525 will be taxed at 12%, and dollars $40,526 – $75,000 will be taxed at 22%. If your taxable income were to grow, then dollars $75,001 — $86,375 would still be taxed at 22%, but after that, the dollars would be taxed at higher tax rates. Filing status (single, married, head of household, etc.) also affects your tax bracket. See the tax brackets for each filing status. How difficult is it to estimate my tax bracket? Luckily, estimating your tax bracket is much easier than actually calculating your exact taxes, because U.S. tax brackets are fairly wide. Just look at the 22% tax bracket. If you are filing as single, any income between $40,526 and $86,375 falls within that same tax bracket. That’s a big margin of error for making an estimate. The wide tax brackets allow you to estimate your tax bracket fairly accurately even at the start of the year, before you know how big your bonus will be, or how much you will donate to charity. Of course, the more detailed you are in calculating your tax bracket, the more accurate your estimate will be. And if you are near the cutoff between one bracket and the next, you will want to be as precise as possible. How Do I Estimate My Tax Bracket? Estimating your tax bracket requires two main pieces of information: Your estimated annual income Tax deductions you expect to file These are the same pieces of information you or your accountant deals with every year when you file your taxes. Normally, if your personal situation has not changed very much from last year, the easiest way to estimate your tax bracket is to look at your last year’s tax return. However, with the passing of the Tax Cuts and Jobs Act in December 2017, a lot of the rules and brackets have changed. Thus, it is wise for most people to estimate their bracket by crunching new numbers. Estimating Your Tax Bracket with Last Year’s Tax Return If you expect your situation to be roughly similar to last year, then open up last year’s tax return. If you review Form 1040, you can see your taxable income on Page 2, Line 43, titled “Taxable Income.” As long as you don’t have any major changes in your income or personal situation this year, you can use that number as an estimate to find the appropriate tax bracket on the table above (or the full set of tables provided by the Tax Foundation). Estimating Your Tax Bracket by Predicting Income, Deductions, and Exemptions Estimating your bracket requires a bit more work if your personal situation has changed from last year. For example, if you got married, changed jobs, had a child or bought a house, those, and many more factors, can all affect your tax bracket. It’s important to point out that your taxable income, the number you need to estimate your tax bracket, is not the same as your gross income. The IRS generally allows you to reduce your gross income through various deductions, before arriving at your taxable income. When Betterment calculates your estimated tax bracket, we use the two factors above to arrive at your estimated taxable income. You can use the same process. 1. Add up your Income. Add up your income from all expected sources for the year. This includes salaries, bonuses, interest, business income, pensions, dividends and more. If you’re married, don’t forget to include your spouse’s income sources. 2. Subtract Your Deductions Tax deductions reduce your taxable income. Common examples include mortgage interest, property taxes and charity, but you can find a full list on Schedule A – Itemized Deductions. If you don’t know your deductions, or don’t expect to have very many, simply subtract the Standard Deduction instead. For 2020, the standard deduction is $12,400 if you are single, and $24,800 if you are married filing jointly. By default, Betterment assumes you take the standard deduction. If you know your actual deductions will be significantly higher than the standard deduction, you should not use this assumption when estimating your bracket, and our default estimation will likely be inaccurate. The number you arrive at after reducing your gross income by deductions and exemptions is called your taxable income. This is an estimate of the number that would go on line 11b of your 1040, and the number that determines your tax bracket. Look up this number on the appropriate tax bracket table and see where you land. Again, this is only an estimate. There are countless other factors that can affect your marginal tax bracket such as exclusions, phaseouts and the alternative minimum tax. But for planning purposes, this estimation is more than sufficient for most investors. If you have reason to think you need a more detailed calculation to help formulate your financial plan for the year, you can consult with a tax professional. How Can I Use My Tax Bracket to Optimize My Investment Options? Now that you have an estimate of your tax bracket, you can use that information in many aspects of your financial plan. Here are a few ways that Betterment uses a tax bracket estimate to give you better, more personalized advice. Tax-Loss Harvesting: This is a powerful strategy that seeks to use the ups/downs of your investments to save you taxes. However, it typically only makes sense if you are in the 22% tax bracket or higher. For those in the 10% & 12% tax brackets, capital gains are taxed differently, which could make this strategy not beneficial. Tax Coordination: This strategy reshuffles which investments you hold in which accounts to try to boost your after-tax returns. For the same reasons listed above, if you are in the 10% or 12% tax bracket, the benefits of this strategy are reduced significantly. Traditional vs. Roth Contributions: Choosing the proper retirement account to contribute to can also save you taxes both now and throughout your lifetime. Generally, if you expect to be in a higher tax bracket in the future, Roth accounts are best. If you expect to be in a lower tax bracket in the future, Traditional accounts are best. That’s why our automated retirement planning advice estimates your current tax bracket and where we expect you to be in the future, and uses that information to recommend which retirement accounts make the most sense for you.In addition to these strategies, Betterment’s team of financial experts can help you with even more complex strategies such as Roth conversions, estimating taxes from moving outside investments to Betterment and structuring tax-efficient withdrawals during retirement. In addition to these strategies, Betterment’s team of financial experts can help you with even more complex strategies such as Roth conversions, estimating taxes from moving outside investments to Betterment and structuring tax-efficient withdrawals during retirement. Tax optimization is a critical part to your overall financial success, and knowing your tax bracket is a fundamental step toward optimizing your investment decisions. That’s why Betterment uses estimates of your bracket to  recommend strategies tailored specifically to you. It’s just one way we partner with you to help maximize your money. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a tax professional.

How Betterment’s Climate Impact Portfolio Was Born Jul 21, 2021 12:00:00 AM At Betterment, our work is just beginning. Our Climate Impact portfolio is as much a process as it is a product. We see it as a continuation of a conversation with our customers, who told us in no uncertain terms, that climate change matters to them. If climate change somehow wasn’t already front and center of your headspace, 2019 likely changed that. In February, Rep. Alexandria Ocasio-Cortez and Sen. Markey released their Green New Deal resolution. By August, the Amazon rainforest, often referred to as the “Earth’s lungs”, was on fire, as climate activist Greta Thunberg sailed across the Atlantic in a carbon-neutral, solar-powered yacht. In New York, she’d address the United Nations, and go on to be named Time’s youngest ever Person of the Year for sounding “a moral clarion call to those who are willing to act.” Later that fall, inspired by Thunberg, actress Jane Fonda partnered with Greenpeace to kick off “Fire Drill Fridays”, a series of weekly protests through Washington D.C. The final week’s theme was “The Role of Financial Institutions in the Climate Crisis”. Dr. Ayana Elizabeth Johnson, a marine biologist and a friend, extended an invitation to join her at this protest. I never thought of myself as an activist, but I had spent the better part of a decade helping to build a different kind of financial institution at Betterment. I knew this was an opportunity I couldn’t miss and soon found myself aboard an Amtrak headed to D.C. Curbing greenhouse gas emissions from human activity must center on dramatically reducing reliance on fossil fuels across every sector of the global economy. No surprise then, that the rallying cry that weekend was cutting off the flow of capital to the fossil fuel industry. One word reverberated across every speech and conversation: “divestment.” As we marched together towards the Capitol, one phrase ran through my mind: “if only it were that simple.” What did feel simple, however, was that those of us pushing for change within the financial services industry hadn’t come close to channeling the remarkable energy on display. In our goal to bring more American investors off the sidelines and into sustainable investing, we were clearly falling short. Since 2017, Betterment has offered one “Socially Responsible Investing” option, constructed from funds that tilt towards companies which rate highly on a scale that considers each of three pillars: Environmental, Social and Governance (“ESG”). ESG is often embraced as the gold standard for sustainable investing by professionals, but is not tailored to a specific investor’s values. In that moment, seeing the power and conviction of thousands who were mobilized by climate change, our sole ESG offering no longer felt like enough. The Betterment Way Back in NYC at Betterment’s headquarters, it was becoming clear that adding a climate-specific portfolio would better reflect some of our customers’ values even more than our broadly-focused offering could alone. If so, greater adoption would further amplify the signal to the industry that values-based investing, despite its recent growth, was still underserved. For over a decade, Betterment has been working to maximize our customers’ expected returns following the principles of global diversification and low cost. We’ve sought to tackle the complexities behind implementing a sophisticated investing strategy, so that our customers don’t have to, while maintaining transparency around the choices that go into our products. We applied this framework to the challenges of integrating our customers’ values into their investments. We felt well-positioned to make this daunting process simpler, wherever we could. Where some amount of complexity was unavoidable, we would be transparent about how we chose to address it. Broadly speaking, there are three distinct approaches to climate-conscious investing, and all three are integrated into Betterment’s Climate Impact portfolio. Divestment (i.e. excluding companies holding fossil fuel reserves) The equities basket includes SPYX, EEMX, and EFAX, “Fossil Fuel Reserves Free” ETFs tracking US, Developed, and Emerging markets. Low carbon exposure (i.e. overweighting carbon footprint leaders within each industry) The equities basket includes CRBN, a global ETF whose objective is to reduce the carbon footprint of a globally diversified portfolio. Impact (i.e. financing environmentally beneficial activities directly) The fixed income basket includes BGRN, holding “green bonds”, which fund projects across the world, including alternative energy, pollution control, and climate adaptation. The nuances behind how these approaches interact with each other is discussed below. Beyond Divestment What exactly was I going on about, muttering “It’s not that simple”, while surrounded by passionate cries to “divest” from fossil fuels? Like a good student of finance, I was referring back to another mantra: “Capital naturally wants to flow toward where it earns the highest return.” A core argument for divestment is that it “increases the cost of capital”. Less demand for a stock means a lower stock price, which means the company needs to give away more of itself to raise the same amount of money. The problem is that the more successful you are at driving up a company’s cost of capital, the higher the expected return for the financier.  As long as the business you want to starve is engaged in activity that remains both profitable and legal, another investor will come along.  The fewer investors are willing, the more those who remain willing stand to make. The alternative to divestment is engagement. By owning a stock, and using your rights to vote on shareholder resolutions, you can attempt to change the company’s activities from the inside. This path is long and messy. What seems like a victory, often curdles into an empty gesture, as management’s words produce no meaningful action. It’s a grind, and success is far from assured. Engagement is rife with compromise and disappointment. Divestment, on the other hand, feels principled and decisive. It offers immediate action in the face of a crisis that feels unstoppable. Yet its economic impact on the perpetrators of harm is negligible, particularly if it’s applied in a vacuum. Both strategies have their advocates, whose vigorous debates occasionally lose sight of the fact that they are on the same team. Moreover, conflicting appeals to absolutes run the risk of paralyzing millions of their fellow citizens, deeply sympathetic to the cause, but reluctant to wade into the confusion. Can the two approaches be meaningfully reconciled? Michael O’Leary and Warren Valdmanis offer a compelling argument that they can. In their recent book, Accountable: The Rise of Citizen Capitalism, they consider the question through the lens of the Divest Harvard campaign, which took center stage on campus in the spring of 2019. While O’Leary and Valdmanis believe in the effectiveness of engagement, they express great admiration for the campaign’s leaders, which include both students and faculty. By directly examining these leaders’ expressed views, O’Leary and Valdmanis conclude the following: Divestment advocates have done the climate movement a great service, by forcing a broad recognition that “there is no value-neutral way to invest”. These leaders aren’t naive. They view engagement with suspicion—as a fig leaf for complacency. But they also understand the limits of divestment within our existing legal and financial framework. Rather than narrowly fixate on proximate effects, these leaders take a longer view of divestment—as a political act of civic leadership. Under this theory, divestment seeks to impose “a cultural toll, labeling oil and gas companies as morally repugnant … making it easier to pass bold legislation rapidly, with broad political support.” Accordingly, the measure of success for divestment should not anchor on the number of dollars diverted, but on its ability to “center climate change in broader discourse”. Furthermore, if you are able to advance that objective, while also pushing for change via engagement, there is no reason why pursuing both in parallel cannot be a coherent strategy. In other words, if an act of divestment, however great or small, aims to achieve more than a feeling of moral satisfaction, it needs to be heard. It needs to help start conversations, trigger chain reactions, grab headlines. And it doesn’t preclude pushing for change within the shareholder framework, if integrated thoughtfully. It’s a lot to ask of your investment account. Here’s how we approached it at Betterment. Divestment And Engagement In Your Climate Impact Portfolio A divestment strategy is implemented in a globally diversified portfolio by applying a screen to an index of all available stocks, expunging those that hold large fossil fuel reserves, and producing a so-called “ex Fossil Fuels” index. The problem with relying solely on an “ex Fossil Fuels” approach, is that it is both under-inclusive, and over-inclusive. First, let’s look at how it is under-inclusive: An “ex Fossil Fuels” index is highly effective at screening out stocks of companies with familiar logos that we’ve seen plastered on gas stations. But, such indexes generally do not exclude the hundreds of companies that don’t necessarily own reserves, but are integral to the fossil fuel industry (e.g. pipeline operators, and the utilities that actually burn the fuels). Critics of a divestment-only approach refer to this phenomenon as “greenwashing”. There are powerful incentives for investment managers to expunge the familiar fossil fuel companies and call it a day. This goes a long way towards providing an investor with emotional satisfaction, but it ignores the complex enmeshment of fossil fuels throughout every sector of the economy. As for how it is over-inclusive: A handful of energy companies have staked their futures on renewable energy, and are actively diversifying away from fossil fuels. However, these transitions take time and today they qualify for exclusion under a blunt divestment criteria. We believe there is merit to the divestment approach. In Betterment’s Climate Impact portfolio, 50% of the stock basket is allocated to SPYX, EEMX, and EFAX, “Fossil Fuel Reserves Free” equity funds for US, Developed, and Emerging markets. For an act of divestment to be effective, it must be heard, and for most investors, this is uniquely possible by joining with other like-minded investors through index funds. For “ex-Fossil Fuels” funds to grow in assets and stature, sends an increasingly loud message, that the public views the industry as a whole as a pariah. We also believe there is merit for the engagement approach. In Betterment’s Climate Impact portfolio, 50% of the stock basket is allocated to CRBN, a global ETF whose objective is to reduce the carbon footprint of a globally diversified portfolio, with an expense ratio of only 0.20%. CRBN was launched on Earth Day, 2015, seeded with an initial investment from the United Nations Joint Staff Pension Fund. Today, it holds nearly $650mm, and is gaining scale rapidly. By excluding companies holding fossil fuel reserves, ex-Fossil Fuel indexes are effectively concerned only with future, not ongoing emissions. CRBN takes aim at both, with more precision, by assigning every company in every sector a “carbon exposure” score, which incorporates any fossil fuel reserve holdings, but also greenhouse gas emissions from the company’s activities (measured per dollar of revenue). It then uses the scores to minimize carbon exposure across the entire index while maintaining tracking error constraints, by overweighting companies that are managing the lowest carbon footprint within their sphere of activity, including in the energy sector, and underweighting companies that lag their peers, with some of the worst offenders getting dropped from the index entirely. Boosting The Leaders Not surprisingly, a rigorous, quantitative methodology is highly effective in service of a clear objective. When compared to the equity basket of Betterment’s core portfolio, CRBN achieves a 50% reduction in carbon emissions. Perhaps more surprising, is that CRBN’s holdings also emit less carbon than the companies collectively held by the “ex-Fossil Fuels” funds, in spite of the latter’s targeted exclusions. CRBN achieves these results by mathematically expressing preference for “best-in-class” leaders in every sector. In practice, this means that CRBN adds back a handful of energy companies which were screened out by one of the three “ex-Fossil Fuels” funds. An energy company can wind up in the index if it’s shifting out of legacy fossil fuel activities, and driving significant investments in renewables or bio fuels. A couple of illustrative examples held by CRBN as of 1/31/21: Neste is the largest producer of renewable diesel jet fuel, which will significantly reduce aviation emissions (it has two renewable refineries but also two conventional refineries). NextEra Energy Inc is the world’s largest producer of wind and solar energy (but also has generating plants powered by natural gas, nuclear energy, and oil) Generally, “best-in-class” energy leaders are companies where pro-transition management factions have won the internal battles, and have successfully pivoted their roadmaps towards a net zero economy. But such strategic shifts can be fragile. Consider NRG, an enormous American power company, whose CEO, David Crane, wrote to shareholders in 2014: “The day is coming when our children sit us down in our dotage, look us straight in the eye … and whisper to us, ‘You knew … and you didn’t do anything about it. Why?’” NRG announced it would cut its carbon dioxide emissions by 50 percent by 2030 and 90 percent by 2050, and began its transformation. But just three years later, Elliot Management, an activist hedge fund unhappy with its financial performance, was able to reshuffle the board, depose the CEO, and begin to sell off NRG’s renewable energy assets. One could argue that the climate movement is better served, if the David Cranes of the world not only get control, but stay in control. Elliot was able to reverse the transition while holding just 6.9% of NRG’s shares. If climate-conscious capital held enough of the rest, and used that perch to fight, Crane could have survived. At a systemic level, divestment and engagement are complementary—the stick for companies core to the problem, and the carrot for those who may be part of the solution. Each message has value, and your investments can express both. However, for these messages to actually reach their intended recipients, how you implement these investing strategies becomes important. A globally diversified portfolio calls for exposure to thousands of individual stocks and bonds. Buying index funds, rather than the individual securities directly, is not only the cheapest and simplest way to get this exposure. For most climate-conscious individual investors, it’s also by far the most effective path to have their dollars contribute to the systemic change they want to see. A detour into some general investing plumbing may help to appreciate why. The Power of the Index While passive investing had been steadily gaining popularity over active stock-picking for decades, the 2008 global financial crisis served as an inflection point. Complex strategies seeking to beat the market came under suspicion, and then continued to lose credibility during the relentless bull market that followed. With each year, a transparent buy-and-hold strategy proved harder and harder to beat, particularly net of fees. The spotlight shifted away from chasing alpha, towards lowering expenses, making the continuing rise of passive index fund investing a textbook flywheel in action, where growth begets more growth. Falling fees mean more inflows, and more assets mean more scale, which allows for another round of fee reductions, which pulls the next cohort of fee-conscious investors into the fold. The big fund managers have been engaged in a decade-long “core war”, led by Vanguard, whose flagship equity fund (found in Betterment’s core offering), has ballooned to over a trillion in assets, with its expense ratio down to 0.03%. These pooling dynamics have had an underappreciated second order effect—the anointment of index providers to new heights of authority in global markets. The trillions may be flowing into Vanguard, Blackrock, and State Street, but the investing decisions have been largely delegated to FTSE Russell, MSCI, and S&P DJI. In 2017, the Economist dubbed them “finance’s new kingmakers: arbiters of how investors should allocate their money.” However laborious the process behind constructing and maintaining an index, the finished product is little more than a list of companies, with assigned percentages that add up to 100%. The index-makers take pains to emphasize the rules-based, non-discretionary nature of their work. Nonetheless, because trillions of obedient dollars promptly and faithfully replicate every bureaucratic tweak, these glorified spreadsheets are imbued with at times eye-popping power. Being added to a list has no bearing on a company’s business, and under an efficient markets hypothesis, should have no impact on share price. Yet it is conventional wisdom that membership in the S&P 500 provides some price support. Thus, joining this iconic club can be cause for fanfare befitting a coronation, while removal can be tantamount to a “humiliation”, a symbol of irreversible decline. Some allegedly “rules-based” decisions are inevitably discretionary, and impactful enough to threaten a geopolitical crisis. A rumor that MSCI was considering reassigning Peru from its flagship Emerging Markets Index, to its less prestigious Frontier Markets Index, put the finance minister, leading a senior delegation, on an emergency flight to NYC to avert the demotion. The gradual inclusion of Chinese “A-shares” into the major indexes was a highly political, contentious process with far greater stakes. In early 2019, MSCI announced it would quadruple its exposure, which is estimated to steer $80 billion of investment into China. Throughout the process, MSCI has at times functioned as a quasi-regulator, at one point delisting several Chinese companies that had violated its internal governance standards. Such examples are myriad, ably outlined in a recent paper on “the growing private authority” of index providers. It’s hard not to come away in agreement with the authors, that this backoffice corner of global finance would benefit from more transparency and accountability. But there’s another takeaway: These mechanical, ostensibly value-neutral switchboards for capital have untapped potential as agents of change. But Make It Sustainable 🚀 What would it mean for sustainability-focused indexes to wield this kind of power? Is it crazy to imagine a future in which getting booted from a major ESG index for failing to hit sustainability targets is viewed as irrefutable evidence of corporate management malpractice? Or is that future more likely than not, if we observe the patterns already in motion, some new, some familiar, and play them forward to their logical conclusion? As of Sept. 2020, the top ten equity indexes were directly tracked by over $3.5 trillion. Of course, there is no hint of ESG anywhere near the top, but there are compelling reasons to believe that a secular shift is already in progress, and that the rate of change will be non-linear. None other than the head of ESG at MSCI believes that its sustainable indexes will eventually overtake its traditional offerings, and that trends suggest that the shift will happen “more quickly than most people would expect.” Indeed, while the absolute numbers are relatively small, sustainable funds are seeing scorching, exponential growth. In 2020, investors poured in $50 billion; double that of 2019, and ten times that of 2018. Meanwhile, we’re on the cusp of the greatest generational transfer of wealth in history, to a demographic that bodes well for only more acceleration. According to Morgan Stanley, “nearly 95% of millennials are interested in sustainable investing, while 75% believe that their investment decisions could impact climate change policy.” This story is genuinely new, but one level deeper is a more familiar one. Sustainable investing, until recently still largely the domain of active management, is catching up with the broader industry, and shifting towards passive. 2020 marked the first year that passive sustainable funds (i.e. ones that fully replicate an ESG index) handily beat active sustainable funds. Passive took in 2.5 times more inflows than active, whereas the split was 50/50 just in 2019. Not surprisingly, ETFs, predominantly passive, and favored by investors for their tax efficiency, dominated mutual funds by similar margins. In other words, the defining capital allocation shift of the last two decades is just now starting to play out within the nascent field of sustainable investing, and we know where it leads—the elevation of the index as a behind-the-scenes nexus of power. Neither retail nor institutional investors are likely to reverse course towards more complexity, less transparency, and higher fees. Sustainable or not, investors have been trained to be laser-focused on low fees. We know how the flywheel turns. How do we harness this unstoppable force as a tailwind for real progress on sustainability, and ensure that there’s more to this reallocation than greenwashing deck chairs on the Titanic? “Index Activism”: A Theory Of Change “Index activism”, as any theory of change, faces serious challenges, addressed below. But the structure of index fund investing, as compared to investing in companies’ stocks directly, is uniquely suited to aggregate and amplify the impact of tens of millions of individual portfolios. It represents a form of “collective bargaining”—putting aside lesser differences in favor of progress towards a greater common cause. Index funds will always entail a trade-off between personalization and the benefits of scale. For some investors, trading the underlying securities for a portion of their overall exposure, will make more sense. However, when it comes to effecting broad, systemic change, the prospect of a robust sustainable index fund ecosystem is hard to beat. We can rely on the asset gathering flywheel to carry funds tracking sustainable indexes to the mainstream. Yet asset inflows alone won’t magically teach the passive asset allocators to be the active shareholders that we need them to be. After all, active ownership is a demanding full time affair, requiring specialized expertise. Most of us already have jobs, and ideally, we would empower a team of experts with our dollars, not only to decide what shares to buy, but also how to then leverage those shares in furtherance of a sustainable agenda. What might it look like, if fund managers acted as stewards of sustainable business, pushing their portfolio companies towards a net-zero economy, standing ready to oppose activist shareholders like Elliot, who seek to undermine progress? Boutique managers who have long specialized in shareholder advocacy can offer a glimpse. In 2020, Green Century, which manages ~$1 billion across three mutual funds, used the shares of Procter & Gamble it holds on behalf of investors to introduce a resolution, calling on the company to step up efforts to mitigate deforestation in its supply chain. P&G’s board recommended that shareholders vote “Against”. It passed anyway, with a resounding 67% of votes cast—the first ever deforestation proposal to do so, receiving twice as many votes as any such prior attempt in all of corporate America. Experts believe it will spur other companies targeted with deforestation resolutions in coming months to engage with shareholder proponents. The Work Ahead Now for the reality check—both Blackrock, with 43% of all passively managed sustainable assets, and Vanguard, with 21%, could learn a thing or two from tiny Green Century, to put it mildly. When it comes to steering capital flow, where their expertise is unparalleled, the giants’ commitment to sustainability is tangible. In January 2020, Blackrock made its first ever addition of a sustainable fund, its flagship ESGU, to forty of its non-ESG model portfolios. As a result, ESGU captured nearly a quarter of the $26 billion of net new money that surged into sustainable strategies through August 2020. Yet, there is no denying that active engagement is not in their DNA. That Larry Fink, the head of Blackrock, would call for every corporation to develop a plan for a net zero economy, as he did in his 2021 “Letter to CEOs”, would have been hard to believe just five years ago. Activists may see more posturing than substance to these proclamations, and the facts don’t exactly refute the accusation. While support for shareholder resolutions relevant to climate change from fund managers was generally on the rise in 2020, Blackrock and Vanguard, the perennial largest and second largest shareholder of any major U.S. corporation, were dead last, voting in favor of just 12% and 15% of such resolutions, respectively. Even basic issues of transparency reflect an unacceptable status quo. For instance, how did these giants, who together control about 15% of Procter & Gamble, vote on Green Century’s deforestation resolution? For now, only they know. Blackrock only recently began to disclose their votes on a quarterly basis, and Vanguard may not announce its votes until August 2021. Reading Fink’s letter in a vacuum, one could get the impression that Blackrock confidently leads on environmental and social issues, and corporations are somewhat compelled to actually listen. At best, that model “is not so much true, as it is in the process of becoming true”, as Matt Levine generously put it. As investors, and as citizens, we can and should demand that managers of sustainable funds act like sustainable fund managers. However, one need not infer bad faith. It’s hard to overstate the banal power of inertia. An active posture towards their portfolio companies runs directly counter to decades of institutional muscle memory. Reorienting the highly coordinated efforts of tens of thousands of people will require its own theory of change. At Betterment too, our work is just beginning. Our Climate Impact offering is as much a process, as it is a product. We see it as a continuation of a conversation with our customers, who told us in no uncertain terms, that climate change matters to them. We set out to integrate this mandate alongside the rest: diversify globally, keep costs low, optimize for after-tax return, and automate as much as we can. It's the framework we've been refining for a decade, and continuing to make it better is all we know. Any links provided to other websites are offered as a matter of convenience and are not intended to imply that Betterment or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise. Higher bond allocations in your portfolio decreases the percentage attributable to socially responsible ETFs.

How Disciplined Will You Be in the Next Downturn? Jul 21, 2021 12:00:00 AM Every investor should have a fire-drilled plan for the next market drop because anticipating your own behavior is part of what makes you a better investor. I can’t take any further losses. I’m just not comfortable with losing 8% of my money in one year. I’ll start thinking about more aggressive investments when the dust settles. The stock market is pretty rough right now. If that continues, I don’t want any part of it. I know I shouldn’t time the market, but it’s now up 3x and I can just see it reversing course soon! These are just a few paraphrased notes from Betterment customers who reduced their stock allocation in January or February 2016. From Nov. 1, 2015 to Feb. 11, 2016, the global stock market (ACWI) fell about 15%. And, of course, markets then rallied 31% up until September 2017. Looking back between February and September of 2017, a stay-the-course investor tracking the index would be up about 20% cumulatively. A reactive investor, who sold in February then re-bought when markets recovered in July, would be up only 4%. Source: Data from Xignite, total returns data for ACWI ETF representing global stock markets. This particular ETF was chosen as it is a widely used global market cap fund, and represents a commonly used investable market cap global stock portfolio. We published research showing that the more a customer changes their allocations, the worse their performance likely is. On average, investor returns dropped about 0.20% per year for each allocation change the customer made. This means if you change your allocation three times per year, you could underperform by about 0.60%. That’s more than twice the annual cost of Betterment’s advice and portfolio management. One study by Vanguard of 58,000 of their IRA account holders from 2008 to 2012 found that those who reacted to the crisis had significantly worse performance than those who stayed the course, giving up about 1% a year. When you consider that a reasonable excess rate of return for global stock markets is about 6%, that could mean giving up about 17% of your expected return. How can you ensure that you won’t succumb to the same fears and anxieties the next time a market drop hits? My recommendation has just three simple steps: Arrange your finances. Write out a downturn plan. Stick to it. Arrange your finances. Properly arranged finances make it much easier to glide through a rough market by buffering and hedging your overall downside exposure. Here are four major steps to help get your finances in order. 1. Have an emergency fund. An emergency fund is usually one of the highest priority goals we recommend customers have, and we believe it should be invested conservatively. A bond-heavy portfolio does a better job than cash at preserving the real value of your wealth. One reason it’s important to have an emergency fund is because it helps gives you peace of mind when longer term, higher risk portfolios are more affected by a market drop. If you need to make a withdrawal from your emergency fund, you’ll be able to access it since it’s invested conservatively and is less likely to experience an extreme loss than a fund invested in a more aggressive allocation. 2. Earmark your money for future expenditures. It’s also smart to earmark your money for future spending. At Betterment, we call this setting a goal. Setting up goals helps to make sure you have money when you need it, aligning our investing advice to your life needs. From existing research on goal-based wealth management and internal research on Betterment customers, I believe investors who use specific and highly personal goals could not only save more, but might also earn higher returns. 3. Don’t take on more risk than necessary given your time horizon. It’s easy to get excited when markets have gone up and increase your stock allocation to try and benefit from it. While it’s ok to deviate within a range, we generally don’t recommend going outside our recommended ranges. Our stock allocation advice is based on your goal type and how long you’re investing for. We take into account the total cumulative returns over that period and figure out an optimal amount of risk for you to take on. You generally shouldn’t take on significantly more risk than we recommend. It exposes you to drawdowns that your portfolio may not have time to recover from. 4. Don’t invest in a portfolio that might keep you up at night. Your emotional time horizon is likely much shorter than the goal term. That’s why, when setting your allocation, we show you a range of one-year performance you can expect from that portfolio. Have an honest chat with yourself about how much of a loss would be too much to bear. Imagine you had invested $100,000 a few years ago, and today you logged in to see your portfolio was down to $90,000, a -10% loss. Would that be too much? How about $70,000, a -30% loss? How about $44,000, a -56% loss? That’s how much a 90% Betterment portfolio lost in 2008-2009. For a 90% stock portfolio, up to a -27% drop over any one-year period wouldn’t be unusual, per the example below which reflects our 90% stock portfolio. You should choose a stock allocation that you could stay invested in, even during a down market. So if the “poor” market performance would be too painful for you, feel free to take on less risk. You’ll have to save a bit more, but you’ll be able to sleep at night. Write out your plan now. Prioritize your goals. In a market drop, most of your goals will likely experience a loss. That might mean shifting balances between them, or waiting longer to achieve some after the market rises again. Know ahead of time what goals you’ll prioritize and whether or not you’ll need to move money from lower priority goals to higher ones. Have an anti-monitoring strategy too. At some point, the stress of seeing losses increases the chance that you’ll do something impulsive. Rather than test your fortitude and willpower, give yourself a break from the stress. If the news is bad, you can always choose to not log into your account. I regularly use apps to restrict my access to unproductive websites at work. I recommend doing the same thing with your investments. What can you do during a market drop? Liquidate legacy losers. The most common barrier to consolidating your taxable investments is capital gains tax. Take advantage of a short-term market drawdown and let go of a high cost mutual fund or diversify away from a single stock position. What can you do today? Prepare a short list of investments you would like to liquidate, and the price at which you will give them the pink-slip. Our tax-switch calculator can also help with that. Do less than you want to. While the best investment strategy is typically to stay invested, some people could find the stress simply to be too much to bear. If you think you might make an extreme decision—such as moving to 100% bonds—if the drawdown continues, then it’s ok to reduce your risk temporarily. Adjust from 90% stocks to 60% stocks, for example, for a 60-day period. Make sure you set a reminder to revisit your portfolio at that point. While we don’t believe it will improve your performance from a ‘cold’ view, it may mean you’ll be less likely to make an emotional decision and have a higher return per nights lost in sleep. Take a vacation from your portfolio: My own research has shown that people are more likely to monitor portfolios during volatile periods. The only problem is that the more you monitor, the riskier your portfolio will seem to you. A better strategy is to login less during volatile periods—a strategy successful investors with higher emotions do follow. Sometimes, it pays to be the ostrich. Talk it out. Have a friend with a cool head? Sure you do. Contact us and our Customer Support Team can walk through your concerns with you. While Betterment is all about efficiency, we know there’s no replacement for a human conversation. And we love talking to you. Seriously. The figures contained in this article have been obtained from third party sources, and their accuracy and completeness are not guaranteed by Betterment. All performance data quoted represents past performance, and past performance is not indicative of future returns. The conclusions drawn in this article should not be construed as advice meeting the particular investment needs of any investor, and they are not intended to serve as the primary basis for financial planning or investment decisions. This material has been prepared for informational purposes only and is not a solicitation or an offer to buy any security or instrument.

Meet $VOTE: Channeling Our Values Through Shareholder Engagement Jul 15, 2021 12:00:00 AM We're adding the new $VOTE ETF to our Socially Responsible Investing portfolios. Here's why it gives investors more power to advocate for their values. Today, we are excited to announce that we will begin integrating the $VOTE ETF, recently launched by Engine No. 1, into all of Betterment’s Socially Responsible Investing portfolios. This new ETF invests in 500 of the largest U.S. companies, weighted according to their size, with a management fee of only .05%. You might think that this sounds a lot like a garden variety index fund tracking the S&P 500—a commodity for many years now. So, why the excitement? In short, $VOTE represents a highly innovative approach to pushing the economy towards sustainability via index fund investing. It may be “passive” in the traditional sense—buying shares in companies purely based on an index—but it is “active” when it comes to engaging with those companies as a shareholder. Beyond Divestment: What’s Shareholder Engagement? Historically, values-aligned investing has often been synonymous with avoiding the purchase of certain stocks—a practice often referred to as “divestment.” The alternative to divestment is “engagement.” By owning a stock, and using your rights to vote on shareholder resolutions, you can attempt to change the company’s activities from the inside. Vanguard, BlackRock, and State Street—the “Big Three” largest fund managers—are collectively the biggest shareholders in most companies, but have historically been reluctant to rock the boat and aggressively challenge management. As a result, when it comes to investing through index funds, the full potential of shareholder engagement to drive change hasn’t been tapped. Engine No. 1’s new $VOTE ETF promises to change that. To understand why, it helps to understand the mechanics of how shareholders can push for change. Proxy Voting Purchasing stock in a company grants you not just a share of its profits, but also the right to influence its decision-making. This process is called “proxy voting,” which can be a powerful tool with the potential to transform the entire economy, company by company. Publicly traded companies operate like quasi-democracies, accountable to their shareholders. They hold annual meetings, where shareholders can vote on a number of topics. Shareholders who disagree with some aspect of how a company’s business is conducted can engage with management, and if they feel they aren’t being heard, can present an alternate course of action by making a “shareholder proposal.” If they can persuade a majority of all shareholders to vote in support of the proposal, they can overrule management. When more drastic change is warranted, such “activist” shareholders can seek to replace management entirely, by nominating their own candidates for the company’s board of directors. Shareholder Activism: Social Change Through Engagement Social change via shareholder activism has a storied history. As early as 1951, in a seminal case, civil rights leader James Peck took the fight to the proxy arena, by filing a shareholder proposal with the Greyhound Corporation, recommending that the bus operator abolish segregated seating in the South. Seventy years later, on May 26, 2021, activist hedge fund Engine No. 1 stunned the corporate world by winning a proxy battle against the current leadership of ExxonMobil, persuading a coalition of shareholders to elect three of its own candidates to the board—the first ever climate-centered case for change. Engine No. 1 argued that Exxon’s share price was underperforming that of its peers because the company was unprepared for the transition away from fossil fuels. It nominated candidates for the board that would push the oil giant to embrace renewable energy. Against all odds, holding just .02% of Exxon’s stock, Engine No. 1 prevailed.  Corporate boardrooms across the entire S&P 500 are buzzing, asking what the Exxon coup means for them. Where will environmentally and socially conscious investors strike next? These questions are warranted: The Exxon campaign was a first, but it surely won’t be the last. “Index Activism”: Bringing Power To The People Individual investors are increasingly aware of proxy voting as a domain by which their portfolios can channel their values. In a recent Morningstar report, 61% of those surveyed said that sustainability should be factored into how votes attributable to their 401(k)s are cast. However, most Americans, including Betterment customers, don’t buy stock of companies like Greyhound or Exxon directly, but through index funds. When you buy a share of an index fund, the index fund manager uses your money to buy stocks of companies on your behalf. As a shareholder of the fund, you benefit financially when these underlying stocks rise in value, but the index fund is technically the shareholder of each individual company, and holds the right to participate in each company’s proxy voting process. As more investors tell the industry that they want their dollars to advance sustainable business practices, the Big Three have been feeling the pressure to work these preferences into their proxy voting practices. This year, they are showing some signs of change. Notably, the Big Three ultimately joined Engine No. 1’s coalition, which could not have prevailed against Exxon without their support. However, even if the Big Three, who manage trillions on behalf of individual investors, continue to side with the activists, what’s missing is a way for individuals to invest their dollars not just to support these campaigns, but to spearhead them as well.   What Makes $VOTE Special Activist shareholder campaigns are generally led by hedge funds, and what happened with Exxon was no exception. However, by launching an ETF that anyone can invest in, Engine No. 1 is looking to break that mold. In 2020, investors poured $50 billion into sustainable index funds—double that of 2019, and ten times that of 2018. The $VOTE ETF should bring even more investors off the sidelines, and into sustainable investing, for two reasons. First, rather than dilute its efforts, $VOTE intends to spearhead a handful of campaigns, pushing companies to improve their environmental and social practices. A focus on the highest impact, and most powerful narratives, will continue to raise awareness for the power of shareholder activism. Second, $VOTE is designed for mass adoption, not as a niche strategy. With a management fee of only .05%, and tracking a market cap weighted index, $VOTE is designed to ensure no trade-off to long-term returns. It is also well-suited for those investing for retirement—and as of today, it will make its way into its first ever 401(k) plan, via Betterment for Business. What Does $VOTE Mean For Investors? We know that many of our customers want to invest for real impact, especially if they can do so without sacrificing their long-term financial goals. If you’re investing through any of Betterment’s three Socially Responsible Investing portfolios, $VOTE will have a target weight equal to 10% of your exposure to the U.S. stocks. With $VOTE in your portfolio, you’ll know that your dollars are directly supporting whatever engagements Engine No. 1 launches next. As their subsequent work unfolds, we will be monitoring their efforts, and updating our customers on the impact their investments are driving. Now that $VOTE exists, anyone—not just Betterment customers—can invest in it, which is a great thing. The bigger it gets, the more it can drive change, and you, as an investor, get to help write the next chapter.

What Are The Most Effective Deposit Settings? Jul 8, 2021 12:00:00 AM Choosing the right deposit strategy is an important step towards helping you reach your goals. We recommend setting up your auto-deposits so that they occur right after each paycheck. You’ve set up your account, prioritized your financial goals, and you’ve linked your checking account. Now you’re ready to start making deposits. Automating your deposits helps you to “pay yourself first” by quickly separating your savings money and spending money. It also reduces the amount of idle cash you hold, which could be earning more value if it was invested. More importantly, regular deposits help protect you from trying to attempt the impossible: effectively timing the market. Deposit Types There are many ways you can deposit into your Betterment account. You can make a one-time deposit, you can set up recurring auto-deposits, and you can even allow us to manage your extra cash by using Two-Way Sweep to automatically fund Cash Reserve, which is a cash account that earns a 0.10% *. One-Time Deposit A one-time deposit is an ad-hoc type of deposit where you choose a specific dollar amount to transfer from your checking account to any of your investment goals at Betterment. They can work well when you have cash on hand that you’re ready to invest, right now. A major downside of a one-time deposit is that you must initiate it manually. You’ll need to log in to your account every time you want to make a deposit. Even though we have a convenient mobile app for both iPhone and Android, we know you’re busy and likely have a lot on your to-do list already. Two-Way Sweep Two-Way Sweep is specifically designed to make your life easier by automatically transferring money back and forth between your checking account and Cash Reserve as needed. First, we’ll monitor your spending patterns and provide you with advice on what to do with any extra cash. Then, we’ll seamlessly transfer your cash back and forth between your checking account and Cash Reserve, depending on where it’s needed most. Auto-Deposits Auto-deposits eliminate the manual process required for a one-time deposit, and instead, allows you to schedule recurring future deposits for a specific dollar value. The set amount will be transferred from your bank account on a repeating frequency that you designate—either weekly, every other week, monthly, or on two set dates per month, making it a great option for anyone who likes to know exactly how much will be transferred and when, on an ongoing basis. We’ll email you the day before a scheduled auto-deposit so that you can make any necessary adjustments before the money is withdrawn from your bank account. The email will provide you with an option to skip the auto-deposit if you need to. Many people utilize the auto-deposit feature as a way to dollar-cost average into the market. Auto-deposits help you stay on track and are the preferred deposit method for any of your goals besides Cash Reserve, which has the additional Two-Way Sweep deposit option. What are the most effective auto-deposit settings? The most behaviorally effective auto-deposit strategy is to set up your auto-deposits so that they occur right after each paycheck. Choosing the day after you get paid as your auto-deposit date allows time for your paycheck to completely settle in your bank account before we start the transfer to Betterment. The principle of having auto-deposits set up for right after you get paid is something you actually may already be doing in your employer-sponsored 401(k) account. Your 401(k) contributions come right out of your paycheck, and never actually reaches your bank account. With other investment accounts that aren’t provided to you by your employer, like IRAs or individual taxable accounts, it’s generally not possible to move money directly from your paycheck to those investment accounts. Instead, the next best thing you can do is to schedule auto-deposits for the day after your paycheck hits your bank account. Optimize Timing You may have heard of the saying “pay yourself first” when it comes to saving money. Setting up your auto-deposits for right after you get paid allows you to do this by separating your paycheck into two categories: savings and spending. From a behavior standpoint, this protects you from yourself. Your paycheck is immediately going towards your financial goals first, and any leftover cash in your checking account can then be used for your other spending needs. Avoid Idle Cash Delaying your deposits for any period of time after you get paid allows your cash to sit in your checking account—which can be problematic. Cash that sits in a traditional bank account is likely earning either no interest or very little interest at best. This means that over time, your cash is effectively losing value due to inflation. Letting the cash sit may also tempt you to try to time the market, which might lead you to ultimately hold on to your cash for even longer because of market activity. Not investing that cash could cause you to miss out on dividend payments or coupon income events that you otherwise would have received. Reduce Taxes Another perk of using auto-deposits is that they can help keep your tax bill low. Regular and frequent deposits and dividends help us rebalance your portfolio more tax-efficiently, which keeps you at the appropriate risk level without realizing unnecessary capital gains taxes. We do this by using the incoming cash to buy investments in asset classes that you might be underweight in, instead of selling investments in asset classes that you’re overweight in. Even little amounts help, because we can use those small amounts to invest in fractions of investments. How much should I deposit into each goal? Not sure how much you should be saving in each of your goals per month? We’ll tell you. You can see our recommendations on the Plan tab of each of your goals. We’ll calculate how much you should be saving towards each goal using information such as how much you already have saved, how long you’ll be saving for, and the expected growth rate of your investments. For more information on how our recommendations are determined, please see our goal projection and advice methodology. Ready to put your savings habits on auto-pilot? If you’re already a customer, setting up your preferred deposit type is easy. On a web browser, simply head to New Transfers and choose the deposit option. If you’re using the mobile app, simply log in and choose the Deposit button that will appear at the bottom of the screen. If you have any questions about how to schedule your auto-deposits, we have a team of customer experience associates available to help with any questions or concerns you may have.

Time to Prepare Your Estate Plan? Consider These Estate Planning Tips Jul 7, 2021 12:00:00 AM An estate plan helps to ensure that your wishes regarding your health and assets are clear and can be followed accordingly, before and after your death. Did you know that you already have an estate plan? That’s right. Your state has general, default laws that kick into action in the event of your physical incapacitation or death. Many these laws won’t manage your estate how you’d want it to be managed—you’d essentially be letting a complete stranger call the shots regarding your health and your assets. You probably don’t want this to happen, so it’s usually best to create a plan that manages your estate on your terms. Consider this: If your estate plan is a house, then a will, health care directive, power of attorney, and trust make up that house’s foundation, walls, and roof. We know that being sick or dying is something you’d prefer not to think about. You may also think that setting up an estate plan is prohibitively expensive, or that you’re too young to have one, or don’t have enough assets to make such a plan worthwhile. But it is crucial for almost everyone to prepare an estate plan. By having one in place, you’ll remove any ambiguity around your wishes when it comes to protecting your family, loved ones, and assets, in case you’re unable to do so. Here, we cover basic estate planning steps to help you get started. Estate Planning 101 Let’s ignore all the legal jargon that you may already associate with estate planning. Estate planning is the act of preparing for the transfer of your wealth and assets in case of illness or death. Items that are part of your estate include your financial assets, life insurance, pensions, real estate, cars, personal belongings, and debts. At its core, an estate plan can be broken down into two phases of time: 1. Before Death Examples of some of the important decisions to make at this stage include: Instructions for medical procedures, such as certain operations, or whether or not you wish to be put and left on life support. Instructions for how to manage your finances in case you’re unable to do so due to illness, injury, or old age, and whom you’d want in charge of carrying out these instructions. 2. After Death Examples of some of the important decisions to make at this stage include: Assigning guardianship over your minor children. How your assets will be distributed across your beneficiaries. These are major decisions that shouldn’t be left to uncertainty or the laws of the state where you live. This is why your estate plan will help provide security in knowing that your wishes will be carried out exactly as planned. Phase One: Before Death This aspect of your estate plan is crucial because it affects both you and your beneficiaries. You’ll decide what you want to happen in case you become physically incapacitated, and assign a person who can carry out your wishes. For this phase, you’ll need to prepare the following two documents: Durable Financial Power of Attorney (POA): This document allows you to designate someone (known as your “agent”) to handle your finances if you are unable to do so. Without a POA and a designated agent, it may be difficult for someone to do things on your behalf, such as pay bills, file taxes, or cash checks. Advanced Health Care Directive: Similar to a Financial POA, this document allows you to designate someone to make medical decisions on your behalf. Again, this person is called your “agent” and can make decisions such as choosing a doctor, accessing medical records, and putting and keeping you on life support. If you’re thinking about naming multiple people to serve as your agents rather than a single person who has total authority, exercise care before doing so. Depending on how you structure your documents, each of your agents’ signatures may be required for every decision, so consider their schedules or locations before you assign them these roles. After executing these documents, consider making sure your banks and doctors have copies of these documents on file; otherwise, they may deem them invalid. Some entities may even require additional documentation or have specific procedures when dealing with agents. Make sure to double-check ahead of time to avoid putting your agents in a difficult position. Phase Two: After Death The second phase of your estate plan deals with what happens after you pass away. Having an estate plan can help to prevent any chaos and messiness by clearly outlining the key roles and documents involved: Joint Owners and Beneficiaries: Joint Owner: If you’re married, this is the most common way to title your accounts. When you pass away, your spouse will become the sole owner of these accounts. A joint owner can usually avoid probate, which is the state’s process of distributing your assets upon your death. Avoiding probate can save time and money, however be wary of adding others, such as your children or grandchildren, as joint owners of your property for the sole purpose of avoiding probate. Doing so can subject you to gift taxes and prevent them from getting a step-up in basis,1 and give them control of any assets in your estate even while you’re still alive. Beneficiaries: Most assets with beneficiaries listed also avoid probate. More and more types of property are allowing beneficiaries, making estate planning even easier. These include: Bank and Investment Accounts: You can easily add beneficiaries to bank and investment accounts. This usually only requires filling out a free request form at your bank or custodian. Retirement Accounts: Similar to other investments accounts, retirement accounts allow you to add and update beneficiaries, usually with a simple form. Life Insurance: Life insurance goes hand-in-hand with estate planning, so make sure you designate beneficiaries to any insurance you have as well. Real Estate: More than half of the states in the United States now allow a Transfer on Death (TOD) Deed. This acts just like a beneficiary on a bank account, in that the real estate will bypass probate. Key Documents of Your Estate Plan: Last Will and Testament (Will): Your will is the document that determines who will inherit any assets if no joint ownership or beneficiaries are listed. If you did a good job at naming beneficiaries for most of your assets, this document will mostly be reserved for personal belongings. However, a will has other important features, such as naming a guardian to look after your underage or non-adult children, and naming an executor, the person who is charged with ensuring your wishes are carried out. Trust: You as a trustor will assign a trustee (usually also yourself) the right to hold title to your property or assets for the benefit of your beneficiaries. A trustee is named to oversee your estate, allowing for increased flexibility, privacy, and control, even after you pass away. For this reason, trusts are more expensive than basic wills. If you have a large estate or more nuanced situations—such as prior divorces, children with special needs, or spendthrift heirs—a trust is worth considering. Keep in mind that there are many different types of trusts and an estate planning professional can help you decide which one is best for you. As in the case of naming a POA, you should be cautious about naming multiple people to serve as your executor or trustee. Oftentimes, doing so can cause more problems than it solves. You’ll want to inform who you’ve chosen to serve as your executors, trustees, or children’s guardians, and make sure they are up for the tasks. These individuals must also have access to your important documents, or at least know where to find them. Finally, it is a good idea to put  these individuals in touch with, or have them meet your attorneys and financial advisors as well. Taking the Next Steps A rock solid estate plan is an important step to ensure that you and your assets are protected in the worst-case scenario. While you now have the basics, this is just the beginning. Because state laws can vary and every personal situation is different, we highly recommend speaking with a professional estate planning professional or an attorney to help you navigate this journey. Also remember that an estate plan is not a static document that you can “set and forget.” We recommend reviewing your estate plan every two years, or when any major life event such as marriage, divorce, or death occurs among your beneficiaries. Betterment customers can log in to their Betterment accounts today to make sure their beneficiaries are up-to-date. After logging in, navigate to "Settings," and then select "Accounts" to view or update your beneficiaries. Remember, talking about death and illness is never easy. But having a plan in place now will give you peace of mind when you and your loved ones most need it. Your family and friends aren’t likely to be experts in estate planning law and dealing with your illness or death will already be stressful enough. Providing a clear set of instructions will help during a difficult time and also prevent any disputes that may arise. 1Step-up in basis: If you sell an asset that has increased in value, you must pay taxes on the difference increase. For example, if you bought a stock for $100 (your cost basis) and it is now worth $150, you will pay taxes on that $50 (capital gain). However, if you pass away and your heir inherits this stock from you, the cost basis is adjusted to the price on your date of death. This is called a “step-up in basis,” and means your heir can avoid taxes if he/she sells that stock. Note that this only applies to certain types of investment accounts.

Benefits Of An Early IRA Contribution Jun 29, 2021 12:00:00 AM Want to know a simple strategy that can help you end up with thousands more to spend in retirement? Time and time again, Betterment and many other financial advisors highlight the overwhelming evidence that market timing doesn’t work. But there’s one exception—contributing to your IRA as early as possible. This timing strategy is so powerful, that any investor who hypothetically could have contributed to their IRA at the beginning of every year would have left an average of $8,800 on the table over a ten-year period (see Figure 1 for the evidence). How it Works: “Timing” Your IRA Contributions In 2020 and 2021, an investor younger than 50 can contribute a maximum of $6,000 to an IRA. Those that are over 50 can contribute up to $7,000.  It’s your choice to either make a maximum contribution early in the year, contribute over time, or wait until the deadline. By timing your contribution to be as early as possible, you can maximize your time in the market, which could help you gain more returns over time. If you save up and max out your IRA at the beginning of the year, it gives each contribution an extra year to grow. If the market trends upwards over time, as it has done in the past, you can expect greater growth by spending more time in the market. Let’s Run the Numbers To test how well this strategy could have worked throughout a ten-year period, let’s compare it to the default strategy for most people—waiting until the end of the year to max out their IRA. For those younger than 50, the current IRA contribution limit for 2020 and 2021 is $6,000. This example will be completely hypothetical, assuming an annual rate of return of 10% to illustrate what performance for IRA contributions could have been like (see Figure 1 below for more information as to how we got this number). Scenario 1: Max Out Late First, imagine making the annual $6,000 investment at the end of the calendar year—every year for 10 years, as will be described below. Scenario 2: Max Out Early For comparison, let’s do the same thing but make each annual investment in January of that same year, which is almost a whole year earlier—the first possible day to contribute for that tax year. Again, for each simulation, we’ll measure the portfolio value on the same day as in the first scenario. In this hypothetical example, investing as early as possible (Scenario 2) would have resulted in an $8,800 higher account balance after ten years, on average. Considering we’ve invested $60,000 total in both scenarios, the $8,800 amounts to an additional 14% return on the invested principal, as compared to the late deposit strategy (Scenario 1). Below, you can see this potential benefit of giving each of your contributions an extra year in the market. Any extra growth can then compound over the entire lifetime of each annual contribution. Figure 1. This figure represents the scenarios mentioned above.‘Deposit Early’ indicates depositing $6,000 on January 1 of each calendar year, whereas ‘Deposit Late’ indicates depositing $6,000 on December 1 of the same calendar year, both every year for a ten-year period. The calculations assume a hypothetical growth rate of 10% annually. The hypothetical growth rate is not based on, and should not be interpreted to reflect, any Betterment portfolio, or any other investment or portfolio, and is purely an arbitrary number. Further, the results are solely based on the calculations mentioned in the preceding sentences. These figures do not take into account any dividend reinvestment, taxes, market changes, or any fees charged. The illustration does not reflect the chance for loss or gain, and actual returns can vary from those above. Ready to “time” your IRA contribution for 2021? Ready to experience the possible benefits of maxing out your IRA early? Get started or log in to open and fund an IRA for the 2021 tax year. You can still contribute to the 2020 tax year up until April 14th. Need a reminder on IRA rules and limits? Please note that Betterment is not a tax advisor—please consult a tax professional for further guidance.

How Memestocks Affected Investors’ Actions And Emotions Jun 24, 2021 12:00:00 AM In April, Betterment surveyed 1,500 investors to examine “the rise of the day trader,” and how ‘memestocks’ affected their actions and emotions when it comes to making financial decisions. Money and emotions have long gone hand-in-hand, and this is no more apparent than during significant financial crises. From the 2008 market crash to COVID-19’s economic impact, we’ve seen first hand how money has the ability to impact our stress levels, mental health and personal relationships. And yet in times of particular financial strife—or likely because of it— many people take actions with their money that often undermine their emotional wellbeing, sacrificing long-term happiness for short-term pleasure without even realizing it at the time. This trend toward short-termism grew in 2020: people stuck inside, on screens all day and kept from their normal activities sought new ways to fill their time and energy. Many took up day trading, culminating in one of the wildest rides at the beginning of 2021 (and recent surges demonstrating people are still trying to head to the moon) with Gamestop, AMC, Blackberry and other retail stocks caught in the middle of a clash between amateur retail and institutional investors. Following this eventful start to the year, Betterment was curious to see both the immediate and long-term impact this had on investors, particularly those involved in the action. In this report -- a survey of 1,500 active investors conducted by a third party -- we took a look at the rise of day trading activity and the impact it did (or didn’t have) on people’s behavior. From their own forecasts, it looks like “the rise of the day trader” is here to stay -- but forecasting is hard. None of us would have bet on the pandemic and the changes it's causing. People actually aren't very good at forecasting their own preferences and behavior in the future, so it will be interesting to see if said forecasts actually come to fruition. Regardless, at Betterment we welcome the addition of consumers looking to learn more about the markets and, ultimately, how to balance their portfolios for the long-term too. Section One: The Rise Of Day Trading Activity With movie theaters, stadiums, bars and restaurants closed, many people took up day trading during the COVID-19 pandemic. Half of our total respondents said they actively day trade investments, and nearly half of those day-traders (49%) have been doing it for 2 years or less. While most day traders indicated their main reason for doing so was that they believed they could make more money in a shorter period of time (58%), many (43%) also indicated it was because it is fun and entertaining. Of those who look to day trading for fun/entertainment, half (52%) said it was to make up for the bulk of their other hobbies—like sports, live music, social gatherings, gambling—not being available due to COVID-19. And these day traders have fully acknowledge that COVID-19 played a big impact role in their market activity overall: 54% indicated they trade more often as a result of COVID-19; and interestingly, 58% said they expect to day trade more as normal activities return and COVID-19 restrictions are lifted, likely as a result of what they learned during this downtime. Only 12% said they expect to trade less. More than half (58%) are using less than 30% of their portfolio to actively trade individual securities or stocks. Nearly two thirds also allow an advisor (either online or in-person) to manage a separate part of their portfolio. Betterment's Point Of View: It is interesting to see more respondents expect to day trade more after the pandemic than are currently day trading: we imagine it is hard for people to forecast themselves into the future and imagine doing things differently than they are now. However, what is positive to see is these people aren’t using an excessive amount of their portfolio to day trade. The majority of investors day trade with a minority of their total investing balance, and delegate day-to-day management of the larger portion of their portfolio to an advisor. Passing hobby or not, how educated is the average day trader on what they’re buying and what they stand to gain—or lose? Sixty one percent rely on financial news websites to decide which stocks to buy, but nearly half (42%) are influenced by social media accounts, showing just how powerful “memestocks” can be. Betterment's Point Of View: More than half of the respondents suggested they buy stocks based on company names they’re familiar with, but we’ve seen this lead to issues in the past—with “ticker mis-matches,” where people trade the ticker of a stock that isn't the correct company. For example, after a tweet from Elon Musk about Signal (a non-profit messaging app), a different company’s stock was sent soaring 3,092%. We also asked day trader respondents if they consider capital gains taxes when deciding to sell their investments. While the majority (60%) indicated that it influences them to hold onto stocks longer to avoid short-term capital gains, 14% said they weren’t aware there was a difference in taxes based on how long they hold a stock. Another 17% said they simply don’t care about the short-term capital gains tax. Who invested their stimmys? Almost all (91%) respondents received some stimulus money, and nearly half (46%) invested some of that money; of those who did invest it, 70% invested half or less of their stimulus. Day trader and male respondents were more likely to invest then their counterparts, as represented in the graphic below. This is in contrast to our COVID-19 investor sentiment survey from 2020, where only 9% of respondents indicated they put some of their stimulus money towards investment. Last year’s response pool was primarily focused on building out their emergency funds, with 40% putting money into a safety net. This is a good indication that respondents are more comfortable with their financial situations this year, compared to the throes of the pandemic. Section Two: Memestocks Understanding And Involvement We asked all respondents how well they understood what occurred in the stock market in January & February surrounding “memestocks” like GameStop, AMC, BlackBerry and other retail investments. Most indicated having some level of understanding, but nearly a quarter (24%) of all respondents said they didn’t understand it well at all; and only half (51%) of day trader respondents said they understood what happened very well. Nearly two-thirds (64%) of all survey respondents said they did not actively purchase any popular retail investments (GameStop, AMC, BlackBerry, etc.) during the stock market rally in January or February. But those that DID were primarily day traders. Of all respondents that did buy in actively, 55% are still holding onto all their investments. Only 2% of those that sold these investments sold everything at a loss; 44% sold all for a profit and 54% sold some at a profit and some at a loss. Of those that bought into memestocks, there is a near universal consensus that they will continue investing in stocks like these that get a lot of attention in the future—97% said they’re at least somewhat likely to invest. Betterment's Point Of View: It is interesting to see the majority of respondents holding onto their investments - are they expecting another high or holding on because they don't want to admit they made a bad investment? Disposition Effect says people tend to hold on until they get back to zero loss; but seeing so few sell entirely for a loss is encouraging. However, 60% previously said thinking of short-term capital gains taxes encourages them to hold onto their investments longer, which is good to see. Section Three: Money And Stress Factors It’s no secret that money and stress are linked, so we wanted to take a look at respondents’ money habits and how that may be impacting stress levels. The consensus is that for better and for worse day traders and younger generations are more engaged with their finances. We asked respondents how much they stress about their finances on a daily basis—three quarters said they stress to some degree. Interestingly, when we looked a layer deeper, day traders are much more stressed than non-day trader—86% indicated they stress to some degree, vs 65% of their counterparts. Unsurprisingly, younger generations are more stressed about their finances than older ones. In looking at the causes of the stress: respondents are nearly equally concerned about money in the short term, near term future, and long term future with the top 3 financial stress factors being their daily expenses (43%), how much money they will have in retirement (43%), and how much money they have saved (42%). We asked respondents how often they are checking their bank account and investment portfolio balances -  39% are looking at their bank account balances every day, with 11% of those checking multiple times a day; 37% also check their investment portfolio balances every day, with 16% of those checking multiple times a day. When we look a layer deeper, we find that day traders are checking both their bank account and investment portfolio balances significantly more than non-day traders. Interesting Bank Account Habits 50% of day traders indicated they check at least once a day (18% multiple times) vs 29% of non-daytraders (5% multiple times). Men check their accounts more often—41% at least once a day (13% multiple times) vs 36% of women (8% multiple times). 46% of Gen Z/Millennials and Gen X both said they check their accounts at least once a day, whereas only 28% of Boomers said the same. Those making more money actually check their accounts more often—42% respondents making $100K or more check every day, compared to 39% of those making between $50-100K and 35% of those making less than $50K. Interesting Investment Account Habits Unsurprisingly, 56% of day traders said they check their investment portfolio balances every day (25% multiple times a day), whereas only 18% of non-day traders said the same. 41% of men check every day, compared to 30% of women. 47% of Gen Z/Millennials check every day, compared to 41% of Gen X and 22% of Boomers. 42% of those making 100K or more check every day, compared to 35% making between $50-100K and 30% of those making less than $50K. Betterment's Point Of View: The differences between men and women here are in line with research we’ve seen elsewhere. Women are less focused on market performance, and more focused on the end financial outcome. They also tend to invest at lower risk levels, so are less likely to see extreme ups and downs. Additionally, Women tend to be less competitive/score based in general, so are less interested in monitoring the game. Encouragingly, when we asked people how they felt checking these accounts, the positive responses outweighed negative options for both. Interestingly, day traders were significantly more excited for both (21% for bank accounts, 25% for investments) than non-day traders (4% and 12%, respectively) as well. Most respondents (89%) indicated they’re putting some money away every month, but it's equally split as to where that money is actually going. Conclusion At Betterment, we have often compared day trading to going to Vegas—have a great time, enjoy yourself, but be prepared to come back home with fewer dollars in your wallet and a hangover.  The trends outlined in this report seem to indicate that more people are dipping their toe into the investing pool and (so far) few have decided to walk away. Whether this trend will continue—and the long term impact it will have on people’s finances, health, stress, etc.—remains to be seen. And for those who want to avoid the FOMO of the next big memestock, but aren’t sure of the best way to get started—a simple alternative is investing in a well diversified portfolio. That way, whenever someone asks if you own the hottest thing, you can say “yes”, regardless of what it is. Methodology An online survey was conducted with a panel of potential respondents from April 26, 2021 to May 3, 2021. The survey was completed by a total of 1,500 respondents who are 18 years and older and have any kind of investment (excluded if only 401k). Of the 1,500 respondents, 750 of them actively day traded their investments while the other 750 did not. The sample was provided by Market Cube, a research panel company. All respondents were invited to take the survey via an email invitation. Panel respondents were incentivized to participate via the panel’s established points program, regardless of positive or negative feedback. Participants were not required to be Betterment clients to participate. Findings and analysis are presented for informational purposes only and are not intended to be investment advice, nor is this indicative of client sentiment or experience. Any links provided to other websites are offered as a matter of convenience and are not intended to imply that Betterment or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, unless stated otherwise.

Understand Your Finances By Connecting Your Accounts Jun 17, 2021 12:00:00 AM Connecting your outside accounts lets you see your holistic financial picture in one place. It also lets us give you more accurate advice. As an added bonus, you may even spot high fees you didn’t know about, or extra cash that could be doing more. Securely connecting your outside investment accounts—such as 401(k)s, IRAs, and taxable accounts held at other institutions—helps us give you better investment advice. For instance, the way we recommend that you save for retirement depends on what sort of account types you have available to you. Knowing that you are making annual contributions to your 401(k) account and getting a 3% match, for example, will drastically alter your retirement projections. The list goes on!   In addition to investment accounts, you can also securely connect debt accounts, such as mortgages and loans. This helps you see your overall financial picture, putting you more in control of your wealth. Your connected account data is regularly updated automatically, so you’ll always know where you stand. Step-by-step instructions for how to sync your accounts. See your wealth in one place. What is your net worth? When you connect all of your other accounts to your Betterment account, you’ll have the power of seeing all of your wealth in one place. Whether your net worth is positive or negative, or mostly managed at Betterment or not—seeing this information can help you see the big picture when it comes to your personal finances. Seeing all your wealth in one place can help you better understand if you’re on track to meet your financial goals, and which goals might need some more attention. .     Receive personalized advice. We understand that you currently may be saving towards your financial goals in more accounts than one. For example, with retirement plans, we’ve found that customers often have investments spread out across multiple institutions, especially in the case of 401(k) accounts. It can be cumbersome to manage your finances across many accounts. When you connect your accounts, we’ll analyze your holdings and display each account’s individual risk profile for you. You can also assign any account you connect to a specific Betterment goal. This allows you to see your overall risk profile across all related accounts.  We’ll provide an assessment of how your current risk profile compares to our recommendations so that you can make informed decisions about whether any adjustments need to be made.     For example, you might find that your overall portfolio is riskier than you thought, and may want to reallocate some of your funds into more conservative investments. Knowing your portfolio’s true allocation can help you better understand the risks you are taking and will help you make informed decisions about how to save for the future. Reveal hidden fees. Fees are sometimes hidden between the lines of confusing jargon and can be hard to locate on your statements. In the financial industry, many institutions thrive off high or hidden fees. At Betterment, we believe in transparency. This is why when you sync your external accounts, we’ll clearly display the expense ratios of the funds you are invested in, as well as how much you are paying in management fees, whenever that data is available to us. Using this information, we’ll analyze how much you could potentially save using low-cost ETFs and a low cost advisor like Betterment.   Identify excess cash. A buffer of cash is good to keep in your checking account for regular transactions and short-term spending needs. However, holding cash in any long-term investment account is likely impacting your potential returns because it’s not being invested. This is known as “idle cash” or “cash drag”. When you instantly connect your funding accounts, we’ll analyze your accounts to determine if you’re holding onto too much cash. We classify any cash or cash-equivalent securities as idle cash. It is “idle” because it’s not invested, and therefore, not working as hard for you as it could be. The opportunity costs of idle cash can be significant—especially over long periods of time and because of inflation. Gain peace of mind. At Betterment, your privacy comes first. We will never sell, rent, or trade your information without your permission. We are a fiduciary financial advisor, so we're obligated to—and want to—act in your best interests Additionally, we strive to exceed the safest standards for protecting your account and financial data. Instantly connecting a financial account through our partner Plaid creates a secure, read-only connection with your institution, and we will never store your credentials, nor share your connected data. Connect your accounts. It only takes a few minutes. To connect your accounts, you must first either sign up or log in. On your home page after logging in, scroll down to the "Other Connected Accounts" and click "Connect New." Search for your firm, making sure you choose the firm name and option that has a matching URL to the one you use to log in to their website. Enter your username and password for that firm, and complete any additional security prompts that appear. You can manage and edit your connected accounts from "Connected Accounts" under "Settings." Need more help connecting your accounts?

Everything You Need To Know About Emergency Funds Jun 17, 2021 12:00:00 AM Some things you need to know about emergency funds: what they are, how big they should be, when to use them, and more. Having an emergency fund is the bedrock of a good financial plan. When you have three to six months of your monthly income saved, you’ll have the financial freedom to focus on other important financial goals in your life like retirement or saving for a home. But how do you create an emergency fund? Where should you keep it? In this article, we’ll cover those questions and how Betterment helps, using something we call your “Safety Net” goal. What is an emergency fund? An emergency fund. A safety net. A rainy day account. Whatever you call it, an emergency fund is a pool of money you save in case you are faced with a worst case scenario: losing your income entirely for some unexpected reason. You should keep these savings for major emergencies like a major medical problem or losing your job. But an emergency fund should not be used unless absolutely necessary. It should never be used for discretionary spending, like going out to dinner or a vacation. Think of those fire extinguishers that say “in case of emergency, break glass.” That is the feeling you should have when you go to withdraw from your emergency fund. If the expense isn’t essential, think twice before dipping in. How does Betterment’s Safety Net goal help? If your emergency money is not invested, you run the risk of decreasing your money’s value over time because of inflation. The aim of our Safety Net goal is to match inflation while lessening potential investment risks. Therefore, our recommended allocation for your Safety Net goal is 30% stocks. With this as a base, you can begin to customize your safety net balance to match your situation. Unfortunately, losing your job is one of the most expensive emergencies you are likely to face, so this is a good starting point for calculating the proper size of your emergency fund. That means a good starting point for your Safety Net balance should be three to four months of expenses. If you’re unsure what three to four months of your spending is, Betterment will calculate it for you using your gross income, zip code and research from the American Economic Association and the National Bureau of Economic Research. If your income isn’t stable it can be a good idea to add a few months to your safety net. If you’re the sole/primary income earner, losing your job could be catastrophic to your family’s finances, more so than if your spouse also works. If that’s the case, consider increasing your safety net by a few months. How To Save For Your Safety Net Goal Building a financial safety net doesn’t happen overnight. However, with a little bit of planning and discipline, you can build your safety net quicker than you might think, by following these steps. 1. Clearly define your goal. You want to have a clear target in mind. That means having a concrete dollar amount and a definite time horizon in which you want to reach it. This might be something like “I want to have $15,000 in 3 years.” This is how opening a Safety Net goal will look like in your Betterment account. 2. Let Betterment calculate your required savings. Betterment will estimate how much you need to save per month to reach your target amount in your desired time horizon. This will depend on: Your target balance Your time horizon How much you already have saved The expected interest rate/growth rate of your account Below is a screenshot of our goal forecaster to help you see how much you need to save per month to be on track for your emergency fund goal, and run what-if scenarios with different monthly savings, time horizons and target amounts. 3. Adjust your plan as necessary. If you aren’t able to save that much, that’s okay. Nobody expects change to happen overnight. It just means you may have to make some adjustments, like delaying your time horizon, diverting savings from other goals, adjusting your budget, or some combination of all of these. You can also use any extra income you get, such as a tax refund or end-of-year bonus to reach your goals. 4. Make saving automatic. Setting up a regular auto deposit can help you stick to your savings plan because it reduces the effort required to save your money in the first place. Betterment allows you to choose the amount and frequency of your auto deposit, and even skip an upcoming auto deposit in case funds are tight. What are the benefits of opening a Safety Net goal? In case you aren’t already convinced, here are three key benefits of having a financial safety net. Avoid unnecessary debt. Peace of mind. Financial flexibility You should plan your emergency fund into your financial plan as a top priority. Opening a safety net goal ensures that your emergency fund is separate from your other goals, is low-risk, easily-accessible, and has competitive earnings/low fees.

3 Strategies That Can Narrow The Racial Wealth Gap Jun 15, 2021 12:00:00 AM Decades of voting, housing, job, and banking discrimination created a racial wealth gap in the U.S. Here are three strategies Black Americans can use to take charge of their finances. One of the hallmarks of this country is an opportunity to become whatever you want to be. But if we look at the racial wealth gap, it unravels a historical narrative of unequal levels of opportunity that continue to impact us today. The Brookings Institute noted that “At $171,000, the net worth of a typical white family is nearly ten times greater than that of a Black family ($17,150) in 2016.” Mehrsa Baradaran, the author of The Color of Money, puts it best when she states, “The wealth gap is where historic injustice breeds present sufferings.” Looking at the racial wealth gap is like a cobweb. Each strand, or in this case, a reason for the racial wealth gap, can be overcome. But if you combine the strands—the reasons—it grows into a web. These strands are decades of voting, housing, job, and banking discrimination, to name a few, and years of this repeated pattern over generations creates a ripple effect that leads to racial wealth disparities today. A Case Study: How The U.S. Systematically Prevented Black Veterans From Military Benefits In World War II. Although there are many examples of how Black Americans were economically set back by the U.S., one tipping point in modern history is how lawmakers and business discrimination practices denied millions of WWII Black veterans access to GI bill benefits. The post WWII GI Bill benefits included low-cost mortgages, educational grants, and low-cost loans to start a business, which are all key wealth building and wealth transfer vehicles.    Ira Katznelson, author of “When Affirmative Action Was White,” said, “there’s no greater instrument for widening an already huge wealth racial gap in postwar America than the GI Bill.” Here are some examples of how Black veterans were negatively impacted during this time period: Housing discrimination left many Black veterans out of the suburban housing boom after WWII. In New York and northern New Jersey, there were about 67,000 post WWII GI Bill mortgages: non-white people made less than 100 of these mortgages. Black people, as well as other ethnic groups, were denied access to vocational training and college education. Even Black veterans who were lucky enough to get GI Bill education benefits faced Jim Crow laws that prevented many from going to college. No access to education benefits hampered many Black veterans from getting better paying jobs. Low paying jobs, combined with living in neighborhoods where schools had fewer resources, had its ripple effect. Their children, the baby boomer generation, were less prepared for college, and their parents couldn’t afford to send them to school. Today, the lack of inherited generational wealth also means that: Fewer Black Americans are investing. More Black Americans have high amounts of student loan debt. More Black Americans have credit card debt, most of which have crippling interest rates. While many of these issues require systemic changes to law, business, and legal practices, there are also tangible strategies Black Americans can adopt now to take charge of their finances: 1. Earn more than just a living wage. Our ability to earn an income is one of the biggest wealth generation tools. If you’re currently looking for employment, do not take the hiring manager’s word for what the salary is. Research the role on websites like Glassdoor, Salary.com, and even your potential employer’s website, to ensure you’re paid what you are worth. Do not be afraid to negotiate your pay when you get an offer or even negotiate in your current role; No one will fight for you like you can fight for yourself. Finally, earning a living wage also means taking advantage of all potential money streams: if you have a 401k plan with an employer match, make sure that at a minimum you are contributing enough to get the full match. 2. Focus on wealth building vs. wealth stripping behavior. As a financial coach, most people I speak to learn about wealth building behavior from their parents, which means that many of us may need further education about how to build wealth. Think of wealth-building behavior as increasing your net worth and wealth stripping behavior as decreasing your net worth. For example, building your savings, investing, and paying off debt are all wealth-building behaviors. On the other hand, not paying off your credit balance in full is wealth stripping behavior. If you’re not sure where to start, Betterment offers excellent tools to help you build wealth: A high-yield cash account for your savings. A high-yield cash account is an incredibly important modern financial tool: Think of it as an alternative to a standard savings account with none of its common drawbacks like transfer limits, minimums, and fees.1 A goal-based investing approach aligned to your life goals. If you don’t know the first thing about investing, or you don’t want to build your own portfolio, Betterment is for you. Depending on what you’re investing for and when you want your money, Betterment will recommend a portfolio specific to you. And if you’re passionate about issues like the environment and social equity, you can choose from three different socially responsible investing portfolios that align with your values: Broad Impact, Climate Impact, and Social Impact. 3. Decide whether or not homeownership is for you. I mentioned before that homeownership is considered a path to building wealth if done correctly. Here are a couple of things you can do to begin your homeownership journey: Determine and stick to a budget: take a good look at your individual finances and spending preferences to determine the monthly payment range that you feel you can comfortably afford. Pull your credit reports and review for accuracy. Use credit monitoring tools to gauge your credit score. Research interest rates to estimate mortgage rates in your desired living area. This is important: Don’t be afraid to question an unusually high rate. Black and Latinx applicants are typically charged higher interest than their white counterparts. Websites like the Consumer Financial Protection Bureau and HUD offer a ton of information about the mortgage process and your rights. Learn about mortgage scams and how someone can take advantage of an extremely stressful experience, particularly for Black first time home buyers. If you feel that you’ve experienced housing discrimination, file a complaint. Remaining silent only enables the discrimination to continue for yourself and others. Individual change is second to systemic change. It’s important to remember that the racial wealth gap is a systemic issue beyond any individual person’s actions: We can’t pretend to solve all racial economic inequality with these recommendations, but they’re a start. The solution involves widespread efforts that protect the rights of Black Americans through legislative change and business practices, as well as becoming your own advocate. 1 For Cash Reserve (“CR”), Betterment LLC only receives compensation from our program banks; Betterment LLC and Betterment Securities do not charge fees on your CR balance. While there is no minimum balance required to be maintained, the minimum amount to open the account is $10.

Financial Advice From Betterment’s LGBTQ+ Community Jun 14, 2021 12:00:00 AM Members of Betterment’s Betterpride ERSG share their financial goals, long-term money habits, and advice for how they approach money decisions in their everyday lives. While not everybody feels that their identity affects their finances, queer people face disproportionate levels of homelessnness, carry more debt, and have more healthcare hurdles than their straight, cis-gendered peers. This Pride month, we’re highlighting stories from members of Betterment’s queer community and sharing the creative ways that they approach money in their everyday life. Get to know our employees with a fun fact. Troy Healey, 401(k) Client Success Manager (he/him): I lived in South Africa for a year. Crys Moore, Product Design Manager (they/them): I'm an avid rock climber. I've climbed all over the U.S, as well as Mexico and Cuba. Sumaya Mulla-Carrillo, Social Media Coordinator (she/her): In addition to my full time job, I'm also a professional dancer. Ricky Whitcomb, Customer Support (he/him): I love cooking and run a food/cooking Instagram account. Woot Hammink, Banking Operations Manager (he/him): My family has farms on three continents! Maria Howe, Sales Development Representative (she/they): I almost never wear matching socks—must be my Aries energy. The path to financial freedom looks different for everybody. Here are some of the goals we’re working towards. Woot Hammink, Banking Operations Manager (he/him): My partner and I have been mulling over buying a home! It's a big, scary investment in a place like New York City. Crys Moore, Product Design Manager (they/them): Saving for a house. Sumaya Mulla-Carrillo, Social Media Coordinator (she/her): Saving for a trip to Italy, and also working towards 1.5 million in retirement. Maria Howe, Sales Development Representative (she/they): Now that I’m on top of my student loans, my partner and I are starting to save for a home. Ricky Whitcomb, Customer Support (he/him): Saving for my wedding. Troy Healey, 401(k) Client Success Manager (he/him): Saving for a cruise ship trip for post COVID-19 travel! Healthy habits make all the difference in doing what’s best for you and your money. Here are some ways our employees are reaching their goals. Sumaya Mulla-Carrillo, Social Media Coordinator (she/her): I use auto-deposit for pretty much every account, and I also save any windfalls or extra money from dancing professionally towards my financial goals. Troy Healey, 401(k) Client Success Manager (he/him): Automation! I deposit $100 every Tuesday into my cruise savings! Ricky Whitcomb, Customer Support (he/him): Prepping my lunches as opposed to ordering out, and saving a percentage of my paycheck. Woot Hammink, Banking Operations Manager (he/him): First: Recurring deposits to a Home Ownership goal. We've got to start from somewhere. Second: We check in with each other frequently, and talk about what we're open to and comfortable with. Since we're not married, ownership gets even more complicated. Maria Howe, Sales Development Representative (she/they): This may be counterintuitive, but after a lot of time spent in grad school and having a tight budget, little indulgences (like dinner out with my partner) are key to making sure I don’t go wild and break my budget. Crys Moore, Product Design Manager (they/them): I auto-deposit into my house goal. Otherwise, I’d spend that money on something else. Our approach to money can change drastically over time, and as we age, perspectives on money shift. Members of the BetterPride community shared advice to their younger self. Ricky Whitcomb, Customer Support (he/him): Open a savings account and don't touch it. Crys Moore, Product Design Manager (they/them): Money is real and has real consequences. It’s not monopoly money. That student loan debt comes back around. Choose wisely young Crys! Maria Howe, Sales Development Representative (she/they): I’d tell myself to go look up IRAs! I knew so little about tax advantaged accounts until working at Betterment. My money could have worked harder for me if I had known more. Woot Hammink, Banking Operations Manager (he/him):  I'd first agree with my younger self that money should be more colorful than our green USD. I'd also take saving earlier more seriously, and spend less money at Dairy Queen. Troy Healey, 401(k) Client Success Manager (he/him): Just make sure if you are going to spend it, you got it in the bank! Sumaya Mulla-Carrillo, Social Media Coordinator (she/her): Take it slow and steady. I always want to achieve my goals as fast as possible, but in reality I have to slow down and stay the course for a while before seeing results. Has your identity influenced your relationship with money in any way? Why or why not? Maria Howe, Sales Development Representative (she/they):  As a queer person who was socialized as a woman, I subconsciously didn’t think of myself as a future breadwinner during formative years. Now that my partner and I are at the point in our lives where we are saving for goals like a house and family, I’m more aware of living in a society where a gender wage gap exists and I’m working hard to catch up! Crys Moore, Product Design Manager (they/them): Even though I have a ton of skin privilege because I'm white, being visibly queer sets me back compared to my cisgender heterosexual peers. Society works for them in ways it doesn't work for me. Most things are a bit harder. Sumaya Mulla-Carrillo, Social Media Coordinator (she/her): Yes and no—I don't think it influences my spending or saving habits, but I do know that I'll eventually have more expenses around having a child, or any legal fees that come with adoption. I'm always mentally preparing myself for that major life expense. Ricky Whitcomb, Customer Support (he/him): When I was younger I definitely felt the need to have the nicest brands and newest styles and now I'm a very happy boring dresser who doesn't spend his paychecks on jeans. Troy Healey, 401(k) Client Success Manager (he/him): No! I am a frugal spender... frugality applies to gay or straight! Woot Hammink, Banking Operations Manager (he/him): Definitely! Being in a "nontraditional" relationship blurs a lot of lines when it comes to long term planning and saving. I've never felt like I have a traditional "Game of Life" style plan, where a simple path can lead me to success.

How Much Could You Be Losing To Fees? Jun 2, 2021 12:00:00 AM Unexpected or hidden fees can damage your long-term investment returns. Sync your outside accounts with Betterment now and see how much you’re being charged by other investment providers. When you invest in valuable items, it’s easy to overlook the hidden fees. Buying a house certainly requires property tax and insurance payments, but you may quickly discover hidden fees in your investment—such as home repair and maintenance costs—of which you were never aware nor did you expect. Purchasing a car results in a similar scenario, in that taxes and insurance are rarely the only expenses. Repair, cleaning, maintenance, and miscellaneous fees can catch you off guard. You’ll soon realize that it’s more expensive than you ever thought to manage these assets. The same is true with investment accounts. At Betterment, we think all investment accounts should be clearly and transparently priced, without any hidden fees. Now, we can help you discover if you’re paying high advisory or hidden fund fees across all of your investments. Here’s a deeper dive into the types of fees you may encounter in your investments with outside fund providers. Understanding Fund Fees Expense Ratios When investing in any mutual fund or exchange-traded fund (ETF), the investor pays fees that cover the management, administration, and operations of the fund. These fees are summarized in the expense ratio. This fee may also include marketing costs which go to the salesperson, known as 12b-1 fees. The expense ratio is visible in the fund’s prospectus, but in general people rarely read that long document. It often goes unnoticed because the fee is not explicitly charged from the balance, but is instead built into the fund’s daily pricing. Contrary to general assumptions, paying higher expense ratios does not guarantee higher returns in an investment portfolio. Since paying higher fees does not necessarily equal high returns, choosing funds with a lower expense ratio is a simple yet generally sound investment strategy. Advisory Fees If you hire an advisor to choose and manage your investments, including one such as Betterment, you’ll most likely pay for the service received. This is known as an “advisory fee.” If you pay advisory fees with an outside investment provider, you can include the fees after you sync your outside accounts with Betterment. We then summarize how much you are paying in fees per year, and also take that number into account when providing retirement advice. Some advisors do not charge fees in an overly transparent manner but earn revenues in other ways. This can include the 12b-1 fees mentioned above, which are built into the expense ratio of the fund, or through load charges, explained below. Lesser-Known Fees Aside from expense ratios and advisory fees, some investment funds have even less transparent costs. One reason Betterment chooses ETFs for our portfolios is because they do not contain the fees mentioned below1, and they are often tax-efficient. On the other hand, mutual funds can have additional fees and revenue-sharing relationships, due to the level of trading and activity involved with the fund’s management. When investing in mutual funds, they typically have the following costs which are borne of the investor, but not included in the expense ratio. These include: Sales load fee: A sales charge imposed by “Class A” or “Class B” mutual funds when you purchase shares. “Class C” shares can have a load fee when you withdraw your money from the fund. These loads are commissions that pay the professional adviser or broker who sold you the fund. Trading fee: Trading fees when you buy or sell stocks in a brokerage account, or when the manager of a mutual fund pays to make trades within the fund. These expenses are taken out of the daily pricing of the fund, but not included in the expense ratio. These fees are hard to estimate, but in general a fund that has a high turnover, like an actively managed fund, will have higher trading fees. Redemption fee: Also referred to as a “market-timing fee,” or “short-term trading fee,” mutual funds charge this fee to discourage investors from making short-term “round trip” transactions (i.e., a purchase, typically a transfer, followed by a sale within a short period of time). 4 Steps to Minimize Investment Fees As a smart investor, there are four steps you can take to help minimize your investment fees. Know where you stand. Look up the expense ratios for all of your investments, or simply sync your outside accounts with Betterment to see a summary of the total advisory and fund expenses you are currently paying. Choose low cost funds. Typically, index ETFs are cheaper than mutual fund equivalents. They generally have no loads or marketing expenses. They also have lower turnover, which means lower internal trading costs and low taxes. Avoid trading costs. If you envision lots of trading activity across your investments, try choosing a platform that has no trading costs. Trading costs can be a constant drag on returns, especially when you use smart strategies like rebalancing and tax loss harvesting. Betterment includes both smart rebalancing and Tax Loss Harvesting+ (TLH+) benefits at no additional cost for customers. Select a low cost advisor. If you have investments with other providers, inquire regarding what fees outside of expense ratios are being charged. You can then enter these additional fees to appear on your synced non-Betterment accounts. Betterment is the largest independent online financial advisor, and we also deliver enhanced value with transparent pricing and lower fees than traditional financial services. When you sync your accounts, not only can you see all of your wealth in one place—we’ll also help you discover which outside investments are charging you high fees so that you can take action accordingly. Get started with opening a Betterment account today. For existing Betterment customers, get started syncing your accounts now. 1Some brokerages charge trading fees for ETFs. Trading fees are included in Betterment’s flat advisory fee.

How Much Crypto Should I Own? Jun 1, 2021 12:00:00 AM What’s the right amount to keep in a portfolio? If investors want to dip their toes into crypto, we recommend aiming for this allocation. Many of us have followed the dramatic rises and precipitous falls of bitcoin, and cryptocurrencies in general, over the past few years. Some may have written them off entirely after 80% declines in 2018, only to see them roar back into investors’ collective consciousness in 2020. Certainly sentiment has shifted over a short two years—more institutional investors are taking a hard look at crypto and previous naysayers have softened their view. This all leads to one question: How much cryptocurrency should I own? Math to the rescue. It goes without saying that this is a hard question to answer. But, we can borrow a page from modern quantitative finance to help us arrive at a potential answer. For years, Wall Street “quants” have used a mathematical framework to manage their portfolios called the Black-Litterman model. Yes, the “Black” here is the same one from the famous Black-Scholes options pricing formula, Fischer Black. And “Litterman” is Robert Litterman, a long-time Goldman Sachs quant. Without getting into too much detail, the model starts with a neutral, “equilibrium” portfolio and provides a mathematical formula for increasing your holdings based on your view of the world. What’s amazing is that it incorporates not just your estimate about how an investment might grow, but also your confidence in that estimate, and translates those inputs into a specific portfolio allocation. Your starting point: 0.50% The Black-Litterman model uses the global market portfolio—all the asset holdings in the world—as its starting point for building a portfolio. This means that, if you don’t have any other views on what investments might perform better or worse, this is the portfolio you should consider holding. In early 2021, the global market for stocks totaled $95 trillion and the global bonds market reached $105 trillion. The cryptocurrency market as a whole was valued at roughly $1 trillion. This means that cryptocurrency represents 0.50% of the global market portfolio. The Global Market Portfolio In Early 2021 Source: Betterment sourced the above cryptocurrency data and stock and bond data from third parties to produce this visualization.  Just as there are plenty of arguments to hold more cryptocurrency, there are also many arguments to hold less. However, from the model’s standpoint, 0.50% should be your starting allocation. Now, add your views. This is where the mathematical magic comes into play. For any given growth rate in cryptocurrency (or any investment for that matter), the Black-Litterman model will return the amount you should hold in your portfolio. What’s more, you can specify your level of conviction in that assumed growth rate and the model will adjust accordingly. In the below chart are the portfolio allocations to bitcoin derived from the Black-Litterman model. This chart can serve as a useful, hypothetical guideline when thinking about how much cryptocurrency you might want to hold. How to use it: Select how much you think bitcoin will overperform stocks, from +5% to +40%. Each return expectation corresponds to a line on the chart. For example, if you think that bitcoin will outperform stocks by 20%, this corresponds to the purple line. Now, follow the line left or right based on how confident you are. If you’re at least 75% confident (a solid “probably”), the purple line lines up with a 4% allocation to bitcoin. Graph represents a hypothetical rendering of confidence of return value based on inputs to the Black-Litterman model. Image does not represent actual performance, either past or present.  One of the most interesting things to note is how high your return estimate needs to be and how confident you need to be in order to take a sizable position in bitcoin. For example, for the model to tell you to hold a 10% allocation you need to be highly confident that bitcoin will outperform stocks by 40% each year. Also of note, it does not take much to drive the model’s allocation to 0% allocation, ie: no crypto holdings. If you don’t think that there’s a 50/50 chance that bitcoin will at least slightly outperform, the model says to avoid it entirely. How we got here. The inputs to the Black-Litterman model tell an interesting story in and of themselves. The main inputs into the model are global market caps, which we discussed earlier, asset volatility, and the correlation between assets. It goes without saying that cryptocurrencies are risky. Over the last five years, bitcoin’s volatility was six times that of stocks and 30 times that of bonds. At its worst, the digital coin saw an 80% drop in value, while stocks were down 20%. Other cryptocurrencies fared even worse. Source: Betterment sourced the above ACWI data and Cryptocurrency data from third party sources to create the above visualization. Visualization is meant for informational purposes only and is not reflective of any Betterment portfolio performance. Past performance is not indicative of future results.    If an asset is volatile, and one is not able to diversify that volatility away, then investors will require a higher rate of return on that investment, otherwise they will choose not to invest. The fact that bitcoin is so volatile, but has such a small number of investors (relative to stocks or bonds) suggests that many investors still do not see the potential returns worth the risks. On the other hand, cryptocurrencies are at their core a new technology, and new technologies always have an adoption curve. The story here may be less about expected return versus risk and more about early adoption versus mass appeal. The final ingredient in the model is bitcoin’s correlation with stocks and bonds. Bitcoin has some correlation with both stocks and bonds, meaning that when stocks go up (or down), bitcoin may do so as well. The lower the correlation, the greater the diversification an asset provides to your portfolio. Bonds have a low correlation with stocks, which makes them a good ballast against turbulent markets. Bitcoin’s correlation is higher, meaning that it can provide some diversification benefit to a portfolio, but not to the same degree as bonds. Cryptocurrencies can be a component of your financial plan—but it shouldn’t be the only thing. While it can’t tell you if bitcoin will be the next digital gold, this mathematical model can help you think about what kind of allocation to crypto might be appropriate for you and what assumptions about risk and return might be underlying it. Even though Betterment currently doesn’t include cryptocurrency in our recommended investment portfolios, you can learn more about how to invest appropriately in it using our cryptocurrency guide. Since crypto should only comprise a small percentage of your overall portfolio, you should still have a diversified portfolio and long-term investment plan that will help you meet your financial goals. Betterment can help you plan for the short and long term, recommending the appropriate investment accounts that align with your financial goals and allowing you to select your preferred risk-levels. You can also align your investments with your values by using one of our three socially responsible investing portfolios.

Understanding Crypto Fundamentals May 20, 2021 12:00:00 AM Cryptocurrency is a complicated technology, but it’s also accessible. It can be understood by anyone, regardless of your background. At this point, it’s highly likely you’ve at least heard the many buzzwords associated with cryptocurrency. Blockchain, Bitcoin, or Ethereum ring a bell? But how many times has someone also said, “You should definitely invest in crypto” and then done a poor job of describing what any of it actually means? I’m all for movements and trends that create engagement within the investing space, but most of us require more before we feel comfortable taking action. My hunch is that some of the qualities that help make an investor successful—being thoughtful and disciplined, for example—can also be our Achilles heel when it comes to crypto and other speculative investments. And while I’m not suggesting that we set our principles aside and immediately add crypto to our portfolio, (heck, only 15% of women are actually investing in it and we’re the better investors, aren’t we?), understanding the fundamentals should help unlock the door to the possibility. At the very least, I hope it prepares you for the next time crypto is inevitably brought up in conversation. So let’s master the three main areas, eh? What it actually is. Considerations for investing. And how to do so, if you so wish. Section 1: So, what’s crypto, anyway? First things first, it’s important to understand a few key definitions. Only then can we piece them together to try and make sense of it all. Three key terms: Cryptocurrency “Crypto”: a form of payment for goods and services that can only be exchanged virtually (digital currency). It’s also decentralized, meaning the transaction doesn’t have to be made through an official financial institution, such as a bank. Blockchain: the technology behind crypto that enables virtual records of all digital transactions to be created and stored securely across computers. This helps verify ownership and prevents fraud. Bitcoin: one of the MANY types of cryptocurrencies that exist. Tied together, crypto is basically a decentralized form of currency that relies on blockchain technology to facilitate secure and strictly digital transactions. Bitcoin, while by far the most popular cryptocurrency, is really just one of many that exist. Bitcoin can be acquired and used to exchange goods and services and/or as an investment opportunity. Still confused? Analogy time. It’s kind of like when you go to a carnival and you use tickets instead of cash. The ticket is your Bitcoin (or another crypto, like Ether) and it carries a perceived value that can be exchanged for something else: Say, a ferris wheel ride. Your primary motivation for having the tickets could be purely transactional, like paying for the fun night at the carnival. But what happens if you wind up with leftover tickets at the end of the night, either intentionally or unintentionally? By not timely exchanging those tickets for other goods and services, it’s expected that their value could change. Over time, the same leftover tickets could potentially buy you 2x the ferris wheel rides, for example, or the same ride could require more tickets than before. To tie it back to cryptocurrency, what continues to attract investors is the idea that the value of cryptocurrency could increase over time. Section 2: To invest or not to invest? The considerations associated with investing in the digital currency space are unique and complex. Does one invest in a single cryptocurrency? A mixture of the 1,000+ possible currencies? Or, is it actually the technology behind cryptocurrency that has the most potential? And exactly how much exposure should one have? If you were hoping for a straightforward answer, I'm sorry to disappoint. Take Bitcoin, for example. Satoshi Nakamoto created Bitcoin in 2009, in response to the financial crisis of 2008. His primary intention was for Bitcoin to act as an alternative to your traditional, bank-controlled currency. Fast forward to today and Bitcoin is still far from being a convenient, 1:1 replacement for cash. Instead, retail investors are flocking to it for its growth potential, betting its value will continue going up. And even though Bitcoin is far and away the single largest cryptocurrency—and the fastest ever asset class to reach a $1T market cap thanks to a $500B surge in 2021 alone—its historical price fluctuations and inherent volatility often make it too risky to be trusted as a standalone investment. Bitcoin’s extreme price fluctuations in April should be a caution sign to all investors. After cracking $60,000, a 15% flash crash had Bitcoin’s price as low as $50,900, and as of end of month April, it was still down about 8%. And if you’re looking for a sound reason as to why the crash happened...good luck. There is no true consensus. So, even if you believe in the technology and conclude crypto’s here to stay, one thing is certain: Right now, this is not a stable asset class and buying Bitcoin is absolutely not the same as holding a regulated currency, like U.S. dollars. That said, even if stability and a disciplined investment approach is important to you, there could still be room for crypto in your strategy. Like anything else, having some exposure is reasonable. You just want to be sure it’s in balance with your broader strategy, explicitly categorized as “play money”, and not being counted towards any specific goal or future need. Until there’s an easier way to actually exchange your crypto for goods and services (at a steady price), you should be buying it primarily for its growth potential. Read more on Betterment's advice for investing in crypto responsibly. Section 3: I think I’m ready to buy. So, you’re ready to join the club. You’ve decided that based on your financial goals and strategy, you’re willing to invest some of your excess cash in crypto. Great. Like the many currencies and tangent technologies, there are several platforms to choose from, possibly even through one of your existing accounts. Unless you have the ability to easily track and monitor your crypto, keeping it separate from your established portfolio may help you better maintain your core strategy moving forward. As you evaluate your options, here are some additional considerations to keep in mind. Safety and security: Use a centralized exchange, or one that’s required to register and follow standard “know your customer” rules (at least when you’re first starting out). Cost: Depending on the platform, there can be trade specific fees, ongoing management fees, and additional costs to send your currency to someone else. General platform functionality: Do you want to be able to simply buy and sell currency? Or do you also want to be able to exchange your currency for additional goods and services and send it to other people? Since this asset class is so volatile, what is your chosen platform’s track record of uptime? Nobody wants their platform to be down while they are trying to make a trade. Companies like Coinbase are often touted as good enough options for beginners and have seemingly avoided the fraud and funny business that other exchanges have fallen victim to. They also have a lot of resources and tools you can access as you get your feet wet. Consider using them as a jumping off point for further exploration. Be an informed crypto investor. So, while this asset class is relatively new and is constantly evolving, it’s important to get familiar with the basics. It’s clear that cryptocurrencies aren’t going anywhere, and the sooner you have the tools to understand what cryptocurrency is—and the consideration related to investing in it—the more empowered you’ll feel participating in the ongoing conversation, and ultimately investing (responsibly), if you so choose.

Personal Finance Stories From Our AAPI Community May 18, 2021 12:00:00 AM Members of the Asians of Betterment ERSG share financial advice learned from their parents and the immigrant experience, and how their financial perspectives have shifted over time. Advice is a powerful way of connecting families across generations. In honor of Asian American and Pacific Islander Heritage Month, we asked members of our Asians of Betterment community to share personal finance advice from their parents. Financial advice is rooted in our experiences. While our families grew up at different times and in different countries, many still have a shared experience of moving to the United States that left an impact on their advice for how to grow their wealth through saving. Eric Pan, Senior 401(k) Operations Associate: I’ve accumulated subtle frugal habits from my parents since I was a minor. From observing my mom pick off slightly rotten parts of the vegetable prior to checkout so it weighs less, to being scolded for tossing a soda can into the garbage instead of the recycling that could be redeemed for cash at the supermarket, their advice has been ingrained in me. Kim Pham, Brand Designer: We used cash for everything. Credit cards were such a foreign concept to me growing up—I didn’t even get my first card until I almost graduated college. We always had the mentality of not spending what we didn’t have. To this day I still take that to heart, but I also understand the efficiency and importance of credit cards and building credit. Anwesha Banerjee, Legal Counsel: My parents taught me about getting a bank account and a (starter) credit card early and paying it in full each month, to start building good financial habits and credit. Also, they emphasized strong and quick mental math—you can't get cheated if you know your numbers! John Kim, Mobile Engineer: My parents were responsible spenders and liked to save. They taught me not to make purchases off of impulse and I learned how to live within my means happily. Jeff Park, Software Engineer: My family's perception of money has always been heavily influenced by historical events that affected my family over generations. My father's family, for example, were scholars in the nobility class, and for all intents and purposes, they were pretty well-off. My grandfather was a university professor in the early 1920s, but due to his vocal criticism of the Japanese occupation, he and his family were forced to leave their wealth behind as they ran away to China to avoid criminal prosecution. My mother's family also saw their wealth significantly decline due to the Korean War. As both my parents looked abroad for sustainable opportunities, they brought with them an understandable fear that events outside of their control can significantly affect their well-being. Prudence and savings were often preached in my family, and we were always told that it is often better to forego immediate petty pleasures for the peace of mind of a prepared tomorrow. Thi Nguyen, Senior Technical Recruiting Manager: My family comes from humble beginnings, and I remember my dad working every single day and only taking time off when he was sick. We never got any advice directly, but understood that working to earn money was tough. My parents never really cared about material things, but we always had food on the table. It taught me that it's okay to spend money on necessities (food, clothing, housing), but I needed to stay humble in how I spent my money. I learned to be frugal and always love a good deal. "Save where you can, spend when you need to." -Thi Nguyen Taking care of our families always comes first. Family is a recurring theme in the way that our community thinks about finances. Our parents instilled a strong sense of frugality and saving, but taking care of family financially, both at home and abroad, always comes first. Kim Pham, Brand Designer: My parents taught me the importance of spending money on family. When my parents first came here they had to build their own wealth from the ground up, which meant a lot of sacrifice. Our family values spending and sending money to our family here and abroad, more than material possessions. Cat Gonzalez, Product Marketing Manager: My mom always taught me that family comes first with your finances. While you are saving for your own goals, make sure to save enough to take care of your family. Help them make sure they have enough to reach their goals as well. Erica Li, Software Engineer: My family taught me to recognize and prioritize your financial goals. Work towards reaching them even if it means sacrificing from other areas. My dad made $30 a month in China before getting the opportunity to immigrate to the United States. His biggest goal, in addition to learning English and acclimating to an entirely new culture, was to save enough money to bring my mother and I over as well. Once my mother and I settled in the United States, new goals and expenses appeared: buying a house in a good public school district and starting a college fund for me. Saving for these goals wasn't such a smooth journey. My mother had to transition from a stay-at-home role to working alongside my dad as our financial circumstances fluctuated. They took up multiple jobs and sacrificed retirement savings to put money towards these goals. We eventually bought a house in New Jersey, and I was lucky to have had financial support from my parents during my college years. Our financial perspectives shifted over time, too. Part of the beauty of the advice passed from generation to generation is how it evolves and adapts over time. Times change, environments change, knowledge changes and our perspectives shift with that. Our community members, many of whom grew up in a different country than their parents, shared how their personal outlook on finances evolved from that of their families. John Kim, Mobile Engineer: I definitely took after my parents saving habits and learned to expand that mentality through investing. Nima Khavari, Account Executive: Moving to the United States and watching my parents adapt to a consumer driven economy based on access to credit was a significant observation. Remembering them trying to understand credit scores and how to improve it in order to purchase a home left a lasting impression. Erica Li, Software Engineer: Now that I'm all grown up, my parents are no longer putting away money towards goals for my benefit. Alongside catch-up retirement contributions, it makes me happy to see that my parents are finally using their money for pleasure. They recently bought themselves a new car after having their old one for 20 years. Also happy to say that they finally replaced their stove with one that has a working oven! Anonymous: My family made every financial mistake in the book. I can't blame them since they immigrated to this country without knowing English and without a formal financial education. They fell for every scam, pyramid scheme, loan shark, didn't know how credit worked, and lost everything. However, it was an opportunity to learn from their mistakes. After seeing what my parents went through, I learned how credit and financing worked magic, financial planning, and how to recognize cons. I wouldn't be as financially apt if it weren't for their experiences—a huge motivation for why I'm studying for the CFP® exam. The plan is to go back to immigrant communities and warn others from making the same mistakes. Kim Pham, Brand Designer: When I was younger, we didn’t invest and we held all our money in savings accounts. This was a hard habit to unlearn. My entire life growing up my parents would instruct us to put all our money into our savings account, mainly because they didn’t know enough about investing. It helps that I work at Betterment because now I learned how to diversify my portfolio, and that investing isn’t—and shouldn’t be—as hard as it seems.

Goal Projection and Advice Methodology May 5, 2021 12:00:00 AM Betterment helps you get on track to meet your goals by providing projections and advice on allocation, savings, and withdrawals. Our methodology for doing so involves some assumptions worth exploring. TABLE OF CONTENTS Projection Methodology and Assumptions Methodology and Assumptions Withdrawal Advice Methodology and Assumptions For Retirement Goals Graph Explanation Goal Status - On Track or Off Track Limitations Betterment provides allocation, savings and withdrawal advice alongside a projection graph when customers view their goal projection under “Plan.” The graph is intended to show the possible future investment values in order to illustrate the 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. See our Terms and Conditions. In the following sections, we’ll provide an overview of our methodology and assumptions for each component under “Plan” in a Betterment goal. Projection Methodology and Assumptions The expected investment portfolio returns used in the portfolio value projection results are based on the expected returns and risk free rate assumptions for your target Betterment portfolio allocation. (See more about how the expected returns are derived). 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 our Portfolio. The recommended allocation mix is based on user investment profile including age, the goal type and time horizon. For Cash Goals, the expected return is based on the current APY on Cash Reserve, Betterment’s high-yield cash account, and risk free rate assumptions. The returns used are net of your current annual fee and we assume that fee holds throughout the investment. Cash Goals have no fee on your account balance (For Cash Reserve (“CR”), Betterment LLC only receives compensation from our program banks; Betterment LLC and Betterment Securities do not charge fees on your CR balance.), and our projections thus use the current APY when forecasting your Cash Goal account balance. In projecting your balance, we estimate the uncertainty in returns for both your investment portfolio and the underlying risk free rate. For Cash Goals, we assume in our projections that the interest rate for Cash Reserve will vary over time commensurate with any changes to the underlying risk free rate. Monthly Contributions or Withdrawals, if specified, are assumed to be made at the end of the month. We project your balance in monthly increments, never going below twelve months. We project allocation changes on a monthly basis. For users with remaining goal terms of less than one year, our projection assumes that you maintain the allocation at the end of the goal term rather than liquidate. We sometimes map external assets to proxy assets. For investments with available data, we map holdings to our asset classes for risk analysis. In some cases we do not have data for a specific investment, usually because the holding is a non-publicly-listed vehicle, such as a private 401(k) plan. In those cases, we use proxy tickers to determine the appropriate asset class exposures. Proxy tickers are provided by Plaid, our third-party data provider for connected accounts. Plaid uses a proprietary process to identify similar public securities to the unknown ticker using structural information (including security type and fund name) and to qualify the confidence level of the similarity. Betterment uses Plaid’s proxy tickers only for securities that pass a threshold confidence level of similarity. Plaid’s methodology may change over time, and Betterment will continuously evaluate any such changes. 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 that you maintain the same portfolio strategy over time. If the portfolio strategy changes over time or has different expected returns, outcomes may be adjusted. Calculations will always be updated based on the current portfolio. Charts and graphs are in nominal terms. Withdrawal Advice Methodology And Assumptions For Retirement Income Goals Only The monthly safe withdrawal is based on a 96% 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 month. The safe withdrawal amount assumes the user does not live past the specified time horizon (“plan-to-age”). Calculations assume the current Betterment 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. Withdrawal advice and graphs are in real terms, using an inflation rate of 2% 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. Graph Explanation The Graph exhibits the possible range of projected portfolio values using color. The dark line indicates the projected portfolio value under average market conditions. This means that there is a 50% likelihood of portfolio values greater than this, and a 50% likelihood of portfolio values less than this. The lighter, 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. 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. Limitations 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, except for retirement goals. All non-retirement goal 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 pre-tax qualified retirement accounts after a certain age. 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 2% 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.

Buying a Second Home? 4 Tax Considerations Apr 29, 2021 12:00:00 AM Buying a vacation property is a great investment goal if you know how to maximize the income and tax deductions. Buying a second home is a great investment goal. But as you comb through the Web for your dream locations and prepare to make a down payment, consider the practical financials of owning a second home. Is this a short-term rental opportunity or true second home?   Usage and financial needs should determine the answer to this question, though most people have to rent their homes in order to get some tax benefits on their property. Renting, of course, can generate income to help defray property costs, which could impact the price you are willing to pay. While it varies by location and rental marketplace, the potential additional income is not a bad perk to consider when buying your vacation home. You will also have all sorts of additional expenses, like utilities, maintenance, repairs, upgrades, yard work, Homeowners Association (HOA) fees, and more. When looking to purchase a second home, you need to factor in all the costs of the home to determine affordability. Before you buy, remember to think through how your usage options may impact the bottom line—whether that means renting the property for most of the year and only using it yourself on occasion, or using the property often and renting it out infrequently. What are the tax implications of renting out the home? If you rent out the home, you will have income tax on the net rental income, but second homeowners may also qualify for various tax benefits. This includes deductions for items like mortgage interest, real estate taxes, casualty losses, management fees, maintenance, utilities, insurance, and depreciation. You may qualify if you rent your furnished property for more than 14 days per year. However, while all of your rental income is taxable, only a portion of your expenses—prorated for the number of days you rent out the property—may be deducted. In addition, you may have to pay transient occupancy taxes, which are similar to those incurred by hotels. In some locales, the property may be taxed differently (perhaps at a different rate as a commercial property), depending on its rental use. Keeping the accounting straight may seem tough, but you can work with a professional property management company to help keep you in compliance with proper accounting of income and the remittance of local occupancy taxes. Who or what entity will own the home? Think through the implications of each of your options for title ownership and what’s best for your individual situation. Some options include: The property is in your name: Growing your estate with the addition of a second home could change your estate plans, if that’s a consideration for you. Keep in mind that, in 2021, if you pass on total assets worth less than $11.7 million from one person, or $23.4 million from a couple, the estate is generally not taxable and free of federal taxes. Your taxable estate may be reduced through deductions, which might include items such as mortgages, estate administrative expenses, and property passed to a surviving spouse. The property is a small business: If you create a limited liability company (LLC) for the property, which may be easily done through your accountant or attorney, membership interest can be transferred across owners more easily. Each LLC creates its own operating agreements, or rules, which are formulated to govern the property, its ownership, and all decisions pertaining to it. What this means is that if the LLC has multiple members, they must all agree to the same rules so there are no surprises. In addition, the LLC offers individual liability protection from potential issues. When structured to address an individual's particular circumstances, high net worth individuals often find an LLC structure is preferred to direct ownership. The property is in a trust: If you anticipate issues with future costs of ownership and decision disputes, a trust can preserve the asset and access to it by heirs. All you have to do is create a trust that holds title to the property, which may be done through your accountant or attorney. What are my exit options? Just like with any asset, you will generally be subject to capital gains tax when you sell your second property. Generally, that means that you are subject to a tax on the proceeds of the sale that are in excess of your cost basis. There are a number of exceptions to the general rule. For instance, one major exception is if you convert your second home into a primary residence for two of the five years before you sell the home, you may be able to reduce your tax liability. You can only claim the benefit exclusion for one home at a time, however. As always, you should look at your overall position and perhaps  always consult a tax professional expert before making any decisions. Second home ownership can offer more than just a spot on the beach or the slopes; depending on how you manage your property, you could see it as a rental annuity stream with tax deductions. However, managing properties can also be taxing on your time and energy, so you may consider working with a professional management company to guarantee income upfront and take away the burden of finding and managing renters. The bottom line is this: Be sure to think carefully through the implications of how you manage your purchase and your property, and consult your accountant and other professionals to maximize upside and ease for you and your family. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

Investing in Your 30s: 3 Goals You Should Set Today Apr 27, 2021 12:00:00 AM It’s never too early or too late to start investing for a better future. Here’s what you need to know about investing in your 30s. In your 30s, your finances get real. Your income may have increased significantly since your first job. You might have investments, stock compensation, or a small business. You may be using or have access to different kinds of financial accounts (e.g. 401(k), IRA, Roth IRA, HSA, 529, UTMA). In this decade of your life, chances are you’ll get married, and even start a family. Even if you’ve taken this complexity in stride, it’s good to take a step back to review where you are and where you want to go. This review of your plan (or reminder to create a plan) is essential to setting up your financial situation for future decades of financial success. Don’t Delay Creating A Plan: Three Goals For Your 30s As always, the best thing to do is start with your financial goals. Keep in mind that goals change through time, and this review is an important step to make updates based on where you are now. If you don’t have any goals yet, or need some guidance on which investing objectives might be important for you, here are three to consider. Emergency Fund Sometimes your plan doesn’t go as planned, and having an adequate emergency fund can help ensure those hiccups don’t affect the rest of your goals. An emergency fund (at Betterment, we call it a Safety Net) should contain enough money to cover your basic expenses for a minimum of three to six months. You may need more than that estimate depending on your career, which may or may not be one in which finding new work happens quickly. Also, depending on how much risk you want to take with these funds, you may need a buffer on top of that amount. Read more about how to calculate your target amount, or follow this simple formula: Monthly Expenditures x Re-Employment Period = Baseline Safety Net Amount As you review your goals, make sure you have established a safety net account. Good options for this include a high-yield cash account like Betterment Cash Reserve, or a Betterment Safety Net. Then, make sure you have enough saved in that account (or are regularly saving into it to build up the balance). Retirement Most people don’t want to work forever. Even if you enjoy your work, you’ll likely work less as you age, presumably reducing your income. To maintain your standard of living, or spend more on travel, hobbies or grandkids, you’ll need to spend from savings. Saving for your retirement early in your career—especially in your 30s–is essential. Thanks to medical improvements and healthier living, we are living longer in retirement, which means we need to save even more. Luckily, you have a secret weapon—compounding—but you have to use it. Compounding can be simply understood as “interest earning interest,”a snowball effect that can build your account balance more quickly over time. The earlier you start saving, the more time you have, and the more compounding can work for you. In your goal review, you’ll want to make sure you are on track to retire according to your plan, and make savings adjustments if not. You’ll also want to make sure you are using the best retirement accounts for your current financial situation, such as your workplace retirement plan, an IRA, or a Roth IRA. Your household income, tax rate, future tax rate and availability of accounts for you and your spouse will determine what is best for you. Use Betterment’s Retirement Planner, which helps answer all of these questions. Also, if you’ve changed jobs, make sure you are not leaving your retirement savings behind, especially if it has high fees. Often, consolidating your old 401(k)s and IRAs into one account can make it easier to manage, and might even reduce your costs. You can consolidate retirement accounts tax-free with a rollover. If you have questions about your plan or the results using our tools, consider getting help from an expert through our Advice Packages. Major Purchases A wedding, a house, a big trip, or college for your kids. Each of these goals has a different amount needed, and a different time horizon. Our goal-based savings advice can help you figure out how to invest and how much to save each month to achieve them. Take the chance in your goal review to decide which of these goals is most important to you, and make sure you set them up as goals in your Betterment account. Our goal features allow you to see, track, and manage each goal, even if the savings aren’t at Betterment. Get Started with Betterment It can be easy to set up your Safety Net, Retirement, and Major Purchase investment goals on Betterment. Get started now. Please note that Betterment is not a tax advisor. Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements. This article is provided solely for educational purposes. It does not address the details of your personal situation and is not intended to be an individualized recommendation that you take any particular action, including rolling over an existing account. When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. Specific factors that may be relevant to you include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account, consult tax and other advisors with any questions about your personal situation, and review our Form CRS relationship summary and other disclosures. If you currently participate in a 401(k) plan administered or advised by Betterment (or its affiliate), please understand that this article is part of a general educational offering and that neither Betterment nor any of its affiliates are acting as a fiduciary, or providing investment advice or recommendations, with respect to your decision to roll over assets in your 401(k) account or any other retirement account. Add Cash Reserve Disclosure to this article.

4 Betterment Investing Options If You Have Low Risk Tolerance Mar 25, 2021 12:00:00 AM If you’re an investor with low risk tolerance, Betterment has options that can help move forward your investing and savings goals, mediating between potential returns and your desired risk level. One of the more hazy concepts to quantify in behavioral investing is the concept of risk tolerance. Though it’s clear that people in general like to win more than they like to lose, there is also a well-known phenomenon that some people are more risk averse than others. Some investors are content to endure losses of more than half of their investment portfolio if they believe that the potential reward is high enough. Others may feel uneasy with even a loss of one percent. In general, we expect that investors who take more risk can often gain higher returns, but that doesn’t mean seeking a low-risk portfolio is the wrong move. On the contrary, steadily investing in a low-risk portfolio can be an appropriate strategy if it’s an approach you can stick with for the long-term. Betterment’s tools can help you determine the amount of risk that’s right for your financial goals and how much you should save to help reach them. If recent market volatility has made you rethink your risk tolerance, here are four options at Betterment that can offer lower risk. Cash Reserve If you’re looking to earn interest on your short-term cash or general savings, consider using Cash Reserve. It’s a high-yield cash account that can help you earn one of the highest variable rates available in the marketplace— 0.10% *. You’ll have the ability to easily transfer your cash to any of your investment goals when you’re ready to take on more risk, but keep in mind that the transfer can take up to two business days to complete. And, not only does Cash Reserve earn a high rate, but it also has FDIC insurance up to $1,000,000† once deposited at our program banks. Cash Reserve is only available to clients of Betterment LLC, which is not a bank, and cash transfers to program banks are conducted through the clients’ brokerage accounts at Betterment Securities. Safety Net Betterment’s Safety Net goal is designed with the specific purpose of building you a financial emergency fund. We recommend that you think of this as a pot of money you save for an emergency, such as a temporary loss of employment or a large unexpected expense. After you decide how much money to put into your Safety Net goal, we invest the money into a 30% stock/70% bond ETF portfolio. While this portfolio is riskier than a 0% stock portfolio, it’s likely a more appropriate allocation for your emergency fund as it can be better at combating a hidden risk to your savings goal: inflation. As Dan Egan, VP of Behavioral Finance & Investing wrote recently, “At least a market crash has the decency of showing up in your balance. Inflation doesn’t tell you that it’s cost you”. While Cash Reserve is built to help keep up with inflation in the short-term, the Safety Net goal can offer the opportunity to potentially exceed inflation while seeking to give you a buffer for rainy days. General Investing Using Betterment’s Portfolio At Low Stock Allocation If you’re now thinking that Cash Reserve is too conservative for your needs but the 30% stock allocation of the Safety Net goal is too aggressive, another option is to set your own stock allocation with Betterment’s allocation slider. For every financial goal you set, Betterment recommends a target stock allocation but lets you adjust it from 0% to 100% stocks. Whatever allocation you choose, Betterment will help you along the way. As you move the slider, we will inform you whether your choice is “Very Conservative”, “Appropriately Conservative”, “Moderate”, “Appropriately Aggressive” or “Too Aggressive”. While we don’t recommend that you change your allocation too drastically one way or the other, feel free to try out different allocations in our preview mode to find the portfolio that’s right for you. Using Flexible Portfolios to Choose Assets We build portfolios that balance a number of different asset classes—like U.S. bonds and international stocks—to achieve a high level of diversification. However, if you want to change exposures to specific asset classes, Flexible Portfolios allows you to make changes to your allocation, and you can choose to only hold what are typically low volatility assets. Another valid use of a Flexible Portfolio is to adjust to high concentrations in your holdings outside of Betterment. For example, if you have a large investment in U.S. bonds in an outside account, you could use a Flexible Portfolio to shift your allocation at Betterment towards more international bonds and away from U.S. bonds. A Flexible Portfolio starts with the Betterment Portfolio Strategy as a baseline, and then we allow you to tune the specific allocation to your preferences. While we don’t recommend you make asset class changes, if you have specific views, you could choose only assets that generally have less volatility. However, you should note that we have specific guidelines for appropriate uses of Flexible Portfolios, and generally, our recommendation is to only decrease risk by adjusting your allocation using your goal slider. As you change the allocation, we will analyze the holdings and inform you whether the risk of the portfolio is suited for your goal, as well as whether the portfolio is adequately diversified. Conclusion Deciding where to place your hard earned cash can be an emotional experience for even the most seasoned financial planner. Choosing a portfolio or high-yield cash account that you can stick with can be particularly important to reaching your financial goals. No matter which of the options above you choose, Betterment will give you advice and support to help you reach your financial goals.

4 Reasons Why Women Need To Start Saving More And Sooner Mar 24, 2021 12:00:00 AM Women face unique financial challenges that make saving for retirement more urgent. When I first started in the 401(k) business and heard someone express the need for a special seminar on women and investing, I balked. Why do we need to talk about saving and investing to women differently than we do to men? As I quickly learned: the need to save for retirement is even more urgent for women because they face several undeniable headwinds. Gender Pay Gap1 For starters, most people are well aware of the gender pay gap, which currently translates into women earning just 82 cents to every man’s dollar. To put it mildly, improvements in this number over the years have been slow, and at the current rate of progress, estimates are that the gender pay gap will not close until 2093. And this number is for all women: for women of color and older women, the gap is even larger. Lower earnings over a working lifetime mean that women are more likely to have less saved for retirement. Longer life expectancies. In addition, the average life expectancy for women is about 81 years compared to 76 years for men.2 That’s five more long years that women have to support themselves in old age when a regular paycheck is no longer coming in.  And that’s just based on averages. One-third of women aged 65-years old today who are in excellent health will probably live to age 95—a full three decades past the traditional retirement age.3 So any money that women have saved for retirement needs to stretch further, in some cases much further. In some cases, this forces older women back into the workforce, often at low-paying jobs. Less time spent working. Compared to men, women often have less consistent income streams during their working years. As the primary caretaker in most families, women are more likely to interrupt their earning years to care for a loved one—whether a child, a parent, or someone else. Or they may elect to take a part-time job which not only reduces their income but often, too, their access to benefits, including a retirement plan. Lower participation in workplace savings plans. Women (and especially women of color) are more likely to work in part-time or other positions that don’t include retirement benefits.4 Even when they have access to a workplace retirement saving program, women are less likely to take full advantage of it. As part of recent study about retirement saving attitudes and behaviors among Millennials and Gen Z, Betterment found that overall, men are simply more engaged than women when it comes to retirement saving.5 Specifically with respect to workplace retirement plans like a 401k: Nearly twice as many women aren’t contributing to a retirement plan. Of those contributing, significantly more men increased their contributions in the last year—so they’re tending to their accounts. More men are maximizing the employer’s match. That means that ⅓ of women who have a match are leaving money on the table. Women’s Lower Participation In Workplace Savings Plans  Wow. That’s a lot of headwind! And that was even before the pandemic hit. As a result of COVID-19, women are more likely than their male counterparts to leave their paid positions to take care of school-age kids, which means the workplace is losing ground in terms of gender diversity.6 But the risks for women are even more personal: dropping out of the workforce means losing traction not only as it relates to career advancement, but also as it relates to financial security and building savings. And once again, women of color are impacted disproportionately: The pandemic impacted the very industries in which they are heavily represented, even while Hispanic and Black women are more likely to be single heads of households and the main source of financial support for their families.7 For all these reasons, women should start saving for their future—regardless of their age—before it’s too late. Younger generations can learn from older women: in one study, 41% of women across all races and ethnicities said that their biggest financial regret was not making the effort to invest more.8 Other research shows that women are 14% more likely to feel financially stressed than men and 13% less optimistic about their financial future.9 Women of all ages need to understand these challenges which may not be affecting them now, but likely will in the future. And if they’re already saving, then they (and everyone else!) should help spread the word. It’s never too soon to start saving for retirement. And Betterment can help. Whether you have your 401(k), IRA or other account with us, we can help you create a plan and determine how much to save, how to invest, and which accounts to use. And our automated tools and strategies will help to keep you on track.

4 Ways Women Can Counter The Financial Effects Of COVID-19 Mar 17, 2021 12:00:00 AM The COVID-19 pandemic and its economic fallout are having a regressive effect on gender equality. Here are four solutions that can help women empower themselves financially. Whether you experienced the virus yourself, cared for sick loved ones, lost your job, had work fundamentally change, or assumed new roles in your household as kids stayed home from school and daycare, it goes without saying that no one is going to walk away from the COVID-19 pandemic untouched. That being said, data regarding the immediate and projected long-term effects of the pandemic consistently show that the impact on women—particularly women of color—are far greater than the impact on our male counterparts. How Women Are More Vulnerable To COVID-19 Economic Effects In September, four times as many women dropped out of the labor force compared to men. During the spring and summer of 2020, on average, 10% of working mothers reported not working each week because they were caring for a child who was not in school or childcare. And to make matters worse, in addition to all of this, women also experience a greater negative financial impact. To understand the significance of what is happening, it’s crucial to address the wealth gap prior to the start of the pandemic.  According to the National Partnership for Women & Families: “White, non-Hispanic women are typically paid just 79 cents for every dollar paid to white, non-Hispanic men.” “Black women are typically paid just 63 cents for every dollar paid to white, non-Hispanic men.” “Native American women are typically paid just 60 cents for every dollar paid to white, non-Hispanic men.” “Latinas are typically paid just 55 cents for every dollar paid to white, non-Hispanic men.” As shown above, the wealth gap is significantly wider for women of color, as they face not only a gender wealth gap, but a racial wealth gap as well. This means that well before the world turned upside down, women were already facing major headwinds financially, and now things seem to be getting harder, not easier. While this is a pretty harsh reality, the good news is that even in tough times, there are things all women can do to help themselves and their families succeed financially. 1. Know your expenses. First things first: Know what you spend money on each month. It is easy to feel overwhelmed and bury your head in the sand when bills start piling up, but knowing where your money goes can help you stay in control of your finances. For example, many people forget about small recurring bills for subscriptions or services, which could add up when money is tight. Housing costs are typically the largest expense, but this is not something that’s easily reducible if you are experiencing job loss or lower wages. Knowing the money areas that are more flexible can help you come up with an effective cost cutting strategy that can be implemented at any time. Research Relief Programs As part of knowing what you spend, you should also know where you can cut costs on larger bills. Due to COVID-19, many private companies are providing some relief to their customers. Educate yourself on the programs available, be it a reduced rate on your utility bill, or waiving late credit card fees. In addition, various social service agencies, states, and local governments are still offering additional rent assistance, and President Biden extended the nationwide moratorium on foreclosures and evictions until at least March 31. Think of it like a fire drill: If you know what to do beforehand, you know what to do in the face of an emergency. 2. Manage debt. The Equal Credit Opportunity Act of 1974 banned lenders from discriminating against consumers based on sex. It is illegal for lenders to charge women higher interest rates based on sex or race. Unfortunately, bias still shows up in the lending process. For example, lenders typically use income to inform loan terms, and since women are statistically paid less, and take on more unpaid work (particularly true during the pandemic), it is no surprise that women face less favorable terms like higher interest rates on credit cards and personal loans. While the system is certainly flawed, managing debt effectively is something everyone can do. If you’re able, the most important thing to do is make sure you are making minimum payments on time. This will help you avoid late fees and negative impacts to your credit score, as missed or late payments feed into payment history which is a large part of your credit score. Women should also be careful about how much they put on credit cards, as many credit card companies will approve customers for larger lines of credit than they can really afford to pay back in a reasonable time frame. Of course, in an emergency sometimes credit cards or loans are your only option to bridge the gap before you are back on your feet, so make sure you use them judiciously. 3. Build an emergency fund. Unfortunately, there are few, if any, programs in the U.S. that act as social or medical “emergency funds” for Americans facing financial hardships unrelated to the pandemic or natural disasters, so it is largely up to individuals to protect themselves financially. If you are fortunate enough to still be employed, you should consider building a three to six month emergency fund. It should cover three to six months of your living expenses to protect you in case of sudden job loss, unexpected medical bills, or other unforeseen events that could cause you to go into debt. I recommend keeping your emergency fund in a low risk account such as a high yield savings account, or low risk investment account. If you do choose to keep your funds in a low risk investment account, at Betterment we currently recommend keeping your portfolio in a 30% stock/70% bond allocation. This is to help keep up with inflation and maintain your money’s purchasing power over time. Use state and federal funds for emergencies. If unfortunately you’ve lost your job during the pandemic or are working less hours, then applying for your state and local unemployment benefits is the best course of action. In addition, with the new COVID-19 relief bill, expanded unemployment benefits from the federal government would be extended through September 6th, 2021 at $300 per week. This in addition to the one time stimulus checks, with single taxpayers getting $1,400 checks, while married couples who file jointly would get $2,800, with an additional $1,400 per dependent for both filers. 4. Keep your career options open. Women leaving the workforce at astonishing rates is a very real problem socially and economically. However, I am generally optimistic that this trend could improve over time as businesses open and new businesses emerge, and kids go back to in-person school full time. If you have been laid off, or forced to stay home due to a lack of childcare, I encourage you to keep your options open by maintaining a professional network or picking up a side hustle. Maintaining a professional network looks different for everyone, but some examples include staying in touch with former colleagues and managers, joining professional organizations, or reaching out to professionals in fields you are interested in through professional networking sites such as LinkedIn. You never know who may be looking to hire in the future that could think of you. As for a side hustle, this can both help bridge the gap financially, but also allow you to explore other fields and gain skills that may translate to full time work or your own business in the future. Hang in there. Over the past year, our lives changed in big ways. Women have been feeling the brunt of these changes, as we’ve had to assume more roles, with less support. It has not been easy, and the new norm may be here to stay for a while longer. That being said, there’s light at the end of the tunnel as more vaccines are distributed, another stimulus check may be headed your way, and kids start going back to school. In the meantime, take the steps outlined above to help you keep moving forward and empower yourself financially.

5 Ways To Spend Your Next Stimulus Check Based On Your Finances Mar 12, 2021 12:00:00 AM A third stimulus check could be on its way to you in the next few days. Here’s how you can plan to use it based on your financial situation. With a newly inaugurated President, the American government is moving quickly on social and economic policies. Most recently, President Biden signed a $1.9 trillion COVID relief bill that includes $1,400 stimulus checks for eligible recipients. While the $1,400 stimulus payments could hit your bank account within a few days, other benefits, such as the extension of federal unemployment benefits and the enhanced child tax credit, may take a few weeks to arrive. No matter what financial stage you’re in, below is a simple action plan on how you can make your stimulus check work for you. How The Plan Works We’ve analyzed five potential ways to use your stimulus check wisely, and organized them according to which stage your finances are currently in. Start from the beginning and work your way up. For example, if you already have stage one covered, congratulate yourself and move onto stage two. Let’s get to it. 1. Spend on necessities. We recognize that for many, receiving their stimulus check can mean the difference between putting food on the table vs. going hungry. If you’re one of the millions of Americans who are unemployed, or are simply struggling to make ends meet, then consider using your stimulus check to help cover your basic necessities (i.e. food, water, heat, shelter). These basic needs should be your first and foremost priority. If you’ll need the money soon for these necessities, you should keep the money in an account that’s immediately accessible. 2. Pay down debt. Once your basic needs are covered, you can consider using your stimulus check to pay down debt. You are not alone if you had to borrow money to get through the difficulties of COVID-19. Americans collectively have over $4 trillion in non-housing debt, $800 billion of which is credit card debt. Paying down any debt will increase your net worth, but you should especially prioritize any debt with high interest rates. Two common culprits of this are credit cards, which currently average a 15% interest rate, and personal loans, which average 10% interest. Really, any debt with an interest over 5% should probably be paid off before investing. 3. Save for emergencies. Next on the list is building an emergency fund. 2020 was a perfect reminder that unexpected events can happen at any time, many of which are outside of our control. When an emergency happens, like an injury, broken appliance, or job loss, knowing you have a safety net to fall back on is priceless. Emergencies, by definition, are difficult to plan for. You don’t know when they will occur or how much they will cost. As a starting point, we recommend your emergency fund be at least three months of your living expenses.  4. Invest for the future. With your emergency fund full, you can calmly focus on investing for your future. Investing your stimulus check in stocks can help your money work harder for you than cash. Unfortunately, only about ½ of American families own stocks, which means many have not reaped the benefits of the double-digit returns we’ve seen over the past decade. Your stimulus check could give you the jump start you need to invest. Betterment makes it easy to invest for common goals such as retirement, saving for college, or buying a home. In just a few minutes, you can have a personalized investment portfolio, built by humans and managed by algorithms. A bonus way to invest for your future is by investing in yourself. Consider instead using your stimulus check to take an online course or train for a new career in our rapidly-changing world. 5. Give to others. Lastly, you can consider using your stimulus check to help others. If your finances are in good shape, giving some or all of your stimulus check to those who need it can be a great way to lend a hand during these trying times. There are plenty of ways you can help out. Donate money to charities. An added benefit of doing this is potentially getting a Federal income tax deduction. Congress passed a special rule that allows you to deduct up to $300 per person ($600 if married filing jointly) of cash donations to charity, even if you don’t itemize! Use your stimulus check to help out a local business that may be suffering due to the pandemic. Even buying a gift card to use in the future can help significantly. Use your stimulus check to help family or friends who need it. Wrapping Things Up The best way to use your stimulus check will depend on your situation, and we recommend working your way down the prioritized list depending on where you fall financially.

How to Save for Retirement: 5 Essential Accounts to Consider Mar 5, 2021 12:00:00 AM If you are wondering where to squirrel away money when it comes to saving as tax-efficiently as possible, consider these five essential retirement account types. Saving for retirement can seem daunting and complicated, but it doesn’t have to be. If you are wondering where to squirrel away money when it comes to saving as tax-efficiently as possible, consider these five essential retirement account types. Traditional 401(k) The most common type of workplace retirement account for investors is a Traditional 401(k). Contributions to a Traditional 401(k) are made with pre-tax dollars, and the money is normally deducted directly from your paycheck before the paycheck reaches you. The result is that Traditional 401(k) contributions reduce your amount of taxable income for the current year. This holds true for Traditional 403(b)s, too. Money in a Traditional 401(k) grows tax-free, and the distributions are taxed when you withdraw the money during retirement. Therefore, it may be smart to contribute to a Traditional 401(k) if you think you will be in a lower tax bracket in retirement than you are currently in now. Another good reason to contribute to a Traditional 401(k) is the possibility of an employer match. Your employer may match the contributions you make to your Traditional 401(k) plan up to a certain percentage. That’s free money—and no one should pass that up. For 2020 and 2021, the contribution limits have increased to $19,500 for those under age 50. For those age 50+, the catchup contribution is now $6,500, meaning that your total contribution limit is up to $26,000. The IRS generally requires you to start taking required minimum distributions from your Traditional 401(k) either when you reach a certain age, or, when you retire from your job—if you are older than the age requirement. Roth 401(k) A less common but increasingly popular workplace retirement account is a Roth 401(k). These accounts have the same contribution limits as Traditional 401(k)s. The main difference is when the funds in Roth 401(k)s are actually taxed. Unlike Traditional 401(k)s, Roth 401(k)s are funded with contributions that have already been taxed. This means that Roth 401(k) contributions do not reduce your taxable income. The money in a Roth 401(k) grows tax-free, and when you withdraw the money in retirement, the distributions are also tax-free. If you think you are going to be in a higher tax bracket in retirement—or generally think tax rates are going to increase in the future—Roth 401(k) contributions may be the right choice for you. If your employer offers a 401(k) match then you will still get the match if you make Roth 401(k) contributions, however, the match will be placed in a Traditional 401(k) account. Keep in mind, the contribution limit across Traditional and Roth 401(k)s is a combined limit. For example, you could not contribute $19,500 to both a Traditional and a Roth 401(k) in 2021—you can only contribute $19,500 total across both. You can split your contributions so that a portion goes to the Traditional and a portion goes to the Roth. Contributions are made on a calendar year basis. Traditional IRA IRAs (Individual Retirement Accounts) are not offered by an employer, which means you have more control and flexibility with the investments and the provider you choose. As long as you earn taxable income you can contribute to a Traditional IRA, and the maximum contribution you can make for 2020 and 2021 is $6,000. If you are over age 50, you can contribute $7,000. Money in a Traditional IRA grows tax-free, and is normally taxed when you take distributions in retirement. Additionally, the IRS generally requires you to start taking distributions from a Traditional IRA starting at a certain age. You can also get a tax deduction on your Traditional IRA contributions in the year you make them. Your ability to deduct, though, can depend on if: You are covered by a retirement plan through work You are not covered by a retirement plan through work Some investors choose to roll over their 401(k)s to a Traditional IRA in order to consolidate their investments at the provider of their choice, or to switch to a provider with a lower fee. For investors looking to make backdoor Roth conversions, it is wise to move an old 401(k) into a current 401(k) if that option exists, instead of a Traditional IRA. Roth IRA Unlike Traditional IRAs, Roth IRA contributions offer no ability to receive a tax deduction. You contribute to a Roth IRA with after-tax dollars, and when you take distributions from your Roth IRA in retirement they are tax-free. Similar to Roth 401(k)s, making Roth IRA contributions is beneficial if you think you will be in a higher tax bracket in retirement than you are now. Another perk is flexibility. Roth IRAs do not require you to take minimum distributions like Traditional IRAs do. Additionally, you can withdraw your contributions to a Roth IRA at any time without taxes or penalties. If you make over a certain amount of income, you cannot contribute to a Roth IRA directly. Roth IRAs have the same contribution limits as Traditional IRAs ($6,000 or $7,000, depending on age), but that limit is the maximum amount total across both types—meaning you cannot contribute the maximum amount of $6,000 (or $7,000) to both a Roth IRA and a Traditional IRA in the same year. Unlike 401(k)s, you can contribute to an IRA up until that year’s tax filing deadline. So for example, you contribute to an IRA for the 2020 tax year up until April 2021. Health Savings Account (HSA) Health Savings Accounts (HSAs) should be used as an option to set aside money for retirement if you have already filled up all your other retirement account options. Contributions to an HSA are tax-deductible, and distributions from an HSA are tax-free if you use the money for medical expenses or related costs. If you allow your HSA to invest and grow over time you can withdraw the funds at age 65 without triggering a penalty. Distributions from your HSA at age 65 or over would be treated similarly to distributions from a Traditional IRA. In 2020 and 2021, you can contribute up to $3,500 to an HSA if you are a single tax filer, and up to $7,000 if you have a family HSA. For 2020, the limits are $3,050 for single tax filers and $7,100 for families. Keep in mind that you can only contribute to an HSA if you are enrolled in a high-deductible health plan through you or your spouse’s workplace. HSA contributions are made on a calendar year basis. Need Advice? Within a Betterment account, we can provide additional advice regarding which accounts you should consider funding and in what order. You can even sync up your 401(k)s and other financial accounts to see an overall picture of your finances. Get started or log in to complete your retirement plan and see personalized savings advice. Our licensed financial experts also offer advice packages for retirement planning and more. Betterment is not a tax advisor. Contact a qualified tax advisor to understand your personal situation. This article is provided solely for marketing and educational purposes. It does not address the details of your personal situation and is not intended to be an individualized recommendation that you take any particular action, including rolling over an existing account. When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. Specific factors that may be relevant to you include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account, consult tax and other advisors with any questions about your personal situation, and review our Form CRS relationship summary and other disclosures. If you currently participate in a 401(k) plan administered or advised by Betterment (or its affiliate), please understand that this article is part of a general offering and that neither Betterment nor any of its affiliates are acting as a fiduciary, or providing investment advice or recommendations, with respect to your decision to roll over assets in your 401(k) account or any other retirement account.

Diamond Hands And Financial Plans: Betterment’s Advice For Investing In Crypto Mar 3, 2021 12:00:00 AM Is there a way to invest in cryptocurrencies responsibly? We certainly think so. Here are five tips to help guide you through the process. Even though cryptocurrencies have only been around for a short period of time, it’s abundantly clear that they’re here to stay. As a financial advisor, we at Betterment want to share our guidance on how to invest responsibly in cryptocurrency, if that’s something you choose to do. Fortunately, Betterment has a set of five universal investing principles that serve as a guide for the investment advice we give our 600,000+ customers, and that can help you make educated decisions about cryptocurrency yourself. 1. Make a personalized plan. As an investor, you have your own unique goals and values. Depending on those goals and values, the role cryptocurrency plays in your overall financial plan—if it has a role at all—will vary. Let’s start with your personal values. Many individuals are fans of cryptocurrency for reasons beyond just the potential to see their net worth go “to the moon.” You may be fascinated with crypto from an engineering perspective, or maybe for the societal impact it could have. Ultimately, it’s okay to invest your money in a way that reflects your personal values; just do so in an informed, principled manner. The second component of personalization is your financial goals. Your goals will also affect if and how cryptocurrency should be implemented into your portfolio. For example, if your child is going to college next year, their tuition money likely shouldn’t be invested 100% in Dogecoin. The volatility is far too large for a goal so short-term. Likewise, your emergency fund shouldn’t be held in Bitcoin either, because of the large price swings it’s experienced over the past few years. But, if you have a play account on the side, or a long-term goal where you’re able to tolerate more ups/downs, cryptocurrency may be an appropriate component of your portfolio. The overall point is that, just like any other investment, there is no one-size-fits-all answer: The best financial advice incorporates the unique goals and values of each person. 2. Diversify your investments. Even if cryptocurrency as an asset class may be here to stay, it’s impossible to know which cryptocurrencies will thrive and which will go extinct. There are currently over 4,000 unique cryptocurrencies, with new coins popping up seemingly every week. It’s likely many, if not most, will fail. With any type of investment, it’s not wise to “put all your eggs in one basket.” That’s why diversification is a critical piece of any financial plan.  In early 2021, the cryptocurrency market as a whole passed $1 trillion for the first time. That’s quite an accomplishment. But when compared to the size of the global stock and bond markets, we see just how new and small cryptocurrency is. All the cryptocurrencies combined total just about 0.5% of the global stock and bonds markets, which exceed $200 trillion. Global Market Capitalization of Stocks, Bonds & Cryptocurrency Sources: Reuters and SIFMA Betterment doesn’t include cryptocurrency in our recommended investment portfolios, but if you do decide to invest in cryptocurrency, it should be in moderation. If you take a market capitalization approach, crypto would make up about 0.5% of your overall portfolio. Even if you are very bullish on crypto, Betterment doesn’t recommend it exceeding a maximum of 10% of your portfolio. We also recommend diversifying across multiple cryptocurrencies. 3. Prepare your taxes. Tax management is part of any investment strategy. Afterall, it’s not what you earn, but what you keep. When it comes to the taxation of cryptocurrency, the word that best describes it is “confusing.” If you’re going to invest in crypto, be sure to comply with all relevant laws and reporting requirements. The IRS published an FAQ page that addresses most common questions, such as: How is virtual currency treated for Federal income tax purposes? Will I recognize a gain or loss when I sell my virtual currency? Where do I report my capital gain or loss for virtual currency? If you invest in crypto, one strategy you may consider to manage taxes is tax loss harvesting. Betterment implements this strategy at the flip of a switch for our investment customers and we’ve automated the process so that our customers don’t have to do it manually. For example, losses that Betterment harvests can be used to offset gains in your cryptocurrency investments. 4. Weigh the overall costs and value. With all the hype and talk of double-digit—even triple-digit—growth in the world of cryptocurrencies, it’s easy to forget about the potential costs incurred from investing in them. Costs, when taken holistically, not only include how much you pay out of pocket, but also the execution quality of your trades, and the opportunity cost of your time. Depending on where you buy and sell cryptocurrency, you could pay transaction fees of over 1% for each trade. Newer cryptocurrencies, or those that don’t trade very frequently, may have larger bid-ask spreads. This means the price for which you can sell your cryptocurrency is lower than what it would cost you to purchase more. Lastly, when there are large price swings, you also must be careful about order execution. All of these direct or indirect costs can chip away at your take-home returns from trading cryptocurrency. 5. Grow investing discipline. Warren Buffet is famous for saying the market is “a device for transferring money from the impatient to the patient." He was referring to the stock market, but the saying also applies to the cryptocurrency market. Almost all investments have ups and downs, and the cryptocurrency market is no different. Bitcoin lost 80% of its value in 2018, over 1,000 currencies have failed, and stories of fraud are not hard to come across. These challenges -- price shocks, bankruptcy, panic, theft -- are not unique to crypto; however the risks are magnified because of the new technology, lack of regulation, and intense media hype around the cryptocurrency market. You must be willing to HODL, even when your portfolio is dropping. As an asset class, cryptocurrencies are extremely volatile, and it’ll likely be the disciplined investors who’ll be rewarded. Before you purchase any crypto, make sure doing so is appropriate for your risk tolerance, and that you have a plan in place for if and when you encounter volatility. Manage your investments purposefully. Cryptocurrency is a novel type of investment, and carries a lot of risk. That’s why having a clear set of investing principles is important. These principles can help guide your investment decisions and help you avoid getting caught up in the news hype of particular cryptocurrencies. While Betterment doesn’t include cryptocurrency in our portfolios, we acknowledge that many investors want to own them. If you are one of those people, hopefully these five principles will help you decide if and how to invest some of your investment portfolio in cryptocurrency.

Safety Net Funds: Why Traditional Advice Can Be Wrong Mar 2, 2021 12:00:00 AM Don’t keep your safety net funds in cash savings accounts that give you little to no interest. Odds are you’ll lose money due to inflation, as well as lose out on the potential growth of your hard-earned savings. We recommend that everyone should save regularly towards some kind of safety net based on their monthly expenses. Conventional wisdom says that safety net funds should be held in a savings account or a similarly risk-free type of account. But is this really the wisest way to manage your rainy day fund? Our analysis finds that you can do better by investing your safety net funds in a diversified portfolio. The Risk Of Holding Cash First, let’s get one myth out of the way. Cash savings accounts are not risk-free. Why? After accounting for inflation, you may not get the money you put in back—in real terms. In that sense, cash savings accounts are not risk-free. Today, with nominal cash interest rates hovering around 2%, money in a traditional savings account could actually earn nothing, or even make a negative real return over the next few years. This means your safety net fund will need to be topped up year after year in order to maintain its real value. It also means that you’ll have a significant amount of wealth that is not growing. This could even be the case for a long period of time if you find that you aren’t needing to dip into it. Invest Your Safety Money Intelligently A better solution is to have a safety net fund and grow it, too. Our default advice for a Safety Net goal at Betterment suggests a 30% stock allocation. While this flies in the face of traditional advice, our analysis below shows that it stands up to critical examination. Example For a worker earning around $110,000 in annual salary, a safety net target might be $18,000—assuming minimum expenses of $4,500 per month for four months. This saver has two options: put this money into a savings account or invest it. We think investing is the smarter choice. However, to be smart investors, we want to also help protect ourselves against potential losses. This is why we recommend adding a buffer of 30% to your original target amount. For example, to maintain an $18,000 safety net, we recommend starting with $23,400>. Once You Reach Your Target The benefit of investing a slightly larger amount than you need is the opportunity to help earn more returns. Your safety net might get bigger than necessary on a regular basis once you’ve reached your target amount. Because of that, we advise transferring any excess to another goal when it gets to be about 20% bigger than the target amount. That excess growth can be transferred to help other goals, like retirement or a vacation. Experience The Upside We do not have a crystal ball and we’ll never know exactly what the stock market will do in the future. But, what we can see in recent history is that the downside of taking some risk is not terrible—while the upside can be very powerful. Have questions about your safety net, financial goals, or the amount of risk you should be taking on? Speak with a CFP® professional to review your current financial situation. Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Financial Resources For Women’s History Month Mar 2, 2021 12:00:00 AM Join us as we celebrate Women’s History Month. Explore our personal recommendations for featured organizations, financial content, and more below. What better way to celebrate Women’s History Month than by considering women’s financial well-being? Though many women are increasingly independent, they’re also often supporting both themselves and other family members. General financial planning often ignores gender-specific issues that continue to challenge long-term financial security for women. Here’s Betterment’s guide to help you navigate the month. Meet Women+ of Betterment The Women+ of Betterment ERSG works to improve the company by partnering across the organization to amplify the voices of and advance equity for all women+, however you identify. We work alongside ERSGs of Betterment to ensure proposed solutions are intersectional. We provide women+ opportunities to strengthen relationships, lead, and broaden their network. Investing, Financial Planning, and Career Tips For Women Everyone should understand the importance of financial planning for women. Here are four articles that can help you get started, from gender-specific considerations to earning more money, here are our money tips for women. Is Financial Planning Different For Women? Betterment’s Women Leaders Share Their Best Career Advice How A Generation Gap Impacts Finance For Women Women and Money: Bridge The Gap Organizations We’re Supporting This Month Even though the COVID-19 pandemic has permeated all aspects of American society, research has shown how women have been disproportionately impacted by working on the front lines and mass unemployment. Here are three organizations you can donate to today who are working to address social and economic gaps for women: Bottomless Closet - Helps women in New York prepare for job interviews and sets them up for success in their careers. Moms Helping Moms - Supports hundreds of thousands of individuals in New Jersey by providing them with essential items for their children and families. Days for Girls - Provides women and girls with reusable menstrual products, health education programs, and training classes. Trans Lifeline - Offers direct emotional and financial support to trans people in crisis – for the trans community, by the trans community. Ladies Who Launch - Facilitates the connections needed to support female entrepreneurs as they follow their passions and launch their businesses. Organizations Supporting Women On Betterment’s Platform Through our Charitable Giving feature, customers can donate shares held for longer than one year to any organization we partner with. Below are three charities working to improve women’s lives: Breast Cancer Research Foundation - Fund the best ideas in breast cancer research. Hour Children - Reunify families impacted by incarceration. Boys & Girls Clubs of America - Provide a safe space for kids and teens during out-of-school time. Invest in gender equity this month with our Social Impact Portfolio. If you’re passionate about issues like gender and racial equity and want to support companies who demonstrate a commitment to gender diversity within senior leadership, you can invest your money in Betterment’s Social Impact Portfolio. There are also two other socially responsible investing portfolios that may align with your values: the Broad Impact Portfolio and Climate Impact Portfolio. What better way to celebrate Women’s History Month than by considering women’s financial well-being? Though many women are increasingly independent, they’re also often supporting both themselves and other family members. General financial planning often ignores gender-specific issues that continue to challenge long-term financial security for women. Here’s Betterment’s guide to help you navigate the month. Meet Women+ of Betterment The Women+ of Betterment ERSG works to improve the company by partnering across the organization to amplify the voices of and advance equity for all women+, however you identify. We work alongside ERSGs of Betterment to ensure proposed solutions are intersectional. We provide women+ opportunities to strengthen relationships, lead, and broaden their network. Investing, Financial Planning, and Career Tips For Women Everyone should understand the importance of financial planning for women. Here are four articles that can help you get started, from gender-specific considerations to earning more money, here are our money tips for women. Is Financial Planning Different For Women? Betterment’s Women Leaders Share Their Best Career Advice How A Generation Gap Impacts Finance For Women Women and Money: Bridge The Gap Organizations We’re Supporting This Month Even though the COVID-19 pandemic has permeated all aspects of American society, research has shown how women have been disproportionately impacted by working on the front lines and mass unemployment. Here are three organizations you can donate to today who are working to address social and economic gaps for women: Bottomless Closet – Helps women in New York prepare for job interviews and sets them up for success in their careers. Moms Helping Moms – Supports hundreds of thousands of individuals in New Jersey by providing them with essential items for their children and families. Days for Girls – Provides women and girls with reusable menstrual products, health education programs, and training classes. Trans Lifeline – Offers direct emotional and financial support to trans people in crisis – for the trans community, by the trans community. Ladies Who Launch – Facilitates the connections needed to support female entrepreneurs as they follow their passions and launch their businesses. Organizations Supporting Women On Betterment’s Platform Through our Charitable Giving feature, customers can donate shares held for longer than one year to any organization we partner with. Below are three charities working to improve women’s lives: Breast Cancer Research Foundation – Fund the best ideas in breast cancer research. Hour Children – Reunify families impacted by incarceration. Boys & Girls Clubs of America – Provide a safe space for kids and teens during out-of-school time. Invest in gender equity this month with our Social Impact Portfolio. If you’re passionate about issues like gender and racial equity and want to support companies who demonstrate a commitment to gender diversity within senior leadership, you can invest your money in Betterment’s Social Impact Portfolio. There are also two other socially responsible investing portfolios that may align with your values: the Broad Impact Portfolio and Climate Impact Portfolio.

The Recommended Allocation To Keep Up With Inflation Has Changed Mar 2, 2021 12:00:00 AM For funds that seek to match or beat inflation, like a Safety Net goal or Emergency goal, we seek to take on minimal risk while allowing your portfolio the potential growth needed to keep up with inflation. Learn about our updated portfolio allocation recommendations for your emergency funds. At Betterment, we are routinely evaluating our investment strategies to help you achieve your financial goals. As part of that routine evaluation process, we have recently updated our recommended portfolio allocation for goals that seek to keep up with inflation. Goals like our Safety Net goal or an emergency fund are designed to be an account you can withdraw from in the case of an unexpected financial situation, such as a large medical bill or the loss of a job. If your emergency money is sitting out of the market and it’s not invested, it runs the risk of losing buying power over time because of inflation. A key risk to this money is that it loses purchasing power as time goes on. A key aim for such goals is to match—or beat—inflation, so that your dollars can keep as much buying power over time as possible. We updated our recommended allocation for goals that seek to keep up with inflation from 15% stocks to 30% stocks. Based on updated analysis below that considers the current yield curve and inflation expectations, our recommendation is that a 30% stock portfolio is the appropriate allocation for your emergency funds. The chosen allocation is designed to match our assumptions regarding long term inflation. We revisit these assumptions annually, and our assumption for long term inflation is still 2%. As interest rates have moved lower, the yield on low asset assets has also gone down. Now, an investor must take slightly more risk to achieve a return that may beat inflation. Just as they have in the past, these economic conditions could change again in the future—which is why we routinely evaluate our strategies over time. Keeping Inflation At Bay In order to determine the right level of portfolio risk, we need two key pieces of information: The expected return of the portfolio The expected rate of inflation Our current inflation assumption is 2% per year. We review our inflation assumptions annually to make sure they reflect the current economic environment, which is always changing. The expected return of the portfolio has two key components: the risk-free rate and the expected return on risky assets. Yield on U.S. Treasury bonds determines the risk-free rate. Since U.S. Treasury bonds are backed by the U.S. government, they are considered to be virtually risk-free. We also estimate how much additional return we might expect from holding risky assets, such as stocks or corporate bonds. Putting these two pieces together gives us the total expected return for the portfolio. As of January 2021, short-term U.S. Treasury bonds were expected to have a 0.10% annual yield. This means that holding these bonds until they mature will produce about a 0.10% annualized return, which is less than the 2% we need in order to combat inflation, based on our current inflation assumptions. By taking slightly more risk, Betterment seeks to improve on the 0.10% risk-free investment return. Based on our asset class return assumptions, we expect that the total returns for our 30% stock portfolio could potentially be 2.1% after fees*, which is slightly higher than our inflation expectations. We Recommend A Buffer Unfortunately, we can’t predict the future, so the actual performance of our 30% stock portfolio may turn out to be different than our projected assumptions. We can use history to help us understand the range of potential outcomes. Our 30% stock portfolio’s worst performance in a historical backtest would have been -22.9%, during the Great Financial Crisis.** To help protect against a temporary market drop, we recommend that you hold an additional buffer that’s 30% of your target amount—which generally represents at least three months of normal expenses—to insulate against down markets. For example, if three months of expenses is $10,000, we recommend that you hold $13,000 in our goal. Why not just hold cash? Finally, you might be wondering, “Why not just use a bank account for my emergency funds?” It’s a valid question. After all, money in a checking or savings account isn’t subject to market volatility. Most traditional bank accounts don’t pay a high enough interest rate to keep up with inflation. The national average interest rate is 0.04%, which is far below the 2% annual return we need in order to simply match inflation. This means that even though the amount of cash you’re holding is stable, its buying power is still declining over time. We’ll help keep you on track while keeping you informed. Having funds set aside for emergencies is the cornerstone of any financial plan, since it provides an important cushion against unforeseen circumstances—circumstances that might otherwise require you to dip into a long term account, such as retirement. In fact, our advisors routinely recommend that the first investing goal our customers set up should be a goal to protect oneself against unexpected costs, like a medical bill, or loss of income. If you currently have a goal that’s set to the target allocation of our old recommendation—15% stocks—we’ll alert you that your allocation is now considered conservative, and that a more appropriate target allocation for your goal is now 30% stocks. While we won’t adjust your target allocation for you, you’ll be able to adjust your target allocation within your goal either on a web browser or on your mobile app. Before making this update, please note that there may be a tax impact. We’ll show you the estimated tax impact before you complete the change inside of your account. As the economic environment changes, we will continue to review our recommendations. Because we believe in transparency, we’ll keep our customers updated if economic condition shifts lead to a chance in our advice and recommendations. We calculate expected excess returns for the assets in our portfolio by applying a Black-Litterman model, as described in “Computing Forward-Looking Return Inputs” of our . By multiplying these expected returns by our portfolio weights, we can calculate the gross expected excess returns for the portfolio. We can then calculate the expected total return of the portfolio by adding to the expected excess return our estimate of the forward-looking risk-free rate. In this example, we used the lowest point on the US Treasury yield curve as our assumption. The expected returns are net of a 0.25% annual management fee and fund level expenses, and assumes reinvestment of dividends.This expected return is based on a model, rather than actual client performance.  Model returns may not always reflect material market or economic factors. All investing involves risk, and there is always a chance for loss, as well as gain. Actual returns can vary. Past performance does not indicate future results. ** The Betterment portfolio historical performance numbers are based on a backtest of the ETFs or indices tracked by each asset class in Betterment’s portfolio as of January 2021. Though we have made an effort to closely match performance results shown to that of the Betterment Portfolio over time, these results are entirely the product of a model. Actual client experience could have varied materially.  Performance figures assume dividends are reinvested and daily portfolio rebalancing at market closing prices. The returns are net of a 0.25% annual management fee and fund level expenses. Backtested performance does not represent actual performance and should not be interpreted as an indication of such performance. Actual performance for client accounts may be materially lower. Backtested performance results have certain inherent limitations. Such results do not represent the impact that material economic and market factors might have on an investment adviser’s decision-making process if the adviser were actually managing client money. Backtested performance also differs from actual performance because it is achieved through the retroactive application of model portfolios designed with the benefit of hindsight. As a result, the models theoretically may be changed from time to time and the effect on performance results could be either favorable or unfavorable.  See additional disclosure https://www.betterment.com/returns-calculation/.

Betterment’s Women Leaders Share Their Best Career Advice Mar 2, 2021 12:00:00 AM Nine women leaders across Betterment talk about their work, leadership, and advice for the next generation. In the full year since COVID-19 fundamentally upended our realities forever, Betterment adapted and grew alongside a changing society, industry, and tumultuous economy. That’s why this Women’s History Month, we’re taking a moment to learn from and appreciate the women who are leading Betterment into the future, by taking a look at their invaluable insights and experiences. We asked nine women at the helm of various departments across Betterment to talk about their work, leadership, and advice for the next generation. What advice do you have for women who are just starting out in their careers? Sarah Levy, CEO: Find something that you are passionate about. You will spend many hours of your life at work and it's best to love what you do. Katherine Kornas, VP of Product: Early in my career, I remember having a conversation with my dad, who worked at General Motors his entire career, about how I always felt like I was “getting it wrong” because I didn’t come up with the same solutions to problems that my colleagues did. “You know what, Kate?” he said. “You think differently than other people. That’s not a sign that you’re unqualified. It’s a sign that you’re an extremely valuable employee because you’re able to see things no one else sees.” Susan Justus, Head of Talent Development: Allow yourself to be vulnerable: Vulnerability is not a sign of weakness and can be your greatest strength. Vulnerability can create a culture of trust and respect. Admitting our mistakes, seeking help, and acknowledging we don’t have all the answers are all expressions of vulnerability. Pat Advaney, Senior Director, B4B Marketing: Don't diminish the value of skills that come easily to you; something that may not be "rocket science" to you is likely something that others struggle with. Own your expertise! Kim Rosenblum, CMO: Try things out; it's hard to know what you will love (or hate!) without hands-on experience. Take time to find the intersection of "what you love" and "what you are good at." Once you know that magic combo it will be easier to create a career path where you will be happy and successful! Veronica Mendoza, Senior Director of Growth Marketing: Don't be too hard on yourself! You can strive to be good without beating yourself up for not being perfect. Can you tell us more about self-care, and how you accomplish it as a leader? Kate Smith, Senior Director of People Strategy & Operations: This is a hard one. As a working mom of three young kids, I find I'm constantly focused on the care of others, and it's only been recently that I've realized the need to carve out time for myself. Once a week my husband and I get the girls to bed, and then I'm off to play a sport I love for an hour, helping me both mentally and physically! Johanna Richardson, Head of Product: Not going to lie: finding balance during the past year has been a constant struggle. Juggling work, normal parenting, and remote schooling all in the place where I live has seriously blurred the lines between all aspects of my life. My daughter has crashed many-a-meeting, but I try to remind myself how cool it is that she gets to see her mom at work up close. That said, carving out some time for myself every day to go for a run or just binge-watch some Netflix is a must. Also, I've really upped my skincare game. Veronica Mendoza, Senior Director of Growth Marketing: I'm not much of a routines or rituals type of person when it comes to self care, but I do believe in Body's Choice. Whether it's a long walk, a night of mindless TV-watching, or just consistently taking a workday lunch break, I try to listen to what my mind or body is telling me it needs—before it starts yelling. Sarah Levy, CEO: It's important to turn off after hours. For me, spending time with family and friends, walking in the park with my husband and dog, and reading books keep me happy. Kim Rosenblum, CMO: It's personal. I try and exercise 5x a week. Even if it's for a short amount of time. And when I exercise I keep a notebook handy because endorphins generate ideas! I also only take on volunteer or extracurricular projects if I have the time. Katherine Kornas, VP of Product: Too much routine is often the source of burnout for me, so when I start to feel like I’m doing the same things, day after day, I’ll do something differently, even if it's uncomfortable at first. Tweaking my schedule even just a tiny bit helps force my brain out of its groove, and I find that I’m able to look at problems and opportunities in new, insightful ways afterwards. What’s your leadership style? Lucy Babbage, SVP of People: I focus on building personal relationships and getting to know my colleagues' personal goals in career and life, and doing what I can to support those goals in the context of what the company needs. I also like to bring some silliness and laughter to the table, so I hope my team thinks I am funny! Susan Justus, Head of Talent Development: I am a people first leader. I lead with care and empathy. I engage my team by asking open-ended questions and creating space for their input and ideas and make myself available to support and guide the process along the way. I am a true believer that people grow when they are provided autonomy, respect and trust to contribute at their full potential. Kate Smith, Senior Director of People Strategy & Operations: Player / coach. I'm ready to roll up my sleeves and get into the details, but can take that step back to be able to take a more strategic view. I want my team to feel empowered and accountable, but I'm here to support them every step of the way. Kim Rosenblum, CMO: Over many years I've learned my strengths and weaknesses. When I'm at my best, I'm supporting people to do their best job—to maximize their talent and potential. Veronica Mendoza, Senior Director of Growth Marketing: I like to think I have a supportive, consultative leadership style. Over time, I've also learned that not everyone responds to a single style in the same way, so I also believe it's most important to be adaptable. Getting to know people individually makes it easier to find the sweet spots between disparate styles, leading to stronger relationships and, very often, better business outcomes. Johanna Richardson, Head of Product: I try to lead with empathy and transparency. I want to make sure that everyone on my team has the space and autonomy to shine and feels supported in their careers. What about your work at Betterment are you most proud of so far? Sarah Levy, CEO: It's pretty early in the journey for me. I'm really enjoying getting to know the team, the industry, and the amazing things that differentiate Betterment: performance, ease-of-use, transparency, and personalization. Susan Justus, Head of Talent Development: Building the Talent Development function from the ground up over the last four years. Creating a core skill training curriculum, leadership development tracks, one-on-one coaching programs and various other tools/resources that support growth and development for employees. Pat Advaney, Senior Director, B4B Marketing: Publishing lots of B4B content that has helped drive traffic to our site and helps educate our employer clients. Kate Smith, Senior Director of People Strategy & Operations: I'm proud of the direct impact my work has on our people and culture. A lot of what we do is behind the scenes, but to see how that work has contributed to Betterment being a great place for our team members to grow and develop their careers, all while creating and supporting an amazing product for our customers—it's very rewarding to say the least! Kim Rosenblum, CMO: It's been a fast first month! I'm learning so much, and I feel very welcomed. I appreciate that everyone here is helpful and a teacher. I'm excited to learn more about our existing and potential customers, building an emotional and resonant brand, and marketing incredible products that meet a vital need. Our mission is quite inspiring! Lucy Babbage, SVP of People: I'm proud to have been part of an ever-evolving team that has made Betterment such a special place to work over the years and also that I finally got our new kitchen construction wrapped! Johanna Richardson, Head of Product: I'm really proud of the team we've built. Truly a stellar crew. Anything else on your mind that our readers should know about? Katherine Kornas, VP of Product: I’m queer-identified and grew up in a conservative, religious Midwest suburb. I didn’t fit in. My experiences, while heartbreaking at times, helped instill a tenacity in me that I often call upon during my career, particularly when I’m faced with tough problems and ambiguity. I believe I’m a better leader because of it—and am proud of that. Kate Smith, Senior Director of People Strategy & Operations: I'm a proud mom to three little girls, and I feel so grateful to work at a place like Betterment where I feel so supported as I try to juggle work and family priorities. Sarah Levy, CEO: I love leading a business with such a positive mission—to empower customers to make the most of their money, so they can live Better! If you’re interested in joining our team, check out the Betterment careers page! We’re always looking for passionate candidates to join our company.

Tax Planning Happens Year Round, Not Just When You File Feb 19, 2021 12:00:00 AM Knowing how your investments affect your tax bill can help you save money not just when you file, but for years to come. Thinking about reducing your taxes may not be your favorite hobby, but the truth is that it can help you keep more of what you earn. While you can't control the stock market, you can control some of your tax obligations. To identify whether your long-term investment strategy is running efficiently, take a few minutes to review these year-round tax optimization tips. 1. Invest Your Tax Refund Would you have guessed that a smart place to invest your tax refund is in an IRA? Normally, investors might divert a portion of the refund into this account as part of a well-rounded investment strategy and claim the deductions on your taxes next year. Invest your refund, and you may get a portion of that back in tax savings. Stay in the habit of investing your refund as soon as you receive it, and over time you’ll feel good when you see your returns start to add up. The IRA contribution limits for 2020 and 2021 are the same. If you are under 50, you can contribute $6,000 to your Traditional or Roth IRA. If you are over 50, you can contribute $7,000 to your Traditional or Roth IRA. 2. Think Several Moves Ahead Investing is complex, and from time to time you might have to sell some of your investments. It might be to rebalance your portfolio, or maybe your goals have changed and your investments no longer match their intended purpose. Smart investors think ahead before blindly selling parts of their portfolio, because selling certain assets could potentially lead to capital gains taxes. By carefully choosing which investments to sell, you can help minimize hefty tax consequences. One way to do this is to partner with an investing company that has the tools to help make this process easy to access and understand. Here at Betterment, we are continuously rebalancing your portfolio as tax-efficiently as possible, using an automated method we call TaxMin. Further, our Tax Impact Preview tool lets you see the estimated potential taxes on a sale before making the trade. 3. Reorganize Your Investments Another way to potentially leverage small tax advantages for long-term growth is to organize your portfolio. Move tax-inefficient investments, like international stocks and other assets that are taxed at higher rates and more frequently, into a tax-deferred account, such as an IRA or a Roth IRA. That way, you can enjoy the potential for higher growth while also facing less of a tax burden. Similarly, you can also move tax-efficient assets, such as municipal bonds, into taxable accounts. For further guidance, we’ve outlined the tax implications that accompany each type of investment account. As part of your reorganization efforts, you may want to consider setting up Tax Coordination, which allows us to optimize this practice of asset location for you. 4. Benefit from Losses It’s never fun to watch your assets lose value, but did you know that in some cases, losses can actually benefit you? You can receive a tax deduction for your losses that can help cancel out the taxes you owe on assets that have gained value, or, you can use up to $3,000 worth of realized losses per year to lower your income—and excess losses can even be carried forward. The practice of selling assets that are currently at a loss in order to reduce your overall tax liability is called tax loss harvesting. You may want to consider our Tax Loss Harvesting+ feature (TLH+), which allows Betterment to automatically capture losses as the market fluctuates at the flip of a switch. Smart investors should always remember that investments involve risk and may result in loss. 5. Give to a Worthy Cause While it’s important to secure your own financial future, many investors see community support as an important additional goal. Consider donating to a nonprofit organization in your community. Not only are you helping to improve the quality of life in your locale, you can potentially claim a deduction from your income taxes. Fortunately, it sometimes can pay to do the right thing. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a tax professional for more information.

An HR Generalist Making $90k In Minneapolis Wants To Pay Off Student Loans Feb 19, 2021 12:00:00 AM How this 25-year-old can pay off her student loan debts and balance car payments and more. How I Money is a series featuring real people who have real questions about money, and real advice from Betterment’s experts. Follow along as our financial planners help folks just like you think through saving, investing, debt, retirement, and more. Meet Lilliana*: Let’s dive into Lilliana’s financial goals and concerns: Talk me through your short-term financial goals. What do you hope to achieve within the next 5 years? Lilliana: Making progress on paying down undergrad and graduate student debt. Paying off a car. Let's talk long-term. What do you hope to accomplish financially 5 years or more from now? Lilliana: Continuing to pay off student loans hopefully before the 15-year repayment period! What impact has COVID-19 had on either your short or long-term financial goals? Lilliana: COVID impacted the start date of my post-graduation job, which restricted my ability to begin refinancing and beginning to pay my student loans until I could start this job roughly six months later—all while my private loans continued to accrue interest. This impacted both my short and long-term goals as paying down the immense student loan debt is my current top priority. If you could ask a financial expert for advice on one money question, what would it be? Lilliana: How should someone plan to start contributing for their retirement when they are unable to comfortably afford to do so in the present moment? What the financial experts say: We asked Corbin to comment on Lilliana’s financial goals. Here are her thoughts. Like many young people, Lilliana has a large amount of student loan debt. How much of her income should she be using to pay student loans? Corbin: I’m so glad to see that Lilliana has a full-time role after graduation, especially since many graduates have struggled this year to find work. Given both her relatively high income compared to the average college graduate and her stated priority of paying off her student loans, Lilliana can be aggressive with her payment plan. There is no set amount of income that Lilliana should contribute, but before coming up with a repayment plan for her debt, Lilliana needs to make sure that she is making all minimum debt payments on time. This will allow her to avoid racking up fees and help her build her credit score. After that, how much she contributes towards her student loans depends on how much cash she has on hand after paying all of her living expenses. Given that aid to federal loans will end eventually, Lilliana should do the following: Pay off debt with the highest interest first. People tend to think that paying off the loan with the highest balance is best, but the reality is that loans with higher interest rates are more costly over time. At Betterment, we consider any debt above 5% interest or finance charge fees to be high-cost debt. Others may use a higher number (like 8%), but we tend to take a more conservative view here. Since Lilliana also mentioned having both federal and private student loans, consolidating and/or refinancing may be in her best interest. While there are differences within these two options, the overall benefit is being able to make one monthly payment instead of individual payments to each loan provider. With private loan refinancing, she may even be able to reduce her interest rate and change her repayment schedule. Once Lilliana knows her new minimum payments, she can choose to pay more towards the highest interest loan or maintain the minimum payments depending on her other competing financial goals, like building an emergency fund or retirement. How should Lilliana plan to save for retirement in the future? Corbin: The most important factor Lilliana has on her side is time. Regular investments made right from an early age can reap huge benefits at the time of retirement, because of money’s time value and compound interest.  Because of this, I’d strongly recommend that once Lilliana gets to a manageable place with her loans and builds a three month safety net, she begin investing for retirement. First, Lilliana should calculate how much she needs to save. To get this number, she needs to consider factors like when she wants to retire, her possible future Social Security benefits, inflation, taxes, and estimated investment returns. Then, Lilliana needs to figure out what accounts benefit her the most based on the factors above, like a 401(k) or IRA, Roth or Traditional account, HSA, and/or taxable investment account, to name a few. Finally, if her employer offers a match as part of her retirement plan, she should contribute enough to get the full benefit. Take advantage of this money, since not every employer is nice enough to offer one! This is the one caveat to the high interest debt pay off recommendation. Since an employer match provides “free money”, you should prioritize maxing this match if one is available over making additional payments to your high interest loans. If all of this sounds overwhelming, that’s totally understandable—but there are services out there that can help with just this scenario. For example, Betterment has a tool that helps tell our customers how much they need to save for a comfortable retirement. We take into account when and where they plan on retiring, as well as their current and anticipated income. Ultimately, Lilliana will have to make investing for retirement a priority and be careful not to sacrifice her debt repayment plan through spending that can restart the debt cycle. Are there other financial goals Lilliana should start thinking along with tackling her debt? Corbin: We always recommend building an emergency fund as one of the pinnacles of financial security. That’s because an emergency fund can help you pay for unexpected expenses that you otherwise aren’t able to afford, or that even force you to take on more debt. An emergency fund can also provide some peace of mind, especially during this tumultuous period of job loss for many folks. We recommend saving three to six months of living expenses, including your monthly housing payments, bill payments, utilities, groceries, and other recurring monthly bills. If Lilliana is able to repay her high interest student loans, build an emergency fund, get on track for retirement, and still have extra cash to put towards other goals, I recommend focusing on her next highest priority such as paying off her car. Whether that means increasing her monthly loan payments or paying off a loan early entirely, she should keep in mind that lenders are not always inclined to help with the latter, because of the potential income they might lose. Want to get your financial questions answered? Submit here. If you have a How I Money entry you’d like to share and want your financial questions answered, submit an anonymous response today. Betterment can help make your financial goals real. When it comes to saving and investing, Betterment aims to help you align your money with your goals. That means not only offering multiple types of accounts for your short and long-term goals, but also helping you identify your goals and invest for them appropriately. Learn more about our guidance and get started saving for your future. Responses for the How I Money series were gathered through voluntary participation in an online survey where participants were requested to provide comments, feedback, ideas, reports, suggestions, data or other information to Betterment (collectively “Feedback”). The Feedback gathered in that survey excluded Betterment clients, was anonymized, and was used internally to help us understand how people could benefit from Betterment’s services and to create content to address those needs. Participants permitted Betterment to use any Feedback they provided for these purposes. While this content is written for advice purposes, it may not be applicable to all and is intended to be informational only.

Q&A: What’s The Future Of Investing? Feb 17, 2021 12:00:00 AM Betterment’s VP of Behavioral Finance & Investing discusses entertainment investing, its impact to long-term investors, and how to know if day-trading is right for you. Millions of people are jumping into the stock market. We’re here for it. It seems easy. It can be fun. Isn’t it for everyone? Plus, you never know when you could take a little play money, trade a hot stock, and double it up. But your real money? That long-term, easy-living, retire-where-and-when-you-want money? That’s our forte. Buying into the entire market, setting goals, saving easy—that’s investing for better. It won't make you a millionaire overnight. But it could probably help make you a millionaire over your lifetime. We asked Dan Egan, VP of Behavioral Finance & Investing at Betterment, to comment on the longer term effects of entertainment investing and how to know if it’s right for you. What happened with Gamestop? What are the broader trends at play here? Dan: The rally and collapse in GameStop hit basically all the classic notes of a bubble and burst, with some added intrigue around short squeezes. To understand the specifics of what occurred, start with this article from The New York Times: “4 Things to Know About the GameStop Insanity.” If you’re interested in exploring some of the psychological aspects behind investor behavior, I touch on that in “Memestonks: What’s Different About This Market?” What is “entertainment investing” and how is it likely to evolve in the future? Dan: It’s investing to entertain yourself, to get stimulated or excited, to relieve boredom. It’s not about long-term growth in the economy, or discounted free cash flow. It’s about being in on the hot new stock, or seeing huge movement in your accounts, and being able to talk about it with other people. There’s a reason BarStool Sports founder Dave Portnoy got into day-trading: the excitement of winning and losing, the ability to yell at the refs and regulators, the game we can all access and play regardless of how small. And finally, don’t forget: the thrill of making and losing money. How does the internet and social media change investing? Dan: It speeds everything up, usually not in good ways. Stock markets already operate at the millisecond. Professionals have news parsed, analyzed, and acted upon by algorithms faster than any human. Social media and always-on news means you hear news faster than ever before, and with greater variety in what you hear. Conspiracy theories and misinformation spreads faster than boring truths. Once you’ve shown interest in a stock, your Facebook, Twitter, Youtube, and TikTok accounts will all double down on that content, hoping to keep you for a few more seconds, a few more ads. This reduces the diversity of perspectives you see. Thus, social media encourages large, dispersed groups of people to coordinate on a single stock or issue, giving it the feel of a grassroots movement. This means that high prices and short-term volatility are more likely to occur, especially in companies consumers interact with. These dynamics have always been at play in markets—that’s not new. Now we’ve sped them up through the internet and fractured social networks. How is the investing industry changing? Dan: Over the past 40 years there’s a consistent trend towards consumers paying less and less for trades, investment management, etc. That trend recently crossed a tipping point, with some consumers paying $0 for trade commissions, $0 for investment management, or $0 for advice. Most folks love free, so companies that offer free trading have grown dramatically in recent history. Of course, those companies are still getting paid, just not directly from the general investor. Free trading services often make money by sending your trades to people who pay to trade against you. These are high-frequency trading shops, hedge funds, etc. When you sell a share for $99.96 and a buyer pays $100.00, these brokerages get the $0.04. This is called the ‘spread’. Do that billions of times, and you can see how they make money. So, they want users to trade a lot. They want users to trade in stocks with bigger spreads. And they don’t care if users make or lose money—they win as long as users trade. Users are the gravy. So it still costs you, but you can’t see how much. You can easily compare trade fees, but not the spread you pay. It is easier than ever to invest well: the minimums are low, the costs are low, diversification is easy, and the markets are reasonably well regulated. It’s also easier than ever to invest badly: you can access leverage, derivatives, and leverage to buy speculative, concentrated assets you don’t really have any underlying understanding of. How will these recent trends in investing impact long term investors? Dan: For the most part, positively. Gaining exposure to genuine economic growth is easier than ever. Holding a broad-based, diversified portfolio means when a new company gains ground, you were already invested in it. That’s part of why Betterment invests beyond the S&P 500: a diversified portfolio with a mixture of stocks and bonds and international exposure helps mitigate risk. Has anything like this happened before, and what has been the impact? Dan: Yes, bubbles—and bubbles popping—happen all the time. They all have a slightly different flavor: 2001 was the original tech/internet bubble popping, 2008 was based on leverage in the housing market, etc. The biggest difference between any two stock-market cycles is whether or not it impacts the real economy, generally through de-leveraging. The stock market can crash without an impact on the real-world economy because all assets are just valued lower. But when that lower valuation causes deleveraging and bankruptcies, the real-world is impacted and it’s dramatically worse. Should I start investing in individual stocks too? How do I know if it’s right for me? Dan: That depends on if you want to. You don’t have to if you don’t want to. I think of it much like this: I could bake my own bread, change the oil in my car, and build my own custom closet shelves. But should I? Here are questions I ask myself whenever I’m tempted to D-I-Y: Do I really want to do this? Will I enjoy it? Will it reduce my time doing other things I enjoy more? How much more will it cost me if I do it wrong, or to a lower quality? Will I need to pay for tools that professionals already have? If I want to do it to learn, that’s great. I’ll need to be deliberate about learning, which means setting up high-fidelity feedback loops about successes and failures. Am I ready to recognize and learn from failure? Am I ready and willing to fire myself if I’m not good at it? It’s fine to have a hobby, but with most hobbies we don’t harbor a belief we might get rich quickly with them—we do them because we enjoy them. Make sure you’re enjoying yourself in the process. How can services like Betterment compliment an active trading strategy? Dan: It’s important to remember that you don’t have to choose between being a long-term investor or an active trader. Long-term investing can be a great compliment to a trading strategy, especially if you want to meet your financial goals like retirement, saving for a home, or saving for college. Betterment helps you invest in what matters to you by helping you define your goals, recommending how much you should save, and tailoring your portfolio recommendations based on when you need the money. For those who do want to actively trade, you can set up a “get rich” portfolio and a “stay rich” portfolio. For example, you can open a riskier "get rich" portfolio at a broker that allows you to day-trade stocks and crypto, then set up a long-term "stay rich" portfolio with Betterment. This way, you can day-trade guilt free without compromising your financial goals. To start, you can allocate about 10% to 20% of your wealth to your “get rich” portfolio, and the remainder to the “stay rich” portfolio. If or when your “get rich” allocations grow to be 40% of your overall wealth, rebalance it back down to 10% to 20%. If you're lucky, you might still get rich and stay rich. If you're not, then the best case scenario is that you still have your long-term investing and savings squared away for future use and you don’t have to start saving all over again.

A Financial Guide To Black History Month Feb 3, 2021 12:00:00 AM Join us as we celebrate Black History Month with the Black at Betterment employee resource strategy group. Explore their personal recommendations for featured organizations, financial content, and more below. Colin. Malcolm. Martin. Harriet. Nat. Nina. Thurgood. Kamala. Huey. Angela. Richard. Red. Muhammad. C. Barack. Benjamin. Assata. Duke. Michael. Hank. Claudette. Maya. Ruby. Emmitt. Arthur. Medgar. Langston. Venus. Serena. Shirley. W. E. B. Jimi. Toni. Alvin. Mae. Phillis. Their self-sacrifice was admirable, and their insatiable determination, particularly in the face of great danger against the most stubborn of odds, was legendary. Where most saw opposition, they saw opportunity. Their actions cemented their legacies and earned them a place in history. This Black History Month let it be highlighted that we can celebrate Black History all year long. Our legacy, accomplishments and sacrifices cannot be confined to 1 month, 28 days, 672 hours. Now, more than ever realizing the celebration is for all races to recognize and honor our achievements, ancestors, comedy pioneering and creativity. To my fellow Black allies, I ask you: How will you celebrate Black History? To my fellow Black people, I ask you: How will you make YOUR Black History a part of OUR Black History? -Nedra Bell, Advisor Servicing Associate at Betterment and member of the Black at Betterment ERSG Meet Black at Betterment Black at Betterment is one of eight Betterment ERSGs, specifically working to “celebrate and elevate Black excellence within ourselves, Betterment, and our community at large by strengthening our relationships, amplifying our voices, and equipping ourselves with the tools necessary to succeed.” Build financial health in the Black community. There are unique and multi-faceted financial struggles faced by Black people in the U.S. Here are three articles written by Tania Brown, CFPⓇ and financial coach, that can help you get your financial house in order: 3 Strategies That Can Narrow The Racial Wealth Gap 3 Tips To Consider Before Paying Off Debt 5 Tips For Financially Supporting Others Support organizations working to improve Black lives. Centuries of racism, institutional discrimination and lack of wealth building opportunities still impact the Black American community today. Here are five organizations you can donate to today who are working to address these social and economic gaps: SisterSong Birth Justice Care Fund: Helping tackle the high Black maternal mortality rate. The Sentencing Project: Organizing for criminal justice reform, particularly mass incarceration. The Okra Project: Supporting Black trans people by providing holistic resources. Live Free USA: Aim to end gun violence and mass incarceration through government reform. TIME’S UP Foundation: Fighting to end sexual harassment and inequality. Give to charities already on the Betterment platform. Through our Charitable Giving feature, customers can donate shares held for longer than one year to any organization we partner with. Below are three charities working to improve Black lives: NAACP Empowerment Programs Brooklyn Community Bail Fund Against Malaria Foundation Invest in your values this year with our Social Impact Portfolio. If you’re passionate about issues like racial and gender equity and want to support companies who prioritize minority empowerment and diversity policies, you can invest your money in Betterment’s Social Impact Portfolio. There are also two other socially responsible investing portfolios that may align with your values: the Broad Impact Portfolio and Climate Impact Portfolio

A Creative Strategist Making $135K In Chicago Dreams Of 1mm In Retirement Feb 2, 2021 12:00:00 AM How this goal-oriented couple can save for the unexpected while still dreaming big for retirement. How I Money is a series featuring real people who have real questions about money, and real advice from Betterment’s experts. Follow along as our financial planners help folks just like you think through saving, investing, debt, retirement, and more. Meet Sasha*: Let’s dive into Sasha’s financial goals and concerns: Talk me through your short-term financial goals. What do you hope to achieve within the next 5 years? Sasha: Be financially stable enough to take one big vacation a year. Have a year's worth of expenses (mortgage, bills, etc.) saved. Be relatively debt free (except for student loans, though those are all federal). Start investing more aggressively towards retirement (tracking towards 1 million in investments by the age of 63). Let's talk long-term. What do you hope to accomplish financially 5 years or more from now? Sasha: Pay off student loans. Maybe start a business? Invest in real estate. Donate more to the causes we care about. Build our dream home. What impact has COVID-19 had on either your short or long-term financial goals? Sasha: My wife worked in the food industry and was furloughed for 5 months this year. While we are very grateful to have an additional salary to pay the month-to-month bills and a decent cushion in savings, we weren't able to start paying down our debt as aggressively as we'd hoped to until now. My job is also not matching 401(k) contributions during this time, though we are hopeful that will resume in 2021. If you could ask a financial expert for advice on one money question, what would it be? Sasha: How best to save for retirement—how do we maximize the impact of our investment? What the financial experts say: We asked Corbin to comment on Sasha’s financial goals. Here are her thoughts. Sasha and her wife have so many short and long-term goals, which is great. How should they prioritize them? Corbin: This is a really common question that a lot of our customers ask, and thankfully Sasha has already done the hard part of figuring out exactly what her goals are. At a high level, prioritizing the life goals we need to save money for is so important because most of us only have a limited amount of income. But before Sasha and her wife even get to saving for their goals, they need to ensure that they’ve covered the basics: Making all minimum debt payments Always having three to five weeks’ worth of expenses in an easily accessible place, like a checking account. Contributing to their employer’s retirement plan to maximize any employer match once they receive a match again. Once they have those three sorted, they can move on to getting specific about each of their goals and determining how much they would have to save, then decide when they’d need the money. For example, they currently have a mortgage but also want to build a dream home—do they want to stay in the house they’re currently in and renovate it, or move to a new home? When would they buy their new home? Where would it be? And what size? When you open a goal within Betterment, we prompt you to enter this information. Keep in mind that it doesn’t have to be exact, but when Sasha completes this process for each of her short and long term goals, she will be able to rank her goals in their order of importance, calculate how much she would have to save for each, and then set up auto-deposits to the goals she is funding so that her savings happen automatically. Sasha also mentioned she wanted to save a year’s worth of expenses in her emergency fund, even though we typically recommend having three to six months’ worth of expenses saved. But, since Sasha mentioned that her wife was furloughed during the pandemic, it makes sense that she would want an extra financial cushion. Once she covers all the basics, I recommend starting there to give them more peace of mind and be prepared for anything else that might happen. How should Sasha and her wife save for retirement? With no 401(k) contribution from her employer, are there other accounts and products they should explore to maximize their investment? Corbin: Fortunately, Sasha and her wife are eligible for both their employer’s 401(k) and an IRA (regardless of if they’re married filing separately or married filing jointly). There are many different options for them to choose from, but she can use these questions to help guide her: How much does she need to save? First, she needs to know how much she wants to spend every year in retirement, and when she wants to retire. This way she can calculate how much money she should be saving, or use a financial product that does it for her, like Betterment. How much can she save? Not everyone can afford to save everything they need to for the retirement lifestyle/age they want. However, Sasha can still weigh her retirement goals against other expenses and financial goals, and determine how much her and her wife can afford and are willing to save for this goal. Does she expect to be in a lower tax bracket today or in retirement? Knowing this will help dictate her highest priority account. For example, if she expects to be in a higher tax bracket, then she should be putting money away in a Roth IRA for tax-free withdrawals in retirement. But if she expects to be in a lower tax bracket, then prioritizing a Traditional 401(k) might be better for her in the long run. For reference, the 401(k) and IRA limits for 2021 are as follows:  The contribution limit for employer-sponsored 401(k) plans remains at $19,500 for individuals under age 50. Contribution limits for IRAs remain at $6,000 in 2021 for individuals under age 50. The income phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household. For married couples filing jointly, the income phase-out range is $198,000 to $208,000. One of Sasha’s long-term goals is to donate more to the causes she cares about. What are some things she should keep in mind? Corbin: Donating any amount of money on a regular basis takes planning. Not only does it require researching the causes and charities she’s interested in, but it also requires tax planning if Sasha envisions reporting the donations in her yearly taxes. One thing Sasha should keep in mind are the administrative expenses of the organization. For some folks, it’s important to them that the money used for these expenses doesn’t outnumber the amount of money used to fund programs. From a personal financial perspective, donating to charity can help reduce her taxes. If Sasha wants to claim a deduction for her charitable donations on her taxes, she needs to itemize rather than take the standard deduction in that year(s). When it comes time to file them, she can use Schedule A on the form 1040 to itemize each of her deductions, and be sure to include her donation on lines 16-19. Another tax efficient way to donate to charity is by donating appreciated stock instead of cash. Betterment has a charitable giving feature that ensures almost all charities keep 100% of your gift. Let’s say that Sasha opens an investment account at Betterment and her money grows over the years. If she were to sell some of her shares and donate the cash, she would pay taxes on the growth, but if she simply donates the actual shares to her charity of choice, she can avoid having to pay taxes on the gains and still gets to deduct the fair market value of the shares on the date of her donation  (as long as the shares were held for more than a year). Another benefit to this strategy is that you can donate shares, and then replace the shares with an additional cash deposit, resulting in a lower embedded tax liability, while keeping your investing goals on track. How much of her student loans should she prioritize paying every month, particularly with federal loans repayments on hold? Corbin: The exact dollar amount of how much she pays off will depend on her competing priorities. Thankfully, on Wednesday, January 20th, President Biden signed an executive order to extend federal student loan forbearance until September 30th, 2021, which is great news. We always recommend making minimum monthly payments on time for all loans and bills, with any extra income going to the loan with the highest interest first, not the highest balance. Want to get your financial questions answered? Submit here. If you have a How I Money entry you’d like to share and want your financial questions answered, submit an anonymous response today. Betterment can help make your financial goals real. When it comes to saving and investing, Betterment aims to help you align your money with your goals. That means not only offering multiple types of accounts for your short and long-term goals, but also helping you identify your goals and invest for them appropriately. Learn more about our guidance and get started saving for your future. Responses for the How I Money series were gathered through voluntary participation in an online survey where participants were requested to provide comments, feedback, ideas, reports, suggestions, data or other information to Betterment (collectively “Feedback”). The Feedback gathered in that survey excluded Betterment clients,  was anonymized, and used internally to help us understand how people could benefit from Betterment’s services and to create content to address those needs. Participants permitted Betterment to use any Feedback they provided for these purposes. While this content is written for advice purposes, it may not be applicable to all and is intended to be informational only. Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Taking Time Off From Work Can Be A Secret Tax Opportunity Feb 1, 2021 12:00:00 AM If you’re taking off time from work—e.g. sabbatical, leave of absence, or traveling the world—you might be able to take advantage of a special tax boon if you put money toward retirement. If you’re taking time off work, it’s probably not for tax reasons. But did you know that doing so could open up a major tax opportunity. It turns out, if you work less than half the year—without becoming dependent on another person—you may be able to take advantage of a special tax credit that could save you hundreds of dollars. And, get this: This year may be one of the only times in your life you’re eligible. Today, we’ll show you how you can potentially take advantage of the retirement saver’s credit. The only major move you have to make is to contribute to an IRA (which you might want to make a Roth IRA) or your employer-sponsored retirement plan, like a 401(k) or 403(b). Why is this tax opportunity a big deal? It’s a win-win. You could potentially pay less in taxes simply by saving for retirement. But you’d have to save this calendar year. If you can put away money for your future self right now, while you aren’t working, you’ll actually get more back from Uncle Sam for your current self. Chances are, you may never be eligible to receive this tax credit again if you normally make more than $32,500 for 2020 ($33,000 for 2021) per year as a single person. It works this year because even if you make a high amount per month, you’re only working a few months in total for the year. It’s one of the rare triple tax advantages in life. This tax credit helps reduce how much you pay in taxes for this year, while letting you save into a Roth IRA or Roth 401(k) where gains are tax deferred, and you don’t have to pay taxes on withdrawals in retirement. In this way, it’s one of the few opportunities where the government offers three tax advantages at once. How does this tax opportunity for not working work? Getting the retirement saver’s credit during a year of taking time off isn’t going to be possible for everybody, but if you plan the next few months effectively, it might just work for you. Let’s walk through exactly what you’d need to do to take advantage. 1. You have to file taxes as an independent person. If you’re taking time off in May, then depending on what choices you make next, you’ll either be independent for the year (supporting yourself in the government’s eyes) or you might be dependent on somebody else (like a family member). If you plan to work and live off existing savings while you take time off, then more than 50% of your lifestyle support will come from yourself, and you can file your taxes independently. This situation opens up tax credits and deductions for you that otherwise would not be there because somebody would be claiming you as a dependent. One of these is the Retirement Savings Contribution Credit. 2. You have to be a full-time student for less than 5 months during the year. In general, if you’re taking off to start school, you’re usually not eligible for this credit, but there are a few exceptions. For instance, if your school is on a quarter/trimester schedule and you’re only taking one term, then you could be eligible. Also, if you’re only enrolled part-time and still supporting yourself, then you could be eligible too. 3. Because you’re only working 50-60% of the year, your annual income will likely be significantly lower than in future years. Because you’re only probably working six or seven months of the year, your federal tax bracket will be far lower than you might expect for future years. If you make a salary, and the annual amount is $50,000, then you could earn as little as $25,000 in gross income. You can qualify for the saver’s credit if your income for the tax year is less than $32,500 for 2020 ($33,000 for 2021) if you’re single and less than $65,000 for 2020 ($66,000 for 2021) if you’re married filing jointly. The level of credit you get is tied to how much you save and depends on the size of your income. If you live and work in an area with a low cost of living, you could have a respectable entry salary of $36,000, and you could be eligible for the maximum credit. We have the entire Saver’s Credit income table below for 2020 and 2021. 4. Start saving into a Roth IRA or employer plan when you’re ready. If the three steps above apply, you’re ready to go after the saver’s credit. Your next step should be to start putting away money for retirement. We suggest using a Roth account, given that if you qualify for the credit, you’re almost certainly making less money than you expect to take during retirement. You can read more about why a Roth accounts might make sense for you, but the short of it is this: any employer plan you’re eligible for may not offer a Roth 401(k)/403(b), but you can always open a Roth IRA as an individual. 5. You need to have a tax liability. The retirement savers credit is non-refundable which means that it cannot reduce your tax liability below zero. Some other credits like the Earned Income Tax Credit are refundable which means you may receive net payout (otherwise known as a negative tax) from the IRS. One of the challenges is keeping your income low enough to qualify for the credit but high enough to have a tax liability that will allow the greatest amount of the credit to be used. 6. Decide how much you’ll save each month. The final step is to decide how much you’ll save and to set up automatic savings deposits. To qualify for the credit at all, your gross salary isn’t likely to be more than $54,000 for the year (and more likely, it will be less)—or just over $4,500 per month before taxes. Since IRA contributions are limited to $6000, you’d need to contribute $2,000 to capture the maximum retirement saver’s credit, which could easily be a half of a month’s salary. In other words, maxing out might be aggressive as you’re getting your first post-collegiate paychecks. But even if you don’t max out, every amount saved supports your long-term retirement and your 6-month chance to get the retirement saver’s credit. If you have a lot in savings, then you can definitely consider transferring savings account money or even taxable invested savings into a Roth IRA to take advantage. FAQs about the Retirement Saver’s Credit So, there you have it: the tax incentive that few people taking a sabbatical or time off work think about using, but many should consider. What other questions might you have? Should I save into my new employer’s 401(k) or an IRA? The great thing about this credit is that both your contributions to your employer’s plan and your IRA help you qualify. So, if you can contribute to an employer plan for part or all of the year, which one should you choose? The answer is that it depends. If your employer plan offers a company match on your contributions, then you should certainly contribute there to capture the match—that’s free money. However, as explained above, it probably makes sense to contribute to a Roth plan—where you pay taxes now and not in retirement—so if your employer doesn’t offer a Roth 401(k) or 403(b), you may want to contribute to get the match, then save further in a Roth IRA. Moreover, some employer plans may have higher fees on the investments provided than you might find by opening a Roth IRA. Is there any way I can qualify for the saver’s credit if I my salary is greater than $66,000? There may be situations that help you qualify for the saver’s credit. For instance, if you get married this year—maybe taking a 6-month honeymoon using savings—then you and your spouse could feasibly qualify for a partial credit if your annual income is not more than $66,000 for the year—meaning your combined salary could be far greater. Also, as you’ll see in the table below, the limits are based on adjusted gross income (AGI), which isn’t just your gross income. Certain life situations can adjust your income, lowering it in a way that may help you qualify or increase your credit. Examples of ways you can reduce your AGI include: pre-tax employer retirement contributions, health insurance premiums,  medical expenses, saving into a health savings account (HSA), moving expenses, capital losses, school tuition or fees you paid, or student loan interest. What are the qualification rules for the credit? See the table below full table of adjusted gross income limits and partial credit rates. Be sure to read the IRS’ detail on the Retirement Savings Contribution Credit too. 2020 Saver's Credit Credit Rate Married Filing Jointly Head of Household All Other Filers* 50% of your contribution up to $1,000 per spouse AGI not more than $39,000 AGI not more than $29,250 AGI not more than $19,500 20% of your contribution up to $400 per spouse $39,001 - $42,500 $29,251 - $31,875 $19,501 - $21,250 10% of your contribution up to $200 per spouse $42,501 - $65,000 $31,876 - $48,750 $21,251 - $32,500 0% of your contribution more than $65,000 more than $48,750 more than $32,500   2021 Saver's Credit Credit Rate Married Filing Jointly Head of Household All Other Filers* 50% of your contribution up to $1,000 per spouse AGI not more than $39,500 AGI not more than $29,625 AGI not more than $19,750 20% of your contribution up to $400 per spouse $39,501 - $43,000 $29,626 - $32,250 $19,751 - $21,500 10% of your contribution up to $200 per spouse $43,001 - $66,000 $32,251 - $49,500 $20,251 - $32,500 0% of your contribution more than $66,000 more than $49,500 more than $33,000 Any tax information provided by Betterment is not a substitute for the advice of a qualified tax advisor. You should consult with your tax advisor to discuss tax-related concerns.

Save for Retirement While You’re Self-Employed Feb 1, 2021 12:00:00 AM Entrepreneurs and small business owners have several options for saving for retirement while saving on taxes. Owning a small business is a lot of work, and planning for retirement may feel like the last thing on your to-do list. CNBC reports that up to 34% of entrepreneurs don’t have a plan for how they’ll retire. Getting started isn’t as hard as it seems. We’ll outline the most common self-employment retirement account options, including tips for who should consider using them, how much you can contribute, and how to set them up. Common Sources of Self-Employment Income While it is widely believed that you must set up a formal business, such as an LLC, to be classified as self-employed—it’s not true. Working freelancers and independent contractors with no formal legal business structure are treated as self-employed individuals. Examples might include Uber drivers, tax preparers, and any freelance workers, such as software engineers. The gig economy has propelled more workers than ever to venture out on their own, seeking to be their own boss and therefore managing their own retirement plan. One Participant 401(k) Plan—Solo 401(k) A Solo 401(k) is similar to a regular 401(k). However, with a Solo 401(k), the participant is both the employer and the employee. This means they can contribute up to the regular employee contribution limit plus up to the employer contribution limit as well. You can also set it up as a Roth 401(k) and make non-deductible contributions now so that you can take tax-free withdrawals after retirement. Who: Self-employed individuals who either have no employees or only employ their spouse. How: Complete the paperwork provided by investment companies that offer Solo 401(k)s. Be sure to research, among other things, plan fees and investment fees. Note that Betterment does not currently support Solo 401(k)s. Contribution Limits: In 2021, you can contribute up to $19,500 as the employee plus up to either 20% of the business’s net earnings or 25% of total wages as the employer—as long as your total contribution does not exceed $58,000. If you are 50 or older, you can catch up with an additional $6,500, bringing the total amount to $64,500 total. Note that if you are also participating in another employer’s 401(k) plan, the employee limits apply per person, not per plan. Dates to Know: You must set up the account by December 31st, but you can contribute up until the tax filing deadline of the following year. Heard about the “Mega Backdoor Roth” 401(k)? Simplified Employee Pension—SEP IRA With a SEP IRA, the business sets up an IRA for each employee. Only the employer can contribute, and the contribution rate must be the same for each qualifying employee. Who: Self-employed or small business owners who do not qualify for a Solo 401(k), or who have employees and are looking for a low-cost retirement plan for their company. How: Simply file a form with the IRS (Form 5305-SEP) and open a SEP IRA at a bank or financial institution. Betterment offers SEP IRAs for self-employed individuals with no employees—read more here. Contribution Limits: For 2021, the business can contribute up to 25% of either the employee’s compensation or 20% of the net earnings from self-employment up to $57,000—whichever is less. There is no catch-up amount for those 50 and older. For 2020, the business can contribute up to 25% of either the employee’s compensation or the net earnings from self-employment or up to $57,000—whichever is less. There is no catch-up amount for those 50 and older. Dates to Know: Set up your SEP IRA by the first tax filing deadline for the year, and you can contribute for the 2020 tax year until your taxes are filed. Learn more about Betterment SEP IRAs. Savings Incentive Match Plan for Employees—SIMPLE IRA A SIMPLE IRA is ideal for small business owners who have 100 employees or less. Both the employer and the employee can contribute. Who: Ideal for small business owners with employees. How: File form 5305-SIMPLE or 5304-SIMPLE with the IRS and open a SIMPLE IRA at a bank or financial institution. Note that Betterment does not currently offer SIMPLE IRAs. Contribution Limits: For qualified employees earning more than $5,000, the 2021 maximum contribution amount is $13,500. The employer can make a maximum 2% fixed contribution or a 3% matching contribution for each employee. Catch up with $3,000 extra per year if you’re 50 or older. For qualified employees earning more than $5,000, the 2020 maximum contribution amount is $13,500. The employer can make a maximum 2% fixed contribution or a 3% matching contribution for each employee. Catch up with $3,000 extra per year if you’re 50 or older. Dates to Know: You must open the SIMPLE IRA by October 1st of the year you wish to contribute in. Traditional IRA or Roth IRA In addition to one of the business-sponsored accounts described above, you can also fund a Traditional IRA or Roth IRA. If you’re looking to use a Traditional IRA to get an income tax deduction, you may be limited in that deduction by the amount of your contributions to other retirement accounts and by the amount of your earned income. If you’re a new business owner or entrepreneur that’s just starting out, you may find yourself in a lower tax bracket, which may mean it’s a good time to convert an old Traditional 401(k) or Traditional IRA into a Roth. That would allow you to capture lower taxes today, and in the future when you’re in retirement and withdrawing from the Roth, there won’t be any taxes on qualified distributions. Learn more about how a Roth conversion might benefit you. You can might be able to roll over your old 401(k) into an IRA to consolidate and possibly save on fees. Who: Anyone with earned income can contribute to an IRA. How: Open a Roth or Traditional IRA with a bank or financial institution. Betterment offers both Traditional and Roth IRAs at a low cost. And the best part? We don’t require any paperwork to open and start funding an IRA. Contribution Limits: For 2020 and 2021, you can contribute a maximum of $6,000 per year to a Traditional or Roth IRA, or $7,000 if you’re age 50 or older. Roth contributions may be limited by your income level. Dates to Know: You can open your IRA at any time. You have up until the first tax filing deadline—no extensions—to contribute to an IRA for the preceding tax year. How to Choose Which tax-advantaged account should you consider using to save for your retirement? That depends on the nature and size of your small business, as well as your own age and future plans. Here’s a scenario for a 30-year old entrepreneur with no other employees, and who is classified as a single member LLC (disregarded entity). The business nets $100,000. Type of Plan Maximum Contribution (2021) Solo 401(k) plan $39,500 SEP IRA $20,000 SIMPLE IRA $16,500 Source: IRS Publication 560 Based on this chart, you might be wondering why anyone would do anything but the Solo 401(k). Here’s why. First, setting up a Solo 401(k) typically requires more advance planning and paperwork than opening a SEP IRA or SIMPLE IRA, either of which can usually be opened online in just a few minutes. In addition, Solo 401(k) plans require you to file Form 5500-EZ with the IRS every year once the plan reaches $250,000 in assets. And of course, with the Solo 401(k), you have to be your own company with no employees. And remember, if your circumstances change, you may be able to roll over your Solo 401(k) plan or consolidate your IRAs into a more appropriate retirement savings account. Betterment is not a tax advisor, and this post is not tax advice. Please seek out qualified professionals that provide advice on these issues for your specific circumstances. When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. The information on this page is being provided for general informational purposes and is not intended to be an individualized recommendation that you take any particular action. Factors that you should consider in evaluating a potential rollover include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account and consult tax and other advisors with any questions about your personal situation. Uber is a trademark of Uber Technologies, Inc. 

Can You Have a 401(K) and an IRA? Feb 1, 2021 12:00:00 AM This is a great question. The answer is yes, you can have both. Should you have both? It depends. Everyone knows that it’s important to save for retirement. But not everyone knows how. This is because there are many different ways you can save for retirement—either through your employer or on your own—and the different options may make retirement planning feel like solving a Rubiks’ cube to most. Our customers have access to a personalized retirement plan, which offers recommendations on how they should save for retirement. Depending on your plan and personal situation, our advice can sometimes be to contribute to both a 401(k) through work while also contributing to an IRA on your own. Generally, you can contribute to both a 401(k) and an IRA at the same time. Retirement Savings Calculator We’ll break down how you should be thinking about contributing to multiple different types of retirement accounts, as we’ll also go over important tax considerations to be aware of. The first step is to figure out how much you should be saving for retirement. Having more than one retirement account can enable you to save even more, so it’s important to know which types of accounts you are allowed to contribute to simultaneously. You also need to know how much you need to save in order to reach your retirement goals, because not knowing how much to save could actually lead you to save more than what you’ll need. If your employer offers a match, contribute to that plan first and aim to get the total match. If your retirement plan recommends saving less than the maximum contribution limit of an employer-sponsored plan—which is $19,500 or $26,000 annually, depending on your age—it may make sense to only save for retirement within that one account. If your employer offers a matching contribution, you should strongly consider contributing up to that point. For example, your company may match 50% of what you contribute for a total of up to 3% of your salary. If this were the case and you contributed 10% of your salary, you’d get an additional 3% match—think: free money—from your employer. If you need to save beyond what you can put in your employer-sponsored plan, an additional account can help you save more. You may find that the amount you need to save is more than what you’re allowed to put into your employer-sponsored retirement plan. Contributing to an additional retirement account can help you make sure you’re saving enough, as well as provide the tax benefits that come with accounts that are specifically used for retirement purposes. For example, you could fund both a 401(k) and a Roth IRA. This enables you to save more, and also gives you additional tax benefit flexibility. If you’re under 50, maxing out both accounts would allow you to save $25,500 a year for retirement. If you’re under 50, married, and both spouses are working, you both could max out a 401(k) and an IRA, and end up saving $51,000 a year for retirement between the two of you. Tax Considerations It’s important to be aware of how each type of retirement account works, as well as how the tax treatment of each may affect you. The below table outlines the main differences between employer-sponsored plans and individual plans, as well as the tax differences between Traditional accounts and Roth accounts. If you think you’ll be in a lower tax bracket in retirement compared to where you’re at now, consider saving in a pre-tax retirement account. If you think you’ll be in a higher tax bracket in retirement compared to where you’re at now, consider saving in a post-tax Roth retirement account. If you’re not sure if a Traditional or Roth is best for you, we’ve got a free calculator to help you decide. Types of Retirement Accounts Traditional Tax-Deferred aka Pre-Tax Roth Post-Tax Employer-Sponsored 401(k), 403(b), TSP Contributions are deducted from your paycheck before taxes. The account grows tax-deferred over time. You’ll pay taxes when you withdraw in retirement. May include an employer match. 401(k), 403(b), TSP Contributions are made after taxes. The account grows tax-deferred over time. May include an employer match, which are placed into a Traditional 401(k). Tax-free distributions in retirement. Individual IRA, SEP Tax deduction for eligible contributions. The amount of tax deduction for Traditional IRAs can vary depending on your income and whether you’re covered by a retirement plan at work. The account grows tax-deferred over time. You’ll pay taxes when you withdraw in retirement. IRA Contributions are made after taxes. The account grows tax-deferred over time. Eligibility is determined by income level. Tax-free distributions in retirement. Need help getting on track? We provide advice on which retirement accounts you should be using, how much you should be saving in each one, and how you should think about the order of operations for funding each account. You can even sync your 401(k)s and other financial accounts to see an overall picture of your finances. Get started or log in to complete your retirement plan and see your personalized savings advice—all in just a few minutes. Our team of CERTIFIED FINANCIAL PLANNER™ Professionals also offers advice packages for retirement planning and more. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

Put Your Tax Refund To Work—We’ll Show You How Feb 1, 2021 12:00:00 AM You finally got your tax refund. Now what? We’ll show you how to put it to use so that you can get the most of your money. Today is the day you’ve been patiently awaiting. You’ve just received your tax refund. While some ponder a vacation on the beach, others—such as smart investors like you—think about how they can invest the funds for the long-term. There is no one right strategy on how to use your refund, but here are some smart money moves you may want to consider. Pay down high-interest debt. Credit cards and personal loans typically charge interest rates as high as 15% to 30% on outstanding balances. Using your refund to pay off this debt is a wise move because it helps you avoid future interest charges on your outstanding balance. Many customers ask us the question—should I invest, or pay off debt? Check out this article if you aren’t sure where paying off debt falls on your priority list. Build a rainy day fund Like it or not, rainy days happen—and we need to be prepared to weather them. That’s why most financial planners recommend having a short-term savings account that holds 3 to 6 months’ worth of expenses. Unfortunately, not all of us have that much cash readily available to immediately access, which can expose us to additional risks in the event of an unexpected major expense or the loss of a job. Consider opening a Safety Net to stash away cash for emergencies. Increase your 401(k) contributions. Although you generally can’t contribute directly to your 401(k) from your bank account, you can increase your contribution rate through your employer and use your refund to cover daily living expenses. First, make sure you contribute at least the amount that your employer will match, if they have a 401(k) matching policy. If your employer offers a Roth 401(k), still consider making contributions, which can provide tax-free income in retirement and a hedge against future tax increases. If you are able, consider contributing the maximum amount for the year. For 2021, if you are under 50, the maximum contribution amount is $19,500. If you are age 50 or older, the maximum contribution amount is $26,000. Contribute to your IRA. If you are looking for another place to grow your retirement investments with additional tax benefits, consider contributing to a Traditional or Roth IRA. If you’re unsure which type of IRA is best for you, we have a tools and resources that can help you decide. For 2020 and 2021, if you are under 50, the contribution limit is $6,000. If you are over 50, the contribution limit is $7,000.  Remember that if you contribute earlier in the year, your future growth could be more than if you had contributed at the end of the year. Invest in education. Benjamin Franklin said it best when he stated, “An investment in knowledge pays the best interest.” Using your tax refund to save for education can turn out to be a wise decision. Tax-advantaged education savings accounts, like your state’s Section 529 plan, allow for your investments to grow tax-deferred. If the funds are used for qualified education expenses, you won’t have to pay taxes when you withdraw. Donate to charity. Giving feels good, but did you know it can also reduce your taxes? Donating to charity allows you to deduct your charitable contributions from your itemized taxes for 2020, while also contributing to causes you care about. You can read more about the rules for deducting charitable contributions on the IRS website. Make Energy-Efficient Home Improvements Using your refund to make energy-efficient upgrades to your home can help reduce your utility bills. The U.S. Government currently has a number of incentives to promote energy efficiency that you can take advantage of. The amount you reduce your utility bills by can then be saved and invested to help maximize the benefit. Good for the planet, good for your wallet—energy efficiency is truly a gift that keeps on giving. Get Started Ready to save? Get started or log in to set up a Safety Net, contribute to an IRA, or start giving to charity. If you plan to use your tax refund to save towards other financial goals, learn how to prioritize each goal. Please note that Betterment is not a tax advisor—please consult a tax professional for further guidance.

How To Make A Mega Backdoor Roth 401(k) Contribution Feb 1, 2021 12:00:00 AM Looking to boost your retirement savings? Contributing above the limit through after-tax contributions into a traditional 401(k) can help you maximize your savings with potentially great tax benefits. For most people that participate in a 401(k) plan through their employer, $19,500 is the maximum contribution (pre-tax and Roth) you can make to your 401(k) in 2021 (those age 50 and older get an additional $6,500 catch-up contribution). This “standard” contribution is considered to be an employee elective deferral. But what if your 401(k) plan could allow you to contribute more than this amount? And how much more? Potentially up to $38,500 more in 2021. After-tax traditional 401(k) contributions are less commonly offered by employers, but for heavy savers or high-income earners who do have this option, after-tax traditional contributions are a great way to try and maximize your overall retirement contributions. “Super-size Me”: 401(k) 2020 Contribution Limits 401(k) plans are a type of defined contribution plan where you, as the employee, make your own contributions to your retirement. In 2021, the total annual contribution limit to defined contribution plans is $58,000 (or $64,500, if age 50 and older). This $58,000 limit consists of your $19,500 contribution (combination of pre-tax and Roth), as well as any matching contributions your employer makes, employer profit-sharing, and after-tax traditional 401(k) contributions made. Any employer match would potentially reduce the amount of after-tax contributions you could make into a traditional 401(k). But if your employer does not provide any matching contributions nor profit-sharing, you could contribute up to an extra $38,500 on an after-tax basis to your 401(k). Tax alert – Even if your employer offers after-tax traditional 401(k) contributions, you may not be able to fully maximize the contribution due to plan limits and nondiscrimination testing for highly compensated employees. How Do After-Tax Contributions Work? Now that we’ve covered different types of contributions that could be made to your 401(k), how do they all work? The $19,500 salary contribution can generally be made as either pre-tax (traditional), or post-tax (Roth): When you make pre-tax contributions, the amount contributed to your retirement plan reduces your taxable income for that year, so that you get a tax break in the year contributing. When you withdraw in the future, you will pay ordinary income taxes on the full amount of the withdrawal, basis and earnings included. With post-tax Roth contributions, the amount contributed does not reduce your taxable income for that year, as you pay tax on the money before it is contributed. As long as you meet general requirements, withdrawals will be free of tax, earnings included. After-tax contributions into a traditional 401(k) are not tax deductible and grow tax-deferred, meaning that earnings will be taxed as ordinary income upon withdrawal. This is unlike general Roth 401(k) contributions, where earnings and withdrawals are tax-free. You might be wondering what happens to after-tax traditional 401(k) contributions after you retire or leave your company. IRS Notice 2014-54 states that earnings from these contributions while they are in the 401(k) would be rolled into a traditional IRA, where you will pay tax upon withdrawal. However, the original after-tax traditional contributions in your 401(k) are able to be rolled into a Roth IRA without paying taxes (since you already paid tax on the dollars contributed), where future growth and withdrawals are tax-free. Benefit To After-Tax Contributions For those who have the option and are able to make these contributions, it enables extra savings to be made into an account that grows tax-deferred rather than being saved to a taxable account, where you will owe annual taxes on dividends. After-tax traditional contributions allow you to indirectly contribute money to Roth-style accounts when you may not have been able to otherwise. For example, your income may be too high to make direct Roth IRA contributions or you may choose not to make Roth 401(k) contributions with your elective deferral because you’d prefer to make pre-tax contributions to reduce your taxable income. If that’s the case, the only other way you’d be able to get money into a Roth IRA for tax-free growth is to execute a Roth conversion, which may require you to pay income tax upon converting. The In-Plan Roth rollover Here is a strategy for how you can further amplify the benefits of after-tax traditional 401(k) contributions. If your employer allows you to make In-Plan Roth rollovers (not all plans offer the feature) – where you can effectively convert your traditional 401(k) to a Roth 401(k) – you can start the tax-free growth on your after-tax contributions even earlier. Any earnings on the after-tax traditional contributions would be considered taxable at the time of the In-Plan Roth rollover. The sooner this process is completed after the contribution is made, it would minimize taxable earnings. In other words, you don’t have to wait until you retire to get your after-tax contributions into a Roth 401(k). Steps To Take For Your Retirement Planning To see if your 401(k) plan offers after-tax traditional contributions, we recommend contacting your plan administrator. Note that Betterment for Business 401(k) plans currently do not offer the ability for you to make after-tax contributions to your Traditional 401(k), nor the ability to convert Traditional funds to Roth funds while the plan is active. Depending on each individual plan, these options could increase non-discrimination testing complexity and lead to unexpected refunds. Over time, we’ll continue to evaluate the value of these additional capabilities to our customers who hold Betterment 401(k) plans through their employer. For those that do have this option, you will want to consider all of the retirement accounts you have at your disposal, the tax benefits each offer, and your overall savings plan and cash-flow needs. If interested, you can speak with a financial planner to help you make the best decision for your retirement plan. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional. This article is provided solely for educational purposes. It does not address the details of your personal situation and is not intended to be an individualized recommendation that you take any particular action, including rolling over an existing account. When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. Specific factors that may be relevant to you include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account, consult tax and other advisors with any questions about your personal situation, and review our Form CRS relationship summary and other disclosures. If you currently participate in a 401(k) plan administered or advised by Betterment (or its affiliate), please understand that this article is part of a general educational offering and that neither Betterment nor any of its affiliates are acting as a fiduciary, or providing investment advice or recommendations, with respect to your decision to roll over assets in your 401(k) account or any other retirement account.

A Development Director Making $100K In DC Envisions A Debt-Free Future Jan 29, 2021 12:00:00 AM How one person can balance paying off credit card debt, preparing for the unexpected, and becoming more financially literate. How I Money is a series featuring real people who have real questions about money, and real advice from Betterment’s experts. Follow along as our financial planners help folks just like you think through saving, investing, debt, retirement, and more. Meet Raven*: Let’s dive into Raven’s financial goals and concerns: Talk me through your short-term financial goals. What do you hope to achieve within the next 5 years? Raven: Pay off credit card debt. Become more financially literate, especially when it comes to investing. Increase savings. Let's talk long-term. What do you hope to accomplish financially 5 years or more from now? Raven: I’m honestly not sure. I’ve gone through some big life changes and need to adjust my plans accordingly. What impact has COVID-19 had on either your short or long-term financial goals? Raven: I have a good job but there is so much uncertainty in the world. Losing my job is in the back of my mind. Not sure what I should be saving or planning for at this point. If you could ask a financial expert for advice on one money question, what would it be? Raven: Do I need a financial manager? Or do I start small with some of these DIY programs? What the financial experts say: We asked Corbin to comment on Raven’s financial goals. Here are her thoughts. Raven has a lot of competing financial goals: does she need a financial manager, or can she start with an automated investing and savings product? Corbin: What a lot of folks don’t realize is that many financial tools are already financial managers. Automated investing providers, like Betterment, offer automated advice and technology that build a unique investment portfolio for each type of investment goal. When you open an investment goal with us, its customized stock-to-bond allocation recommendation is designed to automatically adjust (in most cases) to help you reach your goal without taking on unnecessary risk. But since you also mentioned that she’s interested in financial literacy, working with a CFP® professional to answer her in-depth questions could be beneficial to getting her on the right track. A CFP® professional can work with Raven to review her debt, goals, and retirement planning, as well as her current financial situation and investment portfolio. In either case, an automated financial manager or financial planning professional can help her manage her financial goals. What should Raven do first: pay off credit card debt or increase her savings? Corbin: First, it’s always smart to have a cash buffer. We typically recommend having at least three to five weeks’ worth of expenses in your checking account to cover your expenses. Think about it: If Raven worked to pay off her debt as aggressively as possible but had no extra cash on hand, she’s only one unexpected expense away from potentially being in debt again. Next, she should think about tackling her high-interest debt. For example, credit cards tend to have high interest rates of more than 16.5% on average. If Raven’s debt has higher interest rates than her potential returns through investing or saving, then she’s better off paying off her debt first or paying off her debt and saving simultaneously. How can Raven financially prepare for a potential job loss? Corbin: It’s completely understandable, given the pandemic, that Raven is worried about losing her job. The first thing Raven should do is find out what she’s spending her money on. By creating a list of expenses and minimum payments, she’ll know the minimum she needs to financially get by. While she’s still employed and financially stable, she could also use this time to build her emergency savings. It’s not the most optimal solution mathematically since she still has high-interest debt, but financial decisions aren’t always made solely based on math. Finances are emotional and personal, and they should always reflect the circumstances we’re going through. Since Raven is worried about financial security and her ability to pay bills in the future, building her emergency fund is one way to help her feel better about an uncertain future. She shouldn't ignore high-interest debt, but if making minimum debt payments while building a robust emergency fund for a few months makes her feel more financially prepared, this may be the right path for right now. How should Raven be thinking about long-term financial goals? Corbin: Retirement isn’t always a choice depending on industry and health—given Raven’s age, it’s important that she revisit her retirement plan and find out if she is on track to save enough for what she wants to spend during her golden years, especially if she plans to retire around 64, which is the average retirement age. If Raven’s employer offers a matching plan on their retirement account, it’s most important that she contributes enough to receive the full match: that’s basically free money! After that, I’d recommend not falling into the trap of thinking she can only contribute to an employer plan—using multiple accounts like a Traditional or Roth IRA, an HSA, or an investment account can help her meet her retirement goals, and can also help with taxes. Want to get your financial questions answered? Submit here. If you have a How I Money entry you’d like to share and want your financial questions answered, submit an anonymous response today. Betterment can help make your financial goals real. When it comes to saving and investing, Betterment aims to help you align your money with your goals. That means not only offering multiple types of accounts for your short and long-term goals, but also helping you identify your goals and invest for them appropriately. Learn more about our guidance and get started saving for your future. *Responses for the How I Money series were gathered through voluntary participation in an online survey where participants were requested to provide comments, feedback, ideas, reports, suggestions, data or other information to Betterment (collectively “Feedback”). The Feedback gathered in that survey excluded Betterment clients, was anonymized, and was used internally to help us understand how people could benefit from Betterment’s services and to create content to address those needs. Participants permitted Betterment to use any Feedback they provided for these purposes. While this content is written for advice purposes, it may not be applicable to all and is intended to be informational only.

Memestonks: What’s Different About This Market? Jan 29, 2021 12:00:00 AM You might be wondering what’s going on in the world of “stonks” right now. Yes, we have a take and, no, you won’t be surprised to hear we’re thinking bigger picture. Let’s talk about this whole GME/short-squeezing/meme stock thing. Like many people, you may have a simple question: Is this time different?  Here’s my impression: Most things are the same... In many cases, nothing is new about the meme stock circus. Humanity, greed, FOMO, bubbles, mania. Squeezing and vilifying shorts. You can go back hundreds of years and find loads of examples of madness in the marketplace. Throughout history, the specific game and players has changed, but the desire to win remains the same. ...but not everything. Here’s what’s different this time around: Zero-commission trading. We over-consume free things, and that’s particularly true of the no-cost trading platforms that don’t force you to think twice before hitting “buy” or “sell.” There’s often little thought given to something that costs nothing. Mobile trading apps.  These days, the phones in our pockets offer powerful access to the financial markets. Normal people have greater access to higher risk investments and strategies such as derivatives and leverage (even if some of the pitfalls aren’t clear), and they can coordinate their moves together better than ever (see below). A pandemic. Social distancing has left many of us with a lot of restless energy and no outlet. We can’t go out and play sports, go to the gym, watch a ball game, go to the movie theater, or have a late dinner and drinks with friends. We’re disconnected from each other -- and looking for that connection online. Social networks. Investing is now a social participation sport: you can actually cause the price to move. You can help your team win! Social media has monetized and weaponized people's attention.  These networks tend to direct people's attention into a very narrow frame -- like using a magnifying glass to turn sunlight into a laser. It’s easy to accidentally spend hours diving deeply into a specific topic -- and maybe even get sucked in by a conspiracy theory.  Like the magnifying glass, that laser-like focus can have real-world impacts. How will it end? I see three scenarios: Fast and hard: A major regulator only needs to make a somewhat innocuous statement like, “Oh, we’ve seen some concerning things here; we’re going to start looking into specific actors,” and the typical market reaction would be  quick. Back when Hertz was contemplating doing a secondary offering, the SEC spoke up and the Hertz bubble quickly popped. There are also financial requirements with clearing firms that could cause brokerage firms to restrict transactions in these types of situations to ensure that the firm can continue to operate. Moderately quickly, giving way to the next memestock: It’s hard for meme stocks to keep themselves in focus for long. Novelty fades, and the amount of stimulus (price changes) must rise exponentially in order to keep the focus on.  In this case, options sellers are already beginning to demand higher premiums for new options. It could be a messy unwind. Slowly and permanently: As vaccines roll out, the pandemic ends, I think we’ll start spending our free hours doing more meaningful things -- like spending 3-D time with each other rather than with  strangers on a message board. What’s the aftermath? It’s worth remembering that this doesn't change the underlying companies: no amount of price movement or short-squeezing can turn around a company in a bad business. Some people will get out near the top. You’ll certainly hear those people talking about it. The people who bought from them hoping it would go up further -- and that there would be  another buyer waiting -- will be conspicuously quiet. We've already seen normal investors get burned by memifying trades (see: Hertz, Blackberry). In some cases, an unrelated stock was pumped up quickly by retail investors who didn't realize they weren't trading what they thought they were trading. In every case, someone is left holding the stock when it crashes back to reality. So…? This kind of trading is like going to Vegas. By all means, go, and have a great time. Just be prepared to come back home with fewer dollars in your wallet and a vicious hangover. An alternative? Invest in a well diversified portfolio and whenever someone asks if you own the hottest thing, you can say “yes”, regardless of what it is.

6 Tax Filing Hurdles When Investing Jan 22, 2021 12:00:00 AM Taxes can be confusing, even for the most savvy investors. Enter Eric Bronnenkant, our Head of Tax, with six things to look out for when filing your taxes while investing. Whether you’ve been investing for years or not, holding money in an investment account can make your filing process a bit more complicated. I’m here to help guide you through that process with a few tips. 1. Haven’t taken a withdrawal from your taxable account? Still expect some taxable income. Even if you haven’t withdrawn funds from your account, dividends you’ve earned and capital gains from sales in your account may still be taxable. Sales that don’t result in withdrawals can come from rebalancing that helps keep your portfolio on track, as well as any allocation changes you might have made. The dividend and investment sales will be reported to you on a Form 1099-B/DIV. Interest on your Cash Reserve account will be reflected on a Form 1099-INT. Learn more » 2. If you only have IRA investments, your taxes may be simpler than you think. One of the key benefits of investing in an IRA is that all the income inside the account is tax-deferred. As long as you leave your funds in the IRA, you do not report any of the dividends or investment sales. If your only investments are within an IRA or 401(k), you aren’t typically required to report investment sales on Schedule D/Form 8949 (which you might experience as buying tax software that includes investments), so that may make your filing process more straightforward. Learn more » If you do take an IRA distribution (make a withdrawal), you should expect to receive a Form 1099-R from us. An IRA distribution may or may not be taxable, but it is always reportable. 3. A globally diversified portfolio is a good strategy. Know how it can affect your tax filing. Diversification is one of the key tenets of Betterment’s portfolio advice. International investments help decrease the risk of a portfolio heavily invested in U.S. stocks and bonds. Because of this, you should know that these foreign investments add a few steps when you’re filing your taxes. You’ll need to calculate the foreign tax credit to mitigate the double taxation between the US and foreign countries. Learn more » 4. Tax-smart investing starts with government bonds. Look out for reporting that income. To be as tax-smart as possible, you’ll want to take advantage of every tax benefit available to you. One benefit built into Betterment’s portfolios is income from government bonds, which is exempt from state and local income taxes due to federal law. It is common for investors to overlook this tax benefit and subject all of their taxable interest to state and local income taxes. Be more tax-smart by being sure to report income from government bonds on your state tax returns. Learn more » In addition, municipal bond income is generally exempt from federal income tax. The rules at the state level are a little more tricky. If your resident state has an income tax, it will tax all out-of-state muni income. Knowing what portion of your income falls into the in-state versus out-of-state is important to paying the appropriate amount of tax. Learn more » 5. 2020 markets were volatile, which means Tax Loss Harvesting+ was hard at work.1 Stock and bond markets are inherently volatile. While you hope that they appreciate in value over the long term, it is expected that there may be substantial fluctuations in the short term. Betterment’s Tax Loss Harvesting+ helps to take advantage of volatility by “capturing losses,”—selling investments at opportune times and buying similar replacement investments that do not violate certain IRS rules. These captured losses can then be used to help offset any gains you’ve recognized or against other income in the tax year up to $3,000. If there are any additional losses, they may be carried forward until used in a future year. Learn more » 6. We saw new tax legislation starting in 2019. This changed IRA contribution rules and required minimum distribution provisions. The SECURE Act, which was passed in late 2019, paved the way for retirement rule changes starting in 2020. Traditional IRA contributions have historically been limited to owners under the age of 70 1/2. The age restriction has been lifted starting for 2020 tax year, and even 100 year olds can now contribute to a Traditional as long as they (or their spouse) have “earned income”. Non-spouse beneficiaries of IRAs and 401(k)s historically had been able to withdraw funds over the beneficiary’s life expectancy. For deaths that occur in 2020 or later, the beneficiary is now required to completely distribute the entire account by the end of the 10th year after death. Learn more » Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional. 1Tax Loss Harvesting works automatically for customers who have elected the service in their accounts.

Rolling Over Your 401(k) Jan 19, 2021 12:00:00 AM Have 401(k)s from old jobs lying around? Moving them to Betterment means a common approach for all of your retirement savings. Plus, we make rolling over simple and easy—whether to your 401(k) account or a Betterment IRA. Let’s say you have a 401(k) account at Betterment, but you also have a 401(k) from a previous employer. What should you do with it? You have four choices with respect to 401(k) account from a previous employer: Keep it in your previous employer’s 401(k) plan (assuming previous employer’s plan allows) Roll it over to your current 401(k) plan at Betterment Roll it over to an Individual Retirement Account (IRA) to Betterment or elsewhere Take a cash distribution It’s important to consider all of your available options and to understand the implications of each. Only the first three options keep your money working for your retirement, so taking a cash distribution should be a last resort. Even if you don’t have a huge balance today, thanks to the effect of compounding, your account could grow into a nice chunk of change by the time you retire. Plus, taking a cash distribution is a taxable event, meaning you’ll owe taxes now and might be hit with an early distribution penalty on top of that, courtesy of the IRS. Let’s look at the other alternatives. Keeping your money with your previous employer’s plan Although there are times where it can make sense to keep your 401(k) where it is, doing so may not be in your best interest due to high fees, poor user experience, and a lack of tools and resources. In addition, having a 401(k) account that’s invested in different funds than the 401(k) plan you’re currently contributing to can make it difficult to have a unified investment approach. Rolling over your 401(k) The two remaining choices are either to roll over your old 401(k) to an IRA or to your active 401k at Betterment. Choosing between an IRA or 401k can come down to many factors, such as: fees, investment options, certain tax planning considerations, etc. Choosing to rollover your old 401k to an IRA or to your active 401k is generally the best option for most individuals. Furthermore, you could rollover your old 401k to an IRA provider other than Betterment, but we believe there are lots of reasons why choosing Betterment as your IRA and/or 401k provider is the better choice. At Betterment, it’s different. Simple, efficient, transparent, automated, individualized processes. In just a few clicks, you can start the rollover process to Betterment, whether you’re moving your money to your Betterment 401(k) account or a Betterment IRA. This means you’ll be set up with the appropriate investment strategy, and instantly receive a personalized set of rollover instructions via email. There is zero paperwork required from Betterment, though your previous provider may require paperwork to initiative the rollover. Consolidated investment strategy. By having all of your retirement assets at Betterment, you’ll be able to invest in the same funds and a single, coordinated strategy. This makes it easy for you to monitor your progress and to rest assured that your investments are not competing or cancelling out one another. Low cost with flexibility. At Betterment, our management fee covers everything and is one of the lowest in the industry. The low-cost investments (ETFs) we invest in are among the lowest available to investors. Plus, you can choose from multiple portfolio strategies, including three different Socially Responsible Investing (SRI) portfolios. Holistic view. Betterment’s investment platform allows you to see all of your saving goals in one place, making it easy for you to keep track of your investments. Advice and hands-on customer service. With Betterment, the corresponding investment strategy can align with your specific retirement plan. It can even work in coordination with the rest of your retirement funds. Not only does the website itself provide you with personalized financial advice, we also have a team of CERTIFIED FINANCIAL PLANNER™ professionals and an easy-to-reach customer support team. If you are considering rolling your old 401(k) to another institution, be aware that you may be subjected to lots of paperwork, long waits, and clunky processes. Make sure you understand the fund fees along with other fees that may apply when you open accounts, close accounts, change your allocation, make trades, etc. We automate the rollover process as much as possible. Whether you are rolling over to a Betterment IRA or 401(k), not only does Betterment make the rollover process simple and easy, we also make sure that your funds are placed into a globally diversified investment portfolio that fits your personalized retirement needs—all at a low cost. With just a few clicks inside of your Betterment 401(k) account, we will get the ball rolling for you and automatically open up new accounts (Traditional or Roth), depending on what type of 401(k) monies you are rolling over. We do not need any paperwork from you. Then, we’ll email you a full set of personalized instructions for how to proceed with your rollover, including the next steps to take and the information you need to complete your rollover. Some providers may have rollover paperwork that must be completed or even ask you to give them a call to complete a rollover. If so, there’s no way around that. All of the information you’ll need is included in the Betterment email, including information for how your previous employer’s 401(k) provider should make out the rollover check and where they can mail it to. We will notify you via email as soon as your rollover funds are deposited into your Betterment account. You can roll over more than just a 401(k). It’s important to note that this process does not just apply to 401(k)s. It applies to any employer-sponsored plan that you hold from past employment. This includes pensions, 401(a)s, 457(b)s, profit sharing plans, stock plans, and Thrift Savings Plans (TSPs). Ready to Roll? We designed the rollover process to be as smooth as possible. If you have any questions before or during your rollover process, we have a team of customer experience associates available via phone, email or mobile messaging to sort out any questions or concerns you may have.   Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional. This article is being provided solely for marketing and educational purposes. It does not address the details of your personal situation and is not intended to be an individualized recommendation that you take any particular action, including rolling over an existing account. When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. Specific factors that may be relevant to you include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account, consult tax and other advisors with any questions about your personal situation, and review our Form CRS relationship summary and other disclosures. If you currently participate in a 401(k) plan administered or advised by Betterment (or its affiliate), please understand that you are receiving this email solicitation as part of a general offering and that neither Betterment nor any of its affiliates are acting as a fiduciary, or providing investment advice or recommendations, with respect to your decision to roll over assets in your 401(k) account or any other retirement account.

Roth vs. Traditional IRA Calculator: Which IRA is Right for You? Jan 14, 2021 12:00:00 AM Individual Retirement Accounts (IRAs) are popular because of their flexibility. Use our calculator to help you choose which one is better for now and for the long term. Unlike employer-sponsored retirement plans, which typically have limitations on investment options and fees, IRAs often have more flexibility, with a broader range of investments. More options can help you reduce fees or better diversify. The challenge for most people is understanding which kind of IRA is most advantageous for them—Roth, Traditional, or some combination of both. The advantages of each can shift over time as tax laws and your income level change, so this is a common periodic question for even advanced investors. Major Factor in Choosing Your IRA: Household Income As a baseline, you must earn income in a given year to be eligible to contribute to an IRA. For tax years 2020 and 2021, the maximum contribution that an individual can make to an IRA is the lesser of $6,000 ($7,000 if age 50+), OR your taxable compensation for the year. In other words, if your taxable compensation was only $3,000, then your maximum allowable contribution is $3,000. Additionally, your income will determine whether you are able to contribute to a Roth IRA, and also whether you are eligible to deduct contributions made to a Traditional IRA. However, the IRS doesn’t use your gross income; they look at your modified adjusted gross income, which can be different from taxable income. With Roth IRAs, your ability to contribute is phased out when your modified adjusted gross income (MAGI) reaches a certain level: For married taxpayers who file jointly, the phaseout for 2020 contributions begins at $196,000, and you are completely phased out completely when your MAGI reaches $206,000. For 2021 contributions, the phaseout begins at $198,000, and you are completely phased out completely when your MAGI reaches $208,000. If you are single, the phaseout for 2020 contributions begins at $124,000, and you are completely phased out when your MAGI reaches $139,000. For 2021 contributions, the phaseout begins at $125,000, and you are completely phased out completely when your MAGI reaches $140,000. For more information, see the IRS overview of IRA contribution limits. Regardless of how high your income may be, you can always contribute to a Traditional IRA. But your MAGI—along with whether or not you are covered by an employer-sponsored retirement plan—will determine whether or not you are eligible to deduct your Traditional IRA contribution. Check out this IRS resource on IRA deduction limits. Consider the Tax Benefits After you have determined the type of IRA for which you’re eligible, you’ll then need to decide which is best for your personal tax situation: Roth IRA: No tax deduction for your contribution; you contribute to the account with after-tax dollars. The money grows tax-free, so when it’s time to withdraw the money in retirement, you don’t have to pay taxes on it. Traditional IRA: Typically receive a tax deduction now (reducing your current income for tax purposes), for the contributions you make. Your money grows tax-deferred, meaning you don’t have to pay taxes until you begin withdrawing money from your account later, when the money is taxed at your marginal rate. The main question to ask is whether you expect to be in a higher tax bracket than you are now when you withdraw from the account in retirement. If you choose a Roth IRA, you pay taxes now, and if you retire in a higher tax bracket, or if tax rates go up over time, your withdrawals are protected from those increases. With a Traditional IRA, you save money now—providing you can claim tax deductions. A Traditional IRA is also ideal if you think that your taxes will be lower later. You’ll put off paying your taxes until you are likely to owe less. Your ability to offset your current tax liability with your Traditional IRA contributions can be limited by your income. Once you reach certain thresholds (which are set based on whether or not you (or your spouse) have access to a retirement plan through an employer), your deduction starts to phase out. Check out this IRS resource on IRA deduction limits. If you can’t contribute to a Roth IRA due to income restrictions, but also are not able to deduct your Traditional IRA contributions, you might consider making a Traditional IRA contribution and then completing a Roth conversion (otherwise known as a backdoor Roth contribution).  Note that there may be tax consequences from making a Roth conversion, and whether this strategy is right for you depends on your situation. Getting Started When you open a a Betterment account, we provide advice (even before you fund) regarding which retirement accounts you should be funding and in what order. You can even sync up your existing IRAs, 401(k)s, and other financial accounts to see an overall picture of your finances. Get started or log in to complete your retirement plan and see personalized savings advice. Betterment is not a tax advisor, and we don’t provide tax advice as a service, so this information is just for educational purposes. You should consult a qualified tax professional regarding your personal situation. Any links provided to other server sites are offered as a matter of convenience and are not intended to imply that Betterment or its writers endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise.

3 Tips To Consider Before Paying Off Debt Jan 4, 2021 12:00:00 AM Tackling any amount of debt is a significant part of financial planning. Here are three things you should consider before building your repayment strategy. There are so many different opinions about debt. Some see debt as a barrier to financial success, and others see debt as the holy grail of financial prosperity. But not all debt is created equal, nor does it affect everyone in the same way: Black Americans are negatively impacted more by debt, particularly student loan debt, than their white peers. For example, according to Business Insider, “an average black graduate has $7,400 more in student debt than his or her white peer,” and “white borrowers pay down their education debt at a rate of 10% a year, compared with 4% for black borrowers.” Knowing this and the overall issue of debt in the United States compared to other countries, it’s imperative that Americans, particularly Black Americans, create a plan to tackle this head-on. Ultimately, how you tackle debt should be a personal choice based on your financial goals. For example, if you’re someone who wants to eliminate debt as quickly as possible, then creating a payment plan around that goal may be your priority. If, on the other hand, your goal is to maintain your current lifestyle, then the focus may be managing debt versus eliminating debt. Here are three things you should consider before you start paying off your debt: 1. Take note of your spending and create a plan. A spending plan that accounts for all your required expenses gives you an idea of how much extra money you have to put towards your debt. Money is finite, so to pay off debt, you will have to prioritize how you spend your money.  If your budget is tight, think about how to spend money only on the things you care about, rather than the things you don’t. Cut costs on the objects and experiences that don’t bring added value to your life. 2. Build your emergency savings. The second thing you should consider is beefing up your emergency savings to at least 3 months of expenses. This is particularly true now, during a worldwide pandemic, when many Americans have lost their jobs and are struggling to find new opportunities in a crowded and competitive job market. The New York Times also states that “African-Americans also earn less, are quicker to be laid off, are slower to be rehired and are less likely to be promoted. Historically, the black unemployment rate is twice that of whites.” Saving even three months of expenses may sound like a lot, but without an emergency savings account, you may be one unexpected expense away from getting into more debt. When comparing accounts for your emergency savings, consider ones that allow you to move your money as often as you would need and that offer interest to counteract the effects of inflation. One efficient way to save is by using Betterment’s Cash Reserve account, a high-yield cash account that has unlimited transfers in and out, no fees or transfer amount limits, and FDIC insurance up to $1 million for individual accounts (or $2 million for joint accounts, should you wish to save with a partner)†, once deposited at our program banks. For Cash Reserve (“CR”), Betterment LLC only receives compensation from our program banks; Betterment LLC and Betterment Securities do not charge fees on your CR balance. 3. Choose your debt payoff strategy. The third step to paying off your debt is to choose a long-term debt payoff strategy that will inspire you to stay-the-course. However, in the short-term, always ensure that you are making on time, minimum payments to your loans, since it will save you from being charged extra penalties and fees and from negatively affecting your credit score. Here are four ideas to help inspire you: Debt avalanche: Pay off debt with the highest interest rate first. Depending on your personal situation, this is often the most recommended strategy since it allows you to save money you would have spent paying off interest. What’s considered a high interest rate can vary, but typically it’s an interest rate higher than 5%. Life-altering debt: Pay off debt that, if unpaid, can be damaging— things like tax penalties, certain loans, liens, and judgments due to court decisions. Debt snowball: Pay the smallest balance first. This is best if you’re motivated by quick wins. Debt that triggers an emotional reaction: Pay off debt that makes you feel negatively every time you see the bill. This is an option for those with financial obligations tied to emotionally charged events, like divorce or the death of a loved one. It’s important to note that in whatever strategy you choose, rarely is high-interest debt a good thing. Prioritizing debt with the highest interest rate will generally save you more money and allow you to redirect funds to other financial goals faster. Ultimately, paying off debt requires planning, discipline, and most importantly, patience. Life will still happen while paying off debt. There will be seasons where you may have to pause your accelerated payments and seasons where you can afford to pay more. The key to all of this is to stay the course, and hopefully you’ll reap the rewards in the future.

4 Questions To Help You Invest For Your Financial Goals Jan 4, 2021 12:00:00 AM There are many factors to consider when investing for the first time: Use these four questions as a guide to help you choose the best investment strategy for your financial plan. Warren Buffet’s definition of investing is, “laying out money now, in expectations of receiving more money in the future.” Investing starts with ensuring that nothing gets in the way of you “laying out money now.” This means having a solid financial foundation by doing the following: Saving three to six months’ of expenses in an emergency fund, so your savings, not investments, cover unexpected costs. Paying off high-interest debt, so you are making money from companies rather than paying interest to companies. Contributing enough to your 401k plan to at least get a match from your employer, if you’re offered one: get all the free money you can! Once your financial foundation is in place, use the four questions below as a guide to help decide how to invest your money: 1. What’s the goal for the money? Your goals should always inform what you do with your money, but understandably it can be difficult to envision long or short term life goals as events that need to be saved for. Here are some examples of life events that can be translated into financial goals: Short-term: Wedding gifts, vacations, a new laptop, an engagement ring. Long-term goals: A house downpayment, future college education, retirement. Envision all of your possible goals that may put you into debt if you didn’t begin saving for them now. Once you have a list, you can move on to determining where and how they will be invested. 2. When do you need the money? Recessions, on average, happen every five years. For this reason, some conservative investors decide to keep money needed in five years or less out of the market, while moderate to aggressive investors typically shorten this time period. For financial goals with a time horizon of five years or less, here are some alternatives to high-risk investments where you can save your money: High-yield cash accounts: An excellent alternative to a standard savings account from your bank, high-yield cash accounts typically earn you more, have more flexible transfers, and allow you to easily access your money. Betterment’s Cash Reserve helps you earn a variable rate of 0.40% APY,* is FDIC-insured for up to $1,000,000† once deposited at our program banks, and has no minimum balance. Low-risk investment accounts: Consider investing your shorter-term goals in a low-risk portfolio instead. Betterment offers various low-risk ways to invest, and we give you the opportunity to choose any allocation, even portfolios with little-to-no stock exposure. This strategy can be useful if you are comfortable with the risk statistics provided to you while opening a portfolio and selecting your stock-bond allocation mix. If you decide you do want to invest in the market, consider these options for your money: Stocks: An investment that represents partial ownership of a company. Bonds: An investment in which you lend money to a company for a fixed rate that gets paid to you for a specified period. ETFs: Basket of investments (can be stocks, bonds, or a combination of both) that typically tracks a part of the financial market, called an index. The index can be made up of the largest companies in the U.S., such as the S&P 500. When you open an investment goal Betterment will recommend a portfolio for you when you deposit, based on your goals. Betterment will also handle the trading and rebalancing for you, so that you don’t have to. 3. How many highs and lows in the market can you stand? Everyone thinks they are an aggressive investor until the market drops: your real risk tolerance is how you feel when your investments drop by 30%. Below are three types of risk tolerance: Conservative: Values preservation of funds; can’t handle any fluctuations. Moderate: Values stability of funds; sees market volatility as a necessary evil. Aggressive: Values growth of the funds, can handle wild fluctuations for the price of growth. 4. How knowledgeable do you want to be about investing? People typically fall into three basic investment styles:  DIY: You put in the time to research, create, and monitor an investment portfolio. Most importantly, you can manage your emotions during up and down markets. Do it for me: You partner with a professional to give you financial advice and manage your portfolio. Do it with me: You tap into experts’ knowledge and research to help you select investments based on your needs. Determining how much you want to be involved with your investments and their performance will help you determine who to partner with (if at all) to help you meet your financial goals. If you fall into this last bucket, Betterment can help you meet your financial goals: as your money grows and your priorities change, Betterment’s advice evolves and helps you stay on track. Don’t forget that the most critical part of investing is getting your finances in order: if you decide to invest to meet your financial goals, having your finances in order means you won't have to cash out your investments to cover unexpected expenses. Use these four questions as a guide to help you choose the best investment strategy for your financial plan.

3 Simple Ways You Could Pay Fewer Taxes If You Have An Investment Account Dec 18, 2020 12:00:00 AM Tax loss harvesting, asset location, and utilizing ETFs instead of mutual funds can eliminate or reduce your tax bill, depending on your situation. Here’s why. If you have investments, you might be paying Uncle Sam more than you need to come tax time. Thankfully, there are three things you can do to help keep more of your money in your own pocket. Many investors may not know these strategies are available, or may have heard about them but do not use them. If while you’re reading this you start to think that these strategies are difficult to implement, you’re not wrong. Before we get started, it’s important to note that when you’re a Betterment customer, we can do these things for you (all you have to do is opt-in through your account). Now, onto the good stuff: Let’s demystify these three powerful strategies. 1. Tax loss harvest. Tax loss harvesting can lower your tax bill by “harvesting” investment losses for tax reporting purposes while keeping you fully invested. When selling an investment that has increased in value, you will owe taxes on the gains, known as capital gains tax. Fortunately, the tax code considers your gains and losses across all your investments together when assessing capital gains tax, which means that any losses (even in other investments) will reduce your gains and your tax bill. In fact, if losses outpace gains in a tax year you can eliminate your capital gains bill entirely. Any losses leftover can be used to reduce your taxable income by up to $3,000. Finally, any losses not used in the current tax year can be carried over indefinitely to reduce capital gains and taxable income in subsequent years. How do I do it? For example, sell Coke, buy Pepsi. When an investment drops below its initial value—something that is very likely to happen to even the best investment at some point during your investment horizon—you sell that investment to realize a loss for tax purposes and buy a related investment to maintain your market exposure. Ideally, you would buy back the same investment you just sold. After all, you still think it's a good investment. However, IRS rules prevent you from recognizing the tax loss if you buy back the same investment within 30 days of the sale. So, in order to keep your overall investment exposure, you buy a related but different investment. Think of selling Coke stock and then buying Pepsi stock. Here’s an example of tax loss harvesting: Overall, tax loss harvesting can help lower your tax bill by recognizing losses while keeping your overall market exposure. At Betterment, all you have to do is see if it’s right for you and turn on Tax Loss Harvesting+ in your account. 2. Asset locate. Asset location is a strategy where you put your most tax-inefficient investments (usually bonds) into a tax-efficient account (IRA or 401k) while maintaining your overall portfolio mix. For example, an investor may be saving for retirement in both an IRA and taxable account and has an overall portfolio mix of 60% stocks and 40% bonds. Instead of holding a 60/40 mix in both accounts, an investor using an asset location strategy would put tax-inefficient bonds in the IRA and put more tax-efficient stocks in the taxable account. In doing so, interest income from bonds, which is normally treated as ordinary income and subject to a higher tax rate, is shielded from taxes in the IRA. Meanwhile, qualified dividends from stocks in the taxable account are taxed at a lower rate. The entire portfolio still maintains the 60/40 mix, but the underlying accounts have moved assets between each other to lower the portfolio’s tax burden. Asset location in action.   3. Use ETFs instead of mutual funds. Have you ever paid capital gain taxes on a mutual fund that was down over the year? This frustrating situation happens when the fund sells investments inside the fund for a gain, even if the overall fund lost value. IRS rules mandate that the tax on these gains is passed through to the end investor, you. While the same rule applies to exchange traded funds (ETFs), the ETF fund structure makes such tax bills much less likely. In fact, most of the largest stock ETFs have not passed through any capital gains in over 10 years. In most cases, you can find ETFs with investment strategies that are similar or identical to a mutual fund, often with lower fees. Following these three strategies can help eliminate or reduce your tax bill, depending on your situation. At Betterment, we’ve automated these and other tax strategies, which means tax loss harvesting and asset location are as easy as clicking a button to enable it. We do the work, and your wallet can stay a little fuller. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

The Pursuit Of Betterment’s New CEO (And Finding Happiness Along The Way) Dec 8, 2020 12:00:00 AM Betterment Founder Jon Stein announces the appointment of Sarah Kirshbaum Levy as his successor and new CEO of Betterment. It’s the fall of 2007 on the Lower East Side. My Betterment clock starts not when we launch in 2010 but as I hash out the concept in conversations with roommates and friends. I have a crazy idea: to pursue my happiness via helping Americans pursue their happiness. I write a mission statement: empower customers to do what’s best with their money so they can live better. Investing feels complicated to most people, but the best practices are known and straightforward. Why not take the smart services used by the wealthy and institutions and make them accessible to every American? People like this crazy idea, some join me, and with sweat and sacrifice, a tiny, hungry, customer-impact-obsessed company is born. I pursue Betterment’s mission doggedly. My wife (whom I met in 2006—not coincidentally—her encouragement begets a startup) calls Betterment my “first child.” I say often (usually sincerely): “I’m the luckiest person, I have the best job in the world.” At times, it feels like all of my being, every waking hour, every dream, is intertwined with my company. I am Betterment. There is nothing else. Teammates become best friends (and each other's family: I officiate weddings of Bettementers who later have Betterment babies). I star in TV ads—never imagined that career turn. Early customers email me personally for support (and some still do—love y’all, customers). We grow to $25B AUM, more than 500,000 customers, a team of more than 300, and we move the industry forward. And yet, I know we can achieve more; we have millions more Americans to reach. The Pursuit Of Our Potential For some time, I look to bring in an experienced, dynamic operating leader to help drive the company forward. The search is not initially focused on one specific role to fill; it is about finding amazing talent that could help lead Betterment to realize our full potential. The time at home this year affords more time to devote to the search process, to talk to senior operating leaders and to think about what might be needed for the next leg of the journey. I spend time with hundreds of diverse candidates. I realize that the best way to achieve our mission might be to invite a successor to lead Betterment in the next phase of growth. Due to good fortune and intense effort in a most challenging year, the company has never been in a stronger position. Each line of business is reaching new heights in 2020. We’re beating targets, well-capitalized, with wind at our backs. It’s a good time to hand over the reins. Over the summer, I connect with Sarah Kirshbaum Levy. There is something enthralling about her. I don’t want to jinx or overload it, but outside of meeting my wife, it’s hard, at present, to think of a more consequential introduction. And this is over video conference! The Pursuit Of The One Over the next few months, I spend more time with Sarah and she begins engaging with members of the team and our board. I bring her in full-time as a consultant in a trial run. What a privilege not only to recruit my successor, but to observe her building relationships, to work side by side with her as she iterates on her plan, and to see her making every meeting more open and efficient. I give her my authority to work with the team to architect plans for 2021 and beyond, and she excels. My admiration grows as she starts effectively running the company, with my proxy. My execs tell me they have so much to learn from her. The only thing that is missing is the title—and today, we give her the title. Sarah’s Pursuits Sarah started out at Disney and spent the last 20 years at Viacom, home to beloved brands including Nickelodeon, BET, MTV, and Comedy Central. Through a series of senior leadership roles, culminating in Chief Operating Officer, she’s shepherded global phenomena, from SpongeBob to The Daily Show with Trevor Noah, connecting with audiences in meaningful ways. With her experiences leading large public companies, Sarah is the right executive to lead Betterment now, as we contemplate a transition from private to public in the coming years. For someone with a “big company” pedigree, she’s remarkably down to earth and scrappy. She’s launched and grown businesses, bought and sold businesses, managed the bottom line, and driven consumer brands to win. I appreciate her “outsider” perspective. Betterment is a unique company—not just finance, not just tech, 100% customer-impact obsessed. Take it from one who’s looked: It’d be hard to find someone who’s both spent a career in financial services and can credibly lead the change we envision: to empower customers to do what’s best with their money, so they can live better. The Pursuit Of Happiness I’ve done the best work of my life at Betterment, and I have worked too hard to stop giving it my all to realize this company’s mission, whatever form those efforts may take. From my role on the board, I’ll be supporting Sarah and her team, whether it be via recruiting, investor relations, telling our story, or upholding company culture and values. A dream for me since that Lower East Side fall in 2007 has been to build a sustainable institution, to build something that will outlast me. I’ve never taken a larger step toward that accomplishment than I am today in passing the torch to Sarah. I asked Sarah what mattered most to her in her next role, and she said, without hesitation, “A brand and mission I believe in.” She’s evidenced this for me in every interaction since. I believe that she’ll more fully realize the vision I laid out years ago, and make Betterment the most beloved, most essential financial brand for this generation. And in so doing, she’ll power the pursuit of happiness for millions of Americans.

How To Make The Most Of Your Spending With Cash Back Offers Nov 19, 2020 12:00:00 AM Betterment has partnered with Dosh to offer cash back offers for Checking customers. Learn how to make the most of your spending with cash back offers. We built our no-fee‡, hassle-free Checking account because we believe that you shouldn’t have to pay to access your money. Now, with help from our friends at Dosh, you can make the most of the money you spend by getting automatic cash back at thousands of your favorite brands. Plus thousands more brands Before making your purchase, we recommend checking your app to make sure a specific offer is still available. Merchants subject to change. With cash back offers from Dosh, you can shop from thousands of personalized online and in-person offers within your Betterment account. Plus, there’s no activation required—just shop, pay, and you can see your cash back come through as quickly as the next day. “Our goal at Betterment is to continuously find new ways to help our clients make the most of their money and have their best interests at heart,” said Katherine Kornas, Vice President of Growth at Betterment. “Providing Betterment Checking customers with a rewards program powered by Dosh builds upon this mission, by helping people save more money on everyday purchases. We’re excited to work with Dosh on implementing this benefit for our users.” “We’re passionate about putting cash back in the wallets of consumers when they shop, dine and travel, while making it a frictionless and delightful experience,” said Ryan Wuerch, CEO and founder at Dosh. “We’re so proud to provide Betterment Checking customers with automatic cash back at more than 10,000 of their favorite brands and retailers.” Interested in seeing where you could be earning cash back? Open a Betterment Checking account, browse our offers, and start earning. Cash Back Eligible when using your Betterment Checking Visa Debit Card. Cashback merchants and offers may vary. You’ll see rewards, which are deposited back into your Checking account, in as little as one day after making the qualifying purchase, but it may take up to 90 days depending on the merchant. In order to find you relevant offers, we share your Betterment Visa Debit Card transaction information (and location, if you choose) with our rewards partner,  Dosh. Shared data is anonymized and Dosh is prohibited from selling shared data to any third parties. See Terms and Conditions to learn more. Any references to other merchants or merchant websites are offered as a matter of convenience and are not intended to imply that Betterment or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those merchant sites, or endorses any information contained on those merchant sites, unless expressly stated otherwise.

How The Presidential Election And COVID-19 Impact Investor Sentiment Oct 28, 2020 12:00:00 AM Betterment examines how investor sentiment has evolved since the beginning of the COVID-19 crisis, as well as the impact of the upcoming election on consumer finances. In March, Betterment surveyed a group of investors to examine how the COVID-19 crisis has impacted their financial security and spending habits, as well as gauge their reactions to the market turbulence. In June, after stimulus checks had been sent out and the markets continued to react to the news cycle, we followed up with those investors to look at whether people executed on the savings and investing actions they previously indicated. In the last of our three-part series, we return to those same investors to see how their sentiment and actions have changed since March, their thoughts on the upcoming election, as well as what the future might have in store for them financially. Methodology The third installment was an online reconnect to a panel of potential respondents that completed the two previous surveys. The recruitment period was 9/22 to 9/29. The survey was completed by a total of 1000 respondents who took all three surveys, are living in the United States and who are invested in the markets. The sample was provided by Market Cube, a research panel company. Panel respondents were invited to take the survey via email invitation and were incentivized to participate via the panel’s established points program. Investors are smarter and savvier than when COVID-19 began. With our third checkpoint, we wanted to again see how investors’ sentiments and actions are evolving over recent months. Encouragingly, more investors have an emergency fund in place than the last two times we checked in. They also continue to be less stressed and are less likely to take money out of the markets or tap into their long-term savings. Changes in investor sentiment as a result of COVID-19  Betterment’s Take “Investors seem to be settling into this “new normal.” It is great to see the number of people removing money from the market in the face of volatility trickling downward. But ideally, the number of people withdrawing from the market should be even lower: investors who react to volatility this way may be doing themselves a disservice in the long-run, potentially costing themselves gains by waiting for the market to recover.” Political beliefs and the potential impact of the election on investors. With the presidential election on the horizon, markets are gearing up for a myriad of potential results and almost guaranteed turbulence. As a result, we wanted to see if there were any changes investors might be making to their portfolios. The good news is investors seem to be looking past the short-term noise and volatility, and plan to stick to their long-term saving and investing goals. Do you plan to take any action in anticipation of the November 2020 election? Do you anticipate taking any actions after the election results? Betterment’s Take “With so much uncertainty surrounding the general election, it is encouraging to see investors taking a wait and see approach. To add, it’s even more encouraging to see that if they anticipate making any changes, it is to add money to their investment portfolios after the election.” We also asked investors for their thoughts on the government’s stimulus program. Overall, 71% indicated they were either unsatisfied or neutral on the government’s handling of the stimulus program. Only 15% of Democrats indicated they were satisfied, while 51% of Republicans were satisfied. Changing Perceptions Of Universal Basic Income (UBI) And Retirement How has the pandemic changed your perception about a universal basic income (UBI)? Following the national stimulus program, we were also interested to see if investors’ perception of a universal basic income (UBI) shifted in any way. Nearly one in five (18%) said they are more in favor of UBI than they were before the pandemic, while just 3% are less in favor of UBI. How has the COVID-19 pandemic changed investors’ approach to saving for retirement? While 35% indicated that they have added to a savings account recently—and this number trended up across our three surveys—we also asked investors how the pandemic has changed their approach to saving for retirement. The majority intend to keep saving as they have been, and only 5% of respondents indicated they intend to save less from now on, while 29% said they’d save even more. Betterment’s Take “Seeing more investors adding to their savings while mostly leaving their approach to retirement unchanged is exactly the balance we would hope to see. Having accounts to meet short-term goals means that accounts to fund longer-term goals—such as retirement— can remain untouched and continue to grow. While short-term volatility caused by the pandemic can feel hard to stomach, ultimately investors are weathering the storm and setting themselves up for long-term gains.” What are investors’ most popular investment products during this time period? The most popular investment our respondents had was an IRA, at 66%. More than half (56%) of respondents have individual stocks but only 16% indicated they invest in ETFs outside of or in addition to their 401K. And despite having higher expense ratios, mutual funds (46%) are a more popular choice than ETFs. Betterment’s Take “It is great to see the diverse vehicles that our respondents are invested in, beyond just a traditional 401K or IRA. We would encourage more investors to look at ETFs though, as they are typically cheaper than mutual funds. Investors pay, on average, 0.35% more for an index-tracking mutual fund than for an index-tracking ETF, based on the expense ratio. Any savings that accrue from owning vehicles with lower expense ratios like ETFs are more likely to provide a persistent boost in returns.” More respondents are invested in individual stocks than a 401K or IRA. Investors have adjusted to the “new normal” we live in today. Over the last six-plus months and three reports, we’ve tracked how investor sentiment has evolved during the COVID-19 pandemic, whether people executed on the savings and investing actions they initially outlined, and how it has changed their perception of retirement, finances, and more. Although this is the last of our three-part series tracking investor sentiment, the COVID-19 pandemic is far from over and its impact on many investors will likely be felt for years to come. It will be interesting to watch the long-term effect it has on investors, but for now we’re encouraged to see so many sticking to their long-term goals. From a financial markets perspective, smart investors know to keep their head down and focus on the long term rather than short term volatility. At Betterment, we’re here to help investors stay the course. Founded in the wake of a major financial crisis, Betterment believes financial institutions should work harder for you. Learn more about our commitment to putting your money to work for you.

What the Ultimate Betterment User Looks Like Oct 26, 2020 12:00:00 AM We're going to break down how to get the most value out of the goal-based money manager Betterment is designed to be. We’ve built Betterment to offer immediate value no matter why you came to us—whether for just an IRA or Checking, or everything we offer. Still, customers often ask us, “how do I get the most value from my money?” What are the “pros” doing with their accounts? What does a complete Betterment user account look like? Today, we’re going to break down a full answer to all those questions, showing you a glimpse of what the ultimate Betterment user looks like. Tax Loss Harvesting+ is automatic, but must be turned on within your account. To start with, let’s review the fundamentals of Betterment today. Since our release of Betterment Checking early in 2020, Betterment has been set up to mirror the four major aspects of a person’s financial life: Spending, Saving, Investing, and Retirement. While we’ll dive into each of those aspects later, the first thing to know is that an ultimate Betterment user leverages all four of these offerings at Betterment. That's where our magic happens: You have a full picture of your financial goals in a single place and we help you achieve that reality with our automated optimization techniques and low fees. The first step to Ultimate: Embrace savings goals. What’s the difference between most users and the “ultimate Betterment user”? Fully adopting the idea of goal-based saving and investing. Every new Betterment user starts by answering questions about what they’re trying to do. Are you trying to save for a car? Do you want to invest for retirement? Our aim is to get you thinking about what you want in life—your financial goals. The users who are likely to get the most value from Betterment adopt a wholly goal-focused mindset. They think, “What are the major things I want in life?” And they add those things as goals in the Betterment platform—with all the trappings of a well-defined goal: specific dates, target amounts, a thoughtful name. Here’s an example of what it looks like to become goal-focused. Take those future life decisions that will cost you (that are expensive enough that they might be financially stressful if you don’t save for them ahead of time) and turn them into clear, concrete savings goals that you can get on track to achieve. Keep planning with short-term cash goals and long-term investment goals. The ultimate user won’t have just one vague goal, they will have as many goals as they feel they need for their life. Some people start with the longest term, largest goals, like retirement, and work back to the present. Others like to think about what major purchases they’re looking to make in the next few years, and work toward the deeper future. Whatever your style, you want to get it all set up. If you’re a couple, you should probably do this together. Goals are also helpful because they help you decide how to invest. For the short-term goals in life (money you plan on spending in a year or less), you can save into our yield-earning FDIC-insured goals (i.e you’ll earn interest). For the longer-term goals (those of a year or more), we’ll advise you on a portfolio allocation that adjusts from riskier to more conservative, the closer the goal gets. For the in-between goals, you can make choices based on how you plan to spend your money. What does this look like? Take a peek at just how comprehensive and well thought out your goal-setting can get... Next, stretch your savings potential by auto-saving as you earn. Ultimate Betterment users don’t just set goals; they fund them out of every paycheck to automate their savings habits and keep their goals on track. Preemptively saving for something concrete can help make it easier to resist spending away your hard-earned money. Plus, auto-deposits ensure you invest as you earn, rather than becoming tempted to try and time the market (a task that even the professionals often fail to do well). Take it up a notch by using Checking to spur even more saving. Here’s where top-notch Betterment users really start standing out from others. They don’t just use auto-deposits to save; they minimize the extra cash they might normally spend away using the full power of Betterment’s spending and saving technology. By using Betterment Checking with your Cash Reserve goal, users can get the benefit of Cash Analysis and Two-Way Sweep. Our Cash Analysis feature predicts how much extra cash you have floating in your rolling monthly cash flow, and Two-Way Sweep follows up by taking any cash above that threshold and moving it into your Cash Reserve to earn interest. If your Checking balance falls below where it should be, the cash will then sweep back to be ready to spend, preventing any over drafting. Note: Two Way Sweep and Cash Analysis are not available for goals that can be held in Betterment cash or an Investing portfolio strategy. These features can only be accessed through a Cash Reserve goal. Lean into complexity where it matters: Your retirement goal. Retirement is the longest-term goal most users set with Betterment. It’s also the most complex. Your retirement plan at Betterment can house multiple accounts types and external holdings, forecast how much you need to save based on the income you’ll want to withdraw, and manage your Betterment-held retirement accounts with Tax Coordination, which shelters some investment types from taxes. The most complete Betterment users let our technology advise them on how to save for retirement (e.g. which IRA type to use) while taking on the hard work of bringing their retirement savings into the goal itself. That can mean syncing an existing 401(k) plan, rolling old 401(k)s into an IRA, or moving outside IRA dollars into Betterment. The idyllic retirement goal at Betterment is holistic but straightforward: a single goal with a unified investment portfolio managed across account types. Tax Coordination (also known as asset location) moves more highly taxed assets into tax-advantaged accounts and lower-taxed assets into non-tax-sheltered accounts. Underlying IRA account rules offer tax-free growth, and where assets live outside of Betterment (but synced), they’re taken into account for determining how close you are to reaching your retirement goal. Beyond saving: Turn on investment optimizations. The key to financial success is saving. Once saving is well underway, the optimizing gets interesting. Especially for retirement goals and other long-term investment goals, users can try one of several maneuvers Betterment can help you handle: tax loss harvesting, charitable giving, and personalized portfolio strategy choices. Taking advantage of our automated Tax Loss Harvesting+ (TLH+) is as easy as switching it on with our app. It applies to all goals in personal and joint taxable accounts. Betterment recommends TLH+ to individuals that make more than $40,000 in annual income and married users who make more than $80,000 and file their taxes jointly. When long-term investments realize taxable capital gains, we let you give them away to charity, enabling you to claim a double tax benefit. For any goal, users can optimize their accounts for their views and preferences with portfolio options beyond just Betterment’s core recommendation. These options include Socially Responsible Investing or even designing your own “Flexible Portfolio” using our preset building blocks. Across strategies, Betterment has over 300 portfolio allocation targets you can choose from. Ultimately, we want Betterment users to feel the value of using technology to make their financial lives easier. From supporting your spending needs with Checking to helping you set up goals and invest for them effectively, we at Betterment know the best way to help people do what’s best for their money is to enable their full financial lives. Our biggest fans get this. Use Checking, Cash Reserve, Investing and Retirement together to initiate strong goal-based savings habits, reinforce them with automation and easy transfers, and optimize the rest of the way. That’s what the future of money management looks like. That’s the magic we work to create at Betterment. If you haven't start with Betterment, get started. 1 Two Way Sweep and Cash Analysis are not available for goals that can be held in Betterment cash or an Investing portfolio strategy. These features can only be accessed through a Cash Reserve goal.”

Betterment Socially Responsible Investing Portfolio Strategy Oct 22, 2020 12:00:00 AM Many investors prefer to invest according to their values. Socially and environmentally conscious customers are able to take advantage of our Socially Responsible Investing (SRI) options. TABLE OF CONTENTS How do we define SRI? The Challenges of SRI Portfolio Construction How is Betterment’s Broad Impact portfolio constructed? How socially responsible is the SRI portfolio? Should we expect any difference in an SRI portfolio’s performance? Climate Impact Portfolio Social Impact Portfolio Conclusion In today’s landscape, design and ongoing management of a values-driven investing strategy continues to face many challenges. Even the relevant terminology is in flux. Socially Responsible Investing (SRI), the most historically established term used to describe the integration of values into one’s investments, is today often used interchangeably with Environmental, Social and Governance (ESG), which strictly speaking, is more of an implementation, than the broad concept. Industry professionals are increasingly consolidating on “sustainable investing” as the umbrella designation of choice, though the public at large often associates that term with a narrower environmental focus, further adding to the confusion. Betterment first made a values-driven portfolio available to our customers in 2017, under the SRI label. When we expanded our offerings in 2020, and introduced a new class of engagement focused investments in 2021, we maintained SRI as the umbrella term for the category, including throughout this paper. That there remains no agreed-upon terminology which is broadly understood by retail investors, is as good a symbol as any that this is still an emerging field, with surging demand a relatively recent phenomenon. That the values-driven investing landscape is expected to continue evolving, both in terms of superficial labels, and in substance, continues to inform the core of Betterment’s aspirational approach to SRI. It is as much a process, as it is a product—designed to be iterated on over time, without sacrificing the core principles of our advice: balanced cost and proper global diversification. Despite the nascent state of SRI, Betterment’s portfolios represent a diversified, low-cost solution that will be continually improved upon as costs drop, more and better data emerges, and as a result, the availability of SRI funds broadens  (in this paper, “funds” refer to ETFs, and “SRI funds” refer to either ETFs screened for some form of ESG criteria or ETFs with an SRI-focused shareholder engagement strategy). In developing our SRI portfolios, we had to research, analyze, and ultimately answer five important questions: How should we define SRI for a portfolio? What are the challenges for implementing SRI today? Which SRI funds are among the best for an effective portfolio? How should we assess the “social responsibility” of an SRI portfolio? Should we expect any difference in an SRI portfolio’s performance? The resulting answers to these questions, explained in the sections that follow as well as in our SRI disclosures, informed how we created the Betterment SRI portfolios for our customers, including legacy versions of the SRI portfolios. In the first five sections we answer these questions both generally for all our SRI portfolios and with respect to Betterment’s Broad Impact offering, which focuses on investment options that consider broad social responsibility factors and engagement strategies. Betterment also offers two additional, more focused SRI portfolio options, a Social Impact SRI portfolio (focused on social governance criteria) and a Climate Impact SRI portfolio (focused on climate-conscious investments). These strategies are further elaborated on in Sections VI and VII. I. How do we define SRI? Our approach to SRI has three fundamental dimensions: Reducing exposure to companies involved in unsustainable activities and environmental, social, or governmental controversies. Increasing investments in companies that work to address solutions for core environmental and social challenges in measurable ways. Allocating to investments that use shareholder engagement tools, such as shareholder proposals and proxy voting, to incentivize socially responsible corporate behavior. We first define our SRI approach using a set of industry criteria known as “ESG”, which stands for Environmental, Social and Governance, and then expand upon the ESG-investing framework with complementary shareholder engagement tools.  Though SRI and ESG are often used interchangeably in general financial literature, experts will point out that there is a clear distinction between how each term is defined. SRI is the traditional name for the broad concept of values-driven investing (many experts now favor “sustainable investing” as the name for the entire category). ESG refers specifically to the quantifiable dimensions of a company’s standing along each of its three components. In our SRI portfolios, we use ESG factors to define and score the degree to which our portfolios incorporate socially responsible ETFs. We also complement our ESG factor-scored socially responsible ETFs with engagement-based socially responsible ETFs, where a fund manager uses shareholder engagement tools to express a socially responsible preference. Using ESG Factors In An SRI Approach A significant and obvious aspect of improving a portfolio’s ESG score is reducing exposure to companies that engage in unsustainable activities in your investment portfolio. Companies can be considered undesirable because their businesses do not align with specific values—e.g. selling tobacco, military weapons, or civilian firearms. Other companies may be undesirable because they have been involved in recent and ongoing ESG controversies and have yet to make amends in a meaningful way. ESG controversies include: Environmental controversies related to energy and climate change, land use, biodiversity, toxic spills and releases, water stress, and/or operational waste. A recent example is the BP (Deepwater Horizon) oil spill from 2010. Corporate governance controversies involving fraud, bribery, and controversial investments. A recent example is Wells Fargo’s recent controversy where the company may have created as many as 3.5 million fraudulent accounts in the last 15 years. Labor controversies like discrimination and other violations of International Labor Organization standards. For example, the class action lawsuit against Sterling Jewelers, alleging gender discrimination and sexual harassment within the company. Customer controversies involving anticompetitive practices, privacy and data security, and product safety. Remember the massive Yahoo data security breach from 2016 where 500 million user accounts were hacked? SRI is about more than just adjusting your portfolio to minimize companies with a poor social impact. Based on the framework of MSCI, a leading provider of ESG data and analytics, a socially responsible investment approach also emphasizes the inclusion of companies that have a high overall ESG score, which represents an aggregation of scores for multiple thematic issues across E, S, and G pillars as shown in Table 1 below. Table 1. A Broad Set of Criteria Across E, S and G pillars 3 Pillars 10 Themes 37 Key ESG Issues Environment Climate Change Carbon Emissions Energy Efficiency Product Carbon Footprint Natural Resources Water Stress Biodiversity & Land Use Pollution & Waste Toxic Emissions & Waste Electronic Waste Packaging Material & Waste Environmental Opportunities Opportunities in Clean Technology Opportunities in Renewable Energy Opportunities in Green Building Social Human Capital Labor Management Human Capital Development Health & Safety Supply Chain Labor Standards Product Liability Product Safety & Quality Privacy & Data Security Chemical Safety Responsible Investment Financial Product Safety Health & Demographic Risk Stakeholder Opposition Controversial Sourcing Social Opportunities Access to Communications Access to Health Care Access to Finance Opportunities in Nutrition & Health Governance Corporate Governance Board* Ownership* Pay* Accounting* Corporate Behavior Business Ethics Corruption & Instability Anti-Competitive Practices Financial System Instability *Board, Ownership, Pay, and Accounting carry weight in the ESG Rating model for all companies. Currently, they contribute to the Corporate Governance score directly and 0-10 sub-scores are not available. Source: MSCI Ratings Methodology Shareholder Engagement When an investor purchases shares of common stock in a company, they become a partial owner of that company. As a partial owner, they have not only a claim on the profits of the company but also a right to influence the company’s broader decision-making through shareholder engagement. The most direct ways a shareholder can influence a company’s decision making is through shareholder proposals and proxy voting. Publicly traded companies have annual meetings where they report on the business’ activities to shareholders. As a part of these meetings, shareholders can vote on a number of topics such as share ownership, the composition of the board of directors, and executive level compensation. Investors receive information on the topics to be voted on prior to the meeting in the form of a proxy statement, and can vote on these topics through a proxy card. A shareholder proposal is an explicit recommendation from an investor for the company to take a specific course of action. Shareholders can also propose their own nominees to the company’s board of directors. Once a shareholder proposal is submitted, the proposal or nominee is included in the company’s proxy information and is  voted on at the next annual shareholders meeting. But how does this work for investors who own ETFs rather than individual companies? ETF shareholders themselves do not vote in the proxy voting process of underlying companies, but rather the ETF fund issuer  participates in the proxy voting process on behalf of their shareholders. Shareholder voting is a powerful tool that has been underused on ESG issues until recently.  While support for ESG shareholder resolutions from fund issuers was generally on the rise in 2020, Blackrock and Vanguard, two of the largest ETF issuers, were dead last, voting in favor of just 12% and 15% of such resolutions, respectively. As investors signal increasing interest in ESG engagement, additional ETF fund issuers have emerged that play a more active role engaging with underlying companies through proxy voting to advocate for more socially responsible corporate practices. These issuers use engagement-based strategies, such as shareholder proposals and director nominees, to engage with companies to bring about ESG change and allow investors in the ETF to express a socially responsible preference. II. The Challenges of SRI Portfolio Construction Although using ESG factors to select portfolio funds may sound like a brilliantly straightforward, quantitative approach to constructing a portfolio, unfortunately, in today’s market, there are a number of limitations that plague the process of executing SRI. In spite of these limitations, we still strive to maximize the expression of your SRI values with some of the best available investing tools. For Betterment, three limitations had a large influence on our overall approach to building an SRI portfolio: 1. Poor quality data underlying ESG scoring. Because SRI is still gaining traction, data for constructing ESG scores are at a nascent stage of development. There are no uniform standards for data quality yet. Some companies disclose data on the various ESG metrics, others do not. And companies that do disclose their data may do so in inconsistent ways. As a result, ESG metrics may not necessarily capture the desired concepts and ideals with 100% accuracy. In order to standardize the process of assessing companies’ social responsibility practices, Betterment uses ESG factor scores from MSCI, an industry-leading provider of financial data and ESG analytics that has served the financial industry for more than 40 years. MSCI collects data from multiple sources, company disclosures, and over 1,600 media sources monitored daily. They also employ a robust monitoring and data quality review process. See the MSCI ESG Fund Ratings Executive Summary for more detail. By adopting MSCI’s framework for calculating ESG metrics, we’re putting our best foot forward toward assuring the data is as accurate as currently possible. 2. Many existing SRI offerings in the market have serious shortcomings. Many SRI offerings today sacrifice sufficient diversification appropriate for investors who seek market returns, allocate based on competing ESG issues and themes that reduce a portfolio’s effectiveness, and do not provide investors an avenue to use collective action to bring about ESG change. Some solutions do not use a diversified range of asset classes—for example, holding mostly or entirely US Large Cap funds–or invest only in a handful of individual stocks within an asset class. At Betterment, diversification is a fundamental pillar of our advice, and we do not believe it’s in our customers’ best interests to offer them an under-diversified portfolio. Our approach has the advantage of maintaining global diversification at a relatively low cost. Some approaches to SRI may seek to address a broad set of values by using a combination of more focused, single issue funds as the core of the portfolio (for example, an environmentally focused ETF, a social equity focused ETF, etc). However, some companies rank highly with respect to their environmental practices, but poorly on another, like board diversity, or vice versa. Rather than doubling down on multiple areas of impact, combining funds with a distinct focus can instead dilute each intent, by increasing the likelihood of offsetting positions in the same asset class. Lastly, many ESG offerings today do not provide investors an avenue with which to influence corporate decision-making and bring about sustainable change. Screening-based SRI solutions only work to exclude or include certain industries or categories of companies, but do not give investors the ability to express an ESG preference through collective action. Betterment’s SRI portfolios do not sacrifice global diversification and all three portfolios include a partial allocation to an engagement-based socially responsible ETF using shareholder advocacy as a means to bring about ESG-change in corporate behavior. These approaches allow Betterment investors to take a diversified approach to sustainable investing and use their investments to bring about ESG-change. Engagement-based socially responsible ETFs have expressive value in that they allow investors to signal their interest in ESG issues to companies and the market more broadly, even if particular shareholder campaigns are unsuccessful. The Broad Impact portfolio seeks to balance each of the three dimensions of ESG without diluting different dimensions of social responsibility. With our Social Impact portfolio, we sharpen the focus on social equity with partial allocations to gender and racial diversity focused funds. With our Climate Impact portfolio, we sharpen the focus on controlling carbon emissions and fostering green solutions. 3. Integrating values into an ETF portfolio may not always meet every investor’s expectations, though it offers unique advantage For investors who prioritize an absolute exclusion of specific types of companies above all else, the ESG Scoring approach will inevitably fall short of expectations. For example, many of the largest ESG funds focused on US Large Cap stocks include some energy companies that engage in oil and natural gas exploration, like Hess. While Hess might rate relatively poorly along the “E” pillar of ESG, it could still rate highly in terms of the “S” and the “G.” Furthermore, maintaining our core principle of global diversification, to ensure both domestic and international bond exposure, we’re still allocating to some funds without an ESG mandate, until satisfactory solutions are available within those asset classes. There is a view across the asset management industry, with a certainty approaching conventional wisdom, that only unbundling ETFs and holding the underlying securities directly, will offer the general public the ability to fully align their values with their investments. This approach is increasingly described as “direct indexing”, though the practice of tracking an index by trading the individual stocks in so-called SMAs (separately managed accounts) is decades old. An established index might serve as a starting point, after which, an investor’s specific bundle of preferences can be applied. This is particularly effective with respect to absolute exclusions. While ESG index providers such as MSCI or Morningstar might deem some particular company as worthy of inclusion, direct indexing offers the ability to override it. The hyper-personalization of direct indexing no doubt has its applications, but for most investors, an ETF-based approach to values-driven investing offers some unique advantages. We’ve heard from our customers that while knowing that they have personally limited or eliminated exposure to certain companies is important, it also matters to them that their investing choices contribute towards driving positive change. Investing in ETFs with ESG mandates maximizes the external impact of such choices. Publicly traded corporations employ entire Investor Relations teams, whose jobs include monitoring how their stock is faring across widely adopted indexes. Just as a company’s inclusion into the S&P 500 typically results in a price jump, a downgrade or outright exclusion from an influential ESG index is highly visible, and thus a cause for concern for a company’s management team. But an index is only as influential as the volume of assets that track it, and no assets are as easily counted, and as directly attributable to that index, as those invested in publicly traded funds. Tracking a values-driven index by buying and selling stocks in your personal account allows for additional customization, but when you invest in a fund that tracks that values-driven index, you are pooling your values with those of others in one of the most effective ways, empowering that index, and providing leverage to those who actively engage with companies, pushing them to improve their ESG metrics. Banding together with like-minded investors through a fund, amplifies your voice on issues that matter to you—like a form of collective bargaining. Furthermore, as more dollars flow into ETFs with ESG mandates, issuers are responding with more specialized offerings, allowing for ever more customization when integrating values into globally diversified ETF portfolios. However, that evolution will take time. This is precisely why we’ve approached our values-driven offering as a journey, not a final destination. We are committed to achieving ever more alignment with our customers’ values over time, through ongoing research tracking the availability of better vehicles, and this approach has been validated. When we launched our first SRI portfolio in 2017, only the US Large Cap asset class was allocated to an ETF with a sustainable mandate. It was the beginning of a conversation—an invitation to our customers to signal to the investing industry that this matters to them, and that there is demand for high quality values-driven ETFs. We expected that increased asset flows across the industry into such funds would continue to drive down expense ratios and increase liquidity. Since that original offering, which was the predecessor to what is now our Broad Impact portfolio, we’ve been able to expand the ESG exposure to now also cover Developed Market stocks, Emerging Market stocks, and US High Quality Bonds. We also now include ESG exposure to an engagement-based fund. Sufficient options also exist for us to branch out in two different areas of focus—Climate Impact, and Social Impact. 4. Most available SRI-oriented ETFs present liquidity limitations. In an effort to control the overall cost for SRI investors, a large portion of our research focused on low-cost exchange-traded funds (ETFs) oriented toward SRI. As with any of our portfolios, we aim to help maximize investors’ take-home returns by lowering the costs of the underlying funds. While SRI-oriented ETFs indeed have relatively low expense ratios compared to SRI mutual funds, our analysis revealed insufficient liquidity in many ETFs currently on the market. Without sufficient liquidity, every execution becomes more expensive, creating a drag on returns. Median daily dollar volume is one way of estimating liquidity. Higher volume on a given asset means that you can quickly buy (sell) more of that asset in the market without driving the price up (down). Of course, the degree to which you can drive the price up or down with your buying or selling must be treated as a cost that can drag down on your returns. Figures 1 and 2 below put the liquidity issues associated with trading two of the most widely traded SRI ETFs—ESGU and ESGD—into perspective by comparing their liquidity to the liquidity of other ETFs used in Betterment portfolios. Figure 1 compares the most liquid ESG funds, ESGU and ESGD, to the funds in Betterment’s Core portfolio, showing that ESG funds in general are less liquid than traditional market-cap based funds. Figure 1. In this figure we compare the median daily dollar volumes of the primary funds in the Betterment Core IRA portfolios as of June 2021 against those of ESGD and ESGU. As you can see, most funds that we currently trade in the Betterment portfolios have liquidity that surpasses that of ESGD or ESGU. Data: Factset. Median dollar value traded is measured over the past 45 trading days over the period ending June 3, 2021. However when compared to other ESG funds in Figure 2, ESGU and ESGD are some of the most liquid ETFs compared to other socially responsible ETF products. Liquidity is concentrated in the top few SRI funds Figure 2. ESGU, ESGE, and ESGD are more liquid than other fund options with SRI mandates. Certain SRI-oriented bond ETFs have more recently become liquid enough for inclusion in Betterment’s SRI portfolio, but the vast majority of these funds still lack sufficient liquidity. Data: Factset. Median dollar value traded is measured over the past 45 trading days over the period ending June 3, 2021. Please note that the tickers VSGX and SUSB in this figure are not included in the Betterment Broad Impact portfolio. In balancing cost and value for the Broad Impact portfolio, the options were limited to funds that focus on US stocks , Developed Market stocks, Emerging Market stocks, US Investment Grade Corporate Bonds, and US High Quality bonds. Accordingly, ESGU, ESGV, SUSA, ESGD, ESGE, ,EAGG, and SUSC are the ETFs with SRI mandates that we have selected for the Broad Impact portfolio. They are some of the ETFs with the largest AUM among broadly diversified SRI options, and our investment selection process shows that they have the highest liquidity relative to their size in the Betterment Broad Impact SRI portfolio. III. How is Betterment’s Broad Impact portfolio constructed? In 2017, we launched our original SRI portfolio offering, which we’ve been steadily improving over the years. In 2020, we released two additional Impact portfolios and improved our original SRI portfolio, the improved iteration now called our “Broad Impact” portfolio  to distinguish it from the new specific focus options, Climate Impact and Social Impact, and the legacy SRI portfolio for those investors who elected not to upgrade their historical version of the SRI portfolio (“legacy SRI portfolio”). For more information about the differences between our Broad Impact portfolio and the legacy SRI portfolio, please see our disclosures. As we’ve done since 2017, we continue to iterate on our SRI offerings, even if not all the fund products for an ideal portfolio are currently available. Figure 3 shows that we have increased the allocation to ESG focused funds each year since we launched our initial offering. Today all primary stock ETFs used in our Broad Impact, Climate Impact, and Social Impact portfolios have an ESG focus. 100% Stock Allocation in the Broad Impact Portfolio Over Time Figure 3. Calculations by Betterment. Portfolios from 2017-2019 represent Betterment’s original SRI portfolio. The 2020 portfolio represents a 100% stock allocation of Betterment’s Broad Impact portfolio. As additional SRI portfolios were introduced in 2020, Betterment’s SRI portfolio became known as the Broad Impact portfolio. As your portfolio allocation shifts to higher bond allocations, the percentage of your portfolio attributable to SRI funds decreases. Additionally, a 100% stock allocation of the Broad Impact portfolio in a taxable goal with tax loss harvesting enabled may not be comprised of all SRI funds because of the lack of suitable secondary and tertiary SRI tickers in the developed and emerging market stock asset classes.  Betterment has built a Broad Impact portfolio, which focuses on ETFs that rate highly on a scale that considers all three ESG pillars, and includes an allocation to an engagement-based SRI ETF. Broad ESG investing solutions are currently the most liquid, highlighting their popularity amongst investors. Due to this, we will first examine how we created Betterment’s Broad Impact portfolio. Further information on the Social Impact and the Climate Impact portfolios’ construction can be found in Section VI and VII. In order to maintain geographic and asset class diversification and to meet our requirements for lower cost and higher liquidity in all SRI portfolios, we continue to allocate to some funds that do not have SRI mandates, particularly in bond asset classes. How does the Broad Impact portfolio compare to Betterment’s Core portfolio? When compared to Betterment’s Core portfolio, there are three main changes. First, in both taxable and tax-deferred portfolios we replace the Core portfolio’s current US stock market exposure with an allocation to a broad ESG US stock market ETF (ESGU) and an allocation to a broad US stock market ETF focused on shareholder engagement (VOTE). Two other broad ESG US stock market ETFs (ESGV and SUSA) serve as the alternative tickers for ESGU, which are utilized by Tax-Loss Harvesting+ (TLH+). Currently, there are not any comparable alternative tickers for VOTE so this component of the portfolio will not be tax-loss harvested. Second, in both taxable and tax-deferred portfolios we replace the Core portfolio’s current Emerging Market stock exposure and Developed Market stock exposure with a broad ESG Emerging Market ETF (ESGE) and a broad ESG Developed Market ETF (ESGD), respectively. Because of limited liquidity among other Emerging Market and Developed Market SRI funds, non-SRI market-capitalization based ETFs, which are not screened for ESG criteria, are used as alternative tickers for TLH+. Third, in tax-deferred portfolios we replace the Core portfolio’s current US High Quality Bond and US Investment Grade Corporate Bond exposure with an ESG US High Quality Bond fund (EAGG) and an ESG US Investment Grade Corporate Bond fund (SUSC), respectively. A more subtle difference is that ESG funds tend to tilt away from small-cap stocks when compared to the broader market, as small-cap stocks often score poorly from an ESG perspective. As a result, the SRI portfolio may have limited investments in small cap stocks. Additionally, the Core portfolio has a tilt towards small cap and value, which is removed from all of the SRI portfolios in favor of using more funds screened for socially responsible criteria. ESGU, ESGV, SUSA, ESGD, ESGE, SUSC, and EAGG each track a benchmark index that screens out companies involved in specific activities and selectively includes companies that score relatively highly across a broad set of ESG metrics. ESGU, ESGD, ESGE, SUSC, and EAGG exclude tobacco companies, thermal coal companies, oil sands companies, certain weapons companies (such as those producing landmines and bioweapons), and companies undergoing severe business controversies. The benchmark index for ESGV explicitly filters out companies involved in adult entertainment, alcohol and tobacco, weapons, fossil fuels, gambling, and nuclear power. SUSA benchmark index screens out tobacco companies and companies that have run into recent ESG controversies (a few examples were mentioned earlier). VOTE tracks a benchmark index that invests in 500 of the largest companies in the U.S. weighted according to their size, or market capitalization. This is different from the other indexes tracked by SRI funds in the Broad Impact portfolio, because the index does not take into account a company’s ESG factors when weighting different companies. Rather than invest more in good companies and less in bad companies, VOTE invests in the broader market and focuses on improving these companies’ social and environmental impact through shareholder engagement. Some of our allocations to bonds continue to be expressed using non-SRI focused ETFs since either the corresponding SRI alternatives do not exist or may lack sufficient liquidity. These non-SRI funds continue to be part of the portfolios for diversification purposes. An example of how a Betterment Broad Impact portfolio for IRA accounts at a 70% stock allocation, with its primary tickers, is shown in Figure 4. Taxable portfolios are similar but with the replacement of US High Quality SRI Bond exposure (EAGG primary) by US Municipal bonds (MUB primary) as is implemented currently for Betterment Core portfolios. Figure 4. Betterment Broad Impact Portfolio for IRA – 70% Stock Allocation Based on the primary ticker holdings, the following are the main differences between Betterment’s Broad Impact portfolio and Core portfolio: Replacement of market cap-based US stock exposure and value style US stock exposure in the Core portfolio, with SRI-focused US stock market funds, ESGU and VOTE, in the Broad Impact portfolio. Replacement of market cap-based developed market stock fund exposure in the Core portfolio, with SRI-focused emerging market stock fund, ESGD, in the Broad Impact portfolio. Replacement of market cap-based emerging market stock fund exposure in the Core portfolio, with SRI-focused emerging market stock fund, ESGE, in the Broad Impact portfolio. Replacement of market cap-based US high quality bond fund exposure in the Core portfolio, with SRI-focused US high quality bond funds, EAGG and SUSC, in the Broad Impact portfolio. SRI portfolios can also support our core products for increasing after-tax returns, Tax-loss Harvesting+ (TLH) and Tax-coordinated portfolios (TCP). In the Broad Impact portfolio, because of limited fund availability in the developed and emerging market SRI spaces, we use non-SRI market cap-based funds, like VWO, SPEM, VEA, and IEFA as secondary and tertiary funds for ESGE and ESGD when TLH is enabled. How does the legacy SRI portfolio compare to the current SRI portfolios? There are certain differences between the legacy SRI portfolio and the current SRI portfolios. If you invested in the legacy SRI portfolio prior to October 2020 and chose not to update to one of the SRI portfolios, your legacy SRI portfolio does not include the above described enhancements to the Broad Impact portfolio. The legacy SRI portfolio may have different portfolio weights, meaning as we introduce new asset classes and adjust the percentage any one particular asset class contributes to a current SRI portfolio, the percentage an asset class contributes to the legacy SRI portfolio will deviate from the makeup of the current SRI portfolios and Betterment Core portfolio. The legacy SRI portfolio may also have different funds, ETFs, as compared to both the current versions of the SRI portfolios and the Betterment Core portfolio. Lastly, the legacy SRI portfolio may also have higher exposure to broad market ETFs that do not currently use social responsibility screens or engagement based tools and retain exposure to companies and industries based on previous socially responsible benchmark measures that have since been changed.  Future updates to the Broad, Climate, and Social Impact portfolios will not be reflected in the legacy SRI portfolio. IV. How socially responsible is the Broad Impact portfolio? As mentioned earlier, we first use the ESG data and analytics from MSCI to quantify how SRI-oriented our portfolios are. For each company that they cover, MSCI calculates a large number of ESG metrics across multiple environmental (E), social (S), and governance (G) pillars and themes (recall Table 1 above). All these metrics are first aggregated at the company level to calculate individual company scores. At the fund level, an overall MSCI ESG Quality score is calculated based on an aggregation of the relevant company scores. As defined by MSCI, this fund level ESG Quality score reflects “the ability of the underlying holdings to manage key medium- to long‐term risks and opportunities arising from environmental, social, and governance factors”. These fund scores can be better understood given the MSCI ESG Quality Score scale shown below. See MSCI's ESG Fund Ratings for more detail. Table 2. The MSCI ESG Quality Score Scale The ESG Quality Score measures the ability of underlying holdings to manage key medium- to long-term risks and opportunities arising from environmental, social, and governance factors. Scale 0-10 Score 8-10 Very high ESG quality — underlying holdings largely rank best in class globally based on their exposure to and management of key ESG risks and opportunities 6-8 High ESG quality — underlying holdings largely rank above average globally based on their exposure to and management of key ESG risks and opportunities 4-6 Average ESG quality — underlying holdings rank near the global peer average, or ESG quality of underlying holdings is mixed 2-4 Low ESG quality< — underlying holdings largely rank below average globally based on their exposure to and management of key risks and opportunities 0-2 Very low ESG quality — underlying holdings largely rank worst in class globally based on their exposure to and management of key ESG risks and opportunities Source: MSCI Based on data from MSCI, which the organization has made publicly available for funds to drive greater ESG transparency, and sourced by fund courtesy of etf.com, Betterment’s 100% stock Broad Impact portfolio has a weighted MSCI ESG Quality score that is approximately 21% greater than Betterment’s 100% stock Core portfolio. The data shown in Table 3 and the scale presented in Table 2 show that, on average, while current Betterment Core portfolios hold US, Developed and Emerging Market stocks that are of Average to High ESG quality, the funds that follow indexes based on ESG criteria in the Broad Impact portfolio invest in US, Developed and Emerging Market stocks that are of High to Very High ESG quality. MSCI ESG Quality Scores U.S. Stocks  Betterment Core Portfolio: 5.72 Betterment Broad Impact Portfolio: 6.30 Emerging Markets Stocks Betterment Core Portfolio: 4.72 Betterment Broad Impact Portfolio: 7.35 Developed Markets Stocks Betterment Core Portfolio: 7.26 Betterment Broad Impact Portfolio: 8.35 US High Quality Bonds  Betterment Core Portfolio: 6.28 Betterment Broad Impact Portfolio: 6.84 Table 3. Sources: MSCI ESG Quality Scores courtesy of etf.com, values accurate as of June 3, 2021and are subject to change. In order to present the most broadly applicable comparison, scores are with respect to each portfolio’s primary tickers exposure, and exclude any secondary or tertiary tickers that may be purchased in connection with tax loss harvesting. Because VOTE has yet to be evaluated by MSCI, we use the MSCI ESG score of SPY to derive the above values as it has a very similar investment nature to VOTE.  Another way we can measure how socially responsible a fund is by monitoring their shareholder engagement with companies on environmental, social and governance issues. Engagement-based socially responsible ETFs use shareholder proposals and proxy voting strategies to advocate for ESG change. We can review the votes of particular shareholder campaigns and evaluate whether those campaigns are successful. That review however does not capture the impact that the presence of engagement-based socially responsible ETFs may have on corporate behavior simply by existing in the market.  Engagement-based socially responsible ETFs have expressive value in that they allow investors to signal their interest in ESG issues to companies and the market more broadly. These aspects of sustainable investing are more challenging to measure in a catch-all metric, however that does not diminish their importance. We believe as this  field of sustainable investing expands, investors will demand increased transparency in fund sponsor’s corporate engagements. A Note On ESG Risks And Opportunities An ESG risk captures the negative externalities that a company in a given industry generates that may become unanticipated costs for that company in the medium- to long-term. An example of such a risk is the possible need to reformulate a company’s product due to a regulatory ban on a key chemical input. An ESG opportunity for a given industry is considered to be material if companies will capitalize over a medium- to long-term time horizon. Examples of ESG opportunities include the use of clean technology for the LED lighting industry. See MSCI ESG Ratings Methodology (April 2020) for more detail. For a company to score well on a key ESG issue (see Table 1 above), both the exposure to and management of ESG risks are taken into account. The extent to which an ESG risk exposure is managed needs to be commensurate with the level of the exposure. If a company has high exposure to an ESG risk, it must also have strong ESG risk management in order to score well on the relevant ESG key issue. A company that has limited exposure to the same ESG risk, only needs to have moderate risk management practices in order to score as highly. The converse is true as well. If a company that is highly exposed to an ESG risk also has poor risk management, it will score more poorly in terms of ESG quality than a company with the same risk management practices, but lower risk exposure. For example, water stress is a key ESG issue. Electric utility companies are highly dependent on water with each company more or less exposed depending on the location of its plants. Plants located in the desert are highly exposed to water stress risk while those located in areas with more plentiful water supplies present lower risk. If a company is operating in a location where water is scarce, it needs to take much more extensive measures to manage this risk than a company that has access to abundant water supply. V. Should we expect any difference in an SRI portfolio’s performance? One might expect that a socially responsible portfolio could lead to lower returns in the long term compared to another, similar portfolio. The notion behind this reasoning is that somehow there is a premium to be paid for investing based on your social ideals and values. A white paper by the Morgan Stanley Institute for Sustainable Investing, however, shows that this claim is questionable at best. This paper summarized the results from a study that analyzes the performance of nearly 11,000 funds from 2004 to 2018 and compares traditional funds to sustainable funds. The primary takeaway of the study revealed that there was no trade-off in performance when comparing sustainable to traditional funds. The study suggests they were only able to find sporadic and inconsistent differences in returns, which suggests that while there can be differences in performance over shorter time periods, over the long term there is likely no meaningful difference. The second significant finding from the study was that sustainable funds exhibited 20% lower downside risk, as measured by downside deviation. When considering the possible performance of Betterment’s SRI portfolios (excluding the legacy SRI portfolio), we examined evidence based on both historical and forward-looking analyses described below. When adjusting for the stock allocation level, the data indicates that the performance of Betterment’s Broad Impact portfolio versus our Core portfolio is not significantly different. Backtests Based On Historical Returns Past performance does not guarantee future results. Nonetheless, our analysis of historical returns is consistent with our assertion that the performance of SRI portfolios should track the performance of the Core portfolios very closely. An analysis of the historical total gross returns over the past four years shows that SRI portfolios and Core portfolios have been very highly correlated. In Figure 5 we illustrate this high correlation using Broad Impact IRA portfolios at a 70% stock allocation as an example. Both Taxable and IRA portfolios exhibit similar properties given other stock allocation levels. Figure 5. Betterment Core Portfolio vs Broad Impact Portfolio Monthly Returns Figure 5. Based on historical returns of a 70% stock allocation portfolio gross of all fees for the period starting May 31, 2017 and ending May 28, 2021.* But how do the net returns compare? In Figure 6 we show that the weighted expense ratios of the  Broad Impact portfolio is higher than those of Core portfolios at non-zero stock allocation levels (and the spread increases as you add more stocks to the mix). You might expect that the higher expense ratios would drag down the net performance of Broad Impact portfolios relative to Core portfolios. Figure 6. Weighted Expense Ratios For All IRA Portfolio Allocations Figure 6. Sources: Xignite. Calculations by Betterment as of June 3, 2021. Weighted expense ratios for each portfolio are calculated using the expense ratios of the primary ETFs used for IRA allocations of Betterment’s portfolios as of June, 2021. As it turns out, after reducing returns both by weighted expense ratios and a 0.25% annual Betterment fee, the performance of the Broad Impact portfolio ended up being similar to that of Core portfolio for the period starting May 31, 2017 and ending May 28, 2021, with the Broad Impact portfolio outperforming over this specific period. Table 3 provides an example of this claim for IRA portfolios at a 70% stock allocation. Performance summaries for other stock allocation levels as well as for taxable portfolios look similar. Table 4. Comparing Net Performance 70% Stock Allocation Portfolios for Period starting August 1, 2016 and ending February 28, 2021   Betterment Portfolio Betterment Broad Impact Annualized Return (net) 10.41% 12.14% Annualized Standard Deviation 11.02% 11.46% *Performance information for Table 4 ‘Comparing Net Performance’ and for Figure 5 ‘Betterment Core Portfolio vs Broad Impact Portfolio Monthly Returns’ for the Betterment allocations are based on a backtest of the ETFs or indices tracked by each asset class in Betterment’s portfolios as of June, 2021. Though we have made an effort to closely match performance results shown to that of the Betterment Portfolio over time, these results are entirely the product of a model. Actual client experience could have varied materially.  Performance figures assume dividends are reinvested and daily portfolio rebalancing at market closing prices. The returns are net of a 0.25% annual management fee and fund level expenses. Backtested performance does not represent actual performance and should not be interpreted as an indication of such performance. Actual performance for client accounts may be materially lower. Backtested performance results have certain inherent limitations. Such results do not represent the impact that material economic and market factors might have on an investment adviser’s decision-making process if the adviser were actually managing client money. Backtested performance also differs from actual performance because it is achieved through the retroactive application of model portfolios designed with the benefit of hindsight. As a result, the models theoretically may be changed from time to time and the effect on performance results could be either favorable or unfavorable. The returns of SPY were used as a proxy for the returns of VOTE for the purposes of this calculation due to their similar investment natures. See additional disclosure https://www.betterment.com/returns-calculation/. Source: Price data from Xignite. Calculations by Betterment. Forward-looking Analysis In Figure 7, we graph expected net total returns at each risk (stock allocation) level for both Betterment Core and Broad Impact portfolios. All expected total returns are expressed in annual terms and are net of the portfolio weighted ETF annual expense ratios and a 0.25% annual Betterment fee. Based on the application of Black-Litterman and mean-variance portfolio optimization methods, they are our best estimates of the actual returns, net of known fees, that you might expect to achieve on average annually. The expected net total returns of Betterment’s Broad Impact portfolio are only slightly below those of the Betterment Core portfolio. The higher weighted expense ratios of Broad Impact portfolios account for a large component of their expected underperformance. Figure 7. Comparison of Broad Impact and Core IRA Efficient Frontiers Assumes a risk-free rate of 2.77% Sources: Market capitalization data collected from S&P Dow Jones Indices, SIFMA, and Bank for International Settlements. Price data are from Xignite. A risk-free rate assumption of 2.77% is for a 10-year horizon and is derived using our methods for estimating the forward curve as of June 3, 2021. The forward looking returns are shown net of known fund fees and Betterment’s 0.25% management fee. Calculations by Betterment. Dividend Yields Could Be Lower Dividend yields calculated over the past year (ending June 3, 2020) indicate that income returns coming from Broad Impact portfolios have been lower than those of Core portfolios recently (see Figure 8). Oil and gas companies like BP, Chevron, and Exxon, for example, currently have relatively high dividend yields and excluding them from a given portfolio can cause its income return to be lower. Of course, future dividend yields are random variables and past data may not provide accurate forecasts. Nevertheless, lower dividend yields can be a factor in driving total returns for SRI portfolios to be lower than those of Core portfolios. Figure 8. Comparison of Dividend Yields Source: Xignite, Calculations by Betterment for one year period ending June 3, 2021. Dividend yields for each portfolio are calculated using the dividend yields of the primary ETFs used for IRA allocations of Betterment’s portfolios as of June, 2021. The dividend yield of SPY was used as a proxy for the dividend yield of VOTE for the purposes of this calculation due to their similar investment natures. VI. Climate Impact Portfolio Betterment offers a Climate Impact portfolio for investors that want to invest in an SRI strategy more focused on being climate-conscious rather than focusing on all ESG dimensions equally. The Climate Impact portfolio was designed to give investors exposure to climate-conscious investments, without sacrificing proper diversification and balanced cost. Fund selection for this portfolio follows the same guidelines established for the Broad Impact portfolio, as we seek to incorporate broad based climate-focused ETFs with sufficient liquidity relative to their size in the portfolio. How does the Climate Impact portfolio more positively affect climate change? Half of the stocks in the Climate Impact portfolio are allocated to iShares MSCI ACWI Low Carbon Target ETF (CRBN), an ETF which seeks to track the global stock market, but with a bias towards companies with a lower carbon footprint. By investing in CRBN, investors are actively supporting companies with a lower carbon footprint, because CRBN overweights these stocks relative to their high-carbon emitting peers. One way we can measure the carbon impact a fund has is by looking at its weighted average carbon intensity, which measures the weighted average of tons of CO2 emissions per million dollars in sales, based on the fund's underlying holdings. Based on weighted average carbon intensity data from MSCI (courtesy of etf.com), Betterment’s 100% stock Climate Impact portfolio has carbon emissions per unit sales more than 50% lower than Betterment’s 100% stock Core portfolio as of June 3, 2020. Because VOTE has yet to be evaluated by MSCI, we use the carbon intensity of SPY for this calculation as it has a very similar investment nature to VOTE. The remaining half of the International Developed and Emerging Markets stocks in the Climate Impact portfolio are allocated to fossil fuel reserve free funds, EFAX and EEMX. 40% of the U.S. stocks in the Climate Impact portfolio are allocated to a fossil fuel reserve free fund, SPYX, while the remaining 10% is allocated to the engagement-based ESG fund, VOTE. Rather than ranking and weighting funds based on a certain climate metric like CRBN, fossil fuel reserve free funds instead exclude companies that own fossil fuel reserves, defined as crude oil, natural gas, and thermal coal. By investing in fossil fuel reserve free funds investors are actively divesting from companies with some of the most negative impact on climate change, including oil producers, refineries, and coal miners such as Chevron, ExxonMobile, BP, and Peabody Energy. Another way that the Climate Impact portfolio promotes a positive environmental impact is by investing in bonds that fund green projects. The Climate Impact portfolio invests in iShares Global Green Bond ETF (BGRN), which tracks the global market of investment-grade bonds linked to environmentally beneficial projects, as determined by MSCI. These bonds are called “green bonds”. The green bonds held by BGRN fund projects in a number of environmental categories defined by MSCI including alternative energy, energy efficiency, pollution prevention and control, sustainable water, green building, and climate adaptation. How does the Climate Impact portfolio compare to Betterment’s Core portfolio? When compared to the Betterment Core portfolio allocation, there are three main changes. First, in both taxable and tax-deferred portfolios, replace 50% of our Core portfolio’s Total Stock exposure with an allocation to a broad global low-carbon stock ETF (CRBN) in the Climate Impact portfolio. Currently, there are not any viable alternative tickers for the global low-carbon stock asset class so this component of the portfolio cannot be tax-loss harvested. Second, we allocate the remaining 50% of our Core portfolio’s International Stock exposure, and 40% of our Core portfolio’s US Total Stock Market exposure to three broad region-specific stock ETFs that screen out companies that hold fossil-fuel reserves in the Climate Impact portfolio. US Total Stock Market exposure is replaced with an allocation to SPYX, International Developed Stock Market exposure is replaced by EFAX, and Emerging Markets Stock Market exposure is replaced by EEMX. In the Climate Impact portfolio, SPYX, EFAX, and EEMX will use ESG secondary tickers ESGU, ESGD, and ESGE respectively for tax loss harvesting. Third, we allocate the remaining 10% of our Core portfolio’s US Total Stock Market exposure to a fund focused on engaging with companies to improve their corporate decision-making on sustainability and social issues, VOTE. Currently, there are not any comparable alternative tickers for VOTE so this component of the portfolio will not be tax-loss harvested. Lastly, for both taxable and tax-deferred portfolios we replace both our Core portfolio’s US High Quality Bond and International Developed Market Bond exposure with an allocation to a global green bond ETF (BGRN) in the Climate Impact portfolio. Some of our allocations to bonds continue to be expressed using non-climate focused ETFs since either the corresponding alternatives do not exist or may lack sufficient liquidity. These non-climate-conscious funds continue to be part of the portfolios for diversification purposes. How do performance expectations compare to the Core portfolio? When some first consider ESG investing, they assume that they must pay a heavy premium in order to have their investments aligned with their values. However, as previously noted in Section V, the data suggests that the performance between sustainable funds versus traditional funds is not significantly different, although there can be differences over shorter periods. We also compared Betterment’s Broad Impact portfolio’s returns versus our Core portfolio’s and show the two are highly correlated. This holds true for the Climate Impact portfolio as well. BGRN, the global green bond ETF, was created in November of 2018, so backtests on historical returns are limited. However, we can still examine the Climate Impact portfolio’s return versus Betterment’s Core portfolio to get an idea as to whether they’ve been similar since BGRN’s inception. In Figure 9, comparing an IRA portfolio with a 70% stock allocation, we show that the returns of the portfolios are certainly directionally aligned, while the Climate Impact portfolio actually outperformed (+43.27% vs +39.45%) over the shorter time horizon. Betterment Core 70% Stock Returns vs. Betterment Climate Impact 70% Stock Returns Figure 9. This plot shows the cumulative return of the IRA 70% stock allocation for both the Betterment Core portfolio as well as the Climate Impact portfolio from November 28, 2018 to May 31, 2020. The returns of SPY were used as a proxy for the returns of VOTE for the purposes of this calculation due to their similar investment natures. Performance information for the Betterment allocations is based on the time-weighted returns of Betterment IRA portfolios with primary tickers that are at the target allocation every market day (this assumes portfolios are rebalanced daily at market closing prices). Dividends are assumed to be reinvested in the fund from which the dividend was distributed. Betterment allocations reflect portfolio holdings as of June 2021 and include an annual 0.25% management fee. This does not include deposits or withdrawals over the performance period. These allocations are not representative of the performance of any actual Betterment account and actual client experience may vary because of factors including, individual deposits and withdrawals, secondary tickers associated with tax loss harvesting, allowed portfolio drift, transactions that do not occur at close of day prices, and differences in holdings between IRA and taxable portfolios. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Market conditions can and will impact performance. Past performance is not indicative of future results. Source: Returns data from Xignite. Calculations by Betterment. Now that we have examined how the Climate Impact portfolio has performed historically since inception, we next focus on forward-looking analysis. In Figure 10, we show that the weighted expense ratios of Climate Impact portfolios are higher than those of Core portfolios at non-zero stock allocation levels (and the spread increases as you add more stocks to the mix). However in Figure 11, when we examine this difference within the context of our best estimates of future returns, net of known fees, the expected net total returns of Climate Impact portfolios are only slightly below those of Betterment Core portfolios. The higher weighted expense ratios of Climate Impact portfolios primarily account for their future expected underperformance. Figure 10. Weighted Expense Ratios for IRA Portfolio Allocations Figure 10. Sources: Xignite. Calculations by Betterment as of June 3, 2021. Weighted expense ratios for each portfolio are calculated using the expense ratios of the primary ETFs used for IRA allocations of Betterment’s portfolios as of June 2021. Figure 11. Comparison of Climate Impact SRI and Core IRA Efficient Frontiers Figure 11. Sources: Market capitalization data collected from S&P Dow Jones Indices, SIFMA, and Bank for International Settlements. Price data are from Xignite. A risk-free rate assumption of 2.77% is for a 10-year horizon and is derived using our methods for estimating the forward curve as of June 3, 2021. The forward looking returns are shown net of known fund fees and Betterment’s 0.25% management fee. Calculations by Betterment. VII. Social Impact Portfolio Betterment offers a Social Impact portfolio for investors that want to invest in a strategy more focused on the social pillar of ESG investing (the S in ESG). The Social Impact portfolio was designed to give investors exposure to investments which promote social equity, without sacrificing proper diversification and balanced cost. Fund selection for this portfolio follows the same guidelines established for the Broad Impact portfolio discussed above, as we seek to incorporate broad based ETFs that focus on social equity with sufficient liquidity relative to their size in the portfolio. How does the Social Impact portfolio promote social equity? The Social Impact portfolio shares many of the same holdings as Betterment’s Broad Impact portfolio, which means the portfolio holds funds which rank strongly with respect to broad ESG factors. The Social Impact portfolio looks to further promote the social pillar of ESG investing, by also allocating to two ETFs that specifically focus on diversity and inclusion -- Impact Shares NAACP Minority Empowerment ETF (NACP) and SPDR SSGA Gender Diversity Index ETF (SHE). NACP is a US stock ETF offered by Impact Shares that tracks the Morningstar Minority Empowerment Index. The National Association for the Advancement of Colored People (NAACP) has developed a methodology for scoring companies based on a number of minority empowerment criteria. These scores are used to create the Morningstar Minority Empowerment Index, an index which seeks to maximize the minority empowerment score while maintaining market-like risk and strong diversification. The end result is an index which provides greater exposure to US companies with strong diversity policies that empower employees irrespective of race or nationality. By investing in NACP, investors are allocating more of their money to companies with a better track record of social equity as defined by the NAACP. SHE is a US Stock ETF that allows investors to invest in more female-led companies compared to the broader market. In order to achieve this objective, companies are ranked within each sector according to their ratio of women in senior leadership positions. Only companies that rank highly within each sector are eligible for inclusion in the fund. By investing in SHE, investors are allocating more of their money to companies that have demonstrated greater gender diversity within senior leadership than other firms in their sector. For more information about these social impact ETFs, including any associated risks, please see our disclosures. How does the Social Impact portfolio compare to Betterment’s Core portfolio? The Social Impact portfolio builds off of the ESG exposure from funds used in the Broad Impact portfolio and makes the following additional changes. First, we replace 10% of our US Total Stock Market exposure with an allocation to a US Stock ETF, NACP, which provides exposure to US companies with strong racial and ethnic diversity policies in place. Second, we replace an additional 10% of our US Total Stock Market exposure with an allocation to a US Stock ETF, SHE, which provides exposure to companies with a relatively high proportion of women in high-level positions. As with the Broad Impact and Climate Impact portfolios, we allocate the remaining 10% of our Core portfolio’s US Total Stock Market exposure to a fund focused on engaging with companies to improve their corporate decision-making on sustainability and social issues, VOTE. Currently, there are not any viable alternative tickers for NACP, SHE, or VOTE, so these components of the portfolio will not be tax-loss harvested. How do performance expectations compare to the Core portfolio? When some first consider ESG investing, they assume that they must pay a heavy premium in order to have their investments aligned with their values. However, as previously noted in Section V, the data suggests that the performance between sustainable funds versus traditional funds is not significantly different, although there can be differences over shorter periods. We also compared Betterment’s Broad Impact portfolio’s returns  to our Core portfolio’s and show the two are highly correlated. This holds true for the Social Impact portfolio as well. NACP, the minority empowerment ETF, was created in July of 2018, so backtests on historical returns are limited. However, we can still examine the Social Impact portfolio’s return versus the Betterment Core portfolio’s return to get an idea as to whether they’ve been similar since NACP’s inception. In Figure 12, comparing an IRA portfolio with a 70% stock allocation, we show that the portfolios are directionally aligned, while the Social Impact portfolio actually outperformed (+47.37% vs +43.90%) over the shorter time period. Figure 12. Betterment Core 70% Stock Returns vs. Betterment Social Impact 70% Stock Returns Figure 12. This plot shows the cumulative return of the IRA 70% stock allocation for both the Betterment Core portfolio as well as the Social Impact portfolio from October 24, 2018 to May 31, 2021. The returns of SPY were used as a proxy for the returns of VOTE for the purposes of this calculation due to their similar investment natures. Performance information for the Betterment allocations is based on the time-weighted returns of Betterment IRA portfolios with primary tickers that are at the target allocation every market day (this assumes portfolios are rebalanced daily at market closing prices). Dividends are assumed to be reinvested in the fund from which the dividend was distributed. Betterment allocations reflect portfolio holdings as of June 2021 and include an annual 0.25% management fee. This does not include deposits or withdrawals over the performance period. These allocations are not representative of the performance of any actual Betterment account and actual client experience may vary because of factors including, individual deposits and withdrawals, secondary tickers associated with tax loss harvesting, allowed portfolio drift, transactions that do not occur at close of day prices, and differences in holdings between IRA and taxable portfolios. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Market conditions can and will impact performance. Past performance is not indicative of future results. Source: Returns data from Xignite. Calculations by Betterment. Now that we have examined how the portfolio has performed historically since inception, we next focus on forward-looking analysis. In Figure 13 we show that the weighted expense ratios of Social Impact portfolios are higher than those of core portfolios at non-zero stock allocation levels (and the spread increases as you add more stocks to the mix). However in Figure 14, when we examine this difference within the context of our best estimates of future returns, net of known fees, the expected net total returns of Social Impact portfolios are only slightly below those of Betterment core portfolios. The higher weighted expense ratios of Social Impact portfolios primarily account for their future expected underperformance. Figure 13. Weighted Expense Ratios for IRA Portfolio Allocations Figure 13. Sources: Xignite. Calculations by Betterment as of June 3, 2021. Weighted expense ratios for each portfolio are calculated using the expense ratios of the primary ETFs used for IRA allocations of Betterment’s portfolios as of June 2021. Figure 14. Comparison of Social Impact SRI and Core IRA Efficient Frontier Figure 14. Sources: Market capitalization data collected from S&P Dow Jones Indices, SIFMA, and Bank for International Settlements. Price data are from Xignite. A risk-free rate assumption of 2.77% is for a 10-year horizon and is derived using our methods for estimating the forward curve as of June 3, 2021. The forward looking returns are shown net of known fund fees and Betterment’s 0.25% management fee. Calculations by Betterment. Conclusion SRI portfolios are designed to help you express your values and social ideals through your investments. Despite the various limitations that all SRI implementations face today, Betterment will continue to support its customers in further aligning their values to their investments. Betterment may add additional socially responsible funds to the SRI portfolios and replace other ETFs as more socially responsible products become available. We are now able to provide you with multiple globally diversified SRI portfolios, at relatively low cost that are expected to track the performance of the long-standing Betterment Core portfolio closely. We also now are able to provide you with an avenue to influence corporate decision making. We believe shareholder engagement is a key component of evaluating sustainable investing products. We released our first SRI offering in 2017, with the stated intent to incrementally improve it over time, and we’ve done just that. You can think of these iterations as the latest, and certainly not the last step in that journey. By indicating what matters to you, as an investor, you are sending a signal to the financial services industry, which we will amplify, by bundling it with those of our other customers. As demand grows, and assets flow into funds that best reflect your values, those funds will become bigger, cheaper, and more liquid, continuing to erase whatever accessibility gaps remain between standard market-cap based index funds, and those that track a values-based index or actively engage with the companies they’re invested in. As a result, the SRI portfolio you opt for today will only keep getting better at expressing your values.

How We Help Investors Seamlessly Transfer Accounts Sep 16, 2020 12:00:00 AM Transitioning investment accounts from one provider to another can be tedious and complicated. Humans can help make it seamless and easy. Transitioning investment accounts from one provider to another can be complicated. You may be in the early days of exploration, wondering if adopting a new investment strategy is worth it. Or, you may know that making a switch is what’s best but it’s unclear how Betterment will handle the trading and operational steps required to complete your transfer. How we help customers transition to Betterment. We’ve largely automated the process of transferring outside investment accounts to Betterment. For most customers, our automations fully address their specific needs and a transfer can be self-serviced entirely online. For others, our online tools provide a great foundation, but there’s still a desire for more personalized advice during their transition. Qualified customers, looking for more high-touch support, have access to our Licensed Concierge and partner transfer-specialist teams, who provide personalized and dedicated guidance to customers exploring large and complex transfers to Betterment. For IRAs and 401(k)s, which can be directly transferred without creating a taxable event, we focus on investment strategy comparisons, minimizing advisor pushback, and ensuring that the accounts are moved using the most efficient transfer method available. For taxable accounts, especially those with large embedded gains, we take things a step further, offering personalized tax-impact and break-even analyses. Breaking down our taxable account guidance. As your fiduciary, we believe that transparency is key to making well-informed investment decisions. Whether you’re in the early stages of exploring if Betterment’s right for you, or fully sold and ready to get started, knowing the potential tax implications, and the trading and operational steps required to complete your transfers is important. Below, we offer a step-by-step preview into the Licensed Concierge-specific process. Step 1: Review Current Situation When a Licensed Concierge associate is connected with a new customer, our first priority is to understand the customer’s situation. We start by reviewing their current investment accounts to see if they are properly aligned to their financial goals from a fee, investment mix, and risk perspective. Misalignment in any of these areas can impact a customer’s likelihood of reaching their goals. Upon closer look, the individuals we work with are often surprised to find themselves invested in high-fee and high-risk accounts. Sometimes we learn they were referred to their advisor who charged a 1% management fee. Sometimes we discover they were sold actively managed funds that charged 1% to 2% in fund fees. Some were even do-it-themselves investors, who didn’t have the time to maintain proper account rebalancing, dividend reinvestment, or timely tax-loss harvesting. Whatever the case may be, if you’re looking to review your current situation and find that collecting the necessary information is hard to do on your own, we recommend syncing your accounts to Betterment. Our free, automated tooling will analyze your account details and let you know if you’re taking on too much (or too little) risk, paying too high of fees, or don’t have proper portfolio diversification. Syncing your accounts to Betterment will also allow our human-facing teams to better guide you, if need be. Step 2: Establish A Plan Once we understand a customer’s current situation, our next step is to put together a comprehensive assessment and action plan. While the details are unique to each customer, at a high-level, the moving parts are largely the same. Based on the firm where an account is currently held, the type of taxable account (individual, joint, trust), and the underlying investments, we are able to tell our customers: Whether making a switch to Betterment comes highly recommended based on any red flags from our Step 1 review. Whether the firm and account type can be moved electronically to Betterment through the ACATS network. Which of the current holdings (if any) can be moved to Betterment, in-kind without having to sell at the current provider first. What to expect once we receive the transferred account and begin transitioning it into the target Betterment portfolio. What the estimated tax-impact (if any) will be to move forward with the transfer to Betterment. The above information is delivered to the customer without industry jargon, so that making an official decision is as straightforward as possible. Step 3: Executing The Plan Assuming the customer would like to proceed with a transfer to Betterment, we’ll do a final check to ensure their Betterment account is set up properly. Once everything is in order from our side, we can begin implementing the transfer plan. Since it’s highly likely that our team has performed transfers from the customer’s current provider to Betterment, we’re able to be specific about what to expect throughout the process. We’ll communicate all of the steps involved, the expected timeline to complete, and when possible, we’ll handle any heavy lifting. We’ll regularly check-in and once the transfer has arrived, we’ll confirm with the customer and ensure any outstanding questions are answered. Putting it all together. Deciding whether it’s right to move money to a new provider is tough enough on its own, which is why having access to a dedicated expert can be especially valuable. With extensive onboarding and transfer experience, the Licensed Concierge and partner teams are here to ensure you fully understand how Betterment works and that your accounts are transitioned seamlessly. Interest in learning more about transferring an account to Betterment? Email us at: concierge@betterment.com. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional. This article is being provided solely for marketing and educational purposes and does not address the details of your personal situation and is not intended to be an individualized recommendation that you take any particular action, including rolling over an existing account. When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. Specific factors that may be relevant to you include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account, consult tax and other advisors with any questions about your personal situation, and review our Form CRS relationship summary and other disclosures. Betterment’s Licensed Concierge Team offers support for individuals transferring assets to Betterment of $100,000 or more, and receives incentive compensation based on assets brought to or invested with Betterment. Betterment’s revenue varies for different offerings (e.g., Betterment Digital and Premium) and consequently Team members have an incentive to recommend the offering which results in the greatest revenue for Betterment. The marketing and solicitation activities of these individuals are supervised by Betterment to ensure that these individuals act in the client’s best interest.

Traditional or Roth 401(k)? Sep 8, 2020 12:00:00 AM How to answer your employees’ most frequently asked questions about account types. A retirement plan is one of the most valuable benefits you can offer your employees, but it’s also one of the most confusing. Want to help your employees understand (and appreciate) your 401(k) plan? Start by helping them grasp the differences between Traditional and Roth 401(k)s. An employee quandary: Roth vs. Traditional 401(k) “Roth 401(k) vs. Traditional 401(k)—which do I choose?” “Can I pick both?” “Roth vs. Traditional 401(k)—is one better than the other?” “Roth vs. Traditional—I don’t understand the difference.” However your employees phrase it, one thing is clear: The decision to save in a Traditional 401(k), a Roth 401(k), or both is a difficult one.  Next time you’re faced with an onslaught of questions, consult this script for the answers you need to help your employees make an informed decision. Aren’t Roth accounts only available in IRAs? Thanks to the Taxpayer Relief Act of 1997, Roth IRAs have been around for more than 20 years. However, Roth 401(k)s were introduced in 2001, and have been used by retirement savers ever since. It’s important to note that unlike a Roth IRA, a Roth 401(k) doesn’t have any income limits so you can elect this account regardless of how much you earn.  How much can I contribute to a Roth or a Traditional 401(k)?  In 2020, you can contribute up to $19,500 to a Roth 401(k), a Traditional 401(k), or a combination of both. For example, you can contribute $10,000 to a Traditional 401(k) and $9,500 to a Roth 401(k). Plus, if you’re 50 or older, you can contribute $6,500 in catch-up contributions for a total 401(k) contribution limit of $26,000. What’s the difference between a Traditional and a Roth 401(k)? Let’s start with what’s the same. Both the Traditional and the Roth 401(k) offer special tax advantages that you wouldn’t receive from other taxable investing options. In addition, they’re both funded with contributions directly withdrawn from your paycheck. Finally, they’re both eligible for extra perks like an employer match (aka free money).   Now, here is the key difference: Traditional 401(k) contributions are made with pre-tax dollars while Roth 401(k) contributions are made with after-tax (otherwise known as post-tax) dollars.  Can you tell me more about the tax implications of the Traditional 401(k)? Traditional 401(k) contributions are deducted directly from your paycheck before any taxes are withheld. Here’s an example. Let’s say you earn $40,000 per year but save $3,000 in a Traditional 401(k). Your taxable income is lowered to $37,000 so you would pay less in taxes now.  In addition, the money that you contribute—and any earnings—grow tax deferred until you withdraw it in retirement. At that time, your withdrawals are considered ordinary income and you’ll pay federal and possibly state taxes depending upon where you live. And, if you want to withdraw money before you turn age 59 ½, you’ll also be subject to a 10% penalty unless you qualify for an exception. What are the tax implications of the Roth 401(k)? Like a Traditional 401(k), a Roth account is also tax advantaged—but in a different way. Here’s how it works:  If you decide to contribute to a Roth, the money is deducted from your paycheck after taxes have been withheld. So if you earn $40,000 but save $3,000 in a Roth 401(k), you’ll still be paying taxes on all $40,000.  However, the tax benefit comes into play when you withdraw the money. Because you already paid your taxes, you can withdraw contributions—and any earnings—tax-free if you’re age 59 ½ or older and have held your Roth 401(k) account for at least five years.  So in a head-to-head competition of Roth vs. Traditional 401(k) which one would win?  The short answer is that it depends on your unique financial situation and retirement goals. Want a little extra help? Use this calculator. But really, which type of 401(k) should I choose?  It can be helpful to ask yourself an important question: Do you want to pay your income tax now or later?  If you think your income will increase in the future perhaps because you anticipate getting promoted or earning an advanced degree, then you may fall into a higher tax bracket later. If this is the case, we would recommend making after-tax contributions into a Roth 401(k) account. However, if you foresee your income decreasing, for example, if you are planning on retiring, taking some time off, or leaving the workforce, then you will likely fall into a lower tax bracket in the future. If this is the case, you may be better suited to make pre-tax contributions into a Traditional 401(k) account. As a general rule: If your current tax bracket is higher than your expected tax bracket in retirement, then consider contributing pre-tax dollars into a Traditional 401(k) account. If your current tax bracket is the same or lower than your expected tax bracket in retirement, then consider contributing after-tax dollars into a Roth 401(k) account. What if I’m not sure if my tax rate will be higher or lower in the future?  If you’re on the fence about your tax rate, then it may be prudent to invest in both. By saving for retirement in both a Roth 401(k) and a Traditional 401(k), you’ll know that at least some of your assets will be well-positioned—no matter what the future holds.  What if I want to withdraw my money early—that is, before I turn age 59 ½? Let’s start with the Roth 401(k). Because you already paid taxes on your contributions, you can generally withdraw that portion of the money tax-free. Click here to read more, or we can also break it down further:  The portion of the withdrawal that represents your contributions to the account will generally be nontaxable (and not subject to the 10% penalty) The portion of the withdrawal that represents earnings will be taxable and potentially subject to the 10% penalty However, most early withdrawals from a Traditional 401(k) are taxed as ordinary income plus a 10% penalty. There are some exceptions such as permanent disability.  The tax ramifications of retirement accounts can be complicated. As Betterment is not a tax advisor, we encourage you to consult one ahead of making such decisions.  What if I don’t want to withdraw my money for a very long time (if at all)? When you turn age 70 ½, the IRS usually mandates that you begin withdrawing money from your Traditional 401(k) account. These withdrawals are known as Required Minimum Distributions (RMDs). Even if you roll over your Traditional 401(k) to a pre-tax IRA, the same rules apply.  You also must take RMDs from a Roth 401(k). However, you can roll over your money from a Roth 401(k) to a Roth IRA. If you do, you can avoid the RMD rules, and your account can continue to generate tax-free returns until after you or your spouse dies.  An employer opportunity Deciding between a Traditional and Roth 401(k) is just the beginning of the decisions your employees will face when it comes to saving for retirement. As an employer, you have the opportunity to educate, motivate, and inspire them to pursue their goals—and Betterment can help.  More than a typical retirement plan, Betterment offers an employee-first solution. As a 3(16) administrative and 3(38) investment fiduciary, we act in your best interests and are here to guide you every step of the way from plan design to year-end compliance testing. We’re also here for your employees with personalized advice on everything from whether to invest in a Traditional or Roth 401(k), how much to contribute, and so much more.   For more information, and more, get a free consultation today.  Get a Better 401(k) Note that Betterment for Business is a 401(k) provider for employers to offer to their employees.

Betterment’s Employee Demographics And Our Commitments To Doing Better Aug 14, 2020 12:00:00 AM We share details on the makeup of Betterment’s employees, our initiatives for diversity and inclusion, and how we’re encouraging progress within the fintech community. TABLE OF CONTENTS Betterment’s Employee Demographic Data Scaling Our Diversity And Inclusion Efforts Conclusion In June, our CEO and Founder Jon Stein made a statement: “Betterment will not stand for the unequal treatment of people of color in our company, in our communities, or in our country. We will advocate for our Black colleagues, friends, and fellow citizens and work harder to build a nation that’s just for all, where we all can pursue happiness, without fear, oppression, or unequal treatment.” Over the last two months, we’ve been hard at work learning how to live up to that promise and take a stand against racial injustice. We’ve formed a coalition with the broader fintech community, we’re increasing our transparency with our employees and our customers, and we’re investing in resources for our employees of color. We acknowledge that these initiatives are a work in progress, but we want to share them with the Betterment community. Betterment’s Employee Demographic Data First, we’d like to share the demographic data of our full-time Betterment team (293 employees as of July 7, 2020). The demographic data below is collected using the Equal Employment Opportunity Commission (EEOC) questions and selections during an employee’s onboarding process. Because of this, the type of information we collected is limited. Starting in 2020, we will provide optional opportunities for additional demographic selections (including but not limited to gender, race, and ethnicity) that are more inclusive for both employees and candidates. Full-Time Employees Leadership Team* *(defined as Director-level or higher): Product, Design, Engineering, And Analytics Teams Engineering Teams We've made progress with gender representation over the past few years, but we still have a long way to go. And our progress in racial and ethnic representation—particularly within our leadership cohort—is not where it should be. We have work to do here, and are committed to ensuring that our team better reflects the communities and customers we serve across the U.S. Scaling Our Diversity And Inclusion Efforts The conversations we’ve had internally as a community, and with your input, are helping inform and drive the sustained change we’re looking to make. We’re working toward a new normal in several ways: Fintech Coalition We recognize that the fintech industry needs to improve access to jobs, career advancement, and financial services, not only for underrepresented groups, but especially for people in the Black and brown community. To hold us and other fintech companies accountable to making this change, we spearheaded the creation of the fintech coalition. Each company that joins the coalition will publish individual plans and provide regular updates on progress toward our commitments to enhancing access to financial services, as well as job and career advancement for people in the Black and brown community. As part of the coalition, we are committed to publicly sharing our representation data on an annual basis each July. Betterment’s Call-to-Action Initiative Immediately following the murder of George Floyd, our employees formed a Call-to-Action (CTA) group. These employees have been brainstorming and executing a number of efforts to unbias our product, increase community outreach, and begin internal educational forums such as book clubs and speaker series. This group is committed to creating change over time, beginning with the following: Betterment is supporting our Black employees in “Calling Out Black” every Friday throughout the summer. Calling Out Black acknowledges the exhaustion, pain, and emotional weight our Black employees might feel in the workplace, especially during times of civil unrest due to police violence. These days provide space for our Black employees to reclaim their mental, emotional, and physical wellbeing. Beginning in 2021, Betterment will recognize Juneteenth as an annual paid holiday to commemorate the ending of slavery in the U.S. We are running a summer education series for our non-Black employees about racial inequality and anti-racist allyship, featuring guest speakers as well as small-group discussions. We’ll be working with Paradigm for a three-part Inclusive Leadership Training series beginning in late July. All managers will go through these sessions that are focused on objectivity, belonging and voice, and the growth mindset. In August, Netta Jenkins will provide company-wide training with her business Holistic Solutions, which will include a discussion forum for Black and brown employees, a session for people managers on how to manage during Black and brown trauma, and two town halls for the entire company. Improve Our Hiring Process Over the last few years, our Recruiting Team has taken steps to expand our new hire sourcing efforts and diversify our interview process. Some of these steps include: Partnering with Jopwell, the leading career advancement platform for Black, Latinx, and Native American professionals to support targeted sourcing of diverse candidates. Allocating funds on a monthly basis to post on underrepresented job boards (e.g., Women In Tech, Women In Product, Black Women in Tech, /dev/color, The Mom Project, etc.) Increasing our geographic diversity by building a remote workforce. We recognize that these efforts have failed to impact the percentage of employees of color at Betterment. Because of this, we have amplified our commitment to this area in four ways: With an employee population that is 70% white, we acknowledge that most folks refer others who look like them. We're pausing our cash referral bonus program to reallocate those funds to support diversity, equity, and inclusion (DEI) hiring initiatives. Implementing a more streamlined application process where all candidates only need a resume to apply. Continuing to reduce bias in our job descriptions by investing in technology that decodes gendered language; by excluding education requirements; and by including must-have qualities and experience only. Researching and partnering with companies that help us increase our sourcing reach. Increasing Internal Data Collection This summer, we will launch internal surveys to collect broader representation information for both employees and candidates. These surveys will include additional optional self-identification opportunities for racial and ethnic groups, as well as gender. We will share this information with leadership, ERSGs, and our Community Council on a quarterly basis, and will use this information to inform our progress and let us know where we need to focus our efforts. Amplifying Our Employee Resource Strategy Groups (ERSGs) We currently have seven active ESRGs: Black at Betterment, Latinx at Betterment, Asians of Betterment, Women of Betterment, Women in Tech, Betterparents, and Betterpride. Representatives from these groups act as facilitators between their communities and Betterment leadership, as well as participate in our Community Council, a group that meets on a regular basis to further diversity and inclusion initiatives. Through our partnership with Netta Jenkins, we’re investing time in evaluating and improving the structure and reach of our ERSGs. We want to create more open communication between these groups and company leaders, and ensure that these groups are represented as stakeholders in company initiatives. Conclusion Fintech—and Betterment—has been heralded for providing broad and equitable access to financial services, regardless of how much money someone has. While this access is a step forward, it doesn’t directly address the wealth and financial knowledge gaps felt by many people of color—particularly members of the Black and brown community—at the hands of a system that does not treat them equally. We know we haven’t done nearly enough for our community and our employees, and we must do more. Thank you for your feedback and support as we work to do just that.

The Benefits of Rolling Over Your 401(k) or 403(b) into an IRA Aug 13, 2020 12:00:00 AM Rolling over an old employer-sponsored retirement plan into an IRA can be highly beneficial. Here are three reasons to consider rolling over a 401(k) or 403(b). It might be easy to forget about 401(k)s from past employers, but you'll pay for it in the long run. Here are some reasons to consider rolling them over into one IRA. When you’ve switched jobs multiple times in your career, you may have participated in several employer-sponsored retirement plans, such as 401(k) and 403(b) plans. 401(k)s are generally provided by many for-profit employers, while 403(b) plans are most often used by the nonprofit sector. What many people don’t know is that when you leave a job, it’s important to consider carefully what you do next with your employer-sponsored plan. While working, one of the best ways to save for retirement is to fund an employer-offered plan because they often have important tax advantages and higher contribution limits than individual retirement accounts. But after you leave a job, there are several important reasons to consider rolling over funds from your 401(k) or 403(b). In this article, we’ll run through some of those reasons. 1. Accessing more investment options One of the main benefits of an IRA is that there are often more investment options than a 401(k) or 403(b) plan. If you contribute to your employer’s retirement plan, you might end up with only a few options chosen by the plan administrator. You might have to be heavily invested in company stock or you might have a limited number of high cost mutual funds to choose from. We don’t bring this up as a way of lambasting your administrator—they're simply trying to pick the options they believe should be made available to all employees—but many people don’t realize just how limiting these options can be. If you have an account with a previous employer, you may not have any worthwhile reasons to stay with the limited investment choices within the plan, and that’s one reason to consider rolling into an IRA. An IRA held at a brokerage or investment advisor, like Betterment, enables you to access a much broader universe of funds. For some investors, having the ability to pick and choose any variety of funds is important to them. At Betterment, our investment advice for an IRA (and any account type) is based on research-backed portfolio construction that pursues a highest expected return for the risk you’re willing to take on, while maintaining global diversification and low costs. 2. Lowering Your Investment Fees The fees with an IRA can sometimes be lower than what is charged by your plan administrator. In many 401(k) and 403(b) plans, the expense ratios (i.e. fees) on mutual funds and ETFs can be much higher than those available within IRAs. Also, depending on your plan, by keeping funds within your 401(k) plan after leaving your employer, you may be subject to management fees. Moving to an IRA may involve taking on fees for investment advice and management or trading costs, but all-in, when you do the cost analysis, an IRA can often be less expensive than a 401(k) plan. When evaluating fees, do keep in mind, that if your current employer-sponsored plan is among the nation’s top plans, it could also be worth your while to hold your funds there. 3. Managing Your Portfolio in One Place For many investors, part of the value of rolling over to an IRA comes from the peace of mind of having all of their past retirement contributions (and other investments) in one place, rather than spread out across multiple old employer-sponsored plans and investment providers. When you understand the full picture of your retirement savings, you can often make better estimates of what your future retirement budget could look like. Furthermore, depending on your situation, if you move your retirement assets to one provider, you can also improve the tax-efficiency of your taxable investments using asset location. You can learn more about how Betterment’s Tax Coordination of IRAs and taxable accounts helps increase potential after-tax returns here. Roll over correctly, and you probably won’t need to worry about taxes. Even with the above benefits of rolling over, many people hesitate on the fear of causing themselves extra taxes. The good news is that when rolling over a 401(k)/403(b) or any other employer sponsored plan, we use the direct rollover method to prevent any withholding or negative tax consequences. There are two important things to remember in regards to taxes when rolling over: Be sure to designate a withdrawal from your current provider as a rollover. A rollover from a traditional 401(k) or 403(b) should enter a traditional IRA. A rollover from a Roth 401(k) or 403(b), should end up in a Roth IRA. If you withdraw from a traditional 401(k) or 403(b) as a non-rollover before age 59 ½, you will face a 10% penalty for an early withdrawal. If you rollover from a traditional plan into a Roth IRA, you will have to pay income taxes on the money. Both of these situations are unnecessary for most investors, except in certain circumstances. The key is that when deciding whether to rollover a retirement account, you should carefully consider your personal situation and preferences. In this article, we’ve provided three general reasons to consider rolling over to an IRA, but as an individual investor, your situation is unique. This article is not an individualized recommendation that you take any particular action—just useful information for you to think about. As suggested above, there are a variety of factors to consider when evaluating the choice to make a rollover. In addition to the points above, you might want to consider: The investment options you have access to The current and future fees and expenses you face The investment services you need (and could gain or lose) Any penalties you could face when withdrawing your money Protections from creditors and legal judgments Required minimum distributions associated with certain accounts The treatment of employer stock within your employer plan The world of retirement planning is complicated, no doubt about that. So, before deciding to roll over an employer-sponsored plan, you should research the details of your current account and consult tax professionals and other advisors with any questions about your specific personal situation.

3 Ways To Pay Your Bills With Checking Aug 6, 2020 12:00:00 AM There are three different ways you can use Betterment Checking to pay your bills. Our mobile-first checking account can help make any tedious financial task easy. Paying your bills online with a checking account is an essential feature for most modern banking customers. For nearly everyone, being able to organize all of your monthly payments from a single funding account, selecting the details of the automatic payments, and then seeing a successful transaction are crucial checking components that may factor into choosing your financial institution. With a Betterment Checking account, you can easily pay your bills using your account information or your Betterment Visa debit card. Set up automatic payments for your monthly bills. Here are two ways you can set up automatic payments directly through vendors by providing them with your debit card information or your checking account and routing numbers. 1. Use your Betterment Visa debit card. You can simply enter your Betterment Visa debit card information on the merchant’s bill paying portal and it will pull directly from your Betterment Checking account. This can include the 16-digit card number, expiration date, and security code found on the back of your debit card. Your debit card is available for use anywhere Visa is accepted. 2. Use your account and routing number. You can use your account and routing numbers to pay your rent, student loans, credit card, phone bill, and more. Easily find your Checking account and routing numbers in your Betterment account by logging in on either a web browser or on your mobile app. When asked to choose the account type during payment, make sure to choose “checking.” Make an instant debit card transfer. Another way to pay your bills is by using your Betterment Visa debit card for instant transfers. For example, if your landlord uses third-party apps like Venmo, Cash App, and Zelle for rent payment, you can send an instant debit card transfer from your Checking account via your Betterment Visa debit card. However, not all landlords or property managers accept this, so make sure to confirm with them directly if they accept this method of payment. Betterment Checking: a financial experience made easy. With no overdraft fees or minimum balances, paying your bills with a funded Checking account can be stress-free: Rest easy knowing that your money is yours to spend how you see fit.

How Investor Sentiment Has Evolved During Covid-19 Jul 22, 2020 12:00:00 AM In the second part of a three-part series, Betterment examines how investors used their income and stimulus checks throughout the COVID-19 crisis. In March, Betterment surveyed a group of investors to examine how the COVID-19 crisis has impacted their financial security and spending habits, as well as gauge their reactions to the market turbulence. In part two of our three-part series, we surveyed that same group to see how investor sentiment has evolved. Four months into a nation-wide lockdown and record unemployment, we looked for whether people executed on the savings and investing actions they previously indicated, or if the impact of the virus has only caused investors to dig deeper into emergency funds and retirement accounts. Methodology An online reconnect to a similar survey conducted 7 weeks prior took place with a panel of potential respondents. The recruitment period was June 3 to June 16, 2020. A total of 2,450 respondents, who took both surveys, living in the United States, who are invested in the markets, completed the survey. The sample was provided by Market Cube, a research panel company. Panel respondents were invited to take the survey via email invitation and were incentivized to participate via the panel’s established points program. COVID-19's Financial Impact Over Time As COVID-19’s impact continues to be felt, we wanted to see how investors are reacting over time as we all adapt to the “new normal” that has consumed our daily and financial lives. The good news is that respondents seem to have a better grip on their finances since we last asked. Since March, investors feel less stressed about their financial situation. More investors have added to savings and fewer people have taken out debt. At least somewhat stressed out when it comes to their financial position and outlook: Took money out of the market in the last two weeks: Have no plans to tap into their long-term savings: Added to savings: Increased debt: Emergency funds are growing. When the financial impacts of COVID-19 first hit in March, 34% indicated they did not have a sufficient emergency fund in place. Since then, many investors looked to increase their financial buffer. A third of respondents indicated that since the first survey in March they have started an emergency fund and in the past few weeks, 39% of all respondents have either added to or opened a new savings account. Those who have kicked off an emergency fund in the past few months aren’t just those with the luxury to save. In fact, this group is more likely to say their income was impacted by COVID than those who still don’t have an emergency fund in place: 59% of those with new emergency funds reported having their income impacted by COVID in some way, vs. 49% of those who still don’t have an emergency fund. The stimulus check may have been a jumping-off point. Of those receiving a stimulus check, 41% indicated in March that they planned to put the check toward an emergency fund, and nearly everyone carried through on that plan. In June, 40% indicated that they did indeed put stimulus check funds toward their savings. How Investors Used Their Stimulus Checks In our first survey, investors who expected to receive a federal stimulus check outlined a variety of ways they planned to use that money. In part two, we asked how they ultimately did spend their checks. While most stuck to their word, by saving or stashing their check away in a safety net fund (40%), the data shows that investors who said they planned to invest it, pay off debt, or put it toward retirement may not have followed through on those intentions. Investors were also asked how they would primarily use a second check, should the government announce another stimulus package. Similar to how they used their first check, over a third of respondents (34%) indicated they would save it or put it towards an emergency fund.

Welcome to the Betterment 401(k) Jul 13, 2020 12:00:00 AM Find out how to make the most of your plan and start saving for your future. We’re excited that your company has chosen to help you prioritize your financial wellness with us, starting with your 401(k) plan. Betterment’s goal-based investing approach is designed to help you feel confident that the money you need will be there when you’re ready. Let’s get started. TABLE OF CONTENTS Importance of saving for retirement now How much to save How Betterment makes saving easy Getting started with your Betterment 401(k) Set up or update how much you save Traditional and Roth contributions Customize your retirement plan Your investments with Betterment Rolling over an old 401(k) to Betterment Access to your 401(k) funds Importance of saving for retirement now Retirement is a significant, long-term goal. That’s why, no matter where you are in your career, it’s never too soon to start saving in your 401(k). The sooner you start, the more you’re likely to have when you do retire, whenever that may be. And, of course, it’s never too late to start saving either. There are several advantages to saving for retirement through a 401(k): You can save on taxes Contributions (also called deferrals) made through payroll deduction are convenient and automatic You can legally save more than you can in other retirement vehicles, like an individual retirement account (IRA) In addition, your employer may make contributions to your 401(k) account on a matching (or other) basis. To find out if your employer makes contributions to your account, log into your account, click on “Documents” in the left-hand menu and choose “401(k) documents” to download your “Summary Plan Description” and read about “Contributions to your Plan.” How much to save Whether you decide to contribute to your 401(k) as a percentage of your paycheck or a flat dollar amount, the amount you put aside now is a big factor in how much you’ll have at retirement. Most experts recommend saving 10%–15% of your annual income. We can help you figure out how much you should be saving depending on when and where you want to retire. And, even if you can’t save that much now, save as much as you can every pay period, and commit to revisiting your contribution amount in the future. IRS rules determine how much you’re able to save in your 401(k). For 2020, you can save as much as $19,500 in your 401(k). Those aged 50 and older can save an additional $6,500. How Betterment makes saving easy Our approach uses low-cost exchange-traded funds (ETFs) so more of your money stays invested in your account. Betterment makes saving easy in other ways as well, all at no additional cost to you: Your Betterment dashboard allows you to see all of your financial goals—not just retirement—in one place We automatically incorporate sophisticated investment features that make your money work harder. For example, portfolios are automatically rebalanced, are automatically adjusted over time, and can benefit from tax coordination strategies We offer personalized advice that takes into consideration everything you tell us about you and your situation, including any other accounts you may have Getting started with your Betterment 401(k) Once you become eligible to save in your 401(k) plan, Betterment will create an account and send you a welcome email inviting you to start contributing and to establish your retirement goal. Were you automatically enrolled into your plan? By now, you’ve been notified that your employer is going to help get you started by automatically enrolling you into your 401(k) plan with a specific percentage of pay going toward your 401(k) account. Keep in mind that this default amount, which you see when you first enter your account, is just a starting point. You can increase or decrease this amount at any time. Set up or update how much you save You determine how much to contribute to your 401(k) account each pay period, either as a percentage of your paycheck or flat dollar amount. To set or update how much you’re contributing: Log into your account and choose your Retirement goal from the left-hand menu. Under “Accounts”, locate the contribution type (Roth or traditional) you’d like to update, and click on “edit” within the “Automatic Deposit” column On the next screen, toggle between “% Percent” and “$ Amount” to input the new desired rate or amount you’d like to save. Here, you’ll also see how much you have contributed to your account year-to-date and how much you have remaining before you reach the maximum allowable contribution amount Click on “Update setting” and your new contribution amount will be reflected in your next paycheck (or the next paycheck, if your change was made too close to deadline for payroll changes)   Traditional and Roth contributions Since they are part of your compensation, 401(k) contributions are taxable, but the IRS provides flexibility in letting you choose when to pay those taxes: now (Roth) or later (traditional). Roth 401(k): Taxes are paid up front before contributions to the plan are made. The advantage of making Roth contributions is that withdrawals—both the contributions and earnings—are tax-free once you hit age 59½, as long as you’ve held the Roth account for at least 5 taxable years. Traditional 401(k): Contributions are deducted from your paycheck before any taxes are withheld and will therefore lower your taxable income. Both the contributions and associated earnings are “tax-deferred” until you withdraw the funds, when taxes will be due. You can choose to make Roth contributions, traditional contributions, or both. Read more about how to decide what’s right for you. Customize your retirement plan Planning for retirement may seem overwhelming, but Betterment makes it easy. When you create a personalized retirement plan: You’ll get our recommendations on how much to save, and in which accounts You can see whether or not you’re on track to meet your goal every time you log into your account (and take steps to get on track if needed) You can input personal information like income and retirement age so that the advice is customized to your needs You can sync other accounts so our advice takes your entire financial picture into consideration To set up your personalized retirement plan: Log into your account and choose your Retirement goal from the left-hand menu From the “Plan” tab, click on “Get started” Follow the prompts and click “Finish setup” at the bottom of the “Review Allocation” screen. Don’t worry, you can always change your inputs! Next, track your current savings and sync any outside accounts you’re using to save for retirement Finally, click on “see your plan” to receive Betterment’s recommendations for how much you should be saving (and in which accounts) this year From the left-hand menu, you can also add other financial goals, like building an emergency fund or a vacation fund, and you can even open a cash or checking account. Your investments with Betterment Your retirement account is designed as a long-term investment. Market ups and downs along the way are a normal part of the process. We encourage you to maintain a long-term perspective and to avoid making rash decisions, like removing investments, based on events in the market. Read more about our investment approach. To get started, you’ll be defaulted into our Core Strategy, with a globally-diversified portfolio that’s built based on how long you have until retirement. Betterment will automatically rebalance and adjust your portfolio over time. As an alternative to your default portfolio, you may customize your investments at any time with our Flexible Portfolio option or by choosing one of our Socially Responsible Investing Portfolio strategies, the Goldman Sachs Smart Beta Strategy, or the BlackRock Target Income Portfolio for those in retirement. To learn about these options or to change your portfolio, go to the “Holdings” tab of your Retirement account, and click “Edit” underneath “Portfolio Strategy”. Rolling over an old 401(k) to Betterment When you roll over (or move) other accounts to Betterment, you could lower your investment fees and get personalized advice. Having your retirement accounts in one place can make it easier for you to keep track of your savings. Plus, you’ll be invested in a diversified portfolio and can take advantage of our tax-smart features, which could mean more money in retirement. Start your rollover now to move your 401(k) over from another provider. Questions about whether you should roll over to your 401(k) plan or a Betterment IRA? We’ve got answers. Access to your 401(k) funds Your 401(k) account is designed for retirement, so access to your funds is limited. Keeping your retirement savings invested, even when you change jobs, means that it can continue to grow for the benefit of your future. Generally, you cannot withdraw your 401(k) savings before turning 59½, unless you leave your employer (or become disabled or pass away). If you are still working for your employer, your plan may include provisions that allow you to access funds in a couple of ways: Loans may enable you to borrow a portion of your 401(k) account and repay it over time with accrued interest. This does not impact your credit score because you are borrowing from your own account. Hardship distributions. According to IRS rules, this type of distribution must: be due to an immediate and heavy financial need be necessary to satisfy that need not exceed the amount you needed A hardship distribution to an employee younger than 59½ often includes a 10% early withdrawal penalty. The money you withdraw may also be taxable. In addition, if you were impacted by COVID-19 and your plan adopted certain provisions, you may qualify for special distributions and/or loans in 2020. If you have left your employer, learn about your options with respect to your 401(k) account. Information on the withdrawal and loan provisions can be found in the “Summary Plan Description” (SPD), available within your Retirement account by clicking “Documents” on the left-hand menu and navigating to “401(k) documents”, or within your 401(k) account as part of the withdrawal menu. Didn’t find what you were looking for? Get answers to commonly asked questions and a variety of saving and investing topics via our FAQ or our educational articles. You can also start planning for the future with our free interactive tools. If you’re looking for more in-depth advice or to feel more confident about your financial decisions, consider our advice packages. Our Customer Support Team is available five days a week to help answer questions about your account. Reach out here. Want to educate yourself on retirement planning and financial wellness? Check out our employee resources for more articles and videos.

How to Use Your Bonus Wisely to Get a Tax Break Jul 1, 2020 12:00:00 AM Bonuses are tricky. Here's how you can make your bonus work harder for you by reducing the tax impact. How are you planning to spend your annual bonus? Like with any cash windfall, we all want to use it wisely. But bonuses can be tricky because of taxes. To use a bonus most tax-efficiently, you’ll need to juggle multiple objectives and concerns. If you’re expecting to get more than one bonus per year, it’s important to consider all of the possible ways to invest a bonus to maximize its potential value. In this article, we’ll review how bonuses are typically taxed, what factors you should be aware of, and how to take advantage of different accounts and investing strategies to make your bonus work harder for you. How Does a Bonus Get Taxed? Bonuses are considered “supplemental income” by the IRS, which means they could be withheld differently than your regular salary. The IRS suggests a flat withholding of 22% from bonuses, and many employers follow that method. (Remember that withholdings are meant to be an estimate of how much you’ll owe at the end of the year, not the actual tax itself.) But some employers use the aggregate method, in which your whole bonus is added to your regular paycheck, and the combined amount is withheld at the normal income rate, as though that amount is representative of what you make every paycheck, which could be higher (or lower) than 22%. Some people believe that bonuses are taxed at a higher rate than ordinary wages, but that’s not the case. The aggregate method of withholding can result in bumping you into a higher estimated tax bracket, which creates the illusion that you “keep less of it,” but no special tax rates apply just because a payment from your employer is characterized as a bonus. A bonus is like a raise, but when your income goes up, it could do more that just move you to a higher tax bracket—you could potentially lose certain deductions and tax credits. Bear in mind, while we hope you find this information helpful, you should consult a tax professional to understand your individual circumstances. Betterment is not a tax advisor, so while we like to offer helpful information to get you started, this should not be considered tax advice. With that said, here are some simple suggestions for how you can use tax-deferred or even taxable accounts to help preserve and grow your windfall. 1. Boost Your 401(k) Before you add your bonus to your 401(k), check with your employer about how bonuses are handled. In some cases, your company may not allow you to make 401(k) contributions using your bonus. In others, your 401(k) plan may be set up to withhold the same percentage from your bonus as from your paycheck. Thus, if you typically contribute 10% from every paycheck to your 401(k), that same amount could be withheld from your bonus (unless you say otherwise). In the case of a $15,000 bonus, $1,500 would go into your 401(k), which may be too little for your aims. The Max Contribution Limit for a 401(k) Of course, you can’t contribute more than the annual limit, so be sure to check how much you’ve contributed for the year to date. The contribution limit for your 401(k) for 2020 is $19,500 ($26,000 if you’re 50 or older). You can choose any combination of pre-tax or Roth contributions as part of your total contribution limit.  Not sure which type is good for you? Many participants “split the difference” and contribute 50% pre-tax and 50% Roth. To figure out what kind of contribution might work well for you, use Betterment’s traditional vs. Roth 401(k) calculator. Also, don’t assume that a lump-sum deposit is best, especially if your employer matches your 401(k) contributions. A single large deposit might not get the same amount of matching dollars that a comparable amount would if you spread the deposits over time. Betterment’s resident CFP® professional Nick Holeman notes that it depends on your employer’s matching structure. Certain plans offer a “true-up” for matching contributions if you max out early in the year while many plans do not offer that feature. Talk to your employer to find out exactly how they calculate the match. 2. Take Advantage of Multiple Accounts Now here’s the part you may not be aware of: depending on your income and whether you or your spouse is participating in a company retirement plan, you might be able to reduce your taxable income further by contributing to your flexible spending account this year (the maximum is $2,750 for 2020), a health savings account (the maximum for a family is $7,100 for 2020), and a traditional or Roth IRA. Many people don’t realize that you can participate in a company plan and still fund a traditional or Roth IRA. You could contribute to your 401(k) this year, and contribute to a traditional or Roth IRA as well, or a combination of those. As the IRS notes: You can contribute to a traditional or Roth IRA whether or not you participate in another retirement plan through your employer or business. However, you might not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. Roth IRA contributions might be limited if your income exceeds a certain level. 3. Invest in a “Happiness Annuity” If it’s not possible or advantageous to put your money only into tax-deferred accounts, use your windfall to invest by creating “a gift that keeps on giving.” You could spend it all, sure, but by investing your windfall in a well-diversified portfolio, you can create an additional source of cash flow that steadily adds to your quality of life, year after year: i.e. a happiness annuity. Studies show that steady cash flow increases often feel better than a lump sum that’s here today, spent on the Canary Islands tomorrow.

Taking Action Against Racial Injustice Jun 12, 2020 12:00:00 AM Betterment shares with our customers how we’re taking action against systemic racial injustice.

If We Aren’t Changing The System, We’re Perpetuating It Jun 1, 2020 12:00:00 AM Betterment will not stand for the unequal treatment of people of color in our company, in our communities, or in our country.

Here’s How Other Millennials Are Saving For Retirement May 27, 2020 12:00:00 AM Our research indicates that the majority of millennials and Gen Z are saving for retirement, and shows how much they’re saving.

Compound Interest Can Help Make You Rich May 27, 2020 12:00:00 AM Compound interest is what helps your money make more money, and if you’re young, it’s a powerful tool you can take advantage of.

Video: How Can Tax Loss Harvesting Help? May 6, 2020 12:00:00 AM Tax loss harvesting (TLH) can be a silver lining in bad markets. In this video, Dan Egan, explains how it works at Betterment.  

Why You Should Consider Converting Your IRA Apr 30, 2020 12:00:00 AM If the market is down, you might be doing your future self a favor by converting all or some of your Traditional IRA into a Roth IRA. With great market volatility comes great opportunity. Drops in global markets can be stressful for many reasons, but they also provide opportunities to put yourself in a better financial position for the future. Our investing advice of doing nothing and staying the course is generally the direction we try to nudge you towards when markets are down. However, performing external account transfers and performing Roth conversions are two actions you may want to consider taking when markets are volatile. What is a Roth conversion? A Roth conversion is when you move money from your Traditional IRA to your Roth IRA. Not to be confused with a recharacterization, a Roth conversion is generally a taxable event. When you contribute to a Traditional IRA, you generally are able to deduct your contributions to avoid paying taxes now. Eventually, when you withdraw money out of your Traditional IRA, the amount you withdraw is considered taxable income. Comparatively, when you make deposits or conversions into your Roth IRA, you are using money that has already been taxed or will be taxed that year. Once money is in your Roth IRA, the contributions and any associated earnings will grow over time and withdrawals in retirement will be tax-free. From a tax perspective, putting as much money into your Roth IRA as possible, at a tax rate that’s as low as possible, is one of the best strategies you can use to make the most of your money. There are no income limits for converting to a Roth IRA, and you can perform as many Roth conversions as you want. It’s important to know that once you perform a conversion, you can’t undo it. Before you convert, it might be helpful to be aware of some of the common mistakes people make when performing Roth conversions. Here are a few reasons why you may want to convert your IRA when the market is down. Your income might be lower this year. If you or your spouse have been laid off, furloughed, or your working hours have been reduced, and your overall taxable income for this year is lower than it otherwise would be—then you may be in a lower tax bracket this year. Being in a lower tax bracket means that you’ll likely pay less taxes on your conversion than you otherwise would have. The balance of your Traditional IRA has dropped significantly. When the balance of your Traditional IRA drops, you are able to convert the same number of shares at lower market prices. This means you likely will pay less in taxes than if you converted those same number of shares at higher market prices. Growth from a global market recovery is better in a Roth IRA than a Traditional IRA. As global markets recover over time, the value of your converted holdings will likely increase. This increase in value will now take place in your Roth IRA, which is the most optimal place for money to grow. Down the line, when you start taking withdrawals out of your Roth IRA, you’ll be able to do so without incurring any taxes. How to Convert—We Help Make It Easy We can help you easily convert part or all of your Traditional IRA to a Roth IRA right from within your Betterment account. Just head to Accounts and find your Traditional IRA. On the right-hand side, click the three dots and you’ll see the option to “Convert to Roth IRA.” It generally takes 1-2 business days for Roth conversions to fully complete. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

What Encryption Means for Your Financial Security Apr 16, 2020 12:00:00 AM Encryption and hashing are mechanisms used to conserve your data’s confidentiality and integrity, so that your secrets are kept secret when you send them to us and our servers. You have secrets. They could be passwords, credit card numbers, or even your social security number (SSN). In this digital age, sometimes you have to share those secrets with specific companies, like your financial providers. Encryption is a way to help ensure the confidentiality of a communication between you and the intended recipient, allowing you to share your secrets with that recipient—and no one else. The Problem When you send a message on the internet, it passes through infrastructure maintained by different corporations and people. These parties include people sharing your Wi-Fi network, your employer, and your Internet Service Provider (ISP)—and any one of them could potentially read your messages. When you sign up with Betterment, you must provide your SSN. If we were to send the digits of your SSN over the internet without using encryption, your secret could be exposed to any one of the parties that exist between your computer and our servers. The Solution Fortunately, the problem has already been solved. We use encryption to prevent unauthorized parties from reading your data. To encrypt a message, your computer uses a secret encryption key to “jumble” letters in a specific way into what is known as ciphertext. Only those with the appropriate decryption key are able to turn the ciphertext message back into a meaningful one in the form of plaintext (i.e., your original unencrypted message). The keys are shared between the two parties through a secure key exchange protocol. Encryption makes it significantly harder for anyone besides you and your intended audience to be able to read your messages, since they would not have the secret key necessary to decrypt your message. For example, instead of sending your SSN, your computer sends the encrypted version of your SSN, which is also encoded to prevent transmission errors and would look something like: U2FsdGVkX18eKKilyXU8SGAwB/3Si0YrQcbrU223/YU= To anyone able to view the above ciphertext in our SSN example, the message is a meaningless sequence of characters. Our servers are the intended recipient and have the appropriate decryption key, so we can actually read this and turn it back into the original plaintext message, which is your actual SSN. Betterment helps keep your account secure. At Betterment, we handle many secrets. We use encryption, among other security procedures, to help ensure the confidentiality and integrity of data in transit between your device and our servers. When you log in to your Betterment account on your web browser or mobile app on an untrusted network, such as a coffee shop with an open Wi-Fi network, your communication with Betterment is encrypted. Hence, it cannot be read by anyone snooping on your communications via the open network. Once we receive your data, we store some of it when necessary so that it can be made available to you the next time you access your account. Encryption is used internally within our systems to safeguard the secrets you’ve entrusted us with. Any of your secrets that need to be stored on our servers are first encrypted, and then stored in ciphertext form. The original secret itself is never stored in plaintext form. Secrets should stay hidden, even to us. In some cases, we don't need the ability to read or know the actual value of your secret. Take passwords, for example. A password is used to authenticate you under the assumption that it is something only you know, and no one else knows. When you try to log in to your Betterment account, we only need to verify that the password you entered when logging in matches the one you entered when creating your account. How can we compare the two values without actually looking at your password? Enter hashing. Hashing algorithms are used when we want to store a secret, but we do not need the ability to decrypt it. For example, your passwords are hashed. This process turns them into an unreadable sequence of characters, called a hash. Unlike encryption, hashing can’t be reversed. Given a hashed message, you cannot retrieve the input that generated the message. When you log in, the password you entered goes through the same hashing algorithm used when you set up your account. The hash of the password you just entered is compared to the hash we have on file from when you registered your account. If the hashes are the same, then you’ve entered the same password. We can therefore allow you to log in without ever storing your actual password—only the hash. Please note this article’s purpose is to explain some of the core concepts behind securely storing secrets, and as a result it presents a simplified view of complex technical processes. We're here to help. Have questions about how to keep your account safe? Feel free to reach out to us. We’re always happy to help. We have a dedicated security team working for you and are happy to answer any questions you might have.

How To Transfer Assets In Volatile Markets Apr 6, 2020 12:00:00 AM Have a high-fee or high-risk brokerage account that you’ve been avoiding transferring due to potential tax consequences? Recent market volatility due to COVID-19, otherwise known as coronavirus, has caused investors to feel like they are riding an emotional rollercoaster. While our advice is usually to stay the course during times of market volatility, there are a few things you can do right now to help control your investment outcomes. Here’s Why Taxes Matter Recent volatility could potentially reduce the amount of potential capital gains you would realize when making a switch. This is especially important when transferring taxable investment accounts, since there aren’t any tax consequences when you transfer tax-sheltered retirement accounts. One of the biggest barriers to moving taxable brokerage accounts is that the transfer may require you to sell certain investments you own, either prior to initiating the transfer or, as soon as the transferred assets are received in-kind. This is because your new provider may invest in a portfolio that has different assets in it than your old provider. For example, at Betterment we invest our customers’ assets into a diversified portfolios of low-cost ETFs. When possible, we will transfer assets in-kind via ACATS—but sometimes assets must be sold if ACATS isn’t an option for a given situation. If the investments you need to sell are trading at a large gain—way above what you originally bought them for—then there may be significant tax implications of making the switch. With markets currently down, the gains on your investments may not be as large as they previously were, which could lower or even eliminate the amount of taxes you’ll owe. Three Reasons To Consider Moving Your Investments We speak to prospective customers every single day who have good reasons to move their investments to Betterment. Here are the three most common situations where it’s worth considering a transfer, regardless of how the markets are behaving. 1) You Have Accounts With High Fees There are several fees you could run into when investing. Some of the most common are advisory fees and fund-specific costs, like expense ratios and mutual fund loads. While you can’t control how the market performs or what the tax laws say, fees are something that you actually can control. If you are invested in funds with high expense ratios or, you have an advisor that charges a high advisory fee—or even both—consider how much you could save by transferring. Our annual advisory fee is either 0.25% or 0.40%, depending on your plan. The average expense ratios of our portfolios range from 0.06 to 0.17%. Helpful Tip Even if you will incur taxes, consider running a break-even analysis to see how long it would take for what you’re saving on fees to outweigh the tax cost to switch. We have a calculator you can use to help you with your analysis. We recommend that you consult with a CPA or tax advisor if you have questions about your specific tax impact. Sync your other financial accounts to your Betterment account and we’ll uncover high fees for you. You can even sign up and try this out without ever having to fund your account—because we think it’s important for you to know this information. 2) Your Allocation Isn’t Quite Right We find that customers can be apprehensive about transitioning a stock-heavy portfolio. This is most likely because the portfolio has performed well over time, so the investor could realize large capital gains to divest out of large stock positions. While we always want to be mindful of taxes, our experts believe that prioritizing appropriate portfolio risk is more important than saving on taxes. If you have accounts that are more aggressive than what’s recommended for your goals, or you have high concentrations of single-stock, consider transferring to a portfolio that’s set to the appropriate risk level for you. At Betterment, we will worry about this so that you don’t have to. When you set up each of your investment goals, we’ll give you advice on what amount of risk is appropriate for your specific investment objective(s) and we’ll make sure you’re globally diversified. Helpful Tips Sync your other financial accounts to your Betterment account, so that we can analyze them. You can review how your current portfolio’s allocation and risk level compares to what we would recommend for you here at Betterment. If you hold individual stocks, our advice is to limit your investment in any one individual stock to no more than 10% of your overall investable assets. For example, if you hold $500,000 across all of your accounts and portfolios, you should have no more than $50,000 invested in any one individual stock. 3) You Own Mutual Funds That Pay Capital Gain Distributions Individual investors realize capital gains when selling shares at a higher price than what they were purchased for. However, there is another type of capital gain that you should be wary of when dealing with actively managed mutual funds—it’s called a capital gain distribution. Here’s how they work. Mutual funds invest in individual stocks and bonds. When a mutual fund manager sells underlying investments in the fund, they may realize capital gains, which are then passed on to individual shareholders—people like you and me. These distributions are taxable to shareholders. What’s even worse is that mutual funds can pay out capital gain distributions even if the fund’s overall performance is down for a year. This is just one of the many reasons why we invest in ETFs and not mutual funds here at Betterment. Helpful Tips Capital gain distributions are typically paid out at the end of the year. You can get estimates on these distributions from the mutual fund company directly, and compare it to your own cost basis in the investment. If the taxes you would realize from selling the investments are lower than the taxes you would pay on the capital gain distribution from the fund, then consider making the decision to sell your shares before the distribution is paid out. Making Lemonade Out Of Lemons While this recent market volatility may be hard to stomach, you may be able to use it to your advantage by making strategic investment decisions—like transitioning your investments into a lower-cost, properly diversified portfolio. Taxable account transfers are typically more complex than transferring IRAs, but we hope that this overview provides clarity and direction as you review your current investment strategies and consider making adjustments. Further, we’re here to help. If your taxable portfolio holds more than $250,000 in assets, stop stressing and simply reach out to our licensed transfer specialists at concierge@betterment.com. The service is complimentary and the team can review the specifics of your portfolio and provide you with a recommendation on how to best move—or not move—your assets to Betterment. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

What Should I Be Doing With My 401(k)? Apr 6, 2020 12:00:00 AM With the spread of COVID-19 and recent market volatility, it’s natural to wonder what you should do with your 401(k). With the spread of COVID-19 and recent market volatility, it’s natural to wonder what you should do with your 401(k). Betterment is here to help you navigate your financial life and work toward your retirement goals—whether the market is up or down. You can even join us for a live webinar on April 8. While everyone’s situation is different, we’ve put together some guidance based on common scenarios. Please consult a financial advisor, such as one of our CERTIFIED FINANCIAL PLANNERS™, to develop a specific course of action. What if I’m in a stable financial position? If you feel stable and have a fully funded emergency fund, we strongly recommend that you continue saving in your 401(k) plan. For most people, retirement is years, if not decades, away. And even if you’re approaching retirement, you’ll be spending down your savings for years. Make sure your retirement plan reflects your preferences and current situation. Consider increasing your contributions so that you have more time in the market. What if I don’t have an emergency fund? An emergency fund (or “safety net”) is a foundation of financial security built for times just like this. It’s better if you can save without altering your 401(k) contributions. If that’s not possible or will take too long, it’s okay to temporarily redirect some of your savings toward one. Create a Safety Net goal or Cash Reserve within your Betterment account. Save an amount equal to 3–6 months of expenses as quickly as you can. Once achieved, be sure to turn your 401(k) contributions back on. What if money is tight right now? We know times are hard for many people. First, we recommend looking for ways to cut back on non-essential spending. Little purchases can add up fast, and it’s better to give up a little now and continue the habit of saving. Additional steps: Check for temporary relief, including stimulus checks, student loan pauses, and mortgage breaks. If you expect a tax refund, file your taxes as soon as possible. If you have an emergency fund, consider using it. What if I need to use my retirement funds? If you have no emergency fund (or have used it all) and need money now, you may consider tapping into retirement accounts as a last resort. Fortunately, there’s a new Coronavirus-Related Distribution (CRD) that your plan may allow. This means you can: Access up to $100,000 from your account, with no withholding and no 10% early distribution penalty. Spread the income (and any income tax owed) over three years; but if you repay the distribution within 3 years, you won’t owe taxes. The CRD’s flexibility means it’s likely more beneficial than a 401(k) loan. That said, if your plan allows loans, you may be able to benefit from relaxed loan requirements, such as higher loan amounts and deferred repayments. Please contact your employer to determine if either of these options is available through your plan. What should I do if I’ve been furloughed or laid off? If you’ve been furloughed, you are technically still employed, so you can likely take steps outlined above. If you’ve been laid off, you have additional 401(k) considerations. Even if you can keep your 401(k) in your current employer’s plan, you may find that rolling over to an IRA provides you with additional flexibility. For example, you’re permitted to take a CRD from your IRA, just like the 401(k) CRD, which is a penalty-free withdrawal and can be repaid to avoid taxes altogether. Rolling over to a Betterment IRA means you can continue to take advantage of the same investment advice and platform features you had with your 401(k).

5 Tips For First-Time Investors During A Market Dip Mar 30, 2020 12:00:00 AM As a first-time investor, making that initial deposit and setting up your portfolio can be difficult. During a market dip? Even more so. Here are 5 tips to help you make the most of your money. Investing money for the first time may feel like diving into the deep end of the pool. It can be nerve wracking. This is especially true if you consider the current worldwide pandemic and volatile markets. Before taking any action, it’s important to make sure you have your basic needs, like monthly bills and childcare, covered first. After that, you can safely determine whether to begin investing or not. If you ultimately decide to, here are 5 tips to help new investors get started during a market downturn. 1. Have an emergency fund. Just because you want to invest does not mean you should dump every penny you own into the stock market. Set about three to six months’ worth of expenses and recurring payments aside in an emergency fund. This is a bucket of money that is held in either a high-yield cash account or very low-risk investments, and that you can access quickly if needed. Transaction Timeline Table Having an emergency fund will give you the freedom to invest the rest of your money more aggressively. 2. Invest at your own pace. Investing a lump sum all at once can be scary. Even though studies show that a lump-sum investment will outperform two-thirds of the time, you may not feel comfortable doing that, which is okay. Another approach is to invest a little bit at a time. One of the best ways to do this is by setting up an auto-deposit, where you choose the amount (ie. $300) and frequency (ie. monthly). That way you set your own pace. 3. Focus on your time horizon. Not all your investments need to have the same risk level. You are likely investing for many different financial goals at the same time, like a home down payment, future college expenses, or retirement. Each of these financial goals likely has their own time horizon, and thus should be invested differently. In general: Shorter-term goals should be invested more conservatively, and Longer-term goals should be invested more aggressively. Breaking your investments into goals allows you to better control your risk and build a personalized investing plan. For example, Betterment automatically adjusts your allocations over time to account for market performance and your goal’s time horizon, ensuring that we work for you through all the ups and downs. 4. Pay attention to historical context. As a new investor, you may not have much context or know what to expect in terms of performance. From 1854 to 2009, the U.S. has been through 33 economic downturns. On average, these downturns last for about 1.5 years. After each of the past downturns, the stock market has fully recovered and even surpassed previous all-time highs. That is all to say that we have been through many market dips in the past and likely will see many more in the future. They are an inescapable part of investing and are something that all investors, new and old, should learn to cope with. Though you may be tempted to withdraw all of your investments or even halt your auto-deposits, now is the time to stay the course. History has shown us that the market, and thus your portfolio, will recover. 5. Focus on what you can control. You can’t control the stock market. You also can’t control the news, inflation, GDP growth, or unemployment rates. However, you can control how much you save, how much risk you take, staying diversified, and how you react when markets get scary. In the long run, focusing on what you can control, and doing your best to ignore what you cannot control, is likely to give you better odds of investing success. Make educated decisions about your investments. New investors should not be discouraged by market dips. At Betterment, our passive investing model is derived from the idea that taking action based on market movement can be detrimental: contrary to what you might think, this could actually lower your returns. Despite this, when volatility hits, we are working for you. Our automatic allocation adjustments, portfolio rebalancing, features like tax loss harvesting, and updated personalized advice can help you ride out a market downturn. Ultimately, being thoughtful about your finances and overall risk in your portfolio during market uncertainty can  help you weather the storm, no matter how long the downturn lasts.

Who is Managing My Money—People Or Robots? Mar 24, 2020 12:00:00 AM We manage your money with the help of both human experts and technology—here’s why. Betterment receives thousands of questions per day from both current customers and future customers. Recently, we got a very interesting question: “I’m curious if my portfolio is managed by people or algorithms?” This question is particularly interesting because it hints at the goal we set out to accomplish when we launched in 2010: to democratize finance for as many people as possible. People or algorithms? It’s both! Our portfolios are designed by people and managed by algorithms. Our team of experts that shape the advice that we automate includes traders, quantitative researchers, tax experts, CFP® professionals, behavioral scientists, and many more. All the advice and activity that you see in your account was researched, prototyped, and implemented by people. On top of that, we look for potential improvements or new features—every day. We use technology to help accurately and consistently execute your investment strategy. There are some things that computers are just better at than us humans—monitoring every price change in the market, doing millions of calculations quickly—and we harness those comparative advantages to help do what’s best for your money. Day to day, our automated processes monitor and manage your portfolio. They rebalance your portfolio if it drifts too far away from your target allocation, and execute any tax strategies that you may have enabled. Technology is our force multiplier. A force multiplier is when a combination of factors come together to make something more powerful and successful than the individual factors would have been on their own. You’ve heard the phrase, “greater than the sum of its parts,” right? The combination of human talent with automated technology is the force multiplier that allows our company to help our customers make the most of their money. For example, while our tax-loss harvesting algorithm was developed by the experts who work on our investing and trading teams, it would be impossible for us to manually harvest losses for our customers. We’d have to monitor the daily balances of hundreds of thousands of accounts simultaneously. By converting our human-derived logic into instructions that machines can analyze and respond to, we are able to execute tax and investment strategies in ways that are likely faster and more accurate than doing it ourselves. Technology also allows us to scale our advice and offer it to more customers than we would have been able to otherwise. Automation is great—but we’ll never take it to 100%. We firmly believe that the best way to provide financial advice to our customers is to leave things that are easy to automate to the machines, and leave the rest to the humans. Machines are generally better than people at rule-based decisions, calculations at scale, and data-aggregation. People are usually better at complex decisions, abstract thoughts, and flexibility in logic and inputs. Today, we still believe that people are better suited than machines to deal with behavioral coaching, building advice models, and dealing with complex financial situations. To reflect this belief, we complement our automated advice with access to our financial planning experts through Advice Packages and our Premium service. These allow you to discuss your unique financial situations with one of our licensed financial professionals if the need arises. We also have a Support Team of dedicated professionals who are ready to answer any questions you may have about your account. Our mission is to do what’s best for your money. The line between the two realms of responsibility can shift and blur as computing power and algorithmic research marches on, but you can trust that all decisions that machines make on your behalf at Betterment have ultimately been vetted by a human. In short, the buck stops with people. Our mission is to empower people to do what’s best for their money, so they can live better. We aim to achieve that purpose every day, whether through human creativity and critical thought, or machine automation and precision—and most often a healthy dose of both.

Our Portfolio Is Built To Withstand Market Drops Mar 24, 2020 12:00:00 AM While we don’t know when exactly a market drop will happen, we’ve already prepared for it. We’ve recently seen a sizable drop—or in other words, a drawdown—in the stock market. In fact, it’s large enough to push U.S. equity markets into the first bear market in over ten years. While the last decade has been generally great for investors, there have been a few bumps along the way—like in 2018, when the Dow and S&P 500 both experienced the worst performance during the month of December since 1931. Seeing your investments lose value can cause feelings of fear or concern, but it’s important to remember that any long-term investor is going to see short-term losses at some point in time. There Will Always Be Ups And Downs Even in a good year, your portfolio can experience losses. Let’s take a look at how Betterment’s diversified 75% stock portfolio would have performed over the last sixteen years, assuming the makeup of our current portfolio. The graph below shows the portfolio’s largest drawdown within each year in red, as well as total return for each year in blue. As you can see, even though the portfolio ended the year with positive returns three times as often as it ended with negative returns, it experienced a negative return at some point during every year. Betterment’s 75% Stock Portfolio—Yearly Returns and Largest Drawdowns Source: Returns data from Xignite. Calculations by Betterment. Data ranges from January 1, 2004 to January 1, 2020. The Betterment portfolio historical performance numbers are based on a backtest of the ETFs or indices tracked by each asset class in a Betterment IRA portfolio as of March 2020. Though we have made an effort to closely match performance results shown to that of the Betterment Portfolio over time, these results are entirely the product of a model. Actual client experience could have varied materially. Performance figures assume dividends are reinvested and daily portfolio rebalancing at market closing prices. The returns are net of a 0.25% annual management fee and fund level expenses. Backtested performance does not represent actual performance and should not be interpreted as an indication of such performance. Actual performance for client accounts may be materially lower. Backtested performance results have certain inherent limitations. Such results do not represent the impact that material economic and market factors might have on an investment adviser’s decision-making process if the adviser were actually managing client money. Backtested performance also differs from actual performance because it is achieved through the retroactive application of model portfolios designed with the benefit of hindsight. As a result, the models theoretically may be changed from time to time and the effect on performance results could be either favorable or unfavorable. See additional disclosure here. Despite an average drawdown of 12%, as well as four years with drawdowns greater than 15%, the portfolio had an average yearly return of +8.2%. Even when things looked to be at their worst during the 2008 financial crisis, the portfolio’s largest drawdown was more extreme than the actual ending loss for that year. We Designed Our Portfolios With Drawdowns In Mind Betterment has over 100 portfolios to choose from—but don’t worry, we’ll recommend the right level of risk for each investing goal that you set up. Our recommendations consider both the amount of time you’ll be investing for, as well as the possibility that you could experience market drawdowns during that time frame. For goals with a longer time horizon, we advise that you hold a larger portion of your portfolio in stocks. A portfolio with more stocks is more likely to experience losses in the short-term, but is also more likely to generate greater long-term gains. For shorter-term goals, we recommended a lower stock allocation. This helps to avoid large drops in your balance right before you plan to use what you’ve saved. As your goal’s end date gets closer, we recommend that you reduce your risk -- we can also do it for you -- which helps to reduce the chance that your balance will drastically fall if the market drops. Below, we show the performance of three Betterment portfolios at different risk levels—90% stocks, 50% stocks, and 10% stocks. First, we look at the returns over a shorter period, a year-to-date snapshot ending March 17, 2020. Stock markets have experienced a significant drawdown to start 2020, and as expected, the lower risk (10% stock) portfolio had a smaller drawdown than the higher risk portfolios during this period. Betterment Portfolio Returns at Different Risk Levels (Jan 1, 2020 - March 17, 2020) Source: Returns data from Xignite. Calculations by Betterment. Data ranges from January 1, 2020 to March 17, 2020. The Betterment portfolio historical performance numbers are based on a backtest of the ETFs or indices tracked by each asset class in a Betterment IRA portfolio as of March 2020. Though we have made an effort to closely match performance results shown to that of the Betterment Portfolio over time, these results are entirely the product of a model. Actual client experience could have varied materially. Performance figures assume dividends are reinvested and daily portfolio rebalancing at market closing prices. The returns are net of a 0.25% annual management fee and fund level expenses. Backtested performance does not represent actual performance and should not be interpreted as an indication of such performance. Actual performance for client accounts may be materially lower. Backtested performance results have certain inherent limitations. Such results do not represent the impact that material economic and market factors might have on an investment adviser’s decision-making process if the adviser were actually managing client money. Backtested performance also differs from actual performance because it is achieved through the retroactive application of model portfolios designed with the benefit of hindsight. As a result, the models theoretically may be changed from time to time and the effect on performance results could be either favorable or unfavorable. See additional disclosure here. Next we look at the returns of our portfolios from the beginning of 2004 to March 17, 2020. As you might expect, the higher risk 90% stock portfolio grows faster than the 10% stock portfolio. It also experiences larger and longer periods of negative returns. Betterment Portfolio Returns at Different Risk Levels (Jan 1, 2004 - March 17, 2020) Source: Returns data from Xignite. Calculations by Betterment. Data ranges from January 1, 2004 to March 17, 2020. The Betterment portfolio historical performance numbers are based on a backtest of the ETFs or indices tracked by each asset class in a Betterment IRA portfolio as of March 2020. Though we have made an effort to closely match performance results shown to that of the Betterment Portfolio over time, these results are entirely the product of a model. Actual client experience could have varied materially. Performance figures assume dividends are reinvested and daily portfolio rebalancing at market closing prices. The returns are net of a 0.25% annual management fee and fund level expenses. Backtested performance does not represent actual performance and should not be interpreted as an indication of such performance. Actual performance for client accounts may be materially lower. Backtested performance results have certain inherent limitations. Such results do not represent the impact that material economic and market factors might have on an investment adviser’s decision-making process if the adviser were actually managing client money. Backtested performance also differs from actual performance because it is achieved through the retroactive application of model portfolios designed with the benefit of hindsight. As a result, the models theoretically may be changed from time to time and the effect on performance results could be either favorable or unfavorable. See additional disclosure here. If you were to focus on a short time frame—such as the beginning of 2020—you might be tempted to think that the 10% stock allocation is a better investment than the 50% or the 90% portfolios. But, when you consider a longer time window, it’s clear that the 10% portfolio lacks the potential for the greater returns that are seen in the portfolios with higher risk. You Can Reach Your Goals Despite Market Drops The path to investment growth can be bumpy, and negative returns are bound to make an investor feel uncertain. But, staying disciplined and sticking to your plan can pay off. Let’s consider a hypothetical 30 year old customer who started a Retirement goal in 2004 with an initial balance of $10,000 and ongoing monthly auto-deposits of $350. Below, we show the goal’s projected growth alongside the actual daily balance that the customer would have had over the 16-year period. Leading into 2008, the Retirement goal would have performed better than the median projected outcome, but due to the financial crisis in 2008, the balance would have fallen by as much as 45%. Retirement Goal—Projected vs. Actual Balance Source: Returns data from Xignite. Calculations by Betterment. Data ranges from January 1, 2004 to March 17, 2020. The Betterment portfolio historical performance numbers are based on a backtest of the ETFs or indices tracked by each asset class in a Betterment IRA portfolio as of March 2020. Though we have made an effort to closely match performance results shown to that of the Betterment Portfolio over time, these results are entirely the product of a model. Actual client experience could have varied materially. Performance figures assume dividends are reinvested and daily portfolio rebalancing at market closing prices. The returns are net of a 0.25% annual management fee and fund level expenses. Backtested performance does not represent actual performance and should not be interpreted as an indication of such performance. Actual performance for client accounts may be materially lower. Backtested performance results have certain inherent limitations. Such results do not represent the impact that material economic and market factors might have on an investment adviser’s decision-making process if the adviser were actually managing client money. Backtested performance also differs from actual performance because it is achieved through the retroactive application of model portfolios designed with the benefit of hindsight. As a result, the models theoretically may be changed from time to time and the effect on performance results could be either favorable or unfavorable. See additional disclosure here. The goal projections are for a 30 year old’s Retirement goal on January 1st 2004 with a starting balance of $10,000 and a monthly deposit of $350. The monthly deposit is applied on the first of each month. The goal has a target allocation of 90% for the duration of the time period considered. The average projected balance is derived from the median projected outcome. This hypothetical investor would likely have felt concerned about their portfolio falling below our average projected outcome—and that’s understandable. But, because they continued making their monthly auto-deposits and markets eventually bounced back, the investor would have also come to see their balance grow right back in line with our projections. The most recent market drop brings the balance below our average projected outcome, but remains within our projected range of returns. We’ve seen from previous market drops that sticking to an investment plan has paid off. Hopefully, this historical context may provide some reassurance to investors who stay the course and wait for their balances to bounce back over time. Our Advice: Focus On The Future A sudden drop in the stock market, like the one we’re experiencing now, typically comes with frightening news headlines and panic amongst investors. While some feeling of angst is perfectly normal, it’s important to remember that a temporary slow down in the markets doesn’t mean that they’ll continue to fall forever. If you need some help zooming out, remember that bad markets bring productive opportunities to tax-loss harvest, move your investments with less tax consequences, or make a one-time deposit to help rebalance your portfolio. We are working hard to push you closer to achieving your goals both when markets are up and when markets are down.

Jon Stein: Thoughts on 2020's Volatile Market Mar 19, 2020 12:00:00 AM Much of what Betterment has worked toward the past 10 years has been purpose-built to endure all the worst and the best the market has to throw at us. I started today like I imagine a lot of people around the world might have: Wondering about the latest news. Helping my wife come up with new ideas to entertain our two young daughters. Thinking about how fortunate we are to be together and healthy, and about those most vulnerable during these uncertain times. Connecting with coworkers remotely (and missing our in-person interactions). I’ve also been thinking about my family’s and our customers’ finances. I’ve been thinking about how we all can make smart decisions to make the most of our current situation. Relatives (who are also Betterment customers) have told me brokers are calling them, saying, “Now’s the time to buy,” and “Let’s transition your portfolio,” and, to all of them I reiterate the same thing I always say: “Invest appropriately for your goals. Invest regularly. Stay the course (aka, don’t try to time the market).” Betterment was born in the aftermath of the last financial crisis. Our vision, a smarter way to manage money for everyone, was based in no small part on what I saw during that time: Too many people making rash (often bad) financial decisions and struggling to make sense of the economic turmoil, because of a lack of good, outcome-oriented, fiduciary advice. Much of what Betterment has been working toward over the past ten years—the services we’ve built, the products we’ve launched, the customer-outcome-obsessed company we strive to be for you—has been purpose-built for times like these, to endure all the worst and the best the market has to throw at us. How we’re working for you in these challenging times. Betterment has migrated to fully remote operations, and our teams are all up and running. We are fortunate that we were well prepared for this; in 2019, we opened new offices in Philadelphia and Denver and onboarded a dozen remote employees living across the country. This experience has served us well in our current environment, and made it relatively easy for us to institute a mandatory work from home policy early on. Today, all of our team, all over the U.S., is working for you. Just like you, we have parents juggling meetings with at-home kids, and supportive teammates picking up extra work to allow those who need it to take time to care for loved ones. They’re answering your calls, building and launching our new checking account, or analyzing our trading, advice, and operations, and working hard to give you the service and advice you expect and deserve. That we’ve seen record call volumes might be no surprise. Our call hold times have been elevated: ~30 minutes in the recent, dramatic days of market volatility. For me, this was a positive surprise. It’s longer than I’d like it to be, but better than the busy signal I might have feared after hearing about it elsewhere. Our services have remained open and up through record trading volume. We’ve harvested billions of dollars of tax losses and rebalanced hundreds of thousands of customers smartly, and tax-efficiently, working to make the most of even down days. We’re also launching new ways to answer your questions and connect with you, including advice videos and live Q&A on platforms like Twitter and Reddit. We hear you, and we’re working as hard as we can to respond to your feedback and concerns. “Empower people to make the most of their money so they can live better.” That’s our mission at Betterment—the reason each of us joined and what brings us together. It’s our mission when the market is up and when it’s down. One of the things about working at Betterment is that every single one of us is a customer as well. It means that we’re working for you, and we’re working for our families. We celebrate with you when we reach our financial goals, and we hurt with you when the markets are in turmoil. We’re with you, working hard to help navigate spending, saving, investing, and retirement with confidence. We’ve known from the start that there will be good days and bad days in the market, as in life. We are invested in the world and with the world, in a global portfolio. As the world goes, so we go. Smart investing is the confidence to endure. On average and over time, being broadly and globally diversified is wise, today and every day. Historically, it has led to the most consistent returns, with the least amount of risk, of any widely available investment strategy that we have identified. Implementing it well requires discipline, smart automation, and appropriate identification of goals and time horizons. This approach and our advice are designed to help you make smart decisions today that help you reach your goals in the long-term. Everything we do is built with the intention of helping you achieve better results than you could without us, than anyone could without us. Just as importantly, everything we do is built to help you have peace of mind. But just because some may be better off, or more fortunate, doesn’t make anyone immune to the pain going on around us. As friends and loved ones are vulnerable or exposed and the worldwide economy goes through a rough patch, we feel it, too. Smart investing is not the absence of dark days, or the absence of fear, it’s the confidence to endure. We will get through this, and the economy will be stronger in the long run. Things will get better, for the world, our customers, our team—and you. Invest appropriately for your goals. Invest regularly. And stay the course. We’re here for you, should you want a hand to hold (or, better make that, a person to talk to), and we’ll get through it better, together.

Your Guide to Betterment Rollovers Mar 3, 2020 12:00:00 AM Moving your money to a new financial institution can be tedious and complicated. At Betterment, our goal is to make it easy and automatic. Here, we break down each rollover method and explain which might be right for you. We’ve talked before about why we believe Betterment is the best place to put your money if you’re investing for the long term: our globally diversified portfolio, low fees, personalized advice, and tax-efficient services that can increase your after-tax returns by an estimated 15% over 30 years. Read about all the benefits. Once you’ve made the decision to move your money to Betterment, there are a few different ways you can do so. Based on your account type and provider, we will automatically select an appropriate transfer method for you. If you’re ready to get started now, click the “Transfer” button from the Summary tab of your account. From the Transfer tab, click “Roll over an IRA or 401(k)” to begin moving your money to Betterment. Or, if you'd first like to learn more about each method, read our guide below. A Guide to Moving Your Money to Betterment: 2 Transfer Methods Direct IRA Transfer or Direct 401(k) Rollover via Check Moving money through ACATS is usually ideal because it’s a more efficient process, but in some cases, it’s not an option. To start, both firms must support ACATS transfers. Second, you must move funds between matching account types (i.e., IRA to IRA). Therefore, moving retirement money from an employer-sponsored account, such as a 401(k) or 403(b), into an IRA is generally not an option via ACATS. It’s also worth noting that if you own a mutual fund IRA account and not a brokerage IRA account, you cannot use the ACATS system. There may be other reasons why ACATS is not available for your specific account. In that case, we will automatically provide you everything you need to do a direct transfer or rollover via check. While there are a few more steps required, this method maintains many of the advantages that are tied to direct transfers. Not only can you complete as many direct transfers or rollovers via check as you would like in any given year, it’s considered to be a direct exchange between providers, meaning there are no tax penalties involved and generally no withholding. Read about how to roll over a 401(k) to Betterment. Indirect Rollover As a last resort, completing an indirect rollover is another way to move retirement funds between institutions. However, the many IRS rules and restrictions attached typically make it a last-resort choice. Not only are you limited to one indirect rollover per 365 days, but you must also distribute all or part of your account, take possession of the funds, and then redeposit the cash proceeds into a new IRA within 60 days. What’s more, it’s potentially reportable on your federal tax return. In addition, generally, the original firm withholds on the distribution, meaning you must make up the difference from your own funds, or else it may count as a taxable distribution. This can leave a lot of room for error, not to mention it requires a lot of manual work for you. If you have any questions about moving your retirement money to Betterment, we have experts on hand to assist. Ready to make the move to Betterment? Get started today. Betterment is not a tax advisor, nor should any information contained in this article be considered tax advice. Please consult a tax professional. When deciding whether to roll over a 401(k) account or another retirement account, you should carefully consider your personal situation and preferences. Relevant factors may include that: (i) 401(k) accounts may offer greater protection from creditors than IRAs. (ii) In some cases, the ability to take penalty-free distributions at an earlier age or to defer minimum required distributions. (iii) Some 401(k) accounts may also allow for loans or distributions in a broader set of circumstances than IRAs. (iv) Some 401(k) plans may also offer specific educational and advisory services to participants that are unavailable to some IRAs. (v) Some 401(k) plans may have lower fees and expenses than some IRAs. (vi) Some IRAs may offer a broader range of investment options that some 401(k) plans. (vii) Special tax rules may apply to the rollover of employer securities. You should research the details of your 401(k) and speak to a tax and other advisors about whether the features of your 401(k) are relevant to your personal situation. The rollover process is currently automated for rollovers from select providers. If you have a provider that is not part of our automated process, you will receive an email with a checklist for completing your rollover to Betterment. In processing you rollover request, Betterment will be acting at your direction.

How to Get the Most Impact Out of Your Charitable Donations Mar 3, 2020 12:00:00 AM This holiday season, use Betterment and Agora to make sure your money is having as much impact as it could. How do you want to change the world? No matter the cause you care about, being an effective donor means supporting the nonprofits that have the potential to achieve the most good. However, giving wisely can be tricky. Most of us make decisions using the information we have: a good friend’s recommendation, a convincing website, a well-planned fundraiser. The market is dominated by a small number of nonprofits with large marketing budgets. Roughly 5% of charities in the United States spend more than 86% of all charitable dollars each year. This concentration often leaves out smaller, potentially more innovative charities, and makes it difficult to evaluate real impact. This holiday season, take the steps to make sure your money is having as much impact as it could. How to Maximize Social Returns The first step in identifying the most effective nonprofits is to ignore rough proxies for impact, such as “overhead ratios.” An overhead ratio is the portion spent on management and general operating expenses compared to intervention expenses. Contrary to what you might think, low overhead ratios don’t necessarily indicate effectiveness, because quality management teams may require high overhead for research or to launch new programs. As a simple example, say you want to reduce New York City poverty by funding an after-school program. Program A has an overhead ratio of 10%. Program B has an overhead ratio of 20%. Which actually does the most good per dollar donated? What you really want to know is, per dollar, how many kids are taught and supported in a high quality way? Understanding the impact of your dollar—students taught, lives saved—requires more nuanced research than high-level metrics. Figuring out impact, however, gets complicated fast. The 30 largest foundations spend $3 billion on research and administration of grants, according to research and analysis done by Agora for Good, a platform that allows donors to build and manage virtual foundations with the support of expert guidance. As in investing, specific knowledge is key to appropriately evaluating a nonprofit’s performance. Platforms like Agora for Good help donors navigate this process by providing recommendations on highly effective nonprofits through partnerships with industry experts in each sector—health, education, and environmental protection. Want to address clean water, for example? Find vetted organizations that bring clean water to those in need for just $1 a year. Agora’s mission is that each dollar donated by an individual—from you, your friends in finance, your grandma—is as high impact as a dollar donated by the most well-informed, wealthy philanthropist. You can donate wisely through three simple steps. 1. Develop your giving strategy. Giving, like investing, works best when you proactively develop a strategy based on your vision and goals. Try not to only be reactive to requests for contributions; instead, start by envisioning your ideal world and the causes that would help us get there. With Betterment’s charitable giving service, having a strategy helps you take advantage of giving appreciated shares, which can help you earn certain tax advantages. Even if you just plan to give cash, developing a giving strategy can help you maximize your impact. 2. Optimize your donation amount for taxes. With a strategy in place, you can align your giving with your own potential tax advantages. Most charitable gifts can be deducted on your tax return if you itemize your deductions. Currently, individuals in the United States give just about 3% of their adjusted gross income (AGI). If you give appreciated shares with Betterment’s charitable giving tool, you will also avoid capital gains taxes on those shares. If you strategize well, you can effectively help free up more money when you give from decreasing your tax liability, which in turn helps you give more later. 3. Build your giving portfolio. Think of your donations as you would the money you use to invest. This means using a portfolio approach that lets you select the types of interventions you want to fund, and build a basket of investments. Platforms like Agora for Good can help by creating a single portal to manage, contribute, track your gifts. Here’s the truth: If you are a smart investor, you can—and should—be a smart donor. And with Betterment’s solution for giving shares, you can make your donations as tax-optimized as possible. Learn more about Betterment’s charitable giving tool.

Where in the World Are You Invested? Mar 3, 2020 12:00:00 AM Betterment's portfolio diversification includes holdings across 102 countries. Consider where your money is invested. One of the fundamentals of good investing is good diversification. But it's hard to do well. Here at Betterment we have done that work for you—every customer can easily invest in a globally diversified portfolio of up to 12 ETFs. We picked those 12 ETFs based on careful consideration. For the bond basket, we needed to balance domestic and international interest rate risk and credit risk; and for our stock basket, we needed an appropriate mix of sectors, countries, and capitalization factors. The result is that our customers can access a portfolio that is invested in 102 countries and in more than 5,000 publicly traded companies across the world—along with exposure to government debt, corporate bonds, securitized debt, and supranational bonds with a range of creditors and interest rate sensitivities.1 Why go global? As we mentioned above, it's hard to diversify well. One problem for do-it-yourself investors is that they tend to home-bias their portfolios. They prefer to invest in companies they are comfortable with—because they know them, or they are close to home. Unfortunately, that means they are less diversified than they should be, and expected performance may suffer. Betterment’s portfolio avoids this home bias by reflecting global stock market weights. U.S. stock markets make up about 48% of the world's investable stock market–the remainder is international developed (43%) and emerging markets (9%). You can see this on the fact sheet for the MSCI All-Country World Index. By using the world's markets as its baseline, the Betterment portfolio diversifies risk on a number of levels including currency, interest rates, credit risk, monetary policy, and economic growth country by country. Even as economic circumstances may drag down one nation, global diversification decreases the risk that one geographic area alone will drag down your portfolio. To diversify risk When we selected our bond basket components, we considered which factors affect bond returns—interest rates risk and credit risk. Then we selected funds that would diversify those risks. For example, with high-quality domestic U.S. bonds, the risk comes from a potential rise in interest rates, which will cause a fall in value for longer-dated bonds. To diversify away from this specific U.S. interest rate risk,  we picked another bond asset with low correlation—in this case, high-quality international bonds. The particular fund we used, BNDX, hedges out all currency risk; and includes bonds from stable international governments and international issuers, each of which have their own interest rate risk and credit risk. We also invested a smaller proportion in dollar-denominated emerging market bonds. These tend to have much higher coupons (4.9% at time of publication), but also more volatility in price, as they have a higher exposure to credit risk from international issuers. To capture growth Among our various stock basket components, we include international stocks in order to benefit from growth overseas in developed markets, including the U.K., Japan, Germany, France, Australia, and Switzerland. This helps our portfolio maintain similar expected returns as more concentrated domestic portfolios, but with lower risk. Then with the emerging markets stock component (VWO), we can capture growth in small but expanding markets such as Brazil, India, and China. This further diversifies our portfolio, and should boost expected returns, particularly at higher risk allocations. 1 The portfolio invests in 102 countries at all but 100% bonds and 100% stocks.

How To Avoid Money Fights Feb 12, 2020 12:00:00 AM If you’re like most people, you probably don’t look forward to talking about finances with your partner. Here’s one piece of advice you can start using today. Couples in healthy marriages are twice as likely to discuss money dreams together. But, discussing money can be difficult, which is why so many couples avoid it entirely. How can you start to have productive, healthy conversations with your significant other? Answer: a monthly financial check-in.  Below are tips on how to do it right, and why it works. What’s a monthly financial check-in? A monthly financial check-in is time set aside for you and your partner to talk openly about any financial topics you want. It’s an opportunity to look back on the previous month and to plan ahead for the next month. There are no strict rules on what you can and can’t discuss, as long as it’s money-related. Some common examples might be: Upcoming large expenses: Coachella, friends coming to town, or a wedding. Financial goals: Buying a home, saving for college, or retirement. Important tasks: Updating your W-4, opening a new credit card, or combining your finances in a joint high-yield cash account. Why monthly check-ins work so well. The key is balance. You want to talk about money, but it’s not healthy to have it creep into every conversation. A recurring monthly check-in solves both these problems. Some people don’t like talking about finances at all. A monthly check-in gives you a safe space to start the conversation. Other people think and talk about money all the time, which can be draining on a partner. Unless the matter is urgent, you can make a note and wait to bring it up until the next monthly check-in. 3 Tips To Make Them Effective Choose a fun location: Try a new coffee shop or head to your favorite sandwich spot. Finance isn’t always fun, so tying your monthly check-in to something exciting can help. Set a time limit: Don’t let your monthly check-ins drag on for too long. Talking money can be mentally draining, so try limiting your check-ins between 30 and 60 minutes. Avoid placing blame: For example, if your partner went over budget last month, don’t berate them. Instead, discuss how you can plan better next month. Being smart with money is hard enough on its own. Don’t make it harder by adding relationship stress to the mix. If one of your next financial discussions involves which joint account you should park your short-term cash at, consider opening a  joint Cash Reserve account. Start saving for your future together with a high-yield cash account that features a variable rate up to 0.10% *, no monthly transaction limits, and FDIC insurance up to $2 million once deposited at our program banks†. It doesn’t get better than this.

What Should I Know About Taxes on My Investment Accounts? Jan 24, 2020 12:00:00 AM An informed and educated investor can make better decisions if they know the unique tax attributes of each type of investment account. In the US, 33% of households have a taxable investment account—often referred to as a brokerage account—and 89% of those households also have at least one retirement account, like an IRA or an employer-sponsored retirement account. We know that the medley of account types can make it challenging for the average investor to decide which account to contribute to or withdraw from at any given time. Further, the factors that might inform this decision don’t necessarily align with a straightforward, black-and-white rubric. Taxable Accounts Taxable investment accounts are typically the easiest to set up and have the least amount of restrictions. Although you can easily contribute and withdraw at any time from the account, there are trade-offs. A taxable account is funded with after-tax dollars and any capital gains your incur by selling assets, as well as any dividends you receive, are taxable on an annual basis. While there is no deferral of income like a retirement plan, there are special tax benefits only available in taxable accounts. Any gains avoid taxation until they are realized, or in other words, sold. Investments held for over one year qualify for long-term capital gains treatment, so those gains are taxed at a lower rate than investments that have been sold before being held for a year. There is an additional exception for an investor who holds investment assets until death: their cost basis is “stepped-up” (reset) to the market value on the date of their death. This means that the original cost of the assets is now considered to be the current value, and gains on any growth during their lifetime are avoided. Note too that inherited assets, when sold, are always taxed at the lower capital gains tax rate for long-term gains. The term dividend is frequently used in a broad sense but can ultimately be referring to distributions from a variety of investment activities. Qualified dividends paid from the the earnings and profits of corporations are taxable at the reduced long-term capital gains rates. Foreign taxes paid on dividends from non-US investments may be eligible for a foreign tax credit—to partially or fully offset taxation in the US so you aren’t paying double taxes. Dividends paid from taxable bond investments are taxed at ordinary income tax rates. Dividends paid from municipal bond investments are generally tax-free. Main Considerations for Choosing a Taxable Retirement Account You would like the option to withdraw at any time with no penalties. You have already contributed the maximum amount to all tax-advantaged retirement accounts. Traditional Accounts Includes Traditional IRAs, Traditional 401(k)s, Traditional 403(b)s, Traditional 457 Governmental Plans, and Traditional Thrift Savings Plans (TSPs) Traditional type investment accounts for retirement are generally funded with pre-tax dollars. The investment income received is deferred until the time of distribution from the plan. Assuming all the contributions are funded with pre-tax dollars, the distributions are fully taxable as ordinary income. For investors under age 59.5, there may be an additional 10% early withdrawal penalty unless an exemption applies. There are a number of possible 10% penalty exemptions, such as death, disability, or taking distributions as an annuity stream—refer to IRS.gov for more information. Unlike a taxable account, retirement plans do not receive a step-up in cost basis upon death. Foreign taxes paid on retirement account investments are not eligible to be claimed as a tax credit. Main Considerations for Choosing a Traditional Retirement Account You expect your tax rate to be lower in retirement than it is now. You recognize and accept the possibility of an early withdrawal penalty. Roth Accounts Includes Roth IRAs, Roth 401(k)s, Roth 403(b)s, Roth 457 Governmental Plans, and Roth Thrift Saving Plans (TSPs) Roth type investment accounts for retirement are always funded with after-tax dollars. Qualified distributions are tax-free. For investors under age 59.5, there may be ordinary income taxes on earnings and an additional 10% early withdrawal penalty on the earnings unless an exemption applies. While there is no step-up in cost basis upon death, distributions made to beneficiaries after the account has been open for five years are automatically tax-free. Foreign taxes paid on retirement account investments are not eligible to be claimed as a tax credit. Main Considerations for Choosing a Roth Retirement Account You expect your tax rate to be higher in retirement than it is right now. You desire the option to withdraw contributions without being taxed. You recognize the possibility of penalty on earnings withdrawn early. Summary of Key Considerations Are the retirement account contributions pre-tax or post-tax? Are the retirement account distributions expected to be tax-free? Is there a 10% early withdrawal penalty from a retirement distribution? Is there potential for long-term capital gain tax rates and qualified dividend rates? Going the Extra Mile With Additional Tax Efficiencies Betterment can help you be a smarter investor, because we offer additional features — at no extra cost — to help you minimize taxes so that you can maximize your money. Tax Coordination can help increase your overall returns if you are investing in multiple types of investment accounts, because it allocates your assets within each account type as tax-efficiently as possible. Tax Loss Harvesting+ can be used to capture losses during market declines so that you can use them to help offset future gains or even lower your tax bracket. Learn more about how Betterment helps you maximize your after-tax returns. Betterment is a financial advisor, not a tax advisor—consult a tax advisor or IRS resources for additional guidance. Getting Started Within a Betterment account, we can provide additional advice regarding which accounts you should be funding and in what order. You can even sync up your 401(k)s and other accounts to see an overall picture your finances. Get started or log in to complete your retirement plan and see personalized savings advice.

Goal-Based Investing: A Decade In Review Jan 3, 2020 12:00:00 AM As we all look forward to and plan for the future, let’s stop and take a look at the past decade to see what we can learn from it. I’ve never been particularly good at New Year’s Resolutions. Coming up with a shiny new list of resolutions is always fun, but as we all know—the challenge is sticking to them. But this year, things feel different. A new decade is a fantastic opportunity to reflect on what I want for my life for the next ten years, and set goals to match my vision. Here at Betterment, we take goals seriously. Our entire investing platform was built from the ground up on the idea of goal-based investing. Research has shown that separating your investing dollars based on the actual goals you want to reach is more effective for not just one reason, but for nine reasons. The turn of the decade has sparked my curiosity, so I’ve set out to learn how investing goals at Betterment might have fared over the past ten years. If I had set aside my emergency fund in Betterment’s Safety Net goal, would my portfolio have outpaced inflation? If I had used a Major Purchase goal to save and plan for a down payment on a house, would I have reached my goal? If I had followed Betterment’s contribution advice within the Retirement goal, how would my retirement accounts be looking right now—sunny or bleak? First, some caveats... Our portfolio and advice changes over time, so let’s investigate the answers to these questions acting as if Betterment’s current portfolio and advice had been around in and since 2010. Before I jump into the analysis, I want to be very explicit with some of the simplifying assumptions I’ll be making here. While Betterment launched near the beginning of this decade, our product has in no way been static. One of our core principles is iteration, and so the Betterment of today is very different than it was in 2010. Though it would have been interesting to analyze the growth and improvement of our advice over time, I chose instead to use the goal types and advice of the current Betterment platform and apply them retroactively. The historical return data is, of course, historical, as are inputs into the model such as risk-free rate assumptions—but the actual code is what currently powers our platform. Betterment’s recommendations and models update throughout the lifetime of our customers’ goals in order to give them better advice, and I tried to account for this throughout the analysis. Betterment’s advice for Retirement plans is adjusted for inflation and taxes, whereas other goals are projected at a pre-tax, nominal basis. Lastly, the scenarios I present below are purely hypothetical, and do not represent actual investor returns. They are certainly not promises or guarantees of future returns. Safety Net Goal Setting aside cash for emergencies is one of the most important components of a solid financial plan. At Betterment, our recommendation is that you keep your emergency funds invested in our Safety Net goal. With this specific goal, we invest in low-volatility assets to ensure that your portfolio isn’t at risk of a major drawdown1. But there is also another risk to consider: inflation. If you were to keep your emergency funds in cash, the post-inflation value of the cash would naturally erode over time. In order to try to maintain your portfolio’s value while also trying to beat inflation, we invest Safety Net funds at the lowest possible risk level that still has higher expected returns than inflation—15% stocks and 85% bonds. Let’s assume that at the beginning of the decade, we had already saved up $10,000 in cash for emergencies, and we had invested it all into Betterment’s current Safety Net portfolio of 15% stocks. Would we have outpaced inflation? For the most part, yes, the analysis below indicates that we would have outpaced inflation. Our balance (the blue line) temporarily dips below inflation (the red line) a few times through the projection, but remains above inflation for 92% of the entire time period. The maximum drawdown during this period is 3%, which is well below our recommended buffer of 15%. Overall, we end up with $12,900 in our Safety Net goal, which comes out to around $10,850 after adjusting for inflation. Hypothetical Safety Net "Balance Versus Inflation"—Over the Last Ten Years Source: Returns data from Xignite. Inflation data from the Federal Reserve. Calculations by Betterment. Major Purchase Goal Our Major Purchase goal is designed to help our customers plan for larger, planned expenses that we all encounter throughout our lifetimes. By setting an amount that you’d like your goal to reach by a specific target date, we can give advice on how much you’ll need to save and invest, either as a one-time deposit or through regular deposits over time. We’ll also automatically de-risk the portfolio over time to ensure that a market downturn near the end of the goal term is less likely to affect the outcome. One possible use-case for a Major Purchase goal is for saving for a down payment on a house. My colleague Nick Holeman recently wrote a research report on the economics of buying a home, so I’ll pull some figures from there. Nick found that the average down payment on a home is around $32,500, plus an additional $5,000 of closing costs, so the target balance for our hypothetical Major Purchase goal will be $37,500. Let’s assume that we started saving for the down payment on January 1st, 2010, and we wanted to spend the down payment funds exactly ten years later, on January 1st, 2020. If we feed these values into Betterment’s algorithm that recommends the appropriate savings amounts to reach our goal, we end up with a target savings rate of $230 per month. Let’s also assume that we log in once per year to update our recurring deposits to match Betterment’s advice. With those assumptions in mind, we can explore how the balance of our Major Purchase goal would have evolved over time. The chart below plots the hypothetical balance over the course of the past decade (blue line), compared to the desired end target amount (red line) and the cumulative deposits into the Major Purchase goal (green line). We see that we do end up reaching our goal, and even slightly early—in early 2019, rather than at the end of 2019. Hypothetical Major Purchase Goal Balance—Over the Last Ten Years Source: Return data from Xignite. Calculations by Betterment. Another way to assess the outcome of following the Major Purchase advice is to look at how much we cumulatively had to deposit in order to reach the target amount. If we had chosen not to invest our cash at all and given up the opportunity to potentially receive investment returns, our total cumulative deposits would of course be a flat $37,500—the original target amount for our Major Purchase goal. With the Major Purchase goal, the total cumulative deposits necessary to reach our goal would have been $29,804, which is around 21% less than if we hadn’t invested at all. In other words, committing to Betterment’s deposit advice over the ten year period would have earned us enough returns to allow us to save less towards our down payment, yet end up with the same target amount. The chart below shows the effect investing through the past decade would have had on our goal. The bar in red is the sum of all deposits into the goal over the past decade based on Betterment’s recommendations, and the blue area shows the additional balance gained from investing. Hypothetical Final Major Purchase "Balance Versus Total Deposits" Source: Returns data from Xignite. Calculations by Betterment. In total, we need about $7,700 less to reach our target amount when using the Major Purchase goal as opposed to not investing it at all. That’s not a bad outcome for the five minutes of work per year that it takes to log in and check up on your deposit advice within your Betterment account. Retirement Goal Saving for retirement is one of the most common ways that our customers use Betterment, and we have a wide range of tools to make that journey easier. These include advice on how much to save, how to choose the right accounts, and how much predicted spending power you’ll have in retirement based on our projections. For the Retirement goal, I was curious to see the effect that market conditions of the past decade would have had on the retirement-readiness of a customer nearing their retirement date. I assumed that the customer was 55 years old at the start of the decade, and planning on retiring at age 65. I also assumed the customer wants to be able to withdraw enough money from their account to have $20,000 per year (after paying a 15% long-term capital gains tax) for 20 years after their retirement date to supplement their social security. Based on these inputs and an estimated inflation of 2%, Betterment estimates that the customer would need around $382,000 at retirement, according to the customer’s projection graph. I further assumed that our customer had saved 2/3 of that desired balance at the start of the decade, and that the customer logs in once per year to update their automated deposits according to Betterment’s advice, as the balance in the account changes. Based on these assumptions and market data from the past decade, we can calculate the actual amount that the customer could withdraw in retirement. The chart below shows that due to favorable market conditions, our customer is actually able to withdraw around $20,500 per year in retirement, which is roughly 2.5% more than they initially planned. Hypothetical Retirement "Spending Power Versus Target Spending Power" Source: Betterment data. If 2.5% seems like a very small increase after what has been a historically strong decade for markets, you are not alone—I was also initially surprised. The answer lies in the U.S. Treasury yield markets. Treasury securities are often seen as being some of the most risk-free assets in U.S. markets. At the beginning of the decade, 30-year Treasury rates were around 4.63%2, meaning investors could lock in very high risk-free rates by investmenting in those instruments, or other instruments whose rates are primarily driven by Treasury rates. As of December 2nd, 2019, the 30-year Treasury rate is 2.28%, so investors have a much lower rate on their risk-free investments. The chart below shows the yield curve at the beginning of the decade (blue) and at the end of the decade (red). Yield Curve at the Beginning and End of the Decade The decrease in long-term rates has a large effect on retirees with a fixed-income heavy portfolio. Luckily, Betterment’s advice updates with changes in not just the equity and bond markets, but also because of Treasury rates—so our hypothetical investor did not lose any spending power in retirement due to activity in the Treasury rate markets. On To The Next Decade While no one will ever be able to predict what the markets will do over the next decade, and future market returns are unlikely to match the past, looking backwards can often help us feel empowered to plan for the future. As we usher in the new decade, I hope you’ll join me in thinking about what your goals are for the next ten years, and start planning for how you can make them a reality. 1 Drawdown is an investing term that measures how much an investing balance decreases from its all-time high. In simple terms, you can think of maximum drawdown as the largest loss you might have endured during a period if you invested at exactly the worst time. 2 Data from the Federal Reserve. Please note that clicking the previous link will download a CSV file of historical rates to your computer.

What Is A Fiduciary? Dec 16, 2019 12:00:00 AM A fiduciary is a person or institution that is required to act in the best interest of another person when managing their financial life. Here’s why that can be important. When searching for a trusted professional to manage your investments, you likely researched the advisor’s education, experience, and investment strategy. While all of those things may be important, some advisors are not obligated to do what is in your best interest. Only a fiduciary is required by law to put your interests first. In this article, I’ll explain what a fiduciary is, who is a fiduciary, and when you should seek a fiduciary to manage your investments. What is a fiduciary? A fiduciary is someone who is responsible for acting on behalf of another party, and is legally required to do what is in the best interest of the other party. A fiduciary puts their clients’ best interest ahead of their own. While you may assume that all financial advisors do this, the truth is that many advisors are not held to the fiduciary standard. What is the fiduciary rule? The Investment Advisors Act of 1940. established a fiduciary obligation of Registered  Investment Advisors (RIAs) to their clients almost 80 years ago. In the decades since, the Department of Labor (DOL), the Securities and Exchange Commission (SEC), and several politicians have debated and proposed changes to the scope and application of the fiduciary standard in the financial services industry. Most recently, the much discussed DOL fiduciary rule, which attempted to require all financial advisors to act as fiduciaries when managing retirement accounts, was voted out. While the fiduciary rule was not implemented, the press coverage and industry pushback surrounding the rule shed new light on the fact that many advisors are not required to put clients’ best interests ahead of their own. What is the fiduciary duty? A fiduciary is obligated to follow both a duty of care, and a duty of loyalty to their clients. The duty of care requires a fiduciary to place their clients’ best interest ahead of their own. Under the duty of loyalty, the fiduciary must also attempt to eliminate all potential conflicts of interests, and when that isn’t possible, they must fully disclose conflicts of interest to their clients. While it’s common to find financial advisors that provide similar types of advice, not all advisors are held to the same standards when providing advice. It is important to know who is required to act as a fiduciary so that you can choose the right advisor for your investments and financial situation. Are all advisors “fiduciary” financial advisors? Financial advisors not acting as fiduciaries may operate under a less stringent standard called the suitability standard. Registered Investment Advisors (RIAs), and Certified Financial Planner (CFP) professionals are held to the higher fiduciary standard, while Registered Representatives, and brokers are held to the less stringent suitability standard. Advisors who operate under a suitability standard have to choose investments that are appropriate based on the client’s circumstances, but do not have to put the clients’ best interests first. For example, under the suitability standard, purchasing a low risk mutual fund for a conservative investor is perfectly acceptable even if that particular fund is very expensive and ultimately gives the advisor the biggest commission. Even though there may be more cost effective alternatives out there, the advisor operating under a suitability standard does not have to present a better alternative to the client, since the higher fee option is suitable for the client based on their risk tolerance. The client may be better off with a lower cost alternative, but a non-fiduciary advisor can recommend the fund that will provide them with the greatest payout. Below is a straight forward breakdown between the suitability standard and fiduciary standard: Fiduciary Standard Suitability Standard Investment recommendations must be in the clients’ best interest. The clients’ best interest must come ahead of the advisor’s interest. Advisor must attempt to eliminate all conflicts of interest. If it is not possible, then they must fully disclose all conflicts of interest. Advisor has a duty of care and loyalty to the client. Investment recommendations must be appropriate based on the client’s circumstances. Advisors must attempt to gather relevant information to help determine if an investment recommendation or series of recommendations are suitable. The advisor’s loyalty is to the broker-dealer, not the client. The Importance Of Working With A Fiduciary If you are seeking an advisor who can trade on your behalf and make investment decisions for you, contemplate choosing a fiduciary advisor. This should ensure that you only receive suitable recommendations, but that you are also benefiting from recommendations that are in your best interest. If you want to entrust an advisor with your financials and give them discretion, you may want to make sure they are legally required to put your interests ahead of their own. If you are simply seeking help trading securities in your portfolio, or do not want to give an advisor discretion over your accounts, you likely do not need a fiduciary advisor. Choosing Your Fiduciary Relationship Hiring a fiduciary advisor to manage your portfolio is one of the best ways to ensure you are receiving unbiased advice. When shopping around for a financial advisor, remember to ask whether or not they are a fiduciary, and how they are compensated. This will help you better understand whether or not they are able to give you the caliber of unconflicted advice that you may be seeking. While not everyone feels inclined to work with a fiduciary advisor, asking questions and understanding that not all advisors are held to the same standard of financial advice is key to making the best choice for who you trust with your hard earned money. Why Betterment Is A Fiduciary A common point of confusion is whether or not “robo advisors” can be fiduciaries. Let’s clear up any ambiguities: they certainly can be. Betterment is an RIA and is held to the fiduciary standard as required under the Investment Advisors Act. We act as a fiduciary because we are committed to helping you build a better life, where you can save more for the future and can make the most of your money through our cash management products and through our investing and retirement products. And, our dedicated team of human advisors are CFP™ professionals, and as such, are held to the fiduciary standard as well. This way, customers may be sure that most financial advice they receive from Betterment, whether online or from our team of human advisors, is in their best interest.

Should You Create a Trust Fund? It Could Help You Preserve Wealth Dec 4, 2019 12:00:00 AM Weigh the costs and benefits of establishing a trust as part of your estate planning. For those who have assets to leave as a legacy, a trust can be a strategic part of estate planning. Trust assets can include everything from a life insurance settlement and real estate to investments and cash. However, not all trusts are the same—there are many variations, each with specific benefits and restraints. In the past, establishing a trust was largely viewed as a tool for very high net worth individuals looking to preserve wealth across generations. But these days, easily accessible low-cost investing accounts help us all take advantage of the value that creating a trust can provide for our assets. One of the benefits of trusts is that they can shield assets from lawsuits and probate costs. Many are interested in these benefits regardless of their net worth. With the emergence of automated investing services, like Betterment, setting up and managing a trust account of any size is easier than ever. Selecting the right type of trust for your needs will be something to discuss with an estate planning specialist, such as a financial advisor, accountant, or estate planning attorney.1 However, there are some general benefits that most trusts offer. Below is a summary to help you decide whether a trust may be right for you. Privacy and Protection After an individual’s death, an estate typically goes through probate, where the will is open for public scrutiny and assets may be used to pay off creditors. If assets are held in multiple states (real estate, for example), probate will take place in every state—adding substantial costs to settling an estate. The costs associated with probate could reduce the estate by 3% to 7% on average—and that’s not including additional estate taxes and income taxes that may be due. These additional costs mean significantly less assets are given to the intended beneficiaries. With certain types of trusts, all assets that have been placed in the trust are considered property of that trust, and thus they are off limits to creditors, they’re kept out of public record, and they can avoid probate. Trusts are also a useful way to shield and protect assets for people who are at higher risk of litigation, such as doctors. Placing assets in a trust may also reduce the potential for lawsuits between heirs. Taxes Different types of trusts provide different tax advantages. For example, an irrevocable life insurance trust shelters any life insurance death benefit proceeds from estate taxes. The most popular type of trust is a revocable living trust, which is a trust that can be modified once it is established. It’s created during the grantor’s (the person who funds the trust) lifetime. On its own, a revocable living trust doesn’t provide specific tax benefits, but additional provisions can be added to these trusts to help reduce estate taxes. There are about nine commonly used trust types. Speaking with an estate planner and tax advisor will help you determine how to maximize tax advantages and establish the right type of trust for your needs. Distribution Control Not all beneficiaries need the same thing. A trust can establish guidelines for how and when funds are distributed. Rather than simply naming the person who will inherit your assets, you can add provisions that specify how the trust assets can be used. By adding these provisions to your trust, you can help your assets last longer, since you decrease the risk of a beneficiary draining the account for frivolous expenses. For example, funds might be earmarked for education, for special medical needs, or for distribution only after the beneficiary has reached a certain age. In addition, a trust can ensure—through its guidelines—that money is distributed in a specific way to a specific entity, rather than an individual. This might mean a charity, a religious institution, or your alma mater. Sound Investment Strategy A trustee is the person(s) named in a trust document who is responsible for making decisions regarding the trust. By law, a trustee has a fiduciary responsibility to oversee the funds entrusted to them. Regulation, such as the Uniform Prudent Investor Act, states that a trustee must act “prudently” when administering a trust, which means holding the investments in a sound interest-bearing account, as well as assessing the risk, return, and diversification of assets. Trustees can be an investment firm or an individual. Trustees should ensure trust assets are invested wisely to fulfil the specific aims of the trust.  Automated investment services like Betterment provide trustees with an easy, low-cost way to manage a trust. Consider the Benefits Whether you are looking for asset protection, privacy, tax minimization, control over how your beneficiaries use their inheritance, or a combination of each of these things—establishing and managing a trust has never been easier. After speaking with your estate planning specialist and determining which type of trust is best for you, check out our FAQ on what we offer for trust accounts here at Betterment. 1Note that Betterment is not a tax advisor and nothing in this blog post should be construed as specific advice—please consult a tax advisor regarding your specific circumstances.

FDIC vs SIPC—What’s the difference? Nov 21, 2019 12:00:00 AM FDIC. SIPC. NCUA. There’s a good chance you’ve heard of most of these acronyms at some point while dealing with your finances. But what exactly does each mean when it comes to your money? Take a moment to think about all the different types of insurance you currently have. You may have insurance for your car, renter’s insurance for your apartment, and life insurance for, well, yourself. These days, some of us might even have pet insurance, or better yet—wait for it—alien abduction insurance. Just like other aspects of your life, your money may be insured, or otherwise protected, as well. At a high level, you can think of FDIC and NCUA as providing insurance for banking products, and SIPC as providing protection for funds held in a brokerage account in the event that the brokerage fails. FDIC and NCUA generally cover bank deposits up to $250,000 per account holder, per bank, per ownership category. SIPC generally covers assets worth up to $500,000, with a $250,000 limit on cash holdings, and the coverage applies per each account of a separate capacity. It is important to note that there are risks associated with owning securities, and SIPC does not protect against a loss in the market value of your brokerage account. Part of having a solid financial plan is knowing whether or not your financial assets are insured—whether they’re in cash or investments—and how coverage limits may affect your accounts. Please note that Betterment is not a bank. FDIC: Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) was created in 1933. Does that date ring a bell? In the mid-1930’s, the Great Depression was in full swing. The public needed a reason to trust banks again, especially after seeing hundreds of banks fail in the span of just a few years. The FDIC monitors its member banks, oversees the process of winding down banks if they fail, and insures deposits at member banks. You can easily tell if your bank is a member of FDIC by reviewing your bank’s website, looking for signs in your bank’s local branch, or by searching the FDIC’s website. Accounts Covered: Types of accounts covered by FDIC insurance include checking accounts, savings accounts, savings account alternatives, money market deposit accounts (MMDAs), certificates of deposit (CDs), cashier’s checks, and money orders. Coverage Limits: The FDIC generally insures deposits up to $250,000 per depositor, per banking institution, for each account ownership category. We’ve previously written more in-depth about FDIC insurance here. NCUA: National Credit Union Administration Products provided by credit unions are typically referred to in terms of shares because credit union members are buying shares of credit union ownership when they make their deposits. Even though credit unions are owned by their members, rest assured that they are still regulated. The National Credit Union Administration (NCUA) was created by the U.S. Congress in 1970, and its purpose is relatively self-explanatory. It oversees credit unions and insures the shares that consumers purchase. You can determine a credit union’s NCUA membership by checking its website, seeing if there is a sign at a physical branch, or by searching the NCUA’s website. Accounts Covered: Types of accounts insured by NCUA insurance include regular shares (similar to savings accounts), share drafts (similar to checking accounts), money market accounts, and share certificates (similar to CDs). Coverage Limits: The NCUA generally insures deposits up to $250,000 per depositor, per credit union, for each account ownership category. SIPC: Securities Investor Protection Corporation The Securities Investor Protection Corporation (SIPC) was born when the Securities Investor Protection Act was signed into law in 1970. Its purpose is to protect consumers from the loss of cash and securities held at brokerage firms that go bankrupt. It’s important to distinguish that “loss” in this context doesn’t include a loss due to the market going down. Markets go up and down, and that’s just a fact of investing. Investments can lose value—we all know that. “Loss” in the context of SIPC insurance refers to missing assets or an investment that becomes unaccounted for when a brokerage fails. Think of the classic ponzi scheme where a broker accepts funds to invest, except instead of investing the funds, the broker turns around and pays previous investors so that they believe they are receiving investment returns. A simpler example would be a brokerage firm that improperly commingles operating funds with customer funds and then goes bankrupt. You can determine if a brokerage firm is a SIPC member by checking its website, looking for a sign at the brokerage’s physical branch, or by searching the SIPC’s website. Accounts Covered: Types of accounts and investments generally protected by SIPC include stocks, bonds, mutual funds, money market mutual funds (MMMFs), certificates of deposit (CDs), annuities, government securities, municipal securities, and U.S. Treasury securities (Treasuries). Coverage Limits: SIPC generally covers assets worth up to $500,000, with a $250,000 limit on cash holdings. These limits apply to each account of a separate capacity. Learn more about how an account capacity is determined and what some examples might look like. Because of these limits, you might think that you shouldn’t hold more than $500,000 in a single brokerage account, but remember that SIPC coverage applies to the assets that are ultimately missing, which may not be reflective of the entire account balance. Chances are good that you’ll never end up needing the coverage at all, because fewer than 1% of SIPC-member brokerages were ever subject to SIPC proceedings. Of the claims that were investigated, 99.9% of them resulted in investors being made whole. You can read more about these figures and learn more about SIPC insurance here. Conclusion The financial system in the U.S. is primarily built on trust. The availability of various types of financial insurance and protection helps to assure customers that they can trust the institutions they are placing their hard-earned money with. I can assure you that it is safer to keep your money in a reopened bank than under the mattress. – President Franklin Roosevelt, 1933 Part of any comprehensive financial plan includes examining how each of your accounts are insured or protected, and being aware of any coverage limits that might affect you. If you have questions or concerns about your financial plan, consider speaking with one of our financial advisors. Learn more about how our advisors can help you with your financial plan.

Is Buying A Home A Good Investment? Nov 6, 2019 12:00:00 AM Buying a home has long been considered the American dream. But is homeownership a good investment? Or, much like a fancy sports car, is it just a status symbol?  In order to analyze any potential investment, it’s advised to set aside emotion and internal biases as much as possible, and instead try your best to make a data-driven decision. With a decision as large as purchasing a home, that can be difficult, which is why a thorough analysis is so critical. That’s also why the following research is backed by decades of data from sources such as the Federal Reserve Bank of St. Louis, the United States Census Bureau, National Association of REALTORS®, Federal Housing Finance Agency, S&P Dow Jones Indices, and more. My hope is that after reading this, you’ll be able to answer the question “for the average American household, is purchasing a home as a primary residence likely to be a sound investment?” The answer to this question is part, but not all, of the overall decision to buy or rent your current residence. Note that this analysis is focused solely on primary residences, not on rental properties. To do this analysis, the following research will walk through: The average American homebuyer Upfront costs of home ownership Ongoing costs of home ownership Tax benefits of home ownership Estimated home appreciation Problems with calculating investment returns Internal rate of return (IRR) of home ownership Housing returns vs. stock market returns Final thoughts As an added bonus, there’s also a more granular analysis included at the end for 13 major cities. While having a national average is a great starting point, the city-level can give you a more personalized analysis. Let’s get to it. Average American Homebuyer A & B are a hypothetical married couple that are meant to represent the average American home buyer. I chose a married couple because the majority (63%) of homebuyer households are married couples. They will be used throughout this research to more easily articulate what would otherwise be a very dense list of the various inputs and data points needed to calculate the investment return of owning a home. A & B are buying a detached single-family home, as do 82% of home buyers. Detached single-family homes are far more common than townhouses, condos or duplexes. The home they want has 3 bedrooms, which is the median number of bedrooms in homes purchased nationwide. A & B’s household income is $106,300, exactly equal to the national median income of married homebuyers. Their current monthly rent is $1,148, which is the median monthly rent in the US for an equivalent-sized 3-bedroom house. They also pay $16/month for renters insurance, which is the national average. So to give a quick recap of their information: Relationship status: Married Household income: $106,300 Current rent: $1,148/month Current renters insurance: $16/month Type of home to be purchased: Detached single-family home Number of bedrooms: 3 bedrooms Upfront Costs Of Home Ownership While making their decision, A & B need to choose if they should purchase their home with cash or take out a mortgage. Since 88% of recent buyers financed their home purchase, so do they. Like about 90% of homebuyers who take out a mortgage, they choose a 30-year fixed-rate mortgage. This type of mortgage is far more common than mortgage with shorter terms (ie, a 15-year mortgage), or with adjustable interest rates (commonly called “ARMs”). Their mortgage has an interest rate of 3.56% (the national average as of September 12th, 2019). The home they want is priced at $250,000, which is the median value of all US homes purchased. They make the median down payment, which is 13%, and thus finance 87% of the home purchase. The closing costs associated with the home purchase are 2.0% of the purchase price, which is the low end of the typical range of 2 to 5 percent for home buyers. So to recap the stats on A & B’s home purchase: Type of mortgage: 30-year fixed rate mortgage Mortgage interest rate: 3.56% Home purchase price: $250,000 Down payment amount: 13% ($32,500) Initial mortgage balance: $217,500 Closing costs: 2.0% ($5,000) Before they bought the home, A & B had $37,500 saved up to put towards their home purchase. That money was split between a down payment and closing costs. Now they have a home worth $250,000 and a mortgage of $217,500, giving them immediate home equity of $32,500 (the same as their down payment). Note that A & B actually have less money now than they did before the home purchase because of the closing costs. They, of course, hope to recoup that money and then some through future appreciation in the home. But this is an important point to make, because it usually takes a few years to break even after your home purchase. Ongoing Costs Of Home Ownership Congratulations to A & B, who are now proud homeowners. But as the two of them quickly find out, homeownership comes with many ongoing costs. Using the inputs listed above, their mortgage payment comes out to $984/month, or $11,808/year. A & B’s property taxes cost $2,709/year, which is the median property taxes for all US homes with a mortgage. This comes out to a property tax rate of 1.08%/year ($250,000 home price / $2,709 in property taxes = 1.08%). Homeowners insurance costs them an additional $1,083/year, which is the national average. Since A & B’s down payment was less than 20%, they also must pay private mortgage insurance (PMI). Assuming they have a FICO score of 704, which is the national average, their PMI will cost about $1,196/year. Note that this payment will usually no longer be required once their home equity reaches 20% of the home value. Lastly, they have to worry about ongoing maintenance and repairs that come with owning a home. The exact amount of these ongoing costs is difficult to predict, but a common rule of thumb is that you should plan on spending about 1% of the purchase price of the home each year on home maintenance. 1% x $250,000 = $2,500/year of maintenance and repairs. All together, these costs add up to gross housing costs of $19,296/year. However, this isn’t the full story. By owning a home, it means A & B no longer have to pay rent or renters insurance. So these cost savings should be subtracted from their gross housing costs to find the true net annual cost of homeownership. Their rent was $13,776/year, and their renters insurance was $187/year, so their total housing costs as renters was $13,963. After we subtract this from their gross housing costs, we are left with net housing costs of $5,333/year. A quick recap is listed below. Mortgage Payments: $11,808 Property Taxes: $2,709 Homeowners Insurance: $1,083 Private Mortgage Insurance (PMI): $1,196 Maintenance and Repairs: $2,500 Gross Housing Costs: $19,296 Saved Rent: $13,776 Saved Renters Insurance: $187 Net Housing Costs: $5,333 A & B assume that most of these costs will increase with inflation each year. The two exceptions to this are their mortgage payment and their PMI, which both will stay constant. And again, their PMI will drop off once their home equity meets 20% of the home value. Annual Recurring Costs Of Homeownership Currently the Board of Governors of the Federal Reserve System is targeting an inflation rate of 2.00%/year, so this is the inflation rate we will use in their projections. Below is a table that details their annual expected cash flow. Expenses are listed in black, and money saved is listed in green. You’ll notice that owning a home currently costs $5,333 more per year than renting. However, the mortgage payment, which is the largest annual cost of homeownership noted, stays static while rent would increase with inflation each year. This is why the net annual cost of homeownership goes down each year, until in year 23, when homeownership actually becomes cheaper than renting! Tax Benefits Of Home Ownership An often-cited benefit of homeownership is the tax deductions that come with it. The 2 most common tax deductions are: The ability to deduct mortgage interest you pay (subject to some limitations). The ability to deduct property taxes you pay (subject to some limitations). However, A & B will only be allowed to take these deductions if they itemize their deductions. The Tax Foundation predicts that only about 10% of taxpayers will itemize, so the odds of A & B itemizing are very low. But let’s run the numbers anyways, just to double check if they will be able to itemize or not. A & B are married, so they must choose a filing status of either “Married Filing Jointly” or “Married Filing Separately.” Like 95% of all married couples in the US, A & B choose to file their taxes as married filing jointly, and thus are eligible for a Federal standard deduction of $24,400. This means their total Federal itemized deductions must exceed $24,400, or else they will not be able to deduct their mortgage interest or their property taxes. In year one of owning their home, A & B will pay $7,676 in mortgage interest, and $2,709 in property taxes. Together, these add up to $10,385 of potential itemized deductions from homeownership. This is less than half the $24,400 they need to itemize. A & B would need to have $14,015 in other itemized deductions such as medical expenses, charitable contributions, or state income taxes (subject to the overall limit of $10,000 for all state and local income/real estate taxes) in order to itemize, which is unlikely. Standard Deduction (MFJ) vs. Itemized Deductions From Homeownership While it is true that homeownership can come with extra annual Federal tax deductions (mortgage interest and property taxes), the average homebuyer will not benefit from these potential deductions. However, that doesn’t mean there are no tax benefits to homeownership at all. Even though the average American homeowner will not receive any annual Federal tax benefits, you still may be eligible to exclude any capital gain you realize upon selling your home from counting as Federal taxable income, up to $500,000. There are strict rules to qualify for this, but this can be a huge tax break on what may otherwise be a relatively substantial capital gain. Estimated Real Estate Appreciation A crucial input to estimating how good/bad you think an investment will be is estimating the expected return that investment will give you. This, of course, is extremely difficult to do, since nobody can predict the future. However, we can look to historical data to see how the value of single-family homes has grown over time to get a reasonable expectation of how they will continue to grow in the future. Of course, past returns do not guarantee future results. Whenever looking at historical data, it’s usually best-practice for your data to be as robust as possible. You can do this by: Having as long a time period as possible. Having data from multiple sources. Both of these help to reduce short-term fluctuations and noise from your data, and help make it more reliable. With these two points in mind, we can look at historical housing price data from a few different sources to gain an understanding of how home values have risen and may rise over time. United States Census Bureau The United States Census Bureau Guided Search tool allows you to dig through a trove of historical housing data. The oldest housing price data available in the tool was for the year 2005 and reported the median US home value as $167,500. In 2017 (the most recent available), the median US home value was $217,600. Over that 12-year timespan, that comes out to an average growth rate of 2.2%/year. However, 12 years is a very short period of time. This leads me to believe that this may not be a fully accurate representation of appreciation for the US housing market. Federal Housing Finance Agency The Federal Housing Finance Agency (FHFA) is a Federal agency that “is responsible for the effective supervision, regulation, and housing mission oversight of Fannie Mae, Freddie Mac (the Enterprises) and the Federal Home Loan Bank System.” They maintain the FHFA House Price Index (HPI) which is a “broad measure of the movement in single-family house prices.” They publish regular HPI reports which are free and publicly available. The most recent HPI report available shows the compound annual growth rate of the HPI in the 28.5 years since January, 1991 has been 3.6%/year. S&P Dow Jones Indices LLC S&P Dow Jones Indices LLC is a company that maintains numerous indices that measure the performance of many aspects of global financial markets. One of those indices is the S&P CoreLogic Case-Shiller US National Home Price Index, which “measures the value of single-family housing within the United States.” One area it is made publicly available is through the Federal Reserve Bank of St. Louis. In January, 1987, the index had a value of 63.754. In May, 2019, the index had a value of 209.658. Over that 32+ year time period, that comes out to an average growth rate of 3.7%/year. Irrational Exuberance, Princeton University Press Irrational Exuberance is a book by Robert Shiller on behavioral economic and market volatility. Shiller is an economist, professor at Yale University, best-selling author and 2013 Nobel Prize winner. Needless to say, he is a well-respected member in the world of finance and economics. Part of Irrational Exuberance deals with his historical housing prices. In doing his research, Shiller dug up data showing home prices since 1890. This research is part of what came to be known as the S&P CoreLogic Case-Shiller US National Home Price Index mentioned above. In 1890, the index had a value of 3.557. At the end of 2018, the index had a value of 205.070. Over the 128-year time period, that comes out to an average growth rate of 3.2%/year. Conclusion On Real Estate Appreciation These 4 data sources show that, on average, historical price appreciation for the US housing market has been somewhere between 2.2 to 3.7 percent per year. Various Historical Measures of the Appreciation of U.S. Home Values Because the US Census Bureau Guided Search dataset is too small of a sample size, I’m going to ignore it for this analysis. That leaves us with a range of 3.2% - 3.7% per year. Based off this tight range of historical returns, I am confident in using these numbers in our calculations. If we had historical returns that varied very widely from one another, that would be cause for concern. Given that the dataset from Irrational Exuberance is more than 4x longer than the others, it is my belief that 3.2%/year is the most reliable to use when projecting out long-term expected housing appreciation. However, we will also run the analysis assuming 3.7%/year, the uppermost value from our sources, in order to get a high and a low range of expected outcomes. Again, we should point out that past performance does not guarantee future results. But we can use it as a reasonable estimate of what the future may hold. Problems with Calculating Investment Returns Using the data listed above, let’s assume that A & B’s home will appreciate in value at an average annual rate of between 3.2% & 3.7%/year. Some years will likely be more, and some will likely be less. Some years their home may even drop in value. But we will assume the overall average growth rate will fall within that range. However, this doesn’t tell the whole story of what rate of return A & B will get on their home. That’s because that rate of return doesn’t factor in many important points. Transaction Costs: The process of buying and selling a home is not cheap. The transaction costs associated with homes, often called closing costs, add up fast and must be factored in when you are calculating the true rate of return you expect on your house Cash Flows: The annual change in value of A & B’s home also doesn’t factor in the ongoing costs they must pay each and every year to pay for, live in and maintain the home. Ignoring these cash flows will make their rate of return look far rosier than it is in real life. Leverage: If A & B were all-cash buyers and put down 100% of the purchase price at closing, then their rate of return would more closely match the time-weighted return. However, because they, like most buyers, took out a mortgage, they are using financial leverage to purchase the home. This leverage will increase any gains they receive (and conversely, could increase any losses as well). In order to help solve for these three problems, A & B must use a return method that incorporates these factors. This method is called the internal rate of return (IRR), and while it is more complicated, will account for 3 of these issues. Finding their expected IRR will give A & B a more accurate measure of the rate of return they can expect on their home purchase. Internal Rate Of Return (IRR) Of Home Ownership In order to calculate their expected return of owning a home, A & B must calculate their IRR from the date they bought the home to the date they plan to sell it. To do that, we first must make a few more projections. A & B don’t know for sure how long they’ll stay in their newly-purchased home, but we will assume they stay 9 years, which is the median length of time homeowners stay before selling and moving. By that time, using an estimated annual growth rate of 3.2%, their $250,000 home will have grown to $331,938. Their remaining mortgage balance at the time will be $174,453. So they have $157,485 in home equity. Closing costs for a seller total roughly 8 to 10 percent of the sale price of the home. Let’s assume 8.0% (the low end of the range). Closing costs of 8% would equal $26,555. And since they owned and lived in the home as their primary residence for the last 9 years, and their total capital gain is less than $500,000, A & B will likely get to exclude the entire gain from Federal income tax. All of this leaves A & B with net sales proceeds of $130,930. Home Value in 9 Years: $331,938 Remaining Mortgage Balance: $174,453 Home Equity: $157,485 Closing Costs: $26,555 Taxes: $0 Net Proceeds from Home Sale: $130,930 Now let’s map out all the cash flows so we can properly calculate A & B’s expected IRR. We’ll assume they bought the home in beginning of year 1, and sold it at the end of year 9. For simplicity, we’ll assume the annual recurring costs such as mortgage payments occurred in the middle of each year. Cash Flow of Home Sale After 9 Years When we do this, we see that A & B’s expected annual IRR from homeownership is 8.56%/year. It’s also interesting to see how the annual IRR is affected by how long they stay in their home, as the graph below shows. We can see that it takes A & B 4 years to breakeven and recoup the upfront closing costs. Their annual IRR peaks at year 10, and then slowly declines. This is because as they pay down their mortgage, they are less leveraged. Let’s also see what the annual IRR numbers look like if we assume appreciation of 3.7%/year. Of course, the annual IRR is slightly higher. At 9 years it is 9.96%. This gives us a high and a low range of expected annual IRRs from home ownership. A & B can expect to earn between 8.56% - 9.96% per year from home ownership. Housing Returns vs. Stock Market Returns 8.56 to 9.96 percent per year seems like a good return. But how does it compare to investing in the stock market? In the 92 years from 1926 to 2018, the US stock market has had an average annual return of 10.1%/year. But as savvy investors, A & B know they also have to pay attention to two key factors: fees and taxes on any stock investments they purchase. However, they quickly learn that these 2 factors aren’t nearly as concerning as they initially thought. Fees A & B would not be able to invest directly in an index. Instead, they would have to purchase an investment fund, like an ETF or mutual fund, to give them market exposure to those stocks. Many of these funds charge a fee, often called an expense ratio. Thus A & B’s net return would be the return of the index, minus the investment fee. If A & B work with an advisor, they would also have to pay that advisor’s fee on top of the expense ratio. Let’s say A & B wanted to put 100% of their money into US stocks. They could purchase the Vanguard Total Stock Market ETF (VTI) which has an expense ratio of just 0.03%/year. Let’s say they also wanted to work with a robo-advisor, to give them financial planning advice, tax loss harvest for them, and more. Let’s assume the robo-advisor’s annual fee is 0.25%/year and has no additional trading fees or account opening/closing fees. So their all-in investment & advisor fees would be only 0.28%/year. Their net annual expected return based off the historical performance of the US stock market would look like this: Gross Annual Expected Return: 10.1% VTI Annual Expense Ratio: 0.03% Annual Advisory Fee: 0.25% Net Annual Expected Return: 9.82% Fees do matter when it comes to investing, and they can be a huge drag on net returns if you aren’t careful. However, there are so many low-cost investment options available today that A & B can invest without paying high costs for doing so. Taxes A & B also have to worry about paying taxes on the dividends and capital gains their stock market investments would earn. Like fees, they can eat into your net returns. However, this concern might be overblown. A & B can reduce the taxes on their investments by choosing from amongst the many tax-advantaged accounts available to them. I’ll focus on Roth accounts here because the tax treatment of Roth accounts, if the rules are followed, is very similar to the tax treatment of money used to purchase a home (after-tax contributions, tax-deferred capital gains, tax-free gains upon sale). However, it should be noted that there are also many other types of accounts that offer tax advantages besides Roth accounts. At their income level of $106,300, A & B would both be eligible to contribute to a Roth IRA, up to $6,000/year per person, or $12,000/year as a household. In addition, if they have the option through their employers, they could each contribute to a Roth 401(k), up to $19,000/year per person, or $38,000/year as a household. The majority of US workers have access to defined contribution retirement plans, so this is a reasonable assumption. Between Roth IRAs and Roth 401(k)s, A & B can save a total of $50,000/year into tax-advantaged accounts. With these Roth accounts, A & B have the potential to not pay Federal income taxes on future dividends or withdrawals. Thus, their estimated after-tax return from investing in US stocks would be 9.82%/year. Conclusion On Housing Returns vs. Stock Market Returns The expected return from homeownership is 8.56 to 9.96 percent/year. The expected return from US stocks is 9.82 percent/year. Based on the above assumptions, the expected returns from investing in the US stock market and purchasing a home are very comparable, both being in the high single digits. Investing in stocks is considerably less work than maintaining a home, but being a homeowner provides a lot of satisfaction as well. At the end of the day, the argument can be made, and I think it can be wise, to own both stocks and your home. Final Thoughts For the average American household, based on my assumptions above, purchasing a home for your primary residence has an expected return of 8.56 to 9.96 percent/year. However, there are a few things to keep in mind. It takes on average four years to breakeven from the upfront closing costs. The expected return from homeownership is very similar to the 9.82%/year expected return from investing in US stocks. The average US household does not receive any Federal tax deductions from owning a home, although the capital gains when you eventually sell your home will likely be Federally tax-free. Remember, these are just average expected returns based on historical data, which do not guarantee future results. It’s possible you could earn a higher return than this. You might buy a home in a trending neighborhood that sees housing prices jump. Real estate is, after all, not a single market, but a collection of local markets. You might find a property that is undervalued because it needs a little TLC, but that you could easily put some money and sweat into to boost your return on investment. Or you might decide, after you move out, to hold onto the property and turn it into a rental so it can continue making you money. Any of these situations is possible. But it’s also possible for you to do worse than the average. You might overpay for your home because you’re not viewing it as an investment. You might also spend too much money on home renovations that meet your tastes and needs, but don’t actually increase the home’s value. You might just get unlucky and buy at or near a market high, only to see your home value drop shortly after your purchase (think what happened if you bought a home around 2007). Or you might decide to move out after only a couple of years before you can really recoup your upfront closing costs. You may do better than the historical average, you may do worse. That is, afterall, how averages work. However, if you are considering purchasing a home, likely to be one of the largest purchases in your entire life, it’s usually wise to base your future expectations on a historical average that relies on decades of nationwide research from multiple sources, and that factors in as many details as possible. This analysis has done just that when arriving at the expected return of 8.56 to 9.96 percent/year. You can use this information as part of the decision to buy or rent your current residence. Other factors should, of course, include the opportunity cost of investing your down payment and lower initial monthly cash flows, job stability, willingness to deal with ongoing maintenance, desire to settle down, school district if children are involved, and more. I hope this was helpful. Bonus: City-Level Analysis Understanding the national average expected return on homeownership is a great starting point, but real estate is all about location, and thus each city is unique. Luckily we are able to get some city-level data to make a more granular analysis possible. Below is an analysis for 13 major cities across the US. In addition to the National Home Price Index they keep, S&P CoreLogic Case-Shiller has city-level price appreciation data for many major cities dating back to January, 1987. This data is publicly available through the Federal Reserve Bank of St. Louis. City-level data is also available for home values, property taxes, and rental costs through United States Census Bureau Guided Search. Below is a table of these 4 data points for 13 major cities. The US national average is also included in the table for a reference point. The table is sorted by historical home appreciation, and you’ll see the national annual appreciation is roughly in the middle of the city-level appreciation, as we would expect. City-level Housing Data Data Sources: Federal Reserve Bank of St. Louis and United States Census Bureau Guided Search By keeping all our other inputs from our national analysis constant, and updating these four inputs, we can calculate the expected annual IRR of owning a home for each of these cities. The results are listed in the chart below, with the national average marked in green. Expected Annual IRR of Homeownership You can see how much the expected return varies city-by-city. New York City’s expected return is only 0.66%, while Las Vegas is 13.29%. At first glance, this ranking may appear odd. Many of the cities with the highest historic real estate appreciation result in having the lowest IRRs. What is causing this counterintuitive result? It turns out the answer to this lies in the relationship between current home prices and current rental costs. San Francisco has had historically high real estate appreciation, but the median home value is a whopping 48x the median annual rent! San Francisco, New York and Washington D.C. all have home price-rent ratios of 30 or above, while the US average is just 18. These high home prices mean the annual recurring costs are significantly higher than renting, which hurts your expected return. Below is a graph that plots the annual expected IRR of homeownership against the price-rent ratio. You see a strong trendline appear showing the inverse relationship between expected annual IRR and price-rent ratio. Home Price - Annual Rent Ratio vs. Expected Annual IRR This insight is extremely important to know as a potential homebuyer. In many high-cost cities, you may be better off renting instead and investing the money you save from lower monthly home costs. Of course, housing data can vary widely, even within a particular city. For example, rent may be significantly higher in the Tribeca neighborhood of Manhattan than rent in Jamaica, Queens, despite both areas being in New York City. That’s why, even though this data can be extremely helpful as a starting point, it’s usually best to do a personalized analysis for your particular situation.

Optimizing Performance in Lower Risk Betterment Portfolios Oct 30, 2019 12:00:00 AM In this methodology, we provide insight into how we optimize the performance of the lower risk bonds in Betterment's portfolios. TABLE OF CONTENTS The Role of Ultra Low-Risk Assets in a Bond Portfolio How we optimize ultra-low-risk bonds to target a higher yield Why Two Low-Volatility Funds Result in Our Ultra-Low-Risk Asset Allocation Using 30-day historical yields to inform future yields Continued bond portfolio research In this methodology, we provide insight into how we optimize the performance of the lower risk bonds in our 100% bond portfolio. Primarily, Betterment’s optimization method involves the inclusion of short-term, investment-grade bonds in lower-risk allocations of the Betterment Portfolio Strategy. Why are we exploring this part of how we manage the Betterment Portfolio Strategy? First, over time, we’ve improved the mix of bonds in our portfolios to control risk without compromising expected performance—the main focus of this methodology. Second, many investors may not yet know about the important role of ultra-low-risk bonds in the portfolio we recommend. When investors opt for a 100% bond, 0% stock allocation in their Betterment portfolio, the only assets in the portfolio are bonds with ultra-low-risk profiles. The Role of Ultra Low-Risk Assets in a Bond Portfolio We have constructed the Betterment Portfolio Strategy—our set of recommended portfolios—to fulfill our five investing principles that guide our advice for you. One of our key investing principles is maintaining diversification. Effective diversification means taking as little risk as possible to achieve your growth target. For portfolios with lower risk levels, adding in ultra-low-risk bonds can help reduce risk without adversely affecting returns. We consider U.S. short-term Treasuries and other US. short-term investment-grade bonds to be ultra-low-risk (although all investments carry some measure of risk). At every risk level, Betterment invests in a portfolio that we expect to have the highest rate of return relative to its risk. These portfolios are considered to be on the “efficient frontier,” or the boundary of highest returning portfolios at any given level of risk. By further diversifying bond holdings with ultra-low-risk assets, the Betterment Portfolio Strategy pursues higher expected returns with less risk than portfolios that do not include these low-risk assets. Graphically, you can see below that the highest returning portfolios for lower risk levels (i.e., levels of volatility) are portfolios that include ultra-low-risk bonds (the black line). Additionally, certain low risk portfolios could not be achieved at all without adding ultra-low-risk assets. As you can see below, portfolios constructed without ultra-low-risk bonds (the blue line) are unable to achieve a volatility lower than approximately 7%. Figure 1. Betterment’s efficient frontier including ultra-low-risk bonds Expected returns are computed by Betterment using the process outlined in our methodology optimizing the Betterment Portfolio Strategy. Volatilities are calculated by Betterment using monthly returns data provided by Xignite. At a certain point, including ultra-low-risk bonds in the portfolio no longer improves returns for the amount of risk taken. This point is called the ‘tangent portfolio.’ For the Betterment portfolio strategy, the tangent portfolio is our 43% stock portfolio. Portfolios with a stock allocation of 43% or more do not include ultra-low-risk bonds. When a portfolio includes no stocks—100% bonds—the allocation suggests an investor has no tolerance for market volatility, and thus, our recommendation is to put the investor’s money completely in ultra-low-risk bonds. How we optimize ultra-low-risk bonds to target a higher yield As you can see in the chart below, we include our U.S. Short-Term Investment-Grade Bond ETF and our U.S. Short-Term Treasury Bond ETF in the portfolio at stock allocations below 43% for both the IRA and taxable versions of the Betterment Portfolio Strategy. https://d1svladlv4b69d.cloudfront.net/src/d3/allocation-mountain-chart/aa-chart.html At 100% bonds and 0% stocks, a Betterment portfolio consists of 80% U.S. short-term treasury bonds and 20% U.S. short-term investment-grade bonds. If an investor were to increase the stock allocation in their portfolio, the allocation to ultra-low-risk bonds decreases, though the relative proportion of short-term U.S. treasuries to short-term investment-grade bonds remains the same. Above the 43% stock allocation threshold, these two assets are no longer included in the recommended portfolio because they decrease expected returns given the desired risk of the overall portfolio. Fund selection In line with our fund selection process, we currently select JPST – JPMorgan Ultra-Short Income ETF to gain exposure to the U.S. short-term investment-grade bonds and we’ve selected SHV – iShares Short Treasury Bond ETF to gain exposure to U.S. short-term treasury bonds. To summarize the fund selection process, we start with the universe of bond ETFs with average maturities of less than 3 years, given the relationship between maturity length and risk. We further reduce the set of candidates by ruling out ETFs with unfavorable risk characteristics, including those with excessive interest-rate risk or high overall volatility. We then filter for funds with sufficient liquidity, so that we can maintain low costs for investors. Finally, we select the fund with the lowest combination of expense ratio and expected trading costs: JPST. The same process led to our selection of SHV. Why Two Low-Volatility Funds Result in Our Ultra-Low-Risk Asset Allocation Short-term US treasuries and investment-grade bonds are both inherently low-risk assets. As can be seen from the chart below, short-term U.S. treasuries (SHV) have low volatility (any price swings are quite mild) and smaller drawdowns (the length and magnitude of periods of loss are muted). Though slightly more volatile than short-term treasuries, the same can be said for short-term investment grade bonds (JPST). Figure 2. SHV and JPST The above chart shows the historical growth of $1 invested in each investment option from 9/30/2013 (the first date both funds SHV and NEAR (which is used as a historical proxy for JPST) were in existence) to 5/23/2018. Performance is net of fund-level fees and does not include any management fees from Betterment. Dividends are assumed to be reinvested. The composite is assumed to be rebalanced daily at closing prices. JPST fund inception as in May, 2017. For returns data in May, 2017 and earlier, we use returns from a comparable fund, NEAR. JPST replaced NEAR as our U.S. short-term investment-grade bond fund in Dec, 2019. Data: xIgnite. It’s also worth noting that these two asset classes do not always go down at exactly the same time. By combining these two asset classes, we are able to produce a two-fund portfolio with a higher potential yield and the same low volatility. In fact, combining these asset classes resulted in smaller historical drawdowns in performance that lasted for fewer days than was the case for either asset class individually. As you can see from the chart below, the combination of U.S. short-term treasury bonds and U.S. short-term investment-grade bonds used for the Betterment 100% bond, 0% stock portfolio (blue) generally had shorter, less severe periods of down performance than either fund by itself. Figure 3. Drawdowns in performance The above chart shows the largest drawdowns in performance from Sept 30, 2013—the first date both funds SHV and NEAR, which is used as a historical proxy for JPST—were in existence) to 11/14/2019. Performance is net of fund-level fees and does not include any management fees from Betterment. Dividends are assumed to be reinvested. The composite portfolio (blue) is assumed to be rebalanced daily at closing prices to maintain a 80% SHV, 20% JPST weighting. JPST fund inception was in May, 2017. For returns data in May, 2017 and earlier, we use returns from a comparable fund, NEAR. JPST replaced NEAR as our U.S. short-term investment-grade bond fund in Dec, 2019. Data: xIgnite. Using 30-day historical yields to inform future yields A reasonable question about this methodology is how to interpret the potential returns of the composite looking forward. As with other assets, the returns for ultra-low-risk bonds include both the possibility of price returns and income yield. Generally, price returns are expected to be minimal, with the primary form of returns coming from the income yield. Below you can see that the prices for the composite of 80% SHV and 20% JPST tends to stay fairly constant, while the price with dividends grows through time. This shows that the yield (paid by the funds through monthly dividends) is responsible for almost all of the growth in these funds. Figure 4. Growth of $100 in the Betterment 0% stock portfolio The above chart shows the historical growth of $100 invested in a portfolio that consists of 80% SHV and 20% JPST. Data is from 6/1/2017 (the first full month both funds SHV and JPST were in existence) to Nov. 14, 2019. Performance is net of fund-level fees and does not include any management fees from Betterment. Dividends are assumed to be reinvested. The portfolio is assumed to be rebalanced daily at closing prices. Data: xIgnite. Looking at 30-day SEC yield—a standardized calculation of yield that includes fees charged by the fund—we can get a good sense of the expected performance for these low-volatility assets. Why can we believe this? First, performance is determined by both yield and price change, and because there is low price volatility in these assets, yield is the primary component of performance. We use the SEC 30-day historical yield as an expectation of annualized future yield because it’s the most recent 30 days of yield performance, and we generally expect future yield to be similar to the last 30 days, although past performance does not guarantee future results. We expect this to be the case because the monthly turnover in these funds is relatively low. However, the yield can be expected to change—either up or down—as market conditions, including interest rates, change. The yields you receive from the ETFs in Betterment’s 100% bond portfolio are the actual yields of the underlying assets after fees. Betterment does not adjust the yield you earn according to our discretion, as a bank savings account could. A bank may choose not to adjust its interest rate higher as prevailing rates rise, or may cut its interest rate. Because we are investing directly in funds that are paying prevailing