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![Allocation Advice for Betterment Portfolios]()
Allocation Advice for Betterment Portfolios
Unlike the risk questionnaires, our algorithm weights investment time horizon and downside ...
Allocation Advice for Betterment Portfolios Unlike the risk questionnaires, our algorithm weights investment time horizon and downside risk more heavily, and allows you to deviate from our advice if you want to deviate. TABLE OF CONTENTS We start with your goals How we balance risk and time How we manage downside risk The result? Betterment's glide path Including customer risk preference If you have ever worked with a traditional investment manager or have a 401(k) plan at work, you have likely answered a “standard” risk questionnaire. It often starts with your estimated retirement date and how much money you have, and then ask you what kind of returns you want to see. But these questionnaires measure what kind of risk-taker you think you are, not what kind you need to be in order to achieve your goals. At Betterment, we believe that your investment horizon—how long until you will need your money—is one of the most important determinants of how much risk you should take. The more long-term your investing goals, the more risk you can afford to safely take. Money saved for short- and medium-term goals, such as saving for a house or buying a car, can be invested at a different risk level than a longer-term goal, such as retirement. Another consideration is how you plan to use the money when you need it. Will you take out the investment in a lump sum or will you gradually make withdrawals over time and use that money for income? These are key pieces of information we use when providing personalized investment advice. Below, we walk you through the rationale of our risk advice model. Unlike the standard risk questionnaires, our algorithm weights investment time horizon and downside risk more heavily, and allows you to deviate from our advice if you want to deviate. This is the heart of Betterment's risk advice algorithm. We start with your goals First, let's talk about goals. At Betterment, you can think of goals like different investment buckets. They are technically subaccounts that you can use to silo your retirement savings from vacation savings, for example. Every goal you set up at Betterment (and every customer can set up several) will have its own customized allocation of stocks and bonds. Each goal has different final liquidation assumptions, so it is important to select the one that most closely matches your real intentions. Below we can see the diversity of goals you can manage at Betterment. ...and then look at your investment horizon. Once we know your goal, we next consider how long you will be invested in that goal, as well as the withdrawal plan for that goal. Is it a goal that you plan on cashing out in 10 years, or a goal such as retirement in 30 years, give or take a few years? That actually makes a big difference in the advice we'll give. We assume you will spend your Major Purchase goal savings at a specific point in time. You might withdraw your entire House goal investment after 10 years when you have hit the savings mark for your down payment. In contrast, with a Retirement goal, we assume you will spend funds over a number of years rather than in one lump sum withdrawal. That's the nature of a nest egg—it's the basis for your monthly income in retirement. If you don’t have a specific investment horizon or target amount, we will use your age to set your investment horizon (our default target date is your 65th birthday) in a General Investing goal. It has a similar spending assumption as retirement, but maintains a slightly riskier portfolio even when you hit the target date, since it's not clear you'll liquidate those investments soon. With this information about your time horizon and goals, we can determine an optimal risk level for your investment horizon. We do this by assessing the possible outcomes for your time horizon across a wide variety of bad to average markets. Getting to an optimal risk level, generally attained through exposure to stocks versus bonds, involves weighing the trade-offs between potential gains from higher risk investments and the potential for falling short by playing it safe. We have designed our formula so that it works especially well with our portfolio, which contains multiple globally diversified asset classes. Now, we know we can't predict what the future will be. So we use a projection model that includes this uncertainty by including many possible futures, weighted by how likely we believe they are. We use these probability-weighted futures to build our recommendation based on a range of outcomes, giving slightly more weight to potential negative outcomes and building in a margin of safety—which technically is called 'downside risk' and uncertainty optimization. If you're interested, you can also read more about our projection methodology. Paying particular attention to below-average scenarios we are able to select a level of risk that aims to minimize potential downside risk at every investment horizon. By some standards, we have a fairly conservative allocation model—but as we mentioned above, our mission is to help you get to your goal through steady saving and appropriate allocation, rather than taking on unnecessary risk. How we balance risk and time Now, let's consider now how risk and time work together. The example below shows the forecasted growth of $100,000 in a 70% stock portfolio over three years. The expected return, or median outcome, for this portfolio is $121,917, but the range of possible outcomes moves from at least $180,580 for the top 5% of potential outcomes to no better than $82,312 for the bottom 5%. This is a great example of how stocks can bring both a lot of upside—as well as downside in the short-term. Outcome and risk over a three-year term If the graph above shows an example of the predicted volatility that stocks can bring to very short-term time horizons, what happens to the same portfolio over a 10-year time horizon? Outcome and risk over a 10-year term After 10 years, our models predict that you are less likely to lose money and more likely to come out ahead on an absolute dollar basis. How we manage downside risk Now that the relationship between risk and time is clear, let's turn back to allocation. In order to make an appropriate recommendation of stocks and bonds, we have to look at potential outcomes for everything from 0% stocks to 100% stocks. To do this, we evaluate stock allocations and look at how they might perform at similar percentiles over a fixed investment horizon. This analysis helps us finely tune the stock-and-bond ratio. In the example below, we see the 15th percentile outcome for every stock allocation over a 20-year investment horizon. We use the 15th percentile to represent a 'bad' outcome, i.e., poor predicted market performance. With shorter-term horizons (seven years and less), our modeling shows a majority bond portfolio beats a majority stock portfolio in this ‘bad case.' However, by year 12, the same model predicts higher stock allocations begin to overcome bond-heavy portfolios. By year 20 all majority stock portfolios (at least 50.1%) have better outcomes than majority bond portfolios, even though this is still a 'bad' outcome in terms of investment performance. Returns at the 15th percentile, or a 'bad case' scenario Within this bad outcome scenario let's focus on the best allocation at each time period. Measured by returns, the best expected outcomes are equivalent to the top of this graph (traced in red). Another way to view this best allocation line is to change the y-axis from absolute value in dollars to the stock allocation. If we plot the same 15th percentile best allocation line on a new plot we get the following graph. Portfolio value as a measure of stock allocation at the 15th percentile This new view of the same line clearly shows which allocation would have performed best for a given period. For example, in the ‘bad’ scenario, a 65% stock portfolio would have performed best over a period that lasted 10 years and nine months on the predicted model. Allocation and time Our advice doesn’t only consider the bad outcomes. We seek to find the best stock allocation for outcomes from the expected 50th percentile to the 5th percentile (a 'worst case' scenario, but not THE worst case scenario). You can see the result of this exercise in the graph below, which maps investment horizon against best stock allocation, given the percentile chosen. Percentiles by 5%, from 5th to 50th Our goal is to provide the best possible expected returns. That means aiming to provide you with the best chance of making money and not losing it. To do that, we then must look at the the median outcome—and an average of all the outcomes that are considered bad, which is everything from the 5th percentile to the 50th. (Why 50th? Percentiles over the 50th, the median will always show that 100% stocks are the best allocation.) The dark blue line represents the average ‘best’ stock allocation across all percentiles. Since we have included more downside scenarios in this average, it weighs the potential for loss more than equivalent upside. But note that over longer time periods, even with a downside risk focus, we predict that it is still better to be in a majority stock portfolio compared to a majority bond portfolio. Average of all percentiles For long-term goals, those with time horizons over 20 years or more, we recommend 90% stocks. For short-term time horizons, we recommend 10% stocks. And for intermediate-term goals, the recommended stock allocation rises very quickly. This is based on a conservative downside-weighted risk measure which accounts for your specific time horizon in each goal to help ensure you are taking on the right risk for the level of return you should realize. The result is Betterment's glide path The result is a general framework for the risk allocation advice Betterment uses across all goals, which can supply a goal-specific glide path recommendation. In investing, a glide path is the formula used for asset allocation that progressively gets more and more conservative as the liquidation date nears. Many retirement-oriented target-date funds are based on a glide path (though every firm has its own formula.) At Betterment, we adjust the recommended allocation and portfolio weights of the glide path based on your specific goal and time horizon. This means Betterment glide path recommendations are more personalized to your specific goals and investment horizons. For example, in our Major Purchase goals, shown below, the recommended glide path takes a more conservative path than a recommended retirement glide path—moving to near-zero risk—for very short time horizons. Why is that? This is because we expect that you will fully liquidate your investment at the intended date and will need the full balance. With Retirement goals, in contrast, the glide path we recommend remains at a higher risk allocation even when the target date is reached, as we assume liquidation will be gradual, and you still have years in retirement for your investments to grow before they are liquidated. Learn how this advice varies by goal type. Mixing bonds and stocks across percentiles The bottom line: Our allocation advice is designed at a goal level to help ensure you're taking on the right level of risk based on your personal situation, unlike the impersonal and often unexplained glide path offered by target-date funds. Including customer risk preference How should we modify this analysis for a conservative or aggressive approach? The glidepath derived above is downside optimized because it gives equal weight to each percentile outcome from the median down to the first percentile over a given time horizon. To tailor this guidance to a more conservative or aggressive approach, we’ll change the weights to reflect the degree to which investors care about the worse outcomes versus median average outcomes. A quantitative approach We’ll define a ‘conservative’ approach as giving the median (50th percentile outcome) about 40% of the weight of the 5th percentile outcome. Conversely, the ‘aggressive’ approach gives the 5th percentile outcome about 40% of the weight of the median. Weight Given to Outcome for Different Approaches The result is a set of optimal aggressive and conservative glidepaths, as shown below for a major purchase goal. Deviation from the Recommended Approach This approach does allow for deviation by risk level, which produces a non-linear guidance range. It is wider at moderate allocations, and tighter at the bottom and top of the risk range. Optimal Stock Allocation One reason is simply mechanical: at higher risk levels, you can’t deviate up very much. At lower risk levels, you can’t deviate down much. Taken across the entire range our outcomes, we have determined that ± 7% is a reasonable deviation. We believe a stable range across recommended levels is easier to understand and follow, and there is sufficient noise in the more extreme tails of these estimates to justify allowing a higher range at the tails. We therefore give guidance that the acceptable range of deviation is -7% for customers wanting a conservative approach, and +7% for customers wanting an aggressive approach to that goal. Very conservative More than 7% beneath recommendation Appropriately Conservative Between 3% and 7% beneath recommendation Moderate Within 3% of recommendation, inclusive. Appropriately Aggressive Between 3% and 7% above recommendation Too aggressive ✢ More than 7% above recommendation Unknown When lack of information regarding significant external assets means it’s not possible to reach a conclusive opinion ✢ Betterment for Advisors customers see ‘Very aggressive’ instead. Goal-term guidance Our quantitative approach above allows us to establish a set of recommended risk ranges given our goals. However, an investor may choose to deviate from our risk guidance if they see fit, and there may be appropriate reasons for those deviations. That being said, we provide investors with feedback regarding the potential implications of such deviations and, in doing so, we treat upwards and downwards deviations differently. If an investor decides to take on more risk than we recommend, we communicate the fact that we believe their approach is “too aggressive” given their goal and time horizon. We flag this because even in a setting where an investor cares about the downsides less than the average outcome, it still isn’t rational to take on more risk (viewing this particular goal in isolation). If the investor is unlucky with returns over that period, the losses in a portfolio flagged as “too aggressive” will be very difficult to recover from. In contrast, if an investor chooses a risk level lower than our “conservative” band, we'll communicate that their choice is “very conservative.” This is because the downside of taking on a lower risk level in a moderate outcome scenario is simply needing to save more. And we believe investors should choose a level of risk which is aligned with their ability to stay the course through the short term. Aligning risk level with short-term risk tolerance An allocation cannot be optimal if the investor is not comfortable committing to it in both good markets and bad ones. As a point of reference, our 70% stock portfolio would have lost 46% from Nov. 2007 to Mar. 2009, and been in the red until 2011. While this performance would have been very disappointing, it is important to remember we only recommend 70% stock allocations for goals expected to be held eight years or longer. To ensure that investors understand and feel comfortable with the short term risk in their portfolios, we present them with both extremely good and extremely poor return scenarios for their selection over a one-year time period. -
![The Betterment Portfolio Strategy]()
The Betterment Portfolio Strategy
Betterment’s core portfolio strategy is based on Nobel Prize-winning research. We continually ...
The Betterment Portfolio Strategy Betterment’s core portfolio strategy is based on Nobel Prize-winning research. We continually improve the portfolio strategy over time in line with our research-focused investment philosophy. TABLE OF CONTENTS I. Prerequisites for a Betterment Portfolio Strategy II. Achieving Global Diversification with a Nobel Prize-Winning Approach to Asset Allocation III. Increasing Value with Evidence-based Portfolio Optimization IV. Manage Taxes Using Municipal Bonds Conclusion Citations Betterment has a singular objective: to help you make the most of your money, so that you can live better. Our investment philosophy forms the basis for how we pursue that objective: Betterment uses real-world evidence and systematic decision-making to help increase our customers’ wealth. In building our platform and offering individualized advice, Betterment’s philosophy is actualized by our five investing principles. Regardless of one’s assets or specific situation, Betterment believes all investors should: Make a personalized plan. Build in discipline. Maintain diversification. Balance cost and value. Manage taxes. In this in-depth guide to the Betterment Portfolio Strategy, our goal is to demonstrate how the Betterment Portfolio Strategy, in both its application and development, contributes to how Betterment carries out its investing principles. How we select funds to implement the Strategy is also guided by our investing principles, and is covered separately in our Investment Selection Methodology paper. Within this paper, you will find that our portfolio construction process strives to define a strategy that is diversified, increases value by managing costs, and enables good tax management—three key investing principles. Of these, portfolio strategy construction is most particularly concerned with diversification. And that’s where most investment managers stop—diversifying a portfolio across asset classes. We don’t. As you’ll see in this paper, our prerequisites and iterative portfolio optimization process enable us to construct the portfolio strategy as one piece of a larger holistic investing approach where personalized planning, cost management, tax optimization, and discipline each are achieved through different methodologies. At the end of this paper, we will touch on the complementary processes we use in our investment process and how they work together to help our customers maximize their wealth. I. Prerequisites for a Betterment Portfolio Strategy When developing a portfolio strategy, any investment manager faces two main tasks: asset class selection and portfolio optimization. We’ll provide a guided tour of how we pursue each of Betterment’s investing principles and, in effect, accomplish each task along the way in crafting the Betterment Portfolio Strategy. Laying a Foundation for Personalized Planning & Discipline To align with Betterment’s investing principles, a portfolio strategy must enable personalized planning and built-in discipline for investors. If the Betterment Portfolio Strategy—when standing alone—cannot reasonably be applied to an investor’s specific goal and situation, then it fails to help Betterment achieve its principle of helping customers formulate a personalized plan. If a portfolio strategy seems unintuitive or causes poor investor behavior, then we have failed to build in discipline. The Betterment Portfolio Strategy is comprised of 101 individualized portfolios, in part, because that level of granularity in allocation management provides the flexibility to align to multiple goals with different timelines and circumstances. This helps to lay a foundation for the principles of personalized planning and built-in discipline. While Betterment solves for these principles in other ways as well, their manifestation starts with portfolio strategy itself. II. Achieving Global Diversification with a Nobel Prize-Winning Approach to Asset Allocation An optimal asset allocation is one that lies on the efficient frontier, which is a set of portfolios that seek to achieve the maximum objective for the lowest amount of risk. The objective of most long-term portfolio strategies is to maximize return, while the associated risk is measured in terms of volatility—the dispersion of those returns. In line with our investment philosophy of making systematic decisions backed by research, Betterment’s asset allocation is based on a theory by economist Harry Markowitz called Modern Portfolio Theory, as well as subsequent advancements based on that theory.1 Introduced in 1952, Markowitz’ work was awarded the Nobel Prize in 1990 after his theoretical framework and mathematical modeling informed decades of improvements in portfolio strategy construction. While there remains enormous debate (and entire sectors of financial services) devoted to portfolio construction and optimization, many practitioners rely on Markowitz’ theoretical framework to evaluate returns and measure risk for asset allocation. It’s also a very intuitive framework for constructing a portfolio strategy. The major insight posited by Markowitz is that any asset included in a portfolio should not be assessed by itself, but rather, its potential risk and return should be analyzed as a contribution to the whole portfolio. This is mathematically expressed as an optimization of maximizing expected returns while penalizing those returns for risk. Using this insight as the objective of portfolio construction is just one way of building portfolios; other forms of portfolio construction may legitimately pursue other objectives, such as optimizing for income, or minimizing loss of principal. However, our portfolio construction goes beyond traditional Modern Portfolio Theory in five important ways: Estimating forward looking returns Estimating covariance Tilting specific factors in the portfolio Accounting for estimation error in the inputs Accounting for taxes in taxable accounts Each of these additions to basic Modern Portfolio Theory will be explained in full later in this paper. Asset Classes Selected for the Betterment Portfolio Strategy Any asset allocation strategy starts with the universe of investable assets. Leaning on the work of Black-Litterman, the universe of investable assets for us is the global market portfolio.2 However, the global market portfolio is, in some sense, not well-defined, and, often, definitions depend on the context of the application. Below we describe the assets that compose our global market portfolio and, hence, the Betterment Portfolio Strategy. To capture the exposures of the asset classes for the global market portfolio, we rely on the exchange-traded funds (ETFs) available that represent each class in the theoretical market portfolio. We base our asset class selection on ETFs because this aligns the portfolio construction with our subsequent process, our investment selection methodology. Equities Developed Market Equities We select U.S. and international developed market equities as a core part of the portfolio. Historically, equities exhibit a high degree of volatility, but provide some degree of inflation protection.3 Even though significant historical drawdowns, such as the global financial crisis of 2008, demonstrate the possible risk of investing in equities, longer-term historical data and our forward expected returns calculations suggests that developed market equities remain a core part of any asset allocation aimed at achieving positive returns.4 This is because, over the long term, developed market equities have outperformed bonds on a risk-adjusted basis. Within developed market equities, the following sub-asset classes are included in the Betterment Portfolio Strategy: Equities representing the total market of the United States Equities representing the total international developed market Emerging Market Equities To achieve a global market portfolio, we also include equities from less developed economies, called emerging markets. Generally, consistent with the research of others, our analysis shows that emerging market equities tend to be more volatile than U.S. and international developed equities. And while our research shows high correlation between this asset class and developed market equities, their inclusion on a risk-adjusted basis is important for global diversification. Note that we exclude frontier markets, which are even smaller than emerging markets, due to their widely varying definition, extreme volatility, small contribution to global market capitalization, and cost to access. Bonds Bonds have a low correlation with equities historically. Because of this, they remain an important way to dial down the overall risk of a portfolio. To leverage various risk and reward tradeoffs associated with different kinds of bonds, we include the following sub-asset classes of bonds in the Betterment Portfolio Strategy. Short-term treasury bonds Inflation protected bonds Investment grade bonds International bonds Municipal bonds - read more here Emerging market bonds Figure 1. Correlation between Asset Classes in the Betterment Portfolio Strategy Figure 1. This figure demonstrates the correlation of each asset class relative to each other, using historical data from April 2007 to December 2016. A sample covariance matrix was calculated and then modified by the shrinkage method explained in this paper. The source of data for each asset class is Yahoo! Finance (a specific ETF represents each asset class). Asset Classes Excluded from the Betterment Portfolio Strategy While Modern Portfolio Theory would have us craft the Betterment Portfolio Strategy to represent the total market, including all available asset classes, we exclude some asset classes whose cost and/or lack of data outweighs the potential benefit gained from their inclusion in the portfolio strategy. For this reason, we have excluded private equity, commodities, and natural resources, since estimates of their market capitalization are unreliable, and there is a lack of data to support their historical performance. Our chosen model for assessing the rate of return for a given asset also suggests that asset classes such as these may not show sensitivity to total portfolio returns.5 While commodities represent an investable asset class in the global financial market, we have excluded the class of ETFs from the Betterment Portfolio Strategy for several reasons—most importantly, their low contribution to a global stock/bond portfolio's risk-adjusted return. In addition, real estate investment trusts (REITs), which tend to be well marketed as a separate asset class, are not explicitly included in the portfolio strategy. We include exposure to real estate, but as a sector within equities. Adding additional real estate exposure by including a REIT asset class would overweight the portfolio strategy’s exposure to real estate relative to the overall market. III. Increasing Value with Evidence-based Portfolio Optimization While asset selection sets the stage for a globally diversified portfolio strategy, to increase performance value at a reasonable cost (without sacrificing diversification) we must further optimize the portfolio strategy. This process requires tilting the portfolio strategy in ways that our analysis shows could lead to higher returns. While most asset managers offer a limited set of model portfolios at a defined risk scale, the Betterment Portfolio Strategy is designed to give customers more granularity and control over how much risk they want to take on. Instead of offering a conventional set of three portfolio choices—aggressive, moderate, and conservative—our portfolio optimization methods enable the Betterment Portfolio Strategy to contain 101 different portfolios. Optimizing Portfolios to Help Increase Returns Modern Portfolio Theory requires estimating returns and covariances to optimize for portfolios that sit along an efficient frontier. While we could use historical averages to estimate future returns, this is inherently unreliable because historical returns do not necessarily represent future expectations. A better way is to utilize the Capital Asset Pricing Model along with a utility function which allows us to optimize for the portfolio with the greatest return for the risk that the investor is willing to accept. Computing Forward-Looking Return Inputs To compute forward-looking returns for the Betterment Portfolio, we instead turn to the Capital Asset Pricing Model (CAPM), which assumes all investors aim to maximize their expected return and minimize volatility while holding the same information.6 Under CAPM assumptions, the global market portfolio is the optimal portfolio. Since we know the weights of the global market portfolio and can reasonably estimate the covariance of those assets, we can recover the returns implied by the market.7 This relationship gives rise to the equation for reverse optimization: μ = λ Σ ωmarket Where μ is the return vector, λ is the risk aversion parameter, Σ is the covariance matrix, and ωmarket is the weights of the assets in the global market portfolio.8 By using CAPM, the expected return is essentially determined to be proportional to the asset’s contribution to the overall portfolio risk. It’s called a reverse optimization because the weights are taken as a given and this implies the returns that investors are expecting. While CAPM is an elegant theory, it does rely on a number of limiting assumptions: e.g., a one period model, a frictionless and efficient market, and the assumption that all investors are rational mean-variance optimizers.9 In order to complete the equation above and compute the expected returns using reverse optimization, we need the covariance matrix as an input. Let’s walk through how we arrive at an estimated covariance matrix. The covariance matrix mathematically describes the relationships of every asset with each other as well as the volatility risk of the asset themselves. Our process for estimating the covariance matrix aims to avoid skewed analysis of the conventional historical sample covariance matrix and instead employs Ledoit and Wolf’s shrinkage methodology, which uses a linear combination of a target matrix with the sample covariance to pull the most extreme coefficients toward the center, which helps reduce estimation error.10 Tilting the Betterment Portfolios based on the Fama-French Model Decades of academic research have pointed to certain persistent drivers of returns that the market portfolio doesn’t fully capture.9 A framework known as the Fama-French Model demonstrated how the returns of equity security are driven by three factors: market, value, and size.11 The underlying asset allocation of the Betterment Portfolio Strategy ensures the market factor is incorporated, but to gain higher returns from value and size, we must tilt the portfolios. For the actual mechanism of tilting, we turn to the Black-Litterman model. Black-Litterman starts with our global market portfolio as the asset allocation that an investor should take in the absence of views on the underlying assets. Then, using the Idzorek implementation of Black-Litterman, the Betterment Portfolio Strategy is tilted based on the level of confidence we have for our views on size and value.12 These views are computed from historical data analysis, and our confidence level is a free parameter of the implementation. However, in both cases, the tilts are additionally expressed, taking into account the constraints imposed by the liquidity of the underlying funds. Using Monte Carlo to Add Robustness to Our Tilted Asset Class Weights Despite using reverse optimization to estimate the forward expected returns of our assets, we know that no one can predict the future. Therefore, we use Monte Carlo simulations to predict alternative market scenarios. By doing an optimization of the portfolio strategy under these simulated market scenarios, we can then average the weights of asset classes in each scenario, which leads to a more robust estimate of the optimal weights. This secondary optimization analysis alleviates the portfolio construction’s sensitivity to returns estimates and leads to more diversification and expected performance over a broader range of potential market outcomes. Thus, through our method of portfolio optimization, the Betterment Portfolio Strategy is weighted based on the tilted market portfolio, based on Fama-French, averaged by the weights produced by our Monte Carlo simulations. This highly methodical process gives us a robust portfolio strategy designed to be optimal at any risk level for not just diversification and expected future value, but also ideal for good financial planning and for managing investor behavior. Figure 2. Portfolio Allocations in the Betterment Portfolio Strategy Figure 2. This figure shows the Betterment Portfolio Strategy’s various weighted asset allocations for each stock allocation level. An easy way to see the value-add of our portfolio strategies is to look at the difference between our efficient frontier and that of a so-called “naïve” portfolio, one that is made up of only a U.S. equity index (SPY) and a U.S. bonds index (AGG). The expected returns of Betterment’s portfolio significantly outperform a basic two-fund portfolio for every level of risk (see Figure 4). Figure 3. Optimizing the Portfolio Strategy to Align to the Efficient Frontier Figure 3. The expected excess return hypothetical illustrated in this figure was calculated by reverse optimization using two inputs: market capitalization weight and asset covariance. The grey line can be considered a naïve portfolio of just two asset classes—U.S. Stocks (represented by SPY) and U.S. Bonds (represented by AGG). The blue line represents the Betterment Portfolio Strategy across the entire risk spectrum. At each level of risk, the Betterment Portfolio Strategy has a higher expected excess return. This analysis is theoretical and it does not represent actual or hypothetical performance of a Betterment portfolio. IV. Manage Taxes Using Municipal Bonds For investors with taxable accounts, portfolio returns can be further improved on an after-tax basis by utilizing municipal bonds. This is because the interest from municipal bonds is exempt from federal income tax. To take advantage of this, the Betterment Portfolio Strategy in taxable accounts is tilted toward municipal bonds. Other types of bonds remain for diversification reasons, but the overall bond tax profile is improved. For investors in states with the highest tax rates—New York and California—Betterment can optionally replace the municipal bond allocation with a more narrow set of bonds for that specific state, further saving the investor on state taxes. Betterment customers who live in NY or CA can contact customer support to take advantage of state specific municipal bonds. Conclusion With every element of Betterment’s investing strategy, we hold to the same investment philosophy and the fundamental principles we believe lead to investing success. Our philosophy is simple: We use real-world evidence and systematic decision-making to help increase the value of our customers’ assets. As explained throughout this paper, our portfolio construction process is built on years of research that point to three main areas of focus: diversification through asset allocation, improved value through portfolio optimization, and managing taxes. In the grander scheme of Betterment’s offering, these steps are just the beginning. After setting the strategic weight of assets in the Betterment Portfolio Strategy, the next step in implementing the strategy is Betterment’s investment selection process, which selects the appropriate ETFs for the respective asset exposure in a low-cost, tax-efficient way. In keeping with our philosophy, that process, like the portfolio construction process, is executed in a systematic, rules-based way, taking into account the cost of the fund and the liquidity of the fund. Beyond ticker selection is our established process for allocation management—how we advise downgrading risk over time—and our methodology for automatic asset location, which we call Tax Coordination. Finally, our overlay strategies of automated rebalancing and tax-loss harvesting can be used to help further maximize individualized, after-tax returns. Together these processes put our principles into action, helping each and every Betterment customer maximize value while invested at Betterment and when they take their money home. Citations 1 Markowitz, H., "Portfolio Selection".The Journal of Finance, Vol. 7, No. 1. (Mar., 1952), pp. 77-91. 2 Black F. and Litterman R., Asset Allocation Combining Investor Views with Market Equilibrium, Journal of Fixed Income, Vol. 1, No. 2. (Sep., 1991), pp. 7-18. Black F. and Litterman R., Global Portfolio Optimization, Financial Analysts Journal, Vol. 48, No. 5 (Sep. - Oct., 1992), pp. 28-43. 3 Boudoukh, J and Matthew R., “Stock Returns and Inflation: A Long-Horizon Perspective.” The American Economic Review, (Dec., 1993). 4 Siegel J., Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies. 5 Stambaugh, Robert, “On the exclusion of assets from tests of the two-parameter model: A sensitivity analysis.” (1982) 6 Sharpe, W. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk, Journal of Finance, 19 (3), 425–442, Treynor, J. (1961). Market Value, Time, and Risk. Treynor, J. (1962). Toward a Theory of Market Value of Risky Assets. Lintner, J. (1965). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets, Review of Economics and Statistics, 47 (1), 13–37. Mossin, Jan. (1966). Equilibrium in a Capital Asset Market, Econometrica, Vol. 34, No. 4, pp. 768–783. 7 Litterman, B. (2004) Modern Investment Management: An Equilibrium Approach. 8 Note that that the risk aversion parameter is a essentially a free parameter. 9 Ilmnen, A., Expected Returns. 10 Ledoit, O. and Wolf, M., Honey, I Shrunk the Sample Covariance Matrix, Olivier Ledoit & Michael Wolf. 11 Fama, E. and French, K., (1992). "The Cross-Section of Expected Stock Returns". The Journal of Finance.47 (2): 427. 12 Idzorek, T., A step-by-step guide to the Black-Litterman Model. -
![Goal Projection and Advice Methodology]()
Goal Projection and Advice Methodology
Betterment helps you get on track to meet your goals by providing projections and advice on ...
Goal Projection and Advice Methodology 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.
Further writing from Betterment Editors
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Betterment Raises $160 Million in Growth Capital
Betterment Raises $160 Million in Growth Capital 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! -
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Three LGBTQ+ Influencers Share Tips For Successful Financial Planning
Three LGBTQ+ Influencers Share Tips For Successful Financial Planning 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! -
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How You Benefit Your Community By Investing Responsibly
How You Benefit Your Community By Investing Responsibly 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. -
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Why Exercising Your Power As An Investor Can Impact Climate Change
Why Exercising Your Power As An Investor Can Impact Climate Change 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. -
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How Investing In Gender and Racial Equity Is A Step Towards Social Change
How Investing In Gender and Racial Equity Is A Step Towards Social Change 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. -
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How To Save For Your First Down Payment
How To Save For Your First Down Payment 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. -
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How We Built 3 New Socially Responsible Investing Portfolios
How We Built 3 New Socially Responsible Investing Portfolios 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. -
![ETF Selection for Portfolio Construction A Methodology]()
ETF Selection For Portfolio Construction: A Methodology
ETF Selection For Portfolio Construction: A Methodology 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. -
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Benefits Of An Early IRA Contribution
Benefits Of An Early IRA Contribution 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. -
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How Memestocks Affected Investors’ Actions And Emotions
How Memestocks Affected Investors’ Actions And Emotions 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. -
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Financial Advice From Betterment’s LGBTQ+ Community
Financial Advice From Betterment’s LGBTQ+ Community 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. -
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How Much Could You Be Losing To Fees?
How Much Could You Be Losing To Fees? 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. -
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How Much Crypto Should I Own?
How Much Crypto Should I Own? 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. -
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Personal Finance Stories From Our AAPI Community
Personal Finance Stories From Our AAPI Community 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. -
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Buying a Second Home? 4 Tax Considerations
Buying a Second Home? 4 Tax Considerations 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. -
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Investing in Your 30s: 3 Goals You Should Set Today
Investing in Your 30s: 3 Goals You Should Set Today 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. -
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4 Betterment Investing Options If You Have Low Risk Tolerance
4 Betterment Investing Options If You Have Low Risk Tolerance 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. -
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4 Reasons Why Women Need To Start Saving More And Sooner
4 Reasons Why Women Need To Start Saving More And Sooner 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. -
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How to Save for Retirement: 5 Essential Accounts to Consider
How to Save for Retirement: 5 Essential Accounts to Consider 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. -
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Financial Resources For Women’s History Month
Financial Resources For Women’s History Month 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. -
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The Recommended Allocation To Keep Up With Inflation Has Changed
The Recommended Allocation To Keep Up With Inflation Has Changed 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/. -
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Betterment’s Women Leaders Share Their Best Career Advice
Betterment’s Women Leaders Share Their Best Career Advice 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. -
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An HR Generalist Making $90k In Minneapolis Wants To Pay Off Student Loans
An HR Generalist Making $90k In Minneapolis Wants To Pay Off Student Loans 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. -
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Q&A: What’s The Future Of Investing?
Q&A: What’s The Future Of Investing? 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. -
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A Financial Guide To Black History Month
A Financial Guide To Black History Month 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 -
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A Creative Strategist Making $135K In Chicago Dreams Of 1mm In Retirement
A Creative Strategist Making $135K In Chicago Dreams Of 1mm In Retirement 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. -
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Can You Have a 401(K) and an IRA?
Can You Have a 401(K) and an IRA? 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. -
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A Development Director Making $100K In DC Envisions A Debt-Free Future
A Development Director Making $100K In DC Envisions A Debt-Free Future 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. -
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3 Simple Ways You Could Pay Fewer Taxes If You Have An Investment Account
3 Simple Ways You Could Pay Fewer Taxes If You Have An Investment Account 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. -
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How To Make The Most Of Your Spending With Cash Back Offers
How To Make The Most Of Your Spending With Cash Back Offers 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. -
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How The Presidential Election And COVID-19 Impact Investor Sentiment
How The Presidential Election And COVID-19 Impact Investor Sentiment 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. -
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Betterment’s Employee Demographics And Our Commitments To Doing Better
Betterment’s Employee Demographics And Our Commitments To Doing Better 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. -
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3 Ways To Pay Your Bills With Checking
3 Ways To Pay Your Bills With Checking 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. -
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How Investor Sentiment Has Evolved During Covid-19
How Investor Sentiment Has Evolved During Covid-19 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. -
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Welcome to the Betterment 401(k)
Welcome to the Betterment 401(k) 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. -
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Taking Action Against Racial Injustice
Taking Action Against Racial Injustice Betterment shares with our customers how we’re taking action against systemic racial injustice. -
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Here’s How Other Millennials Are Saving For Retirement
Here’s How Other Millennials Are Saving For Retirement Our research indicates that the majority of millennials and Gen Z are saving for retirement, and shows how much they’re saving. -
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Who is Managing My Money—People Or Robots?
Who is Managing My Money—People Or Robots? 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. -
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How to Get the Most Impact Out of Your Charitable Donations
How to Get the Most Impact Out of Your Charitable Donations 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. -
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Goal-Based Investing: A Decade In Review
Goal-Based Investing: A Decade In Review 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. -
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FDIC vs SIPC—What’s the difference?
FDIC vs SIPC—What’s the difference? 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. -
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Optimizing Performance in Lower Risk Betterment Portfolios
Optimizing Performance in Lower Risk Betterment Portfolios 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 market rates, you can feel confident that the yield you are receiving is fair and in line with prevailing rates. Below we can see that over the 30 days ending Nov. 14, 2019, SHV had an annualized yield of 1.59%, net of fund fees, which is dispersed to shareholders on a monthly basis. Over the same period, JPST yielded 2.12%. The 100% bond portfolio, composed of 80% SHV and 20% JPST, has yielded 1.70%. Table 1: Risk and Yield Ultra low-risk bond baseline (SHV) Additional candidate fund (JPST) SHV 80% + JPST 20% SEC 30-day yield (includes fund expense ratios) 1.59% 2.12% 1.69% Annual Volatility 0.30% 0.38% 0.30% Deepest drawdown return -0.12% -0.34% -0.12% Expense ratio 0.15% 0.18% 0.16% SEC 30-day yields are as of Nov. 14, 2019. Annual volatility and drawdown return are calculated 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 Nov 14, 2019. 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.SEC 30-day yields, annual volatility and drawdown are net of fund fees and do not include Betterment’s management fee. Data from Xignite and Betterment calculations. Bond portfolio research never stops. By combining multiple low-risk assets, we seek to deliver higher expected returns, through higher yields, while keeping risk in check. The diversification benefits of U.S. short-term treasuries and investment-grade bonds allow us to construct low-risk portfolios with shorter and less severe downturns. As always, we iterate on our portfolio optimization methods. We update our changes in this overview of our financial advice as we develop improved ways of helping you reach your financial goals. -
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Cash Analysis Methodology
Cash Analysis Methodology Betterment's cash analysis aims to provide smart feedback when we think you have extra cash that could be earning you more value if it were in a higher yield account. TABLE OF CONTENTS How We Analyze Your Checking Account Predicting Future Expenses Based on Past Expenses How We Define Extra Cash in Checking Accounts Evolving How We Help You Manage Cash Most American adults face some sort of cash management problem. Maybe you face a tight budget and need to control expenses; or maybe you have extra income and want to know the best use for that cash; or perhaps your income fluctuates from month to month and you’re looking to maintain a relatively constant amount of cash in your checking account. As a financial advisor, Betterment aims to help people better understand their cash flows to make more effective decisions for their money. It’s part of our core philosophy: Every person should have a personalized financial plan, and to get there, you often need a more solid understanding of your day-to-day money needs. At a high level, we offer two things to help Betterment customers manage their cash. We analyze the timing and amount of money flowing out of the checking account you’ve linked to your Betterment account. We identify whether you have extra cash in your linked bank account that might earn a higher yield in a different account, such as Cash Reserve. In this methodology, we’ll describe our process for analyzing how money flows out of your checking account, and how we arrive at our recommendation on whether you have any extra cash in your account. How We Analyze Your Checking Account At Betterment, we allow you to link one checking account to deposit and withdraw money from your Betterment accounts for several reasons. For starters, it helps us prevent fraud by giving customers just one door to move money through. It also allows us to start helping you manage your cashflow (without collecting information on all your possible accounts) by analyzing your checking transactions to make a recommendation on how much extra cash you may have. Betterment only analyzes expenses that are debited from your checking account, so expenses made through a credit card are analyzed as an aggregated credit card expense, not as individual expenses. For those with multiple checking accounts, it’s important to keep in mind that we only analyze the one checking account linked to Betterment. Predicting Future Expenses Based on Past Expenses We make a prediction about future expenses by looking at your last year of expenses. To get a better idea of your ongoing expenses, we filter out and remove very large, one-off expenses. We consider expenses to be large or one-off if they are over either the greater of $5,000 or the 99th percentile of all your expenses. If multiple expenses occur on the same day, we’ll add all of those expense totals together as if it was all one expense. To make the forecast, we averaged the last year of the combined, filtered expenses and scale by the upper and lower bounds of the forecast period (21 days and 35 days). Our predictions are updated on a regular basis as new expense data is available, which means that you may see them change from day to day. How We Define Extra Cash in Checking Accounts To estimate how much extra cash you may be holding in your checking account, we use the expense analysis and prediction process explained above to define a target balance for your checking account in the future. Because the goal of our analysis is to continually give you smart feedback on your balance, the target balance isn’t static advice; it evolves as our prediction about your cash needs evolve. To arrive at our target balance for determining how much extra cash you have, our technology simultaneously makes two predictions: How much cash we predict you’ll need for the next 21 days (three weeks). How much cash we predict you’ll need for the next 35 days (five weeks). The difference between the current balance in your checking account and your target balance (the balance we predict you’ll need for the next 35 days) is what we consider extra cash, which we recommend moving to an account where you could generate higher earnings. If your current balance falls between the 21-day prediction and 35-day prediction, then we provide you with a message to use your own judgment as to whether you have extra cash based on your knowledge of your cashflow expectations. If your balance falls below the 21-day prediction, then we suggest that you may want to check in on your balance to see if you can cover your expenses, given what we know about you. This analysis will be updated regularly, as long as your checking account remains linked to Betterment. So, our advice on your extra cash will refresh regularly. It is important to note that this information is not gathered or adjusted in real time. We aim to provide current checking account balance that is no more than 24 hours old, so you should be aware that deposits and withdrawals won’t be reflected immediately in your cash analysis. While there are an array of cash savings solutions to choose from, we tie this analysis to Cash Reserve. It is important to note that we assume a cash solution is the appropriate use for any extra cash in your checking account and do not consider whether that money might better be used for investing, or for another purpose, such as paying down debt. Cash Analysis is 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. Evolving How We Help You Manage Cash As described in this methodology, we aim to provide smart feedback when we think you have extra cash that could be earning you more value if it were in a higher yield cash account. You can think of this methodology as a starting point for helping you manage your cashflow. By adding to our analysis and refining our prediction capabilities, we’re working to help you manage your cash more effectively over time. -
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Assessing a Portfolio’s Diversification
Assessing a Portfolio’s Diversification Guidance on diversification to help you make portfolio changes, knowing the potential impact to the future performance of your investments. TABLE OF CONTENTS Why does diversification matter? Understand the Efficient Frontier How We Measure Diversification Offering Feedback in Flexible Portfolios Higher levels of diversification allow you to take less risk to help achieve your desired level of return. At Betterment, we have carefully constructed our recommended portfolio strategy to achieve optimal diversification; it’s one of the core principles of our investment philosophy. We also allow investors to use our customization feature, Flexible Portfolios, to meet their individual needs. To help investors maintain diversification while adjusting their portfolios’ individual asset classes, we give real-time feedback about the level of portfolio diversification as they construct a Flexible Portfolio. Why does diversification matter? It’s worth taking a moment to review why diversification matters. An objective of almost any portfolio is to seek growth with as little volatility as possible. Most assets will have price swings along the way; however, not all asset prices change at the same time or in the same way. In other words, price volatility is unavoidable, but if we choose the right set of investments, we may be able to lower the overall volatility of the portfolio. This is possible when the prices of individual parts of the portfolio move in different directions. As illustrated below, the less that prices move in tandem, the smoother the returns of the overall portfolio are expected to be. The value across time of the two-asset portfolio is likely to be somewhat smoother while any drawdown in value is less severe. You can see more research on diversification here. Illustration of Diversification Figure 1. The less that prices move in tandem, the smoother the returns of the overall portfolio are expected to be. A simple example below shows that as you add to a portfolio uncorrelated assets—i.e., assets whose prices move independently of one another—the overall portfolio becomes less volatile, even when each asset has the same individual level of volatility. Volatility of a portfolio with N uncorrelated assets, all with 12% assumed volatility Figure 2. This figure is hypothetical in nature and simply shows six portfolios of imaginary uncorrelated asset classes with an assumed volatility of 12%. The example demonstrates the mathematical reality that a portfolio of assets that do not perfectly correlate is less volatile than any single asset in the portfolio. Understand the Efficient Frontier Mathematically, as long as assets not perfectly correlated, we can combine them into a portfolio to lower the overall volatility. Below, you can see the result of various portfolios that combine global stock and bond assets. Because of diversification, we can see that the combinations of assets are expected to perform better than the individual assets themselves. Efficient Frontier for the Betterment Portfolio Strategy Figure 3. This figure illustrates hypothetical annual expected excess returns—i.e. returns that exceed the risk free rate—projected for portfolios of the Betterment Portfolio Strategy. The calculation uses our asset class return assumptions using the Capital Asset Pricing Model. The blue points represents the Betterment Portfolio Strategy across the entire risk spectrum. The grey points represent other portfolio combinations using the fund components of the Betterment Portfolio Strategy. At each level of risk, the set of Betterment-recommended portfolios have higher hypothetical expected excess returns. These returns do not include a Betterment management fee or fees charged by issuers of particular securities. These returns include reinvestment of dividends and are in excess of the risk free rate. This calculation is hypothetical in nature, does not represent actual returns attained, and does not take into account any future economic or market conditions. The impact of trading, and other income is not considered. Actual results may differ significantly from the values shown. You can also see that there is a boundary at which we can no longer create a portfolio that has a higher expected return, given its level of risk (points no longer go higher or further to the left). The set of portfolios that comprise the outer boundary is called the efficient frontier. The efficient frontier is the set of hypothetical optimal portfolios that seek to provide the best possible risk-adjusted return, which is an input in determining the specific portfolio that Betterment recommends to a customer. Ideally, investors want to invest in portfolios on or very close to the efficient frontier. When a portfolio moves further from the efficient frontier, it may be taking additional risk that you are not being fully compensated for. Risk and returns are fundamentally linked. When you take more risk in your portfolio, you should aim for expected compensation via a higher return; it doesn’t make financial sense to take on more risk for less or the same returns. Investors should avoid portfolios that take unnecessary and uncompensated risk. The efficient frontier acts as a kind of north star, illustrating the best returns an investor could expect for a given level or risk. How We Measure Diversification When investors use Betterment Flexible Portfolios, we measure the amount of uncompensated risk they are taking in their portfolio. In other words, we measure how far the portfolio is straying from the efficient frontier. Using our portfolio optimization process, we have worked to make sure any recommended portfolio in the Betterment Portfolio Strategy is optimally diversified and sits on or very close to the efficient frontier. Because our recommended portfolios are optimally diversified, these serve as the starting point for any comparison. This is also why we recommend that investors choose the Betterment Portfolio Strategy. To measure diversification in a Flexible Portfolio, we calculate the expected return and volatility of the customized portfolio and compare it to an appropriate comparison portfolio in the Betterment Portfolio Strategy. Put simply, a Flexible Portfolio is well diversified if it has the same risk-adjusted return as the comparison Betterment portfolio. So, we define our diversification rating as the difference between the volatility of the Flexible Portfolio and the rescaled volatility of a comparison portfolio in the Betterment Portfolio Strategy. This process has two steps. First, we identify the portfolio in the Betterment Portfolio Strategy that has the closest expected return to use as our comparison portfolio. For example, if a Flexible Portfolio has an expected excess return of 5%, then we compare it to the 76% stocks, 24% bonds allocation of the Betterment Portfolio Strategy. Then, we assess how much additional risk the Flexible Portfolio may be taking on by scaling the Betterment-recommended portfolio to have the exact same expected return as the Flexible Portfolio. Now that we have two portfolios with comparable expected annual returns, we evaluate how much additional risk (expected volatility) a custom portfolio may be taking. That extra risk is the result of under-diversification—either from not holding enough assets or holding too much of one asset or a number of similar assets. Shown graphically, you can see that a portfolio consisting of 80% US stocks and 20% US bonds is expected to achieve the same annual return as the Betterment 63% stock portfolio, but has almost 10% more risk. Uncompensated Risk from Poor Diversification Figure 4. See Figure 3 for more information on the analysis behind this chart. Here we visualize the uncompensated risk—same hypothetical expected excess return but different expected volatility. Offering Feedback in Flexible Portfolios As we see above, diversification (or lack thereof) can be measured by the amount of uncompensated risk a portfolio is taking when compared to an optimal Betterment portfolio. When an investor is adjusting a portfolio using Flexible Portfolios, we provide real-time feedback on the amount of uncompensated risk. If a portfolio’s uncompensated risk is too high, we will highlight it and recommend increasing diversification across assets. There are a number of reasons investors may want to adjust the holdings in their portfolios. Our feedback on the diversification helps these investors make changes while highlighting the potential impact to the future performance of their investments. -
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Two-Way Sweep Methodology
Two-Way Sweep Methodology Two-Way Sweep helps make everyday cash management easier to handle by seamlessly moving your extra cash from your linked checking account—and back when you need it. TABLE OF CONTENTS A Recurring Analysis Sweeping in to Betterment Sweeping Out of Betterment An Automated Solution for Extra Cash Betterment aims to help its customers manage their cash and investments more effectively by analyzing external accounts and making smart suggestions about how they could potentially be earning more or saving on fees. In this methodology, we’ll describe how Two-Way Sweep helps make everyday cash management easier to handle. Here’s how it works: Our recurring analysis determines whether your checking account holds enough cash to meet expected cash expenses for the next 21 to 35 days. If extra cash is found, Two-Way Sweep will automatically transfer money from your checking account to Cash Reserve. If your checking account balance falls below the balance we predict you’ll need in the next 21 days, we will automatically move money back into your checking account. A Recurring Analysis The goal of Two-Way Sweep is to seamlessly move your extra cash from your linked checking account to our high-yield cash account—and back when you need it. Two-Way Sweep combines a daily recurrent cash analysis with an automated cash transfer. We believe that a checking account must have enough cash reserves at all times to meet expected future cash expenses, yet this cash amount should not be excessive. Ideally, excess cash should be put to work to earn a yield that’s safe, yet higher than what’s typical in an average savings account. Two-Way Sweep monitors your linked checking account daily and aims to keep the account balance between the lower and upper bounds. How are these bounds defined? The lower bound is computed as an aggregate of 21 days of projected cash expense and recurring account transfers, while the upper bound is computed as an aggregate of 35 days of expense and recurring account transfers. You may also add additional padding to these bounds, which we discuss later in more detail. The range of 21 and 35 days is chosen to minimize the amount of extra cash in your checking account while also providing enough cash to meet expected cash expenses in the near future. You may also set your own target balance range for your checking account if you wish to do so. Each day, Two-Way Sweep will estimate the lower and upper bounds. By balancing what we predict you’ll need in your checking account in the next 35 days with the objective of not holding too much extra cash, Two-Way Sweep helps you earn more on your extra cash by shifting it to our high-yield cash account. No cash transfer takes place if your checking account balance already falls between the lower and upper bounds. Sweeping Into Betterment Two-Way Sweep’s movement of cash into Betterment is essentially automating our cash analysis and using Cash Reserve, our high-yield cash account, as the default destination for your extra cash. As we’ve articulated in this comparison, there may be other products you might also consider for earning a high yield on extra cash, but our cash account’s advantages in terms of yield and liquidity make it an ideal spot for your extra cash within Betterment. Betterment uses cash analysis to repeatedly analyze how much extra cash you may have in your checking account. The decision to sweep money into Cash Reserve is based on whether your linked checking account balance is greater than the upper bound, calculated as the amount of cash needed for the next 35 days of cash expenses. When Two-Way Sweep is activated and extra cash is found, we will move your extra cash, up to $5,000 per sweep, into Cash Reserve. After the sweep is complete, another sweep in will not occur again for at least seven days, as a rule. If you initiate a manual withdrawal from your cash account to your checking account, Two-Way Sweep will be automatically paused for two weeks, with the assumption that you plan to use the funds and don’t want them to be swept back to Cash Reserve right away. We will notify you via email before a sweep takes place. You have until 12 PM EST the following day to cancel the sweep, either through the link in the email, or in your account. Sweeping Out of Betterment Although our automated sweep to put your extra cash to work in your cash account is innovative, the true innovation of Two-Way Sweep is its ability to also sweep cash back into your checking account when you need your extra cash. Identifying When You May Have Too Little Cash If, on any given day, your linked checking account balance falls below the cash amount we estimate you‘ll need in the next 21 days (the lower bound), Two-Way Sweep will transfer cash back to your checking account. The sweep will transfer back enough cash to restore your checking account balance to the midpoint between your lower and upper bounds (as calculated on the day of the transfer). The maximum that we will transfer to your checking account is the total balance in your cash account. If your savings are less than the amount needed to bring your checking account balance back to the midpoint between your lower and upper bounds, we will transfer your full Cash Reserve balance back to your checking account. However, after the transfer, your checking account balance will still be below the midpoint. Moving Cash to Your Checking Account If our daily cash analysis finds that you have less than 21 days of expected cash expenses in your checking account, Two-Way Sweep will start the process of automatically moving cash into your checking account from Cash Reserve. If, during the transfer period, our cash analysis finds that your checking account balance is now sufficient (or if extra cash is now detected), the transaction will still continue to process. While a transfer is in progress, we will not initiate any additional sweeps, either to or from your cash account. If, on the day after a sweep into your checking account completes, our cash analysis again shows that your balance is low, Two-Way Sweep will initiate another sweep from your Cash Reserve account to your checking account. We will notify you via email before a sweep takes place. You have until 12 PM EST the following day to cancel the sweep, either through the link in the email, or in your account. Setting a Custom Target Balance Range If your bank requires you to hold a minimum balance, or you are aware of expenses that are not accounted for in our prediction of your lower and upper bounds, you can set your own target balance range for your checking account. This gives you additional control and flexibility to set a range that works for you and that you are comfortable with. Note that Two-Way sweep does not guarantee that your checking account balance will not drop below the lower bound. An Automated Solution for Extra Cash Two-Way Sweep is an automated solution for reducing cash drag in your checking account. It monitors your checking account and estimates future cash expenses on a daily basis with the goal of maintaining a checking account balance that’s within an optimal range while also putting any excess cash to work. Two-Way Sweep takes advantage of Cash Reserve to earn a yield that’s above the usual rate offered by an average savings account. -
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What Are Your Alternatives To Standard Savings Accounts?
What Are Your Alternatives To Standard Savings Accounts? Opting out of a standard savings account could earn you more returns in the long-term. Find out some of your options below. Much like investing, retail banking is an area of finance that leaves customers largely underserved. Banks have historically offered savings accounts that come with fees and minimums, as well as transaction limits that do not let you move money in and out of them when you want to. Unfortunately, that isn’t even the worst part: the real issue is that most of these accounts earn you next to nothing for keeping your money in them. Digging into the specifics of your own savings account might be arduous, but you will likely end with the realization that you are getting anywhere from 0.01% to 0.10% on your balance. That’s right: A standard savings accounts will earn you around $2.50 per year on an account balance of $25,000. Would you subject your cash to that? The good news is, you don’t have to. There are better alternatives out there. 3 Alternatives to Standard Savings Accounts 1. High-Yield Accounts Your bank probably won’t tell you this, but if you do some quick Googling, you can find high-yield accounts—and their interest rates–pretty easily. High-yield accounts typically offer better yields than standard savings accounts. Consider using Cash Reserve, a high-yield cash account as part of our cash management suite. It’s an easy way to save that can help you earn a variable rate of 0.10% * is FDIC-insured for up to $1,000,000† once deposited at our program banks, and has no minimum balance. 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. 2. Certificates of Deposit Certificates of deposit (CD) can also stand as a better alternative—from a yield perspective—to low-yield savings accounts. CDs are also FDIC insured and will pay you based on the amount of time you keep your cash in the CD. Like savings accounts, CDs have relatively low average annual rates, but some online banks offer more competitive ones. The longer you keep your money in a CD, the higher your yield will be: 3 months: 0.47% 6 months: 0.87% 1-year: 1.23% Data source: DepositAccounts by lendingtree. Includes average APY (%) rate over the past five years and is subject to change over time. Data as of 12/2019. If you know you won’t need your cash for a specific amount of time, CDs can provide competitive yields with low risk. However, that is their downside, too. CDs offer little flexibility, and if you need your money before the term is up, banks will likely penalize you for withdrawing. In some cases, they will collect the interest you have earned too. 3. Low-Risk Investment Account Consider investing your extra cash 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. Making a Decision If you take a moment to login to your savings account, try to take a look at your interest rate. Chances are you could earn a higher yield by placing that money in a high-yield cash account, CD, or in a low-risk investment account. It’s important to note: don’t make this decision based solely on rate-chasing. Picking a spot to park your excess cash should holistically be about flexibility, fees, and its competitiveness on rates. And if you just have too much cash in general? Invest it! -
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Cash Reserve Has A Variable APY: What That Means For You
Cash Reserve Has A Variable APY: What That Means For You Interest rates change over time, but at Betterment, we are always working hard to help give you one of the best rates possible so you can make the most of your money. Our objectives are aligned with yours: we want to grow your money. Cash Reserve is a high-yield account that is different from the savings accounts that you might find at traditional banks. We’re not tied to one specific bank, so we have the opportunity to obtain attractive rates in the marketplace. We use our size and scale to access a network of program banks, and then we use our technology and efficiency to pass rates on directly on to you. Is that rate guaranteed? No, it’s variable, and that’s by design. The Federal Funds Rate influences interest rates across all banks. As rates change, so will the Cash Reserve rate. You can feel confident that Betterment is always working to offer you one of the best interest rates we can find, no matter what the current rate environment may be. See what the current variable interest rate is for Cash Reserve. How does Betterment get one of the highest possible rates? Similar to how we aim to select the best ETFs in each asset class for your portfolio, we work with a number of program banks to provide you with one of the best possible rates we can find and then pass them on to you. Often, these rates are more competitive than what you could get as an individual depositor. When you deposit with Betterment, you become part of a larger community of savers. Banks can more efficiently support our customer base as a group, rather than as individuals. What causes interest rates to change? No matter where you bank, the prevailing interest rate environment will have an impact on your interest rate. The amount banks are willing to pay on deposits is heavily influenced by the Federal Reserve, which sets the rate at which banks can loan money to each other. This is known as the Federal Funds Rate. It’s the rising tide that raises all rates, and the receding tide that can also bring them all down. The Federal Reserve sets a target range for the Federal Funds Rate, rather than aiming for a specific number. Because of this, the Federal Funds Rate can change by a small amount from day to day. However, larger changes to the Federal Funds Rate can occur when the Federal Reserve changes its target range or when the Federal Reserve changes policies. The interest rate you receive on Cash Reserve typically will change as a result of these more significant shifts in the Federal Funds Rate. How do interest rate changes affect me? Let’s take a look at just how the Federal Funds Rate affects rates at traditional banks. The chart below shows the relationship between what happens to the rates at traditional banks when the Federal Funds Rate goes up or down. Historical Comparison of the Federal Funds Rate and the Average Bank Rate This chart shows the historical Federal Funds Rate in comparison to the historical national average savings rate. Source data: Federal Reserve and FDIC. The average rate at banks has been nearly flat throughout the period shown above. The wide spread between the two lines on the graph represents the additional amount of interest we’re able to pass on to you because of the way our Cash Reserve product is set up. What will future rates look like? If the Federal Reserve lowers its target range, the interest rate on Cash Reserve will generally change by a similar amount. You can expect this to impact rates at other banks as well. Below, we’ve extended the previous comparison chart to include a forecast for how the Federal Funds Rate might change in the future. Potential Future Rates With Forecasted Interest Rate Changes Source data: Federal Reserve and FDIC. This chart shows the hypothetical future Federal Funds Rate in comparison to the hypothetical future national average savings rate, based on one possible path of future changes in the Federal Funds Rate. The forecasted Federal Funds Rate is based on yield curve data as of 10/10/2019. This chart is hypothetical in nature and based on forecasts. Actual interest earned may differ. As you can see in the hypothetical chart above, the announcement of a rate change by the Federal Reserve would cause changes in the interest rate environment. Because Cash Reserve tracks closely with the Federal Funds Rate, you can expect that, in the future, our Cash Reserve rate will continue to track alongside the Federal Funds Rate as it changes. We Do What We Believe Is Best For You As your advisor and as a smart money manager, it’s in our DNA to do what we believe is best for you. We’ve spent the past decade working to optimize your investments and provide you with advice that helps you reach your long-term financial goals, and we are excited to partner with you to make the most of your money with our newest cash management solution—Cash Reserve. -
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What A Trip To The Casino Can Teach You About Investing And Risk
What A Trip To The Casino Can Teach You About Investing And Risk Learn the ins and outs of how gambling works from a quantitative investor, and use it to your advantage in investing for the long term. For better or worse, there is a certain thrill involved with gambling that makes otherwise rational individuals make irrational bets. When the Mega Millions jackpot hit $1.6 billion in October 2018, over 370 million tickets were sold—that’s more than one ticket for every person in the United States. Of course, the vast majority of those who bought the tickets knew their chances were slim of winning the jackpot in the end. They probably even realized that, on average, they’d lose money by buying a ticket. What you should know is that gambling is never an effective use of money, and gambling addiction can be a major problem. In this article, we’ll review some ways to think about light gambling, but if you gamble often, we encourage you to talk with an appropriate professional. Even with small-time gambling, it’s important not to wager any more money than you can afford to lose. That said, if you set a reasonable, fixed limit of what you will gamble ahead of time (and stick to it!), an occasional night of gambling in Vegas or an entry into your office Fantasy Football pool can be fun. Of course, it’s even more fun if you win. If you do gamble, here are two things you should keep in mind to help maximize your chances of returning, or exceeding, your stake: know your odds, and size your bets accordingly. Part 1. Knowing Your Gambling Odds One of the important skills to have is knowing exactly what your odds are, and how you can improve them. In a skill-based gambling game, like poker, you can increase your chance of winning with practice, but even games that are completely dependent on luck can have different odds based on strategy. As an extreme example, let’s consider the Mega Millions lottery I mentioned earlier. In this game, players choose five numbers between one and 70, and a sixth number between one and 25. The lottery then draws numbers at random, and players win successively more money based on the amount of correctly matched numbers. Players can win the jackpot if they match all six numbers correctly, and if the jackpot isn’t won at a drawing, the money rolls over to the next drawing. The first thing to note is how miniscule the chance of winning the jackpot is. The total number of possible combinations for the lottery is 302,575,350, meaning you have an eight-times higher chance of flipping two nickels and having them land on their side than to win the jackpot. One strategy that may seem enticing at first is to closely monitor the jackpot and only buy when the value gets very high. Since every ticket costs $2, you could technically buy every combination of numbers for a bit more than $600m, seemingly guaranteeing a profit if the jackpot exceeds that number. However, an important caveat is that the jackpot is split between all winners, and a split jackpot would ruin what seemed like a sure win. Nonetheless, the prospect of a large jackpot is enticing. Using LottoReport.com’s data from the 97 Mega Millions drawings between December 2017 and November 2018, we found a pretty clear relationship between jackpot size and number of tickets sold: Relationship between Mega Millions Jackpot Size and Tickets Sold If we assume that each person randomly chooses the numbers on their ticket, we can pretty easily calculate the odds of a split jackpot (using the same set of data): Mathematical Chance of Winning as Jackpot Increases in Value At a jackpot size of just over $1 billion, it becomes more likely than not that someone will win the grand prize. Somewhat more counterintuitively, the probability that someone else will win the jackpot given that you also won the jackpot is about the same, i.e. around 50% if the jackpot is over $1 billion. This means that there is probably some “sweet spot” in which the jackpot is small enough that not as many people decide to buy tickets, but still large enough to maximize your possible returns. Part 2. Sizing Your Bets The second skill you should have is to know how to size your bets. Even with great odds, most people place odds that are too conservative, hampering their potential winnings, or too aggressive, increasing their risk of losing money. In one study from 2016, participants were given $25 and were allowed to bet on a biased coin that had a 60% chance of landing on heads. Even though the participants were given even odds and the probability of winning was high—i.e. the game was stacked in their favor—the majority of the participants performed suboptimally, with 30% of them going bust within 30 minutes. Their mistake was unsound bet sizing. You can view bet sizing as a spectrum of risk-seeking behavior, where we have the most conservative option at one end—don’t bet at all, no matter how good the odds are—and the most aggressive on the other—bet the farm (or better yet, mortgage the farm and bet that money too!) on any gamble, no matter how long the odds are. Mathematically, both of these behaviors are well below optimal if you want to maximize your betting winnings, and the optimal strategy exists somewhere between the two. The optimal bet-sizing strategy is a matter of math. John Kelly found the optimal solution in 1956 for how to size your bets if you want to increase your wealth optimally in the long-run. The so-called “Kelly Criterion” can be described in a short formula. Then, we can test out the formula with simulations of what individuals’ gambling circumstances might actually be like. What we’ll find at the end is exactly what casinos already know well—that typically the best gambling strategy is to only gamble a small amount of your wealth, while diversifying your bets. Using the Kelly Criterion The mathematical formula for the Kelly Criterion is: f = (pb – q) ÷ b where f is the fraction of your bankroll that you should bet, p is your chance of winning, q is your chance of losing (i.e., 1 – p), and b are your net odds, i.e. the amount of money you would win by betting $1 and winning. For example, in the biased coin study described earlier, the participants should have bet (60% x $1 – 40%) / $1, which equals 20% of their bankroll. The participant who follows this strategy could expect their wealth to grow by 2% per bet, on average. Simulating Possible Outcomes We can test this out by running a Monte-Carlo simulation, in which we simulate a strategy thousands of times to estimate the efficiency of a strategy. Assuming that each player can play 300 games in the 30 minutes allotted to them, and that the players’ “wealth” is capped at $250, how well do the players do if they follow the optimal bet sizing strategy? Let’s simulate the results for one player first: This player had a very volatile and bumpy start, but by following the Kelly Criterion they managed to maximize their wealth after a bit less than 100 coin tosses. Let’s see what happens when we simulate the wealth of 10,000 people: When we look at the summary results above, things look very rosy. Over 90% of players end up maxing out their wealth, and no-one went broke when they followed the Kelly Criterion. However, what is missing from this chart (compared to the previous figure) is the amount of volatility in the results. If you look back at the single individual, you can see just how volatile their wins and losses were. At any point, a bad run of three tails in a row would cut your wealth in half. This sort of drawdown is a rare event in stock markets and can make even the steadiest investor question their strategy, but we would expect a 50% drawdown to happen over 19 times if we played the coin-toss game 300 times as we posited earlier. Casinos Play Optimally and Pool Money to Help Reduce Likelihood of Losses While playing optimally—if emotion wasn’t part of the game—might help lead to better results, it can’t solve for the volatility in wins and losses. And yet, that’s what most players want: to win and keep on winning. Maybe you could pool your money with many other players and share your collective winnings in order to reduce your likelihood of losing… Congratulations, you just invented the casino! Positive expected returns and small bet sizing are exactly what allows a casino to reduce their risk and maximize returns, and why you see casinos impose maximum limits on bet sizes, even if the odds are in their favor. Outsmart average. Be more like the casino with your investments. When thinking of gambling, everyone wants to be James Bond—calmly going all-in on what seems like an impossible hand, and then winning with a royal flush in the end. But for each James Bond, there are thousands of gamblers losing their money in games specifically designed to be stacked against them. What’s really cool is to be the casino. Strict regulations and the astronomical amounts of cash needed to create your own casino makes it a hard business to crack in to, but what you can do is implement some of the factors that help make casinos successful into your own investment moves: 1. Diversify your bets. Casinos never bet all their cash on one horse. Similarly, you can improve your investment returns by diversifying your investments across different asset classes and geographic markets. 2. Play the odds. A casino will never enter into a bet in which they expect to lose money. Most individuals would probably say they behave the same way, and yet millions of Americans keep significant portions of their cash in checking or savings accounts with yields far below the current inflation rate, almost guaranteeing that they’ll lose money in real terms. If you don’t want to invest, help maximize your cash by putting it to work in a high-yield cash account, like Cash Reserve. 3. Turn Your Losses into Wins A small consolation if you lose at the gambling table is that your losses are tax-deductible, up to the extent of your other gambling winnings. You can do even better, however, by harvesting and deducting your investment losses, while still retaining the potential for investment upside. -
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Manage Your Cash the Modern Way With Two-Way Sweep
Manage Your Cash the Modern Way With Two-Way Sweep Manage your cash the modern way—effortlessly. Try out Two-Way Sweep, our latest in cash management technology. Most of us organize our day-to-day financial lives using three different accounts: a checking account, a savings account, and a credit card. The Headaches Of Cash Management After paying bills and paying down credit card balances each month, you may accumulate extra cash in your checking account. Over time, if you leave this extra cash in your checking account, it will likely lose value to inflation, and you may wish to move that extra cash to an account that earns a higher yield over time. On the other hand, if you find that you end up spending more than your income in a given month, you may need to move cash back from your savings account (or from another type of account) to your checking account. If you choose to manage your cash manually, not only would you have to take time to move money back and forth, but to get the most out of your hard earned money, you may also end up spending your time comparing banks to find the best yield for your savings account. Does all this sound like the perfect job for a computer? It is. Two-Way Sweep Provides A Solution The next evolution of cash management for Betterment customers is here. By working alongside our cash analysis recommendations and Cash Reserve, Two-Way Sweep minimizes the need for tedious manual cash management practices. Two-Way Sweep automates transfers between your checking account and our Cash Reserve account so that idle cash you might have in your checking account is moved to help earn a higher yield. Conversely, if we detect insufficient funds in your checking account for your expected future spending needs, Two-Way Sweep will move cash back to your checking account from Cash Reserve. Now you can have a personal cash management tool that helps you earn a high yield on money that may otherwise be sitting in cash, and also aims to keep enough cash in your checking account to cover expected future cash needs. Ready To Try The Latest Technology? We have automated cash management by addressing two competing objectives: increasing returns on idle cash while sufficiently funding your checking account to cover expected future cash needs. Get started or log in to access Two-Way Sweep in your Betterment account. We’ve also got all your Two-Way Sweep questions covered in our methodology and our comprehensive overview. -
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How Much Are You Losing To Idle Cash?
How Much Are You Losing To Idle Cash? Uninvested cash may feel more readily available compared to when it's invested, but there can be better ways to manage your funds. Find out how. So far, we’ve told you about the consequences of having uninvested cash in your investment portfolio. But cash is king, and so even the most savvy investors still keep money in places like checkings and savings accounts in order to have easy access to those funds, which then can be used for day-to-day expenses. Here at Betterment, we want you to do better. What Is “Idle Cash”? Idle cash is money that is not invested in anything and is therefore not earning investment income. It’s money that is not actually participating in the economy-- not being spent on anything and not increasing in value. Therefore, it can’t earn you anything. Ultimately, keeping idle cash on hand is simply not as beneficial as you may think. In fact, these funds are frequently considered wasted, as they typically cannot keep up with the effects of inflation. In the U.S., the inflation rate that the Federal Reserve targets is 2% annually-- given that your idle cash likely does not increase in value, its purchasing power actually decreases as time passes. That’s right—uninvested funds gradually lose value, since they are unable to keep up with the rate of inflation, which means that as time goes on, the $100 under your mattress can eventually only buy $98 worth of things, then $96, then $94, and so on. And that’s just inflation—the opportunity cost of keeping cash that you otherwise could invest in the market is even worse. Why do people keep uninvested cash? Despite the fact that keeping idle cash can be detrimental to a successful, long term savings plan, there are still plenty of reasons for people to keep cash on hand. Accessibility and liquidity are huge factors—investors want to be able to pay their bills from their checking accounts with the click of a button, for example—as is safety and security, and the fact that savings accounts from member banks are FDIC-insured. The current reality is that among the checking and saving accounts out there, the return on deposited funds is very low. In fact, the FDIC announced that as of February, the average yield on a savings account is 0.09% APY—in a 2% inflation environment, this is still a purchasing power losing investment. The yield on checking accounts is even worse—most of these products have very low interest rates. How much uninvested cash can I get away with keeping? While a small portion of uninvested cash may seem insignificant, it can be disadvantageous for at least two reasons: Preventing it from keeping up with inflation rates means your cash loses value over time, and You fail to benefit from money that can compound over time and garner even higher returns. Typically you shouldn't reinvest cash if it costs you more to actually invest it than what you would earn, due to, for example, broker commissions. However, at Betterment, the absence of trading commissions, as well as our ability to support fractional shares, help ensure that every last cent of your cash is being put to work for you. If we assume an average trading cost of $7 per trade (typical of discount brokerages) and you don’t want to reduce your returns by more than 1%, then you should have, at most, $700 of cash. Even though we recommend having no cash at all because any amount may reduce your returns, for practical reasons we believe portfolios have too much cash when they exceed $700 in cash. How should I manage the rest of my cash instead? There are many schools of thought as to how cash can be managed, but the most common objectives are the following: Yield (without meaningful risk) and liquidity-- simultaneously making sure that your cash does not waste away due to the effects of inflation while mitigating potential high risk. That you are able to access your cash within a reasonable amount of time. Consider Using Cash Reserve At Betterment, we spend a lot of time thinking about how to help you make the most of all your money. In fact, we recently launched Cash Reserve, a high-yield cash account that’s designed to help you manage your idle cash and can earn you a variable rate up to 0.10% ,* once at our program banks. For example, our Two Way Sweep feature for Cash Reserve runs an automated daily cash analysis on your checking account, in order to determine if your account is holding too much, or too little, cash. We’ll then adjust it accordingly, all automated for your convenience. Idle cash can also result from cash dividends which are not reinvested: at Betterment, your dividends are automatically reinvested, resulting in zero idle cash and zero cash drag from your accounts. In addition, we provide you with a holistic picture of all your investment accounts from a cash management perspective, from idle funds in external accounts to the cash inside the funds you purchase. We highlight each portfolio’s total idle cash, along with a simple projection of how much potential returns could be lost by holding that cash amount long-term. -
![Why Only “Buying Local” When Investing Is Risky]()
Why Only “Buying Local” When Investing Is Risky
Why Only “Buying Local” When Investing Is Risky Currently, U.S. investors may be asking themselves why they should be investing outside of their home country when their own stock market is doing so well. Just a few decades ago, U.S. investors were asking themselves the opposite question. The third quarter of 2019 brought some very positive news for me on a personal level—I received my green card and am now a permanent resident of the United States. If that’s not enough to make me feel patriotic about my newly adoptive country, I needn’t look further than the U.S. equity markets to feel proud. Over the past decade, the American stock market has been incredibly strong, and by some definitions we qualify for having the longest bull market in history. For example, from September 5th, 2011 until September 5th, 2019, the total return of Vanguard’s VTSAX fund, which tracks the total U.S. stock market, was 252%. Vanguard’s VFWIX fund, which tracks world equity markets outside of the U.S., only had a total return of 58% over the same period. Why invest in international stocks? A natural question after hearing this statistic might be: why does Betterment’s portfolio have such a large allocation towards international stocks? After all, our 100% stock portfolio currently has a target allocation of around 40% in international equities. The short answer is that the Betterment portfolio is designed to be representative of the makeup of global investable assets as a whole, and around 40% of the world’s equity assets are invested outside of the U.S. But an international portfolio can also reduce the risk of overweighting one particular country in your portfolio. Home bias can lead to more risks. Some investors choose to overweight their investments in their home country, which is a phenomenon known as home bias. Home bias can expose your portfolio to more risks as it gets less internationally diversified. An especially gut-wrenching example of these risks occurred during this last quarter for Argentinian investors. Latin American investors tend to have strong home bias, with the average Latin American investor tending to allocate 97.5% of their portfolio to Latin American markets—even though only 1.4% of the global capitalization is Latin American. An extremely high local stock market allocation may have been initially positive for Argentinian investors, because their markets grew over 40% in the first eight months of the year. However, on August 12, 2019, the MSCI All Argentina 25/50 Index fell over 24% in just one day. Currently, the index is now seeing overall negative returns for the entire year. Source: Data from Xignite This recent loss was a blow to Argentine equity investors, especially among those with a strong home bias. It’s worth noting that because Argentina and the U.S. are entirely different countries, we generally shouldn’t expect their markets to behave the same. While Argentina is a beautiful country known for its art, dance, food, mountains, and beaches—it’s also currently battling an extremely high inflation rate. The country is currently instituting currency controls to combat the devaluation of the Argentine peso. True diversification helps equip you for the long haul. It’s impossible to predict what will happen with the U.S. stock market going forward. But, we do know that historically, U.S. stocks have also seen long streaks of underperformance compared to international stocks. In the chart below, we plot the 2-year annualized returns of the MSCI EAFE index, which tracks the performance of international developed stocks, and the MSCI USA index, which tracks U.S. equities. Highlighted in gray is any period where international stocks outperformed U.S. stocks. Keep in mind that past performance is not indicative of future performance. Source: Data from MSCI Since the start of the indices, we see that U.S. stocks have outperformed international stocks about 57% of the time. However, until 1990, U.S. stocks only outperformed international stocks 32% of the time. At that time, U.S. investors may have been asking themselves the exact opposite question—why invest in American equities that are lagging international markets? True international diversification means that your portfolio will never be the portfolio with the highest returns—but it will also generally be better equipped to handle local crises and downturns. We now live in a globalized world, and your portfolio at Betterment is designed not only to help avoid the risk of local downturns, but to capitalize on global growth over the long term. -
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How To Buy Life Insurance
How To Buy Life Insurance Life insurance is meant to help complete your financial plan, but buying life insurance can be a confusing experience. Luckily, we’ve outlined eight steps you should take to purchase life insurance. Life insurance is meant to help complete your financial plan. While you help to pay for all the things your family needs in life, life insurance can allow you to continue paying for those same things after death. The life insurance death benefit helps protect your beneficiaries from shouldering an immense financial burden, and can pay for college, dependent care, and other debts that you may have incurred while alive that your family could be responsible for. But buying life insurance can be a confusing experience. Luckily, we’ve outlined eight steps you should take to purchase life insurance. Learn the life insurance vocabulary. Determine how much life insurance you need. Get a free quote and pick a life insurance policy. Collect the documents you need to get started. Complete the application and phone interview. Get a medical examination. Wait for underwriting approval. Sign the documents and pay for your policy. 1. Learn the life insurance vocabulary. Wading through the morass of life insurance know-how means picking up a bunch of new vocabulary words. Knowing what these words mean is half the battle, because you’ll be better equipped to choose the best life insurance policy for your needs. Here are some of the most important terms: Death benefit — The amount of cash paid out to your beneficiaries when you die, if you’ve been keeping up with your premiums. It’s one of the most important considerations you make when taking out a policy, as you want it to be high enough to help cover your family’s expenses when you’re gone. Premium — The amount you pay monthly or annually to keep your policy in effect. Some life insurance types accrue a cash value that can be used to pay your premiums, but those cash value life insurance policies usually have higher premiums in the first place. Term — The period your life insurance policy lasts, as long as you’ve been paying the premiums, if you buy a term life insurance policy. Other types of life insurance, such as permanent and other cash value life insurance lasts your whole life instead of just a term. Beneficiary — The person or persons, or some entity like a business, charity, or trust, that you list on your life insurance policy to receive the death benefit after you die. You should list a primary beneficiary as well as contingent beneficiaries in case the primary beneficiary is unable to receive the death benefit. Policy — The policy is the document that you receive from your life insurance company explaining the details of your coverage, including how much the death benefit will be and what you’ll pay in premiums. It will also list the conditions that must be met for the death benefit to be paid out, and failure to meet those conditions could cause a delay in a payout or cancel it entirely. Coverage — Coverage is the amount of the death benefit that gets paid out. Coverage can also include other value components, like the cash value of certain life insurance policies that can be redeemed or borrowed against before death. In addition to learning the vocabulary, have a look at Policygenius’ guide to the different types of life insurance to help you choose the policy you need. 2. Determine how much life insurance you need Before you shop around for a life insurance policy, take stock of the expenses you have and expect to have in the future. Remember, the purpose of life insurance is to help make sure your family isn’t left paying for those expenses on their own. If you’re married, you want to leave a financial cushion for your spouse. But you also want to make sure that they can continue to pay off the loans you co-signed. If you have a mortgage with your spouse, your spouse could lose the house if they are unable to keep up with the payments. So make sure you factor in any debts that your spouse may have to cover when determining how much you need. If you have kids, take stock of what child care costs right now. The amount you currently put toward child care should be factored in when determining how much life insurance coverage you need. However, you’ll also want to account for expenses in the future, like your children’s college tuition. You’ll want to make sure you leave enough behind for your spouse to cover your kids education expenses. Add up all these costs to get a sense of what you’ll likely need to replace after you’re dead. Your death benefit should encompass the entire dollar amount minus any liquid assets you already have that your family can use to make up some of the financial shortfall. A typical breakdown looks like this: OBLIGATION COST RESOURCES After-tax income $32,500 Assets $20,000 EXPENSES Five years of support at $32,500/year $162,500 Raising two kids, ages 3 and 5* $1,176,147 End-of-life expenses $10,000 Total expenses $1,348,647 DEBT Credit card debt $5,000 Auto loan $3,000 Mortgage $500,000 Total debt $518,000 Total financial obligations (Expenses + Debt) $1,856,647 Total financial obligations minus assets (Coverage gap) $1,836,647 RECOMMENDED COVERAGE $1,840,000 *Assuming each goes to a private, out-of-state, four-year university, plus childcare expenses For more tips and information, see Policygenius’ full guide on how much life insurance you may need. 3. Get a free quote and pick a life insurance policy Getting a quote is easy. You can do it using Policygenius’ coverage calculator with just a few pieces of personal information, like your location, age, gender, and basic medical history. Getting a quote shouldn’t take you much more than 10 minutes. Using an independent insurance agent or broker, you can get quotes from a number of different insurers right under one roof with just a few pieces of personal information, like your location, age, gender, and basic medical history. These quotes will feature your premiums and the amount of coverage you’ll receive, and you can compare and choose the one you need. You can also adjust some of the numbers in the Policygenius calculator until you hit upon a premium-to-coverage ratio that fits more in line with your budget. Most people pick the cheapest policy that has the coverage they need, but it’s important to compare other features, like what features and riders a company offers, their customer service and other ratings, and whether or not they’re best for your particular health profile. Compare beyond price to find the best life insurance company for you. With Policygenius, you can compare your various life insurance options side by side for free. If you’re unsure of which insurance carrier you should go with, be sure to check out Policygenius’ insurer reviews, which can help you satisfy concerns you may have, such as whether an insurer has good customer service or lets you make modifications to your coverage online. 4. Collect the documents you need to get started You can make the application process as seamless as possible by having all the documents you need on hand before you apply. These include: Proof of identity, citizenship, and age, like a driver’s license, birth certificate, or a valid passport. Noncitizen residents can use their green card (permanent resident card) or an employment authorization card. Proof of income. You can use pay stubs, a letter of employment, a tax return, or an earnings statement from your bank if your primary income is from interest or rent. If you’re unemployed, an unemployment letter or monthly statements describing your unemployment benefits will work. Proof of residency. For renters, that could be your signed lease or a rent receipt. For homeowners, your mortgage bill or a property tax statement will suffice. Insurers will also accept a utility bill or a postmarked envelope with your return address on it. 5. Complete the application and phone interview Getting a quote is an application in that you had to hand over basic information. But the actual application is a little more in-depth. That could mean providing your Social Security number, which the insurers need in order to check whether you’ve applied to other policies with other insurers and to confirm what you reported in your medical history against prescription drug databases like the Medical Information Bureau (MIB). The application may also ask for a driver’s license number to see if you’ve been involved in any accidents. You’ll be asked to authorize your doctor to share your health information with the life insurance company, known as an attending physician statement (APS). This information is necessary to not only get you the correct policy but could also come into play later when the insurer is paying out your death benefit. If you have any medical conditions that should’ve affected your premiums, the insurer may recalculate the amount they owe to your beneficiaries to account for the missing information. Some life insurance carriers will still want to hear from you by scheduling a phone interview. The purpose of the phone interview is to confirm the contents of your application (the “application quality check”) and may include additional questions about your hobbies and lifestyle. If you’re the kind of person who attempts to jump the Grand Canyon on a motorcycle, you can probably expect to pay a little more for your life insurance coverage. Be prepared for questions about your financial health, including your income and net worth, as well as about other life insurance policies you have. At this point, your premium is still an estimation. Everything that comes next will gauge the accuracy of the information you provided to make sure you pay the right amount in premiums after your policy goes into effect. 6. Get a medical examination The life insurance medical exam is meant to get an in-person look at your health. It’ll be just like going to the doctor’s office for a checkup, except that you can have the medical examiner come to your home or office. The technician or nurse will take basic measurements like your height and weight, blood pressure, and pulse, as well as draw a blood sample. Sometimes you’ll also be asked to provide a urine sample. The insurance medical exam is free for you and should take about 30 minutes. You’ll have to schedule the appointment time with your life insurance company, usually during your phone interview, and someone from the medical testing company will get in touch if they need to reschedule or cancel. Although the procedure might seem a little burdensome, you can use the same results on other life insurance applications up to about six months later if you don’t ultimately go with your first choice of carrier. You can also ask the testing company or the life insurance company for a copy of the results, effectively scoring yourself a free medical exam. If you’re young and healthy, you may qualify for simplified term life insurance, which doesn’t require a medical exam. If you’re fine with the small coverage amount (usually a maximum of $250,000), then this form of no-medical-exam life insurance could save you a lot of money on premiums. 7. Wait for underwriting approval The hard part is over. Now all you have to do is wait. But what’s happening behind the scenes is that someone called an underwriter, who works for the insurance carrier, calculates how risky you’re going to be to insure. The underwriter’s job is basically to confirm whether you actually get the rate you were originally quoted, and this process can take up to six to eight weeks. During underwriting, the underwriter will look at the results of your medical exam and the data you submitted with your application. They will cross-reference what the insurer knows about your medical history with what’s in the MIB, looking as far back as seven years ago to see what medications you’ve been prescribed. The underwriter will also learn whether you’ve ever been convicted of a DUI/DWI or reckless driving as well as other traffic offenses. To determine how much your premiums will cost, insurers use a health rating that will be affected by the results of your medical exam. Some medical conditions that could cause a downgrade in your health ratings, and thus an increase in the premiums you’ll have to pay, include high blood pressure, high cholesterol, and tobacco use. The most common life insurance classifications, in order from highest health rating to lowest, are Preferred Plus, Preferred, Standard Plus, and Standard. People whose health ratings are even worse than the Standard classification are assessed with a table-rating system. 8. Sign the documents and pay for your policy. Once the underwriter completes his or her work, you officially own a life insurance policy. All that’s left is for you to receive the policy and sign it. This is your chance to confirm all of the details of the policy you discussed with the insurance agent or company during the application process, the most important of which are your premiums and coverage. While the death benefit will usually stay the same, your premiums could have gone up or down depending on the assessment of the underwriter. In addition to signing the policy, you also authorize a method of payment in the appropriate section. During the application process, you decide to pay either a monthly or an annual premium (with the latter usually offering a small discount), and this should also be indicated on the policy. You can always change the frequency of payment after the policy is in force by contacting your insurance company. Once you sign the policy, you’ll need to mail it back to the insurer. Yes, even in the age of artificial intelligence and driverless cars, you still need to use the post. (Some insurers will let you make changes to your policy online, like updating your personal information or beneficiaries.) Make sure to keep a copy of the policy in a safe place, and let your beneficiaries know exactly where that place is and how to access it. If your beneficiaries don’t know about the policy, they won’t know to claim the death benefit you’ve been paying for all this time, and having easy access to the policy will help them claim the payout as soon as possible. Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you. This article originally appeared on Policygenius, a licensed insurance broker. Betterment is not an insurance broker and this article is not insurance advice nor an offer for particular insurance products or services. The content was not written by an insurance agent, and it is intended for informational purposes only, and it should not be considered legal or financial advice. Betterment makes no warranties or representations with respect to specific insurance offerings. -
![High yield savings accounts the ultimate guide]()
High-Yield Savings Accounts: The Ultimate Guide
High-Yield Savings Accounts: The Ultimate Guide High-yield savings accounts can offer higher interest rates than traditional counterparts. Learn everything you need to know about them in this guide. You have a lot of choices when it comes to how you save your money. Depending on your financial goals, you may want to invest, keep your money in a checking account, or move it into a savings account. Each choice comes with pros and cons. When you invest, you may be able to get better returns, but it’s not as liquid (meaning it’s harder to quickly access your money). There may be penalties for withdrawing before a specified time, limits on how much you can withdraw, and other restrictions. Investing can also present more risk, especially with short term goals. A checking account allows quick access to your money, but funds in checking accounts generally don’t accrue interest (and when they do, it’s often not much). For short-term savings goals like establishing an emergency fund, preparing for an upcoming project, or planning your next big trip, a savings account can be a smart approach. It gives you a separate account to save toward your goal—which you hopefully won’t be as tempted to use for regular purchases, like you would with a checking account. It also accrues interest over time, so your account will grow beyond what you deposit. Unfortunately, traditional savings accounts tend to have very low interest rates. According to the Federal Deposit Insurance Corporation (FDIC), the national average interest rate for a savings account is 0.09 percent. That means if you deposit $10,000 into an average savings account right now and don’t touch it, a year later it will only be $10,009. That’s not nothing, but depending on the fees associated with your account and inflation, your money could actually lose value over time if the interest rate is too low. Thankfully, there’s another option. If you want to accrue more interest while still having convenient access to your money, you’ll want to look into a high-yield savings account. In this guide, we’ll explore: What makes a high-yield savings account different from traditional savings accounts. How to spot some key features to look out for. When you should use one. For starters, let’s talk about what these accounts actually are. Please note that Betterment is not a bank and this article is intended to be purely educational. What is a high-yield savings account? A high-yield savings account is exactly what it sounds like: a savings account that typically gives you a higher annual percentage yield (APY) than traditional savings accounts. It’s not an investment, so there’s minimal risk: your earnings are guaranteed based on the APY offered by the institution. And these accounts often have no fees (or else, minimal fees) to start or maintain your account. You simply make deposits and watch your savings grow over time. Additionally, high-yield savings accounts backed by one or multiple banks are federally insured by the FDIC for up to $250,000 per bank, if that bank is a member of the FDIC. Through a credit union, they may be insured for the same amount by the National Credit Union Association (NCUA). Check with your local credit union to ensure they are part of the 98% regulated by NCUA. How do they compare with other account types? Since you have a lot of options when saving for financial goals, it’s helpful to consider which account type makes the most sense for your situation. Here’s a quick look at the typical APY for a one year certificate of deposit (CD), a traditional savings account, a checking account, and a high-yield savings account, assuming you deposit $5,000: Account type Typical APY* Balance after 12 months Checking account 0.00% $5,000.00 Traditional savings account 0.10% $5,005.00 High-yield savings account 2.336% $5,116.80 One year CD 2.55% $5,127.50 Data source: *Typical APY was determined using the top five accounts in each category in the U.S., as determined by NerdWallet in July 2019. In many cases, you can find a 12-month CD that will accrue more interest in one year than a high-yield savings account. But one of the key advantages of a high-yield savings account is also one of the disadvantages of a CD: liquidity. Like a traditional savings account or a checking account, with a high-yield savings account you can use your money when you need it—in many cases without penalties of any kind. And unlike a CD, you don’t need to wait a specified period for your funds to “mature” (this is when the money is “due” back to you). So you could save for three months. Or 14. It doesn’t matter. If you reach your savings goal ahead of schedule, you can start the next step ahead of schedule, too, instead of waiting for your funds to become available again. A CD may be a better option if you plan on: Saving for multiple years. Not touching your funds for the entire duration. But if you may need to access your money quickly or you only plan on saving for a short time, a high-yield savings account will give you similar gains with far more flexibility. And while traditional savings and checking accounts are convenient and accessible, their interest rates are typically very low (and in the case of the average checking account, virtually nonexistent). Your money is essentially just sitting there, waiting to be used. Your account will only see significant growth when you make deposits. And the forces of inflation may actually decrease the value of your money. A high-yield savings account can give you the flexibility you expect from your traditional savings or checking account, but keeps your money working toward your goal whether you make additional deposits or not. Now let’s look at what kinds of goals a high-yield savings account can be well suited for. When To Use A High-Yield Savings Account A high-yield savings account is often ideal for short-term financial goals and funds you may need to access quickly. This could include goals like: Establishing an emergency fund Saving for a wedding Planning a vacation Getting ready for a down payment on a house Preparing for college next year, or in a few months Making home renovations Buying a car Anticipating taxes (especially if you’re self-employed) Really, any purchase you plan on making in the next few months or within a couple of years could be a good fit for a high-yield savings account. You could use a high-yield savings account for longer term goals like an education fund for your children or retirement planning, but when you won’t need to access your funds until years from now, it may make more sense to look into opening an investment account (such as a taxable brokerage account or IRA). Investing generally carries greater risk than a high-yield savings account, but typical market returns may be greater than the interest accrued from a savings account over long periods of time. But for your short-term goals and funds you need quick access to, a high-yield savings account might be the smart choice. You wouldn’t want, for example, to have your emergency fund tied up in a CD where it’s not as available to you. You never know when an emergency is going to happen, so you need your emergency fund on hand at all times. If you decide a high-yield savings account is the right choice for your goal, there are still some big decisions to make. There are countless banks and credit unions—both online and physical—that offer high-yield savings accounts, and they aren’t all created equal. Here’s how to spot the good ones. How To Compare High-Yield Savings Accounts Before you choose a high-yield savings account, there are a number of factors you’ll want to compare. While the APY is the most obvious and appealing feature, there are other differences between accounts which can affect the following: How fast you’ll reach your goal. How much your balance will actually grow. How available your funds really are. Here’s what you’ll want to take a look at when evaluating your options. Minimum Deposit Many high-yield savings accounts require a minimum deposit to open your account. Depending on the amount you have to get started, you may need to pay as much attention to the minimum deposit as the APY when you select an account. Minimum Balance Some accounts have a minimum balance you need to maintain in order to receive the advertised APY. If you fall below that amount, you may default to a significantly lower APY, in which case you might be better off choosing another bank with a lower rate but no minimum balance. This is a bigger factor if you plan on making withdrawals frequently, as you’re more likely to fall below the minimum. Transaction Limits Because of the Federal Reserve’s “Regulation D,” there are transfer and withdrawal limits you should be aware of before signing up for a high-yield savings account. Keep in mind that banks may impose further limits and have their own guidelines and restrictions regarding them—and the penalties you may incur if you go beyond them. If you plan on withdrawing from this account frequently or transferring funds to your checking account, you’ll want to pay attention to these limits. Fees Many banks charge fees to open and/or maintain an account. They may charge these fees annually, monthly, or quarterly, and in some cases they may cancel out or even exceed the gains you’d see through interest. Some banks may build the fees into your APY so that you’ll still see the advertised gains, and others add these fees after, which reduces your actual yield. Additional Account Requirements Sometimes banks won’t allow you to just open a high-yield savings account. They may require you to also open a checking account (which may come with fees and a minimum balance of its own). So even if their high-yield savings account has the best APY, you’ll have to decide if it’s worth the extra baggage that comes with it. Withdrawal Options In addition to the number of transactions you’re allowed to make, you’ll want to explore the ways you’re allowed to make withdrawals. Can you make transactions online, or do you have to physically go to the bank or credit union? Is there a mobile app you can use? An ATM? You want convenient access to your money, so be sure to consider that when you’re deciding where you save. Deposit Options Similarly, some banks and credit unions make it more convenient to make deposits. Ideally, you want a bank that lets you deposit your paycheck directly into your account, or at least lets you set up automatic deposits that pull from the account your check is currently going toward. This will help ensure that you actually put funds in this account each month by reducing the temptation to simply deposit whatever is left over each month (which will almost always be less than you want). The easier it is to make deposits, the more likely you are to stick to your goals. Compound Frequency Your annual percentage yield (APY) represents how much you can expect your balance to grow each year. But within that year, your interest compounds at different frequencies depending on the account you choose. If your account compounds monthly, that means your balance will accrue a little bit of interest every month. If it compounds daily, you accrue interest daily. It could also accrue quarterly, semiannually, or even annually. That means some accounts accrue more interest on their interest than others, even if they have the same APY. If two accounts have 2% APY, but one compounds annually and the other compounds daily, the account that compounds daily will actually grow more than 2% over a 12 month period. You’ll accumulate 2% interest on the original balance, but since the interest compounds every day, you’ll be gaining interest on your interest, too. But the account that compounds annually will only accrue interest on your interest the following year, when the interest has been in your account for 12 months. So depending on how long you plan on saving and how frequently you want to make deposits and withdrawals, an account that compounds daily may be a better option than one that compounds annually, semiannually, or quarterly, even if it has a slightly lower APY. -
![What is a life insurance beneficiary]()
What Is A Life Insurance Beneficiary?
What Is A Life Insurance Beneficiary? If you have an active life insurance policy when you die, your insurer will pay out a death benefit. The person or organization you choose to receive the death benefit is called the beneficiary. If you have a life insurance policy, and you’ve been keeping up with your premiums, your insurer will pay out a death benefit when you die. The benefit goes to someone who you designated with the insurance company, such as your spouse. That person is called a beneficiary. Your life insurance beneficiary can be a family member, a friend, a business partner, a charitable organization or a legal entity like a trust or your estate. While the beneficiary is your choice, some states have laws that regulate who you can name as a beneficiary. You can also name multiple people as beneficiaries and choose to have the death benefit distributed among them. Read on to learn about the different types of beneficiaries, who can be a beneficiary, and the roles and responsibilities of the beneficiary. In this article, we’ll cover: Primary and contingent beneficiaries. Who can be a beneficiary. How to update your beneficiaries. How a beneficiary can claim the death benefit. Can a life insurance beneficiary get denied the death benefit? Naming your life insurance beneficiary is a big decision, so we recommend consulting with an estate planning professional for guidance Primary And Contingent Beneficiaries Your primary beneficiary is the original person or organization you designate with the insurer to receive the life insurance benefits when you die. Most people designate their spouse. You can also name multiple beneficiaries and determine how much each one gets. If you don’t choose any primary beneficiaries, the insurance company will pay out your benefit to your estate. This can significantly slow down the disbursement of life insurance benefits because your benefits are subject to probate, which is when the courts determine who should get your assets. You may also have to pay tax on your life insurance benefit if it goes to your estate. You’ll also want to choose some contingent beneficiaries. A contingent beneficiary is someone you elect to receive the death benefit if the primary beneficiary dies or goes out of business before you die. Although the contingent beneficiary is named in the life insurance policy, they won’t receive a portion of the death benefit if any of the primary beneficiaries are still alive. The first contingent beneficiary you name is called the secondary beneficiary, the third is the tertiary beneficiary and so on. Who Can Be A Beneficiary Your Spouse Most people choose their spouse as their primary beneficiary. Life insurance is meant to help protect your family from financial hardship after you’re gone, so by leaving money to your spouse, you can help ensure that they won’t struggle with paying the bills or for your kids’ college. Additionally, nine states have “community property” laws that make it illegal to name someone other than your spouse as your beneficiary without their consent. These laws generally apply only if you got the policy after getting married. These states have community property laws: Arizona California Idaho Louisiana Nevada New Mexico Texas Washington Wisconsin Alaska and Tennessee also have community property laws, but they are voluntary. You and your spouse have to opt in to them. Your Kids We don’t recommend naming your children as beneficiaries if they’re still minors. It’s very difficult to pay out such a large sum to a child without jumping through some legal hoops. If you designate a minor as your beneficiary, when the insurer pays the death benefit, it will go into a trust overseen by a court-appointed guardian. That guardian will hold onto the money until the child reaches the “age of majority.” You can also designate a trust in the child’s name as the beneficiary, and the fiduciary in charge of the trust will pay out the benefit when the child becomes eligible. Nonrelatives You can designate a business partner or even just a friend as a beneficiary. Remember, your beneficiary can be anyone you want, with one exception: If you live in a community property state, you will need to get consent from your spouse in order to pay the benefit to someone else. Organizations Your beneficiary doesn’t have to be a person. You can direct your life insurance policy to pay out to an organization, such as your business. Many people select an organization as their beneficiary if their family is already well-off. A sudden injection of cash can help any business manage the loss of an employee or owner. You might also consider a charity or nonprofit. These organizations often operate with tight margins, and you can help further their mission by naming one as a beneficiary of your life insurance policy. A Trust Another way to leave an insurance benefit to your intended beneficiary is by having the insurance company pay out to a trust. Trusts are also useful because if you’re considering an unusual choice as your beneficiary, you might run into resistance from the insurer itself. In that case, you can name a trust as your beneficiary so that an appointed conservator can receive and disburse the money on your behalf. People have even used trusts to effectively leave money for their pets. You would accomplish that by naming someone to inherit the pet in your will, and then establishing a trust to pay for the pet’s care using the money from the insurer. There are multiple types of trusts, like irrevocable and revocable living trusts, and you might not even need one depending on what assets you have and what’s in your will. How To Update Your Beneficiaries You can change your life insurance beneficiaries at any time by contacting your life insurance company. Common reasons to change beneficiaries include getting married, getting divorced, or if your original beneficiary dies. How you actually update your life insurance beneficiaries will depend on which carrier you have your policy with. Some allow you to update beneficiaries online. Others require a phone call or for you to fill out a paper form that you either mail or fax. How A Beneficiary Can Claim The Death Benefit The beneficiary needs to do a few things before the insurer pays out: Get a copy of the death certificate. This proves that the claim is legitimate. Find the policy document. This paper has the details of your life insurance policy. You should have this document in your records and you should always make sure your beneficiaries know where to find it. Otherwise they may have to call up insurance companies to find the one that insured you. File a “request for benefits”, or claim form, with the insurer. How The Beneficiary Gets Paid Once a beneficiary finds the right paperwork and correctly submits the claim form, they will get paid the death benefit. This is the amount of insurance coverage you purchased. So if you had a $1 million policy, your beneficiary will receive $1 million (with rare exceptions). There are two options for how to receive the money: Lump sum. Your beneficiary can request the entire amount all at once. That’s useful if he or she has any immediate expenses to cover, like your funeral or mortgage payments. The best part is that it’s typically tax-free. Installment or annuity. Your beneficiary can also request to receive the payments in monthly or annual installments. This might be beneficial if they think it’ll be easier to manage, or if they know their spending habits are less than thrifty. Installments can be spread out across five to 40 years. Can a life insurance beneficiary get denied the death benefit? There are a couple of scenarios where the life insurance carrier may deny your beneficiary’s claim to the death benefit. If your beneficiary is suspected of foul play, the insurer will (hopefully) reject their claim. Thanks to “the slayer rule,” most states won’t pay the benefit if there’s any evidence against the person trying to claim it. The insurer may also deny your beneficiary if you die of a disease that you didn’t mention in your application or that was caused by something you didn’t mention. For example, if you die of esophageal cancer, but you failed to mention your smoking habit on the life insurance application, the insurance company could withhold the death benefit. Similarly if the insurer finds out you died from a previously undisclosed risky hobby, the insurer could recalculate your premiums to the amount it believes you should have been paying and subtract that amount from the payout. Ultimately, there are many reasons why a life insurance beneficiary may be denied the death benefit. Make sure to check-in with your life insurance provider about what scenarios may fall under this category. Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you. This article originally appeared on Policygenius, a licensed insurance broker. Betterment is not an insurance broker and this article is not insurance advice nor an offer for particular insurance products or services. The content was not written by an insurance agent, and it is intended for informational purposes only, and it should not be considered legal or financial advice. Betterment makes no warranties or representations with respect to specific insurance offerings. -
![Why Stock Market News Might Be Misleading You]()
Why Stock Market News Might Be Misleading You
Why Stock Market News Might Be Misleading You Learn to separate the meaningful information from the noise. Knowing the right way to interpret market news can help us to make smarter decisions about how to manage our investments. The end of 2018 may have felt like a stomach-churning time for those of us following closely. Stocks were volatile, and U.S. markets ended the year with an almost 10% drop. Non-U.S. stocks fared better than that, but they also experienced losses in Dec. It’s understandable if you felt unsettled. Let’s fast forward a few months. Now the story feels different, doesn’t it? Stock markets saw strong returns in Jan. and Feb., overcoming the losses from Dec. The stark contrast between 2018’s ending and 2019’s beginning gives us valuable insight into how we interpret market changes and the news that surrounds them. Growth of $1 Across Stock Markets—December 2018 to March 2019 Data source: Xignite. Assumes dividends are reinvested. You can help avoid this emotional rollercoaster by choosing not to focus on month-to-month performance. It’s a mental strategy that some of the world’s smartest investors recommend. However, market news always creeps into our news feeds in one way or another, especially during market drops. It’s worth reviewing what matters and what doesn’t. Tune out the noise by avoiding these three common fallacies. As market news is reported, you should be aware of a few fallacies in the way stock market performance is presented. 1. The Dow Fallacy The Dow Jones Industrial Average, otherwise known as “the Dow,” is perhaps the most commonly reported stock market index. However, it’s actually a very poor benchmark for most people’s portfolios, especially if you invest in a globally diversified set of stocks and bonds. It’s comprised of only 30 large-cap U.S. stocks. The limited number of stocks in the index does not give an accurate overall representation of the U.S. stock market. The index is price-weighted, which means that stocks with a larger share price influence the index more than stocks with a lower share price, regardless of the relative size of the company or industry. Other widely reported indexes also have problems you should look out for: The S&P 500 only accounts for the 500 largest stocks in the U.S. The performance of mid-cap and small-cap stocks is not captured at all in this index. Moreover, like the Dow, performance of international markets is also missed. Unlike the Dow, the S&P 500 uses market-capitalization weighting, which avoids the pitfalls of a price-weighted index. In the S&P 500, the companies are represented in proportion to how much of the overall market they make up. Or, if you watch the Russell 3000, it captures the market-cap weighted performance of the largest 3,000 stocks in the U.S. market, which represents about 98% of the total U.S. stock market. Like the S&P 500, it weights them relative to their size, but still it’s only U.S. stocks; the Russell 3000 does not consider international companies. So, if all of these indices aren’t effective benchmarks for a globally diversified portfolio, like Betterment’s, what index can you look to? Well, if you’re investing in 100% stocks, the MSCI All Country World Index is a good choice. It’s a market-cap weighted index that covers U.S., international developed, and emerging market economies. 2. The Points Fallacy The performance of indices like the Dow is often reported in terms of points, which describe the nominal changes in the value of the index. The problem with points is that they count for less and less as the index grows in value. For example, ten years ago, the Dow was at approximately 7,300. A 150-point drop in the Dow would have been a 2% decline. Currently, it hovers around 25,000 or 26,000. A 150-point drop now would be about a 0.60% decline. When an index experiences a major swing in either direction, the points will usually be a larger number than in the past, since the value of the index has grown. For example, a 2% decline in the Dow today would be about a 500-point drop. Scary news headlines like “Dow loses 500 points” can be particularly unsettling. We get it. But, if you recognize that 500 points just ain’t what it used to be, you’ll quickly realize that this only means a 2% drop—something that is not particularly uncommon. It’s better to think about performance in terms of percentage changes, rather than in terms of points. This way, you will not be influenced by large point changes that are simply the result of the index having grown over time. 3. The Urgency Fallacy It’s also smart to remember that news writers want you to read their stories. They want to grab your attention, which often ends up looking urgent and dramatic. We’ve all seen headlines like “Dow Jones plunges” or “Three things you need to know about the market right now.” Though these types of headlines might increase readership, they may not necessarily help us make good financial decisions. Ignoring the bait should help turn your emotional roller coaster ride into smooth sailing. Focus on what matters, and ignore what doesn’t. As investors, it’s in our best interest to separate the meaningful information from the noise. Remember that the Dow is not really the best way to understand market performance, and that points can mean different things depending on the value of the index. Knowing the right way to interpret market news can help us to make smarter decisions about how to manage our investments. When you’re investing for the long haul, reacting to a news story is rarely a smart decision. This is one of the many reasons why Betterment automates many parts of portfolio management for you. Our rebalancing and tax loss harvesting features don’t read the news; they look at the data and help you make the right moves in your portfolio so that you can reach your investing goals. -
![Do I Need Disability Insurance]()
Do I Need Disability Insurance?
Do I Need Disability Insurance? Most people overlook disability insurance. Here's a guide to why you might need it, along with what kind and how much. While most people see the benefits of life insurance or health insurance, disability insurance is often overlooked. But it can be just as important a part of your financial plan as other types of insurance. Disability insurance helps ensure you have income coming in to help protect your financial plans even if you’re sick or injured. It’s not just about knowing that you need disability insurance, but what kind of disability insurance policy is right for you. Read on to learn about: Who needs disability insurance What kind of disability insurance you need (and don’t need) How much disability insurance to get Who needs disability insurance? If you work, have people relying on your income, and aren’t financially able to go years, or even just months, without a paycheck, you should consider disability insurance. Why might you need it? Because most people rely on their paychecks to pay bills and support their families, they would benefit from having disability insurance to cover these responsibilities if something prevented them from working. Consider the following: Over 25% of American workers experience a long-term disability longer than three months at some point in their careers. 69% of workers have no long-term disability insurance coverage. 66.5% of all U.S. bankruptcies stem from illness or injury-related medical issues. You may think that disability insurance is just for accidents and that you’re not at risk if you don’t work a dangerous job. However, 90% of long-term disabilities result from illness rather than accident, meaning they can affect you no matter what you do for work. Even white collar professions like doctors and lawyers likely need disability insurance — in fact, because of the expensive educational investments in these fields, they benefit even more from disability coverage. If you don’t have disability insurance, you can risk not being able to cover everyday expenses, pay regular bills, or keep up with your larger financial plan. Disability insurance helps protect your ability to earn an income and should be considered a part of every financial safety net. What kind of disability insurance might I need? Once you realize you need disability insurance, you need to decide what kind of disability insurance. Most provide the same sort of protection but under very different circumstances, so it’s important to choose the right one. The options available to most people are: Long-term disability insurance Short-term disability insurance Employer-provided disability insurance Social Security disability insurance Workers’ compensation Do I need long-term disability insurance? Long-term disability insurance (LTD) should be the first option for most people looking to protect their income. LTD provides income when you’re unable to work for at least two years, and can last all the way to retirement. A great part about long-term disability insurance is that, for the most part, benefits are distributed tax-free and can be used on whatever you need them for. You have the freedom to use it as needed and can maintain your lifestyle. Long-term disability insurance can be the most cost-effective form of protection you can get. When it comes to length of coverage, benefits received, cost, and ease of qualification, LTD can give you more for your money. Do I need short-term disability insurance? Some people would rather purchase a short-term disability policy instead, thinking that they’ll recover soon and won’t have to pay for a long-term policy. But most short-term policies max out at six months of coverage, well short of the 36 months an average disability lasts. The monthly premiums for short-term disability are also relatively close to those of LTD. Considering you get much more coverage with LTD, it can make it the more cost-effective product. It’s also typically easier to buy long-term disability insurance. You can go to essentially any insurance company and buy an LTD plan, but there are relatively few options for buying a private short-term plan. Which brings up a time when short-term disability insurance might be worth it: if you can get it subsidized by an employer. Some workplaces offer subsidized short-term disability insurance, making the cost cheap or even free. If this is the case for you, you should consider it. Short-term disability insurance can complement LTD by providing coverage before your long-term benefits kick in, but if you have to foot the entire bill yourself it’s likely not worth the cost. Do I need disability insurance alternatives? While LTD is a good choice, and short-term policies can work in the right circumstances, there are other forms of disability insurance that you should be wary of because they can leave you unprotected in the long run. Employer-sponsored long-term disability insurance: Like short-term disability insurance, if you’re able to get LTD subsidized through your employer, it’s worth looking into. However, it probably isn’t a good replacement for a private long-term policy. The coverage amount through an employer plan can be limited, and it’s tied to your employment so you’ll lose coverage if you leave the job for whatever reason. A private policy is portable and will follow you to any employer you’re with. Social Security disability insurance (SSDI): SSDI is used as an excuse for not buying a private disability policy, but most people don’t realize the limitations of SSDI. It’s extremely hard to qualify for, largely because you have to be unable to work at all, rather than just unable to work in your profession. Even for people who do eventually qualify, it can take appeals and many years, and the benefit amount is relatively low. Workers’ compensation: Many people have workers’ comp through their employer, but this only covers disabilities that occur on the job. That means it only kicks in in a small portion of incidents and shouldn’t be relied on for comprehensive coverage. How much disability insurance might I need? Once you’ve determined that a) you need disability insurance and b) long-term disability insurance is likely your best option, you have one final needs-based decision to make: how much you need. You should take three things into account when determining how much additional protection you need: Coverage amount: Long-term disability benefits will pay around 60% of your gross monthly salary, short-term disability benefits up to 80%, and SSDI pays under $1,200 a month. Make sure your benefits cover any bills and immediate expenses, but don’t forget about savings and long-term plans like retirement that require investment as well. Duration: The average disability lasts for around three years. A long-term insurance disability policy that lasts five years should be the minimum duration, but a policy that lasts until retirement provides the maximum protection (and usually isn’t much more expensive than a five-year policy). When determining how long benefits should last (known as the benefit period), you should also consider when they start. This is called the waiting period, or elimination period. Ninety days is typically the most cost-effective elimination period. Cost: The amount of disability insurance you have depends in part on what you can afford. The cost is determined by coverage amount and duration, along with other factors like age, health, and gender. However, most people can expect to pay between 1-3% of the annual income on disability insurance. SSDI and workers’ compensation are free, and employer-sponsor disability benefits are subsidized, but be sure to factor in indirect costs — the aforementioned limitations of these forms of protection — as well. How much disability coverage you need depends on your individual financial circumstances, including your ability to self-insure with savings. Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you. This article originally appeared on Policygenius, a licensed insurance broker. Betterment is not an insurance broker and this article is not insurance advice nor an offer for particular insurance products or services. The content was not written by an insurance agent, and it is intended for informational purposes only, and it should not be considered legal or financial advice. Betterment makes no warranties or representations with respect to specific insurance offerings. -
![How To Find Affordable Life Insurance]()
How To Find Affordable Life Insurance
How To Find Affordable Life Insurance Buying cheap life insurance doesn’t have to mean skimping on coverage. Knowing how companies set rates means you can take the right steps to finding an affordable life insurance policy. Life insurance is a crucial part of a financial safety net. But in addition to getting the best life insurance coverage, you also want to find an affordable life insurance plan. It may seem like there has to be a tradeoff between finding a cheap policy and a comprehensive one, but there are things you can do to help you find an affordable policy. In this article, we’ll discuss how to: Buy life insurance early. Buy a term life policy. Get the right amount of coverage. Understand the underwriting process. Choose the best life insurance company for your situation. Compare quotes. Don’t be afraid to use a broker. Buy life insurance early. Life insurance isn’t usually a top priority for young people, since they might not have mortgages, dependents or the same financial responsibilities that older people might have. But one big way to help yourself get cheaper life insurance is to buy early. Life insurance is almost always cheaper the younger you are when you buy it. Rates rise an average of 8-10% every year you put off applying. Plus, when you buy young, you lock in premium rates for the entire duration of the policy. That means you’ll be paying the same low insurance premiums decades later. The following table demonstrates how the monthly cost of a term life insurance policy increases as you age, based on three coverage amounts. These numbers reflect the average monthly premiums for men. Average rates for women are generally lower. Average Life Insurance Rates By Age AGE $500,000 $750,000 $1,000,000 30 $25.97 $36.25 $43.94 35 $27.26 $38.18 $47.37 40 $36.68 $52.28 $65.32 45 $58.22 $84.75 $108.15 50 $87.81 $129.13 $167.06 55 $140.95 $208.85 $257.14 60 $233.36 $347.46 $456.42 This explainer gives an in-depth look at life insurance rates by age and the benefits of buying young. Shopping for life insurance over 50. Even though you’ll typically get better rates if you buy when you’re younger, you may still need to buy insurance later on in life. While it will inevitably be more expensive, it’s still possible to find low-cost life insurance, especially if you’re healthy. One way to find an affordable insurance policy is to look for a smaller benefit amount and shorter term length than you would if you were buying in your 30s. Now, this doesn’t mean you’re giving up the coverage you need in order to save money. Because you have fewer, if any, dependents, you likely just don’t need as much coverage as you would have needed decades earlier. So consider a smaller policy, such as one that lasts just until your mortgage is up. This guide will help you determine what length of benefit you actually need. You can also look into types of no-medical-exam life insurance, like simplified issue or guaranteed issue life insurance. These allow you to apply for a life insurance plan without getting a medical exam. They can be more expensive than a typical term policy, but they’re still a good option for some older or less-healthy applicants because they have less-stringent health qualifications. If you’re an older applicant, start your search by learning more about the best life insurance for seniors. Buy a term life policy. In almost every case, term life insurance is the most affordable option. It’s also the most straightforward type of life insurance; it provides only a death benefit, without any additional investment components, and it expires after a set period of time. Because you can choose whichever term length works for your situation, you only pay for the insurance coverage you want. If you’re in your mid-30s, you could realistically take out a 20-year, $1 million term life policy and pay insurance premiums of about $45 per month. Affordable Whole Life Insurance Whole life insurance is a type of permanent life insurance, which means it lasts for as long as you continue paying your premiums, with no expiration date. It’s also a type of cash-value life insurance with an investment option that gains interest over time. A whole or permanent life policy can be a valuable tool for some people, especially those who have complex financial situations and would benefit from the cash value. However, the investment component and maintenance fees make whole life insurance rates up to six to ten times as expensive as term life. If you do want a whole life policy, the best way to find an affordable policy is to be smart about the coverage you need, the company you choose, and your overall health. Long-term Care Insurance The majority of people who turn 65 will need some form of long-term care and the U.S. Department of Health & Human Services, estimates an average cost of $138,000. So while a death benefit can help your loved ones after you pass, you may also need to pay for care before you pass. That’s where long-term care (LTC) insurance comes in. LTC insurance helps you pay the costs associated with chronic illnesses, like Alzheimer’s, that leave you unable to care for yourself. LTC can cover nursing home costs and at-home care if you’re unable to live alone. LTC insurance can be costly so there are a couple of things to consider. For starters, ask about a long-term care rider as you look for your regular life policy. Some companies offer standalone LTC plans but they are usually more expensive than a rider and it’s harder to qualify for them. The other advice in this article also applies to getting LTC. In particular, you can save significantly by getting coverage for LTC in your 50s or earlier. By the time you get into your 60s, adding LTC to your insurance will cost you thousands more. Supplemental Group Life Insurance Another way to keep a personal life insurance policy affordable is to supplement it with employer-provided coverage. Group coverage through a workplace is a common benefit that you can get at little or no cost. The downside is that it usually won’t provide enough coverage for all your needs and it’s tied to your employment. But while an employer-provided group policy isn’t enough on its own, it can supplement a private policy. If you’re able to get, for instance, $50,000 worth of coverage for free, you can consider lowering your private policy (and thus your monthly premiums) slightly to make it more affordable. Get the right amount of coverage. It’s easy to overestimate the amount of life insurance you need and buy too much, raising the cost considerably. But it’s also easy to underestimate how much you need, potentially leaving your beneficiaries on the hook. A good rule of thumb is that the insurance you need is equal to 10-12x your salary. You can estimate how much coverage that means for you by using a free life insurance calculator. You can also crunch the numbers on your own if you prefer. Either way, make sure to consider all of your financial obligations when choosing a benefit amount and term length. For example, take the following into account: Existing debt, like a mortgage or student loans. Future college plans (for you, a spouse, or a child). Dependents, including children and aging parents. Any financial cushion you want to leave behind. Final expenses, like end-of-life medical care or funeral costs. Consider the ladder strategy. One tricky situation when it comes to how much life insurance you need is that your coverage needs decrease over time: your mortgage debt decreases, you need to provide for kids for less time, and so on. By using the ladder strategy, you can get the coverage you need while ensuring you’re not paying for coverage you won’t need later in life. With the ladder strategy, you buy multiple policies of varying coverage amounts and term lengths. As the decades pass, some policies will expire, and at the end you’ll be paying for a small policy that covers your current needs and nothing extra. Policyholders can spend up to 50% less on life insurance by laddering smaller policies versus buying one larger policy. Understand the underwriting process. Life insurance companies largely set the price of policies through the underwriting process. This is where they determine how risky an applicant is to insure by using: Your current health and medical history. This is done primarily through a paramedical exam and a request for documents from your doctor. Motor vehicle reports that show your driving record. A phone interview with you to find out if you have any dangerous habits (like smoking) or hobbies (like rock climbing). At the end, the underwriter will assign a classification to you that determines your policy cost. There isn’t anything you can do to change what happens in the underwriting process, but knowing beforehand what insurance companies look for can help you take steps to lower your insurance costs. For example, a health condition like diabetes can result in more expensive life insurance. But with certain steps to manage your condition, like taking the proper medication or treatments, insurance carriers may lower your premiums. Before you apply for life insurance, help yourself by taking a minute to learn more about what happens during the life insurance underwriting process. Choose the best life insurance company for your situation. Life insurance companies use your health to determine your policy cost, but not all carriers treat health conditions the same way. One common example is that certain companies offer better rates than others for former or current smokers. Certain companies also offer better rates for people of certain ages, military personnel, high-net-worth individuals, recovering alcoholics, those who recently lost weight, people with high blood pressure, or individuals with certain types of cancer. These differences between companies are why the best life insurance company for you is usually the one that is most accommodating to your health situation. Going with the wrong one can cost you thousands of dollars over the decades you own the policy. To see which companies offer comprehensive and affordable life insurance coverage based on specific factors like your age, lifestyle, or health circumstances, see our page on a few top life insurance companies. Compare quotes. Taking all of the above into account — coverage amount, type of policy, company differences — can feel overwhelming. But if you want the best insurance rates, it’s also crucial to compare life insurance quotes for different plans. An easyway to quickly compare quotes from multiple insurance carriers is with an automated process like Policygenius. Otherwise, you will need to do all of the above — figure out what type of insurance you need, the death benefit size, which company is best for a given health situation, and more — and then go to each company individually, write down their offers, and compare manually. And if you do it manually, you’ll still need to apply through the insurance carrier, another thing Policygenius helps you do quickly and without putting you through a confusing online application. Don’t be afraid to use a broker. Knowing how to get an affordable life insurance plan is important, but so is recognizing some myths about saving money. It’s untrue that you can save money by buying directly through an insurance company. Using a life insurance agent or broker does not come with additional costs. Life insurance rates are highly regulated, so the same policy cannot be offered at a discount by some parties or marked up by others. You will pay the same amount for an individual policy whether you buy from the carrier or use an independent broker. Additionally, independent brokers (like Policygenius) can help guide you through the process and answers questions you may have about how certain policies or companies compare. We’ve also debunked a few other common myths about life insurance to make sure you understand what you’re getting with your policy. Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you. This article originally appeared on Policygenius, a licensed insurance broker. Betterment is not an insurance broker and this article is not insurance advice nor an offer for particular insurance products or services. The content was not written by an insurance agent, and it is intended for informational purposes only, and it should not be considered legal or financial advice. Betterment makes no warranties or representations with respect to specific insurance offerings. -
![Low Risk Investment Options For Your Money]()
What Is Life Insurance?
What Is Life Insurance? What does life insurance do, who needs it, and why is it important? You might have an idea of what life insurance is. But if you were asked to define life insurance, could you do it? What if you needed to describe the different terms, provisions or types? What exactly is life insurance good for? How long does it last? Who needs it? It seems complicated, but the answers are fairly straightforward. Life insurance provides a tax-free lump sum of money to your loved ones in the event of your death, allowing them to continue toward their financial goals. It’s a value asset that gives you peace of mind that they’ll be taken care of even when you aren’t around. In this life insurance 101 guide, you’ll learn: How life insurance works The advantages of life insurance Why life insurance is important How does life insurance work? Life insurance is easy to understand once you know what questions you should be asking. If you understand the common components of an insurance policy, how to apply, the different types of policies and the costs involved, you’ll know how to get the right coverage for your family. What are common features of life insurance? No matter what type of policy you buy, life insurance consists of these four components: Policyholder The person who owns the life insurance policy. Typically, if the policyholder dies, the death benefit is paid out, but it’s possible to take out a policy on someone else. Beneficiary The person, people or institution(s) that receive money if the policyholder dies. There can be more than one beneficiary named on the policy. Premium The money paid monthly or annually to keep a policy active (or “in-force”). If you stop paying premiums, the policy lapses. Death benefit The money paid out upon the event of the policyholder. Life insurance goes into effect as soon as you make your first premium payment, meaning you’re eligible for the death benefit as soon as the policy is in force. Insurance companies always pay the death benefit, except in specific circumstances where they aren’t obligated to, like: The policyholder outlives their term life policy The policy lapses or is canceled The death occurs within two years of the policy being in-force and the insurance company finds evidence of fraud on the application How do you apply for life insurance? The life insurance application usually takes four to eight weeks from start to finish, but you can complete the process in just seven steps. Here’s how it works: Get free quotes. Comparing rates from different insurance companies allows you to make sure you’re getting the most affordable policy. You never have to pay for life insurance quotes. Choose your policy. Take into account cost, customer service and the average application time. Fill out an application. You can fill out your application online or call a licensed expert to get help. Either way, you’ll need to answer some basic income and health information. Take a medical exam. As part of the underwriting process, you may need to take a medical exam that’s similar to a basic physical. The exam is free, and a technician will come to your home or workplace on your schedule. Complete a phone interview. An insurance agent will ask you a few lifestyle and health questions. Wait for approval. An underwriter will take all of the information collected to decide on a final premium rate, which should be similar to the quotes you received. Sign your policy. After you sign your policy and send in your first premium payment, your policy will be in-force. What are the different types of life insurance? Not all life insurance policies are created equally. How long the policy lasts, the cost and extra provisions depends on the type of coverage. Broadly speaking, life insurance is divided into two different types: term and permanent. Term Life Insurance Term life lasts for a predetermined period of time, known as the term. When the term is up, the policy expires. This is usually the most affordable type of life insurance, and lasts only as long as you need it to cover debts and provide for beneficiaries. Permanent Life Insurance Permanent insurance doesn’t have an expiration date and lasts for as long as the policyholder pays the premiums. Permanent policies also have a cash value component that acts as a sort of investment vehicle that can be borrowed against. The cash value portion, along with fees, raises the price of permanent policies compared to term. Permanent life insurance policies include whole, variable, universal and variable universal life. Whole vs. Term Most shoppers have to decide between term and the most popular type of permanent life insurance, whole. Term life is the right choice for a majority of people because it’s affordable and straightforward. However, whole life, with its cash value and permanent status, can be useful for people with complicated finances. A licensed expert can help you decide which is the best option for you. How much does life insurance cost? The actual cost of life insurance depends on a number of factors, including where you live, your age, your health and health history, your financial history and your hobbies. And, of course, the coverage amount, type and term length (if applicable) of the policy plays a role in setting rates, too. Different insurance carriers weigh these factors differently, which is why it’s important to compare quotes from multiple companies to make sure you’re getting the most affordable rate. What are the advantages of life insurance? There are many benefits of life insurance that make it a necessary part of any financial plan. No matter how you use it as part of your safety net, you can count on the following. It provides money tax-free. The death benefit provided by a life insurance policy is a lump sum of money that’s usually tax-free. That means the whole amount goes to your beneficiaries – and they don’t have to plan their goals around receiving only a portion of the money thanks to taxes. It’s affordable protection. While the exact cost of life insurance varies, for the most part, it’s pretty affordable. Consider this: A healthy 30-year-old male can expect to pay under $40 a month for a $1,000,000 term life policy. That’s about half the cost of the average internet bill. Since it helps pay for college, a house, retirement, and more, that’s money well spent. It’s an alternative investment option. Term life insurance is straightforward, but the cash value of whole and other permanent types can act as a forced investment vehicle. You should talk to a financial adviser before deciding whether or not a permanent life insurance policy is the right path, but if you’ve already maxed out other investment options like an IRA, life insurance might work as an additional vehicle. Why is life insurance important? Financial planning is important, but if you’re the breadwinner and you die, it makes all of that planning moot. The meaning and importance of life insurance is the peace of mind it helps provide when it comes to: Protecting future plans like college and retirement for your beneficiaries Paying off debt like a mortgage or student loans Estate and inheritance planning to leave something behind for children, grandchildren, or charities Covering end of life expenses like funerals, which have an average cost of nearly $10,000 Who might need life insurance? Life insurance is a useful tool for most people, but that doesn’t mean everyone needs it. It’s often unnecessary if: You don’t have any beneficiaries. If you’re young and single, and no one is counting on you financially, you probably don’t need life insurance. But keep in mind that there are still reasons you might buy it. Life insurance gets more expensive the longer you wait to buy, so you might choose to apply while you’re young to lock in low rates. You might also want to leave money to an institution or charity. You don’t have (or anticipate) any debt. If your death won’t leave loved ones with debt, you might not need life insurance. But you should also consider future debt, like the cost of putting your kids through school or caring for aging parents. It’s important to look ahead to your life insurance needs, not just to the past. You can self-insure. Even if you do have or anticipate debt, you might be able to cover the costs simply using your own savings. If you don’t fall into one of these scenarios, you should seriously consider life insurance. If you don’t have it, you risk leaving your loved ones financially vulnerable in a worst-case scenario – something that can be easily avoidable with life insurance. Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you. This article originally appeared on Policygenius, a licensed insurance broker. Betterment is not an insurance broker and this article is not insurance advice nor an offer for particular insurance products or services. The content was not written by an insurance agent, and it is intended for informational purposes only, and it should not be considered legal or financial advice. Betterment makes no warranties or representations with respect to specific insurance offerings. -
![Quarterly Commentary The inverted yield curve]()
Understanding The Inverted Yield Curve
Understanding The Inverted Yield Curve Our economy is about to make history. June of 2019 marked 10 years of expansion of the U.S. economy, which ties with the previous record spanning March 1991 to March 2001. The economy is on track to have its longest period of economic expansion in U.S. history, meaning that various measures of our country’s economic success are on an upward trend. June of 2019 marked 10 years of expansion of the U.S. economy, which ties with the previous record spanning March 1991 to March 2001. 10 years of expansion is nearly double the average expansion since the 1940’s. This may leave an investor wondering if the end of growth may be near. However, economic expansions don’t simply die of old age. You can look to Australia’s economy, which has been growing for the past 28 straight years, as a good example. What ultimately directs growth is the underlying health of the economy. Economic health is typically measured by factors such as employment levels, inflation, and gross domestic product (GDP). Unemployment is currently at multi-decade lows and inflation remains in check. Both are positive signs of a healthy U.S. economy. Recently, attention has turned to the bond market, where the yield on longer-term U.S. Treasury bonds is lower than their short-term equivalents. This phenomenon—known as yield curve inversion—has received a fair amount of media coverage recently, and it’s often described as a sign that a recession could be coming. Though an inverted yield curve has preceded a number of recent recessions, the timing around a recession is uncertain, often happening years later. Additionally, stocks can still have positive performance while the yield curve is inverted. What is the yield curve, and why is it inverted? The yield curve refers to the yield paid on bonds at different maturities. Bond maturity refers to the amount of time between when the bond is issued and when it reaches its end date and the issuer must redeem it. Generally, bonds with longer maturities have higher yields to compensate investors for tying up their money for longer. This is called an upward sloping yield curve. Upward Sloping Yield Curve (US Treasuries—June, 2018—1 Year Ago) Data: US Treasury The yield curve inverts when longer maturity bonds—10 year bonds for example—have a lower yield than short-term bonds. To describe the slope of the yield curve, yields on three-month or two-year maturity bonds are often compared to the yield on 10-year bonds. If three-month or two-year bonds have higher yields than the 10-year bonds, the yield curve is considered inverted. Inverted Yield Curve (US Treasuries—June, 2019) Data: US Treasury The yield curve generally inverts when investors collectively think that short-term interest rates will fall in the future. In that case, investors rush to “lock in” a rate for a longer period of time, and in the process, they drive down yields. During recessions, the Federal Reserve generally lowers short-term interest rates to stimulate growth. In the past, an inverted yield curve has often preceded a recession as bond investors looked to lock in a rate for a longer time period in anticipation of actions taken by the Federal Reserve. How predictive has the yield curve been? To be fair, an inverted yield curve has preceded a number of recessions. However, an inverted yield curve does not make an upcoming recession a sure thing. In fact, three of the last 10 times that the yield curve inverted, no recession occurred over the following two-year window, per Goldman Sachs research in March of 2019. Even in the times when a recession did follow, the timing has been fairly uncertain, starting anywhere from 8 to 22 months after the curve inverted. This lead time was often longer during periods of low inflation—like the current inflation environment, which has been hovering at or below 2% for a number of years now. Finally, there just haven’t been enough historical business cycles to confidently say an inverted yield curve means a recession is coming. Business cycles represent the rise and fall of the economic output of goods and services and are generally measured by a country’s GDP. There have been 33 full cycles since the mid 1850’s, and only 11 in the modern, post-war era. With such few instances in the past to draw from, it’s hard to say that an inverted yield curve on its own means a recession is on its way. What should an investor do? Often, more money can be lost trying to avoid a down market than in the down market itself. In general, stocks have risen even as the yield curve was inverted. It’s also important to remember that a market decline of 10% or more has lasted four months, on average. Therefore, trying to time the next downturn generally isn’t a good strategy. Instead, investors should make sure that the risk in their portfolios matches their investing time horizon. Smart investors align the risk in their portfolio to reflect how long they plan to invest. Money that you will need soon should skew towards lower risk investments. At Betterment, we’ll help you do this automatically by setting your portfolio up at an appropriate allocation (your mix of stocks and bonds) and with auto-adjust turned on in your portfolio, we’ll automatically adjust your allocation as your goal’s end date approaches. Betterment’s portfolio recommendations take the potential for down markets into account and seek to align your risk with your investment horizon to help you have the best chance of reaching your goals—whether there is a recession in the future or not. -
![Understanding Your Total Compensation Package]()
Understanding Your Total Compensation Package
Understanding Your Total Compensation Package While interviewing, potential candidates should be empowered to evaluate whether a company is a good fit for their financial and cultural needs, as well as vice versa. Here are some factors you should consider when making your decision. The Job Search. Whether you’ve been through it or not, you’re probably aware of how long and arduous a process it can be. Looking for the right positions, networking, and interviewing encompass only the first part of the search; determining whether the company is a fit for you and your career is the second (perhaps even more important) part. But once you get past the final round of an interview, the anticipation leading up to a job offer sets in. As the job market becomes more saturated and companies try to distinguish themselves from their competitors, candidates have more benefits to weigh than in the past. Instead of giving the brand and prestige of the company more weight in deciding to accept a job offer, potential employees are now thinking “what’s the opportunity, and how can that set me up for success?” As such, understanding your compensation package becomes paramount. Join us as we interview Kate Smith, Senior Director of HR and Recruiting at Betterment, on explaining the different benefits companies may offer candidates and how we should weigh individual needs with our career aspirations. How have employers seen compensation packages traditionally, and how has that changed over time? Traditionally, offer packages have been seen as a base salary with potential for a discretionary bonus. Equity and bonus guarantees were typically reserved for more senior-level hires. This may still be the case for larger, more corporate organizations, but we’ve seen a shift, particularly in the tech industry. Equity isn’t just reserved for senior-level hires, but available and offered to new hires from entry level and up. We’ve also seen a shift in what is included in the offer letter: more companies are highlighting their non-monetary benefits (like the vacation policy, free food, and learning and development opportunities). In a competitive market for talent, companies need to find ways outside of just cash and equity to differentiate themselves. As they also become more tech savvy and flexibility is encouraged, these become big selling points for candidates from a cultural and work/life balance standpoint. How would you describe the different parts of a compensation package? How do you think most employees tend to think of their compensation? Is there a difference? Here are some of the more typical cash components of a compensation package: Salary, Bonuses, And Commissions Salary Cash compensation is typically positioned as an annual salary. It’s important to understand the pay schedule: will you be paid weekly, bi-weekly, or every two weeks? And yes, there is in fact a difference between those last two. It would also be prudent to ask about the company’s raise philosophy. When would you be eligible for a raise? Are they performance based, or standardized? What could your salary growth look like over time, and what impacts that? Bonuses These can be in the form of a “sign-on” bonus (most commonly disclosed at the time of offer and then paid out once you start at a company), or an annual bonus—and in some cases, both. For sign-ons, it’s important to understand what the terms of the bonus are: when will it be paid out? Is there a “clawback” and what is the timeframe for it? For example, in some workplaces if you leave the company within a year, you must pay back the full amount. For discretionary bonuses, it’s important to understand the timing of payout, what the bonus amount is based on (personal performance, company performance, or a combination of the two), and if the bonus is paid for the portion of time served for that first year. Commissions Many sales roles may include a commission component, which is additional cash compensation based on pre-set sales goals. Most commission packages include a base salary which may not be much, so make sure to ask what your “Total Target Compensation” would be, and what the variable compensation (commissions) is based on. If your company has a discretionary bonus, it’s probably worth asking if you would be eligible for that bonus as well—this may not be the case in all places. Paid Time Off, Sick Days, And Parental Leave Holidays Get a list of the company holidays. If there are religious holidays you celebrate that are not accounted for on that list, you may want to discuss any needs you have upfront. Vacation Are there a set number of days you get, or are they unlimited? If set, what is the number and when are you able to increase the amount of vacation days you receive? What’s the accrual schedule for vacation days? Most companies with a set number of vacation days allow you to accrue those days over the course of the year. Additionally, you may want to ask what their rollover policy is. For example, will they allow you to rollover unused vacation days to the next year, and if so, what is the limit? If the company provides unlimited vacation days, it couldn’t hurt to ask: “On average, how many vacation days do people take per year?” The answer can be telling as to how truly flexible the company may be. Sick Days Similar to vacation days, it would be helpful to understand if sick days are allocated or if they're unlimited. Do unused days carry over as well? Parental Leave This is formerly known as “maternity leave” (and still may be at some companies). We’re seeing more companies change their policies to account for bonding time for non-birthing parents, inclusive of adoptions. Whether you’re thinking about starting a family now or in the future, it’s important to ask about the parental leave policy. A few things you should aim to understand: Who’s eligible for leave (birthing mothers, non-birthing parents, adoptive parents)? When are they eligible? Should you be at the company for a certain amount of time before you can take leave? Is it paid leave or unpaid leave? If paid, is it salary continuance, or will you receive checks directly from your insurance carrier? Will your job be guaranteed for that time? If you wanted to take unpaid leave, is that possible, and would your job be held? Medical, Dental And Vision Insurance If you’re offered these benefits, what does the company contribute compared to the premium you’re paying? Do any of the policies cover fertility treatment, and who is eligible for that? Retirement Savings Plan When it comes to saving for retirement, many Americans fail to adequately prepare for their own futures. Make sure to take this portion of your compensation package seriously, and keep these questions in mind: Does the company provide a plan to allow you to contribute to a 401(k) or other retirement accounts? If so, does the company offer a percentage match on your contributions? If yes, when do they start matching, what is the amount, and how often? Some personal advice that I received as a new grad: contribute to your 401(k) from the start. It’s money you won’t miss and you’ll learn to live off of what’s being deposited into your account. You’ll be amazed at how those savings can grow over time (especially if you receive an employer match). Should I only be considering monetary factors in my decision? Absolutely not! Many companies today are offering perks that don’t amount to direct monetary compensation, but can drastically affect your quality of life. Here are just a few non-traditional perks that are worth weighing into your decision: Flexible work hours and work from home (WFH) policies Learning and development stipends Gym reimbursements Childcare reimbursement or on-site childcare Laundry stipend Travel stipend Why do non-traditional benefits matter? First and foremost, it’s important to think about how you personally value the non-monetary benefits. Do they make your life easier? Do they help alleviate stress? Does it help you save money? These are all things to consider that are related to the cultural environment of the company you’ll be working for. Also, it says something about their values and what they stand for—are they supportive of working hard, yet rewarding their employees during stressful times or when good work has been done? What are some tips for encouraging our readers to have those difficult conversations about negotiations with their prospective companies? Three important factors come to mind: Reiterate how interested you are in the position and how committed you are to the company. Determine for yourself what’s a “must have” versus what’s a “nice to have” benefit. Some things may not be negotiable—for you, or for the company—and sometimes it’s ok to walk away if those “must haves” are not aligned. Conclusion Whether you’re interviewing for your first job or are switching roles after being in the workforce for many years, it’s important to think about how your individual needs matter. Thinking critically about what’s important to you and your family will help you determine where you should take your next step professionally. By deciding the amount of compensation you need and deserve, while also thinking about what benefits you value, you’ll be able to set your personal benchmarks and come to the table ready to discuss your needs with your potential—or even current—employer. And, if your interests are guiding you towards the fintech space for your next role, check out our Betterment careers page! We’re always looking for passionate candidates to join our company. -
![Plan Ahead When Saving For Vacations]()
Plan Ahead When Saving For Vacations
Plan Ahead When Saving For Vacations We’ll help you plan and save so you can stress less about your bank account while you’re on the beach, on top of a mountain, or wherever else your travels take you. Taking a vacation isn’t something that should make you feel guilty. Unplugging from work can help you connect with your loved ones, the world around you, and even yourself. Here at Betterment, we recognize this with policies that encourage work-life balance for our employees. Thankfully, our financial advice can help you, too. When you’re prioritizing your financial goals, consider any vacations you plan to take in the future. Perhaps you know you’ll have to travel for a wedding next summer, or your family always takes an annual summer vacation when the kids are out of school. Don’t make the mistake that 55% of Americans make—forgetting to budget and save for an expected vacation. As your financial partner, Betterment can help you plan so that you can be a smart investor and get some well deserved relaxation. How To Plan A Vacation I live in New York City, so when I think about a vacation, I often think about pristine white sand beaches and serene ocean views. Let’s say you were planning a hypothetical vacation to the beaches of Florida next summer: we’re going to walk through the setup of a major purchase goal so that you can see exactly how Betterment helps you prepare. First, let’s talk about cost. Although the cost of a vacation can vary greatly depending on your destination, the price tag of the average vacation is about $1,145 per person. For a family of four, this would increase fourfold to a total of about $4,580. These figures will frame our discussion today, but make sure to do your own research on your desired destination before setting up your vacation goal in your Betterment account. Know that if costs change, your goal can be adjusted and updated at any time. Setting Up A Major Purchase Goal After choosing a destination and determining the cost, the next step is to set up a major purchase goal, either on the website or through the mobile app. Simply using a goal-based system to save and invest for a vacation can help you actually achieve that goal—among other benefits. Let’s name the goal “Florida Vacation” to stay organized and differentiate it from other savings goals. If you wanted to take this vacation in the next year, set the time horizon for one year, just in time for next summer. Assuming that you’re traveling alone, select the average vacation cost of $1,145 for the target amount, knowing that you may end up needing more or less, depending on what flight and hotel deals you’re able to find. As shown above, Betterment has selected a risk level for you that’s 24% stocks and 76% bonds. This risk level is based on the amount of time you’ll be investing for, which is only one year. Generally, the shorter your time horizon, the less risky you’ll want to be with your savings. Auto-adjust is also selected by default, which means that the risk level will automatically be dialed down even more as you get closer to your vacation date. Reviewing The Possible Outcomes As shown in the screenshot below, after setting up the target amount, time horizon, and risk level, you’re then presented with a graph that tells you the earnings over the designated time period under certain levels of expected market performance. You will likely meet your savings target plus an additional $6. That’s good, because airport coffee can be expensive. If the market performs poorly, Betterment’s technology predicts that the growth projection is $45 less than the target. This means that you would likely need to make some minor last-minute adjustments to your plans (for example, taking public transportation to and from the airport rather than a cab). Regardless, you can still feel good knowing that you’re saving most of what you might need. Automating Future Deposits Most importantly, the screenshot above demonstrates how Betterment also recommends a monthly deposit amount you should be putting into the goal so that you can reach your target of $1,145. It looks like a monthly deposit of $94.49 is the recommended amount according to Betterment, although you could always split it in half and set up auto-deposits to occur when you get your paycheck (every two weeks, bi-weekly, etc). Because this is the one of the most recommended ways to set up auto-deposits, you should choose the option that aligns with your pay schedule. For a family of four, coming up with $4,580 to drop on a summer vacation might seem like a challenge when thinking about all of your other expenses. However, breaking it down into “per-paycheck” deposit amounts over a year period makes it seem more manageable. For a Betterment major purchase goal that’s set for a one year time horizon, and a target amount of $4,580, the recommendation is a monthly deposit of $377.95. Split between two paychecks per month, and even between two spouses, the “per-paycheck” savings per spouse would be about $94.49. As you can see, it pays to plan ahead. If you don’t have a Betterment account yet, there are no upfront costs associated with signing up to create your own major purchase goal. Take a look at the advice and play around with different target amounts and time horizons. If you do decide to invest your savings with us, our management fee of .25% offers unlimited access to automated portfolio management, Tax Smart investing features, personalized financial dashboards and customer support. In a year’s time, you will thank your past self for taking the time to set up a major purchase goal and automating your deposits. I suspect that your family will, too. -
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Understanding The Cost Of Life Insurance
Understanding The Cost Of Life Insurance Learn what goes into pricing life insurance and how to get a low cost policy to protect your family. Life insurance provides a financial safety net that you'll potentially be paying for some decades. That’s why it’s important to understand the cost of your policy. After all, letting a policy lapse because you can’t afford it defeats the purpose of having it in the first place. A healthy 35-year-old male can expect to pay about $327 per year on life insurance premiums. But individual costs depend on a number of factors, including the details of your policy, your health, age, hobbies and gender — these are some of the criteria used by insurance providers to give you a classification that deems how risky you are to insure. What are the chances that you’ll die over the course of your policy? If you’re very unhealthy and more likely to die during your policy term, you’ll be charged more. If you’re in tip-top health and there’s little risk that the life insurance company will have to pay the death benefit, then you’ll get better rates. Knowing what goes into the cost of before you get life insurance quotes can help you make better decisions during the application process and find a policy that fits your budget. Your policy Your health Your age Your hobbies Your gender Your Policy Coverage Amount and Term Length How much life insurance you need is a two-part question: how much coverage you need (the death benefit), and how many years you need that coverage to last (the term). Both are important and affect the cost of life insurance. Policies with higher coverage amounts will cost more, as do policies that last longer. Note that the policy length is only applicable to term life insurance. Permanent life insurance doesn’t have this limitation and costs more. More on this distinction below. Type Of Life Insurance The type of life insurance you have will largely affect the cost of the policy. A term life insurance policy is typically the most common and most affordable; a permanent policy is more expensive but has extra perks, like an investment-style cash component. Term life insurance cost With term insurance, you pay a monthly premium for a set amount of time. If you pass away while your policy is active or in-force, the insurance company will pay out a death benefit to your beneficiaries. A term life insurance policy is the right policy for most people. A healthy 30-year-old male can expect to pay an average cost of $26 a month for a 20-year policy with a $500,000 coverage amount. Whole life insurance cost While term insurance is typically affordable, whole life insurance has the potential to be pricey. Whole policies can be 6 to 10 times as expensive as a comparable term policy. This is because: It lasts longer. A term life policy has an expiration date, but whole life policy doesn’t. As the name implies, it lasts your entire life as long as you pay the monthly premiums, and therefore it’s more likely that you’ll die while the policy is active. There’s an additional cash-value component. Like other types of permanent life insurance, whole life has a cash-value component in addition to a life insurance component. Premium payments are split between these two sides, leading to higher rates. There are more fees. Due to the above points, there are management fees associated with whole life insurance that are incorporated into premium rates. Riders Riders are like mini contracts appended to your life insurance policy that allow for customization for individual scenarios. They often come at an additional cost that will raise your premium and as such some riders might not be worth it. Your Health Your health status is one of the most important factors in determining your premiums. The healthier you are, the less likely you are to die, and thus cheaper to insure. During the underwriting process, you’ll have to answer some questions about your health and your family health history, and take a brief medical exam. The insurance company may also request an Attending Physician’s Statement (APS) from your doctor to get their assessment of your health as well. Some things that might result in higher premiums include: High blood pressure High cholesterol Hypoglycemia HIV/AIDS and hepatitis Recreational drugs including marijuana Nicotine use Chronic illness If you use marijuana, your insurance company might also take that into consideration or even classify you as a smoker. However it's still possible to find providers to accommodate your lifestyle and health status whether you're a smoker, former smoker, or marijuana user so it's important to shop around. Similarly, chronic illness or pre-existing conditions also tend to warrant higher premiums, but it's possible to find life insurance coverage with the right provider. Your Age In most cases, the older you are, the more you’ll pay for life insurance. This is because as you age, your health generally declines and your likelihood of dying while the policy is active increases. That’s why it’s best to get coverage while you’re healthy and young. For a healthy male aged 30 years old, a 20-year term policy purchased has a $26 monthly premium, but the same policy at 40-years old would cost $37. Your Hobbies Some hobbies are more dangerous than others. If you skydive or scuba dive, your insurance company may deem you a higher risk and raise your rates since there’s a higher chance they’ll have to pay out the death benefit. Your provider might also check out your driving history. A motor vehicle report will alert them to any risky drinking and driving-related behavior, like DUIs or DWIs, which will also increase your premium. Your Gender In most cases men pay higher premiums than women, due to the fact that they engage in riskier behaviors and have a shorter life expectancy on average. However applying for life insurance during pregnancy can raise your rates depending on the trimester. In most cases you’ll find that you can get a lower premium if you postpone buying life insurance until after you give birth. Read more about buying life insurance when you’re pregnant. Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you. This article originally appeared on Policygenius, a licensed insurance broker. Betterment is not an insurance broker and this article is not insurance advice nor an offer for particular insurance products or services. The content was not written by an insurance agent, and it is intended for informational purposes only, and it should not be considered legal or financial advice. Betterment makes no warranties or representations with respect to specific insurance offerings. -
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Health Savings Accounts: The Sharpest Tax Tool In The Shed?
Health Savings Accounts: The Sharpest Tax Tool In The Shed? As an investor, you may be thinking about funding an HSA but are unsure about whether it is a useful financial planning tool. Here are six different scenarios for how an HSA can work for you. You might say that Health Savings Accounts (HSA) are the Swiss Army knives (SAK) of financial planning tools. Both were originally designed for a particular function, which they still do quite well. What's more, their unique designs lend them a versatility not found elsewhere in the toolshed. As a result, they have evolved over time into powerful multi-purpose solutions. A Brief History Of The HSA Conceived in the 1880’s, the SAK has a hundred year head start on the HSA. Through the ingenuity of myriad users, its most valuable applications may have already come to light. In contrast, the HSA is a mere adolescent whose raw potential has only been glimpsed. When approved by Congress in 2003, HSAs were intended to serve as an aid to Americans struggling to afford skyrocketing health care costs. The concept was simple: Enroll in a High Deductible Health Plan (HDHP) and contribute to its companion HSA, get a tax deduction. Later in the year, withdraw from the account tax-free as qualified medical expenses occur. Assuming an HDHP was the right choice for your family, it was a pretty good deal. And it still is. To reiterate, individuals who only use HSA funds for qualified medical expenses receive a triple tax free benefit: Tax free growth Pre-tax contributions Tax free withdrawal (only for qualified medical expenses) Here’s a sampling of some of the most powerful and interesting applications for this account. 1. Last Minute Tax Planning Tool Use Case: The good news? Your new employer awarded you a hefty bonus last year. The bad news? You are going to owe big this year. It’s too late to boost your 401k contribution and you’ve already leveraged all other tax breaks. But wait! You haven’t yet maxed out your HSA last year, so you help ease the pain by making a last minute contribution. Key Feature: You have until the tax filing deadline of the following year to make an HSA contribution for a given year. Caution! Your tax bill will be lower, but you still have to come up with the cash for that, plus the HSA contribution. Note too that contributions made for prior years up until the tax filing deadline can’t be made through payroll. That means the tax break for Social Security and Medicare is lost. 2. Retirement Healthcare Nest Egg Use Case: You have a handle on today’s medical expenses. It's projections for healthcare costs in retirement that worry you. So instead of depositing only enough to cover this year’s medical expenses in your HSA’s savings account, you contribute the max. Then you put it in potentially higher earning investments similar to your retirement portfolio. Over time, it grows into a tidy sum for retirement healthcare. Key Features: 1) HSAs are not “use it or lose it”; balances roll over to the next year ad infinitum. 2) HSA money can be invested. Caution! Some HSA accounts limit you to savings accounts only, or require you to hold a certain amount in cash before investing. Some offer better investment options and lower fees than others. Choose your provider carefully! 3. Medical Emergency Fund Use Case: You’d been using your HSA to build a healthcare nest egg as in #2. Then a silly accident left you with shockingly high out-of-pocket expenses. In the past, you might have turned to your emergency fund, credit card, or 401k. Instead, you tap your HSA, leveraging its triple-tax-free nature to cover these costs most efficiently. Key Feature: It’s your prerogative to change your mind about when to tap your HSA account. Caution! Only costs that meet IRS standards for qualified medical expenses (see Publication 502) receive full tax benefits. Also, even if your HSA is targeted at retirement, consider keeping a portion in cash. Then if you need it for a medical emergency, you won’t be forced to liquidate volatile assets in a down market. 4. Backup Emergency Fund Use Case: Same as #3, except the silly accident resulted in more out-of-pocket expenses to your car than to you. This, at a time when your regular emergency fund is already depleted from fixing the leaky roof. You can’t use your HSA savings to pay the auto body shop – not tax- and penalty-free anyway. However, you can be reimbursed by your HSA in 2019 for a 2011 shoulder surgery you paid for with non-HSA funds. Then you can use that cash to cover your fender bender. Key Features: Same as #3, and… There’s no time limit on when you can be reimbursed for prior qualified expenses. Caution! Same as #3, and… Be meticulous about HSA recordkeeping. If you can’t produce receipts for reimbursed expenses during an IRS audit, your triple-tax-free benefits could be disallowed, and penalties due. 5. Supplemental Retirement Savings Account Use Case: You diligently fund and invest your HSA over the years, resulting in a healthy balance at retirement. But lucky you, you got the good genes! As it becomes apparent you won’t need your whole HSA for medical expenses, you decide you’d like to spend it on a yearlong cruise instead. You absolutely can, and it won’t cost you tax-wise any more than withdrawing from your IRA. Key Feature: At age 65, the penalty for non-qualified HSA withdrawals goes away. Caution! Although you won’t pay a penalty, you will be subject to taxes on withdrawals used for anything besides qualified medical expenses. 6. Long Term Care Coverage Use Case: Your family’s history suggests you won’t be one of the lucky ones described in #5. But the cost of long term care (LTC) insurance is inducing serious shock. You can make it more affordable by using triple-tax-free HSA money to pay the premiums. If you’re not eligible or incur LTC costs not covered by insurance, those too can be paid with HSA funds. Key Feature: LTC insurance premiums and out-of-pocket costs are qualified medical expenses. Caution! No double-dipping! If you use your HSA for LTC expenses, you can’t also take other LTC-related tax breaks. Finding Your Edge The best application for your HSA is a function of your personal situation, needs, and resources. So take time to educate yourself or work with a financial pro to get the most out of it. Then help ensure it stays in optimal working order by periodically monitoring cash levels, fees, investment options, and asset allocation. And keep a sharp eye out for new laws, products, and usage models. While the HSA is already a valuable addition to any financial toolbox, the history of the Swiss Army knife suggests that its potential has just begun to be tapped. 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. -
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How A Generation Gap Impacts Finance For Women
How A Generation Gap Impacts Finance For Women Personal finance needs vary greatly across generations — but perhaps even more so for women. When the topic of “women and money” comes up, the focus is usually on the gender gap. Much has been written about how women have to overcome wage disparity, the “pink tax”, risk aversion, and longer life expectancies to achieve their financial goals. But, these common focuses ignore a potentially larger gap: How women’s financial needs vary from one generation to the next. Some of this “generation gap” is the natural result of being at different stages of life. The role of women in the family, the workplace, and society has evolved so much that what worked in Grandma’s day may no longer even be an option for her daughters and granddaughters. To understand this better, let’s look at a hypothetical family. A Millennial's Financial Circumstances The countdown to her 10th high school reunion is on. It’s three months out, and her phone is flooded with group text messages about travel details and plans for that weekend. One friend in the group suggests making a reservation at an upscale restaurant near the venue for dinner before the reunion begins. There's just one problem: She’s still paying off last year’s round of bridesmaid duties. That, and not so long ago she was laid off from her full-time job. She’s patched together side hustles as a tutor, dog walker, and rideshare driver, but that income barely covers rent and food, much less health insurance, college loans, or expensive dinners with friends. Her emergency fund is almost gone, and none of her options look good. She considers tapping into her 401(k) instead of using a credit card, but her money-savvy friend warns her about the long-term folly—and short-term tax implications—of doing so. With the possibility of moving back in with her mom looming large, the timing on her reunion couldn’t be any worse. Considerations for the “baby boomer” mom. Her mom is celebrating a reunion this year herself: It’ll be her 40th high school reunion and the first one she’s been to since divorcing her high school sweetheart. They started off as the 50-50 partnership she and her classmates idealized: Dual incomes, common goals, and shared financial responsibility. Then kids came along. When her dad died, her mom needed a lot of support-- so she quit her job. Before long, they found themselves in surprisingly traditional roles. She took over the monthly bills, he made the big picture decisions. Squeezed by their “sandwich generation” duties, talk about money fell by the wayside. It was only through the divorce proceedings that she discovered how little money and savings they had. Now she’s picking up the pieces. Mom is back to full-time teaching and she’s thrilled to be beefing up her pension and 403b. But, thanks to her years out of the workforce and paying for her child’s higher education, she’s got a lot of catching up to do. How does she begin to balance everyone’s needs? Should she sell the now too-big family home? Will she ever retire? Can she afford to hire a financial planner? Can she afford not to? Even though her new job provides her with some financial stability, it’s a far cry from the future she and her high school friends envisioned. A grandmother’s financial obstacles. The matriarch of the family only wishes she were well enough to make it to her upcoming 75th high school reunion. Due to various health issues, she’ll be spending time indoors instead of reminiscing with her few remaining classmates. Together they survived the Great Depression, World War II, and the many boom and bust cycles that followed. Times were often difficult, but they got by. No one had credit cards or financial planners. They simply spent less than they earned and saved in advance for big expenses. She remembers her young husband surprising her with their new home. It wasn’t until he died decades later that she discovered it cost the then-pricey sum of $5,900. That’s the way it was: men handled the money, and that was fine by her. She grew to love that home, and it grew to be worth a hundred times its cost. The equity is what allowed her to live there. But how much longer can it last? Is it time to move to assisted living? Can she afford it? What about the kids’ inheritance? Progress For Better It’s true that most women share financial concerns unique to their gender. However, as illustrated in this scenario, those concerns can vary tremendously across generations. Even within generations, women’s needs are by no means monolithic. Where once there were prescribed roles and paths outlined for women, the choices are now virtually limitless. Personal finance is evolving in parallel. Yesterday’s safety nets are being supplanted by sophisticated products and planning strategies. The safe, reliable pensions, bond ladders, and comprehensive health insurance of old are giving way to new, more flexible tools of the trade, such as 401k’s, Health Savings Accounts, and long term care insurance. Grandma couldn’t get a credit card in her own name until 1974; in comparison, her granddaughter could have one at her eighteenth birthday. She might also even have her own Roth IRA and 529 accounts. And, there’s a good chance a robo-advisor is making investment decisions on her behalf. The bottom line: gender gap notwithstanding, today’s woman has all the power to make — or break — her financial future, even though effective use of this power requires much greater financial acumen than generations past needed. Lean into the women-focused personal finance resources that exist. If you decide to seek advice from a professional, be sure that person (and the firm they represent) are considered fiduciaries and are obligated to act in your best interest. Certain online investment platforms hold themselves to this standard and may be a good jumping off point for free educational content and ultimately investment options. -
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How Betterment Works During Volatile Markets
How Betterment Works During Volatile Markets It can be difficult to ride out a market downturn when you can see it affecting your investment portfolio. We have automated features in place to address volatile markets when they occur. Volatile markets can make even the most experienced investor worry about their investment accounts. A sharp drop in your portfolio’s value is never fun. It might leave some investors wanting to take immediate action. Because we passively invest here at Betterment, taking action based on market movements is not required on your part, and doing so can actually lower your returns. An internal study found that customers who change their allocation as a result of market changes are often likely to underperform customers who don’t make such unnecessary changes. When volatility does hit—and it will—we have several automated features that can help keep you on track towards your financial goals even in times of uncertainty. Automatic Allocation Adjustments Many financial advisors, including Betterment, will help you choose an asset allocation that is suitable for each of your financial goals. When you initially set up a goal with us, we will ask you how long you’ll be investing for and what amount of money you’re aiming towards. This information helps us choose the appropriate asset allocation for you not only for right now, but for the future as well. For most goals, the asset allocation will automatically get less risky as you get closer to your goal’s end date, by following a “glide-path”. This reduction in risk as your goal’s end date gets closer is based on Betterment research into potential negative outcomes, or downside risk. If you’re only investing for a short time period, it’s a good idea to invest in low-risk assets, because you likely won’t have enough time to earn back value if a large market drop occurs. Over long time horizons, including stocks in your allocation is likely to lead to a higher final balance, even in poor market scenarios. Since 1871, the lowest average annual return over any 30-year period for the S&P 500 was still 5% from 1903 to 1933, a period that includes World War I and ends in the middle of the Great Depression (data from Robert Shiller; calculations by Betterment.) Even during one of the most tumultuous 30-year periods in American history, adding stocks to your allocation would have left you better off than leaving your money on the sidelines. Portfolio Rebalancing The allocation that we choose for you is our best estimate of the combination of assets that will help you reach your goal by the date you’re aiming for. But, unless each asset you invest in has the same exact returns, normal stock market fluctuations will cause your actual allocation to drift away from the allocation you started with. We call this process portfolio drift, and though a small amount of drift is perfectly normal—and a mathematical certainty—a large amount of drift could expose your portfolio to unwanted risks. Example: If you initially split your investment 50/50 between stocks and bonds, and in the subsequent month stocks return 10% while bonds stay at the same price, your actual allocation at the end of that month could be around 52% stocks and 48% bonds. A period of sustained volatility could be especially harmful to your portfolio if your portfolio drift is left unchecked. To help minimize this risk, we automatically rebalance your portfolio whenever your portfolio drift exceeds a certain threshold. We generally use any cash inflows, like deposits or dividends, and outflows, like withdrawals, to help rebalance your portfolio. When money comes in, we can buy assets from asset classes your portfolio is underweight in. When money is going out, we can sell assets from asset classes your portfolio is overweight in. This cash flow based rebalancing method helps keep your portfolio risk in check while reducing the need to sell investments, and potentially realize capital gains, to rebalance. If rebalancing does require selling investments in a taxable account, the specific shares to be sold are selected tax-efficiently, using our TaxMin method, ensuring that no short-term gains will be realized in your account during the rebalance, as these are particularly tax-inefficient. Tax Loss Harvesting Tax loss harvesting is the practice of selling an investment that has experienced a loss. By realizing, or "harvesting" a loss, you are able to offset taxes on both gains and income. The sold investment is replaced by a similar one, maintaining an optimal asset allocation and expected returns. Tax loss harvesting is a feature that may benefit you most when the market is volatile. After all, if there are no losses in your account, we cannot harvest any losses. In fact, we found that the periods where tax loss harvesting would have provided the most hypothetical value was in the period following the dot-com bubble as well as the financial crisis of 2008. You can use any harvested losses to reduce capital gains you’ve realized through other investments in the same tax year. This can reduce your tax bill, especially if you have a lot of short-term capital gains, which are taxed at a higher rate than long-term capital gains. If you’ve harvested more losses than you have in realized capital gains, you can use up to $3,000 in losses to reduce your taxable income. Any unused losses from the current tax year can be carried over indefinitely and used in subsequent years. Updated Advice When you set up your goals, we’ll offer advice on how much you should be depositing in order to reach your goal. Large swings in the market can change our deposit advice, because different deposit amounts are now needed. Fortunately, if your account drops in value due to large market swings, our recommended monthly deposit advice will increase to help keep you on track. Likewise, a large increase in your account value caused by strong market performance will mean you can decrease your monthly deposits and still reach your goal, though an added margin of safety doesn’t hurt. We’ll Be Right There With You Hopefully you’re no longer worried about the next market downturn. You know that Betterment is working for you through all the ups and downs, because we have built-in features that help you ride out inevitable volatile markets. Set up your account today and let us ride out the next market downturn with you. -
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Investing in Different Assets: What Are Your Possible Choices?
Investing in Different Assets: What Are Your Possible Choices? You want to begin investing, but have no idea where to start. Here is your guide to investing in different assets, jargon-free. It’s easy to get overwhelmed by the number of new and foreign terms we encounter while investing. In this article, we will provide a basic overview of different types of investments and how you should think about using them. Before we get started, the first jargony term that you may encounter is “asset class.” Though it sounds fancy, it simply describes a broad group of fundamentally similar investments. You can think of different asset classes as different species of investments -- investments in each asset class share common traits. Stocks, bonds and cash are three of the most common asset classes in the investing world. There are others, like commodities (raw materials or agricultural products) and real estate, but they fall outside the scope of this article and are less common for investors to consider. One final note—here at Betterment, we invest your funds in stock and bond ETFs that we’ve researched and selected for you. You can read more about our investments and portfolio strategies here. The information in this article is intended to be educational so that you can be an informed investor no matter where you choose to invest. Investing In Stocks First, let’s understand exactly what we are getting when we buy a stock. When you buy a stock you are getting partial ownership of the company, and with that comes all the benefits (and risks) of being an owner. You get a vote in how the company is run -- which often takes the form of proxy votes. You participate in the value creation when the company does well -- generally in the form of an increase in the value of the stock or dividends. You also experience the downside when the company performs poorly --- generally in the form of lower share prices or reduced dividends. As a stockholder you have a claim on a company’s earnings after debts are paid. This is a fundamental feature of stocks and differentiates them from bonds and cash. The most meaningful difference here is that potential future value of a stock is not limited. So, if a company does very well, you participate in all the positive performance after debts are covered. The flip side of this is that if the company does poorly, stockholders are the first to absorb losses, before lenders are impacted. Overall, this means stocks are more risky than bonds but also have the potential to generate higher returns. Historically, stocks have outperformed bonds. The chart below shows the historical growth of a broad stock investment compared to bonds and cash, after adjusting for inflation. As you can see, stocks are more volatile, but also generated the most growth. Data source: Stocks For The Long Run. Page 10. 1998. Buying Bonds Bonds are essentially IOU’s from companies or governments. A bondholder essentially owns a loan that must be repaid in the future. Bondholders earn income from interest payments and return of the initial loaned amount, called principal, at the bond’s maturity. Unlike stocks, the return on a bond is capped. The payments to the bondholder are predetermined at the time the bond is issued. This means that even if a company does extremely well, the bondholder will only get what was agreed upon in the terms of the bond. This is why bonds are often called “fixed income” investments -- because the amount of income generated by a bond is fixed at the time of purchase. If a company does poorly, however, bondholders have priority when it comes to getting paid. This makes bonds less risky than stocks. In general, bonds are a safer asset class than stocks. Holding Cash And Equivalents Cash is the asset class you might be most familiar with. There are a wide range of places you can park your cash and earn interest in the process. Cash and cash equivalent assets are very low risk, highly liquid (easily convertible to cash), short term investments. These include money markets, treasury bills, certificates of deposit (CDs), and short-term corporate debt. Because cash and cash equivalents tend to be very safe, the biggest risk is inflation eroding the buying power of your dollars. In fact, historically holding cash can lose an investor money after accounting for inflation. Below is a chart of interest rates on a savings account after accounting for inflation. As you can see, after accounting for inflation, the “safe” investment in cash can actually lose value. Purchasing Funds Now that we understand the different kinds of assets in which we can invest, it’s worth considering one additional concept -- investment funds. Mutual Funds vs. ETFs Investment funds will select a group of stocks or bonds and manage those assets for the benefit of fund shareholders. The two most common type of funds are mutual funds and exchange traded funds (ETFs). The advantage of an investment fund is that you immediately benefit from since a fund holds many individual assets. Diversification is the process of investing in different assets to reduce exposure to risk. In fact, investment funds allow you to invest in broad swaths of asset classes in one fell swoop. For example, Vanguard’s Total Stock Market ETF (VTI) invests in the entire U.S. stock market. The fund owns over 3,000 individual US stocks. There are some subtle, but meaningful distinctions between mutual funds and ETFs. Perhaps the most obvious is that ETFs, as the name suggests, are traded directly on the stock exchange. This means that you can buy or sell shares of an ETF throughout the trading day. Mutual funds transactions, on the other hand, occur once at the end of each day at the funds closing Net Asset Value (NAV). ETFs are also more tax efficient than mutual funds. Without getting into too much detail, ETFs are able to swap out investments with large taxables gains with new shares of the same investment. This means that ETFs are substantially less likely to generate capital gains inside the fund. Ultimately, there are many advantages to using ETFs that could better serve your financial plan. How To Invest We know that stocks are generally more risky than bonds and that we can use investment funds to get broad exposure to these asset classes. The next logical question is: What exactly should I buy and how much of each? To answer this, we want to focus on two things: risk level and diversification. First, we want to make sure that we are building a portfolio of stocks and bonds that takes an appropriate amount of risk for your investment goal and time horizon. In general, shorter term goals should take less risk, which means holding more bonds and fewer stocks. As your investment horizon (or the length of time you are aiming to invest your portfolio) lengthens, you should consider investing a larger part of your portfolio in stocks. More time allows for more opportunities to participate in the upside potential that stocks provide. However, you should think broadly about all the factors influencing your financial life and set customizable goals to further your financial plan. You also want to make sure that you are selecting stocks and bonds in our portfolio that maximize the level of diversification in your portfolio. Simply put, you want to add investments that you believe will grow in value but also don’t go up or down in value in exactly the same way at exactly the same time. In the illustrative example below, you can see that by combining U.S. and international stocks, the overall portfolio is less volatile. A portfolio with good diversification overall will typically grow while the value of the overall portfolio remains more stable compared to individual investments. Let Us Take The Wheel Here at Betterment, we’ll take care of it all for you. We’ll invest your funds in a mix of globally diversified stock and bond ETFs, chosen to help you earn better returns at various levels of risk. Speaking of risk, we’ll recommend how much to take on based on when you'll need your money. Get started with us and put your investment choices on auto-pilot today. -
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The 3 Estate Planning Documents Everyone Should Have
The 3 Estate Planning Documents Everyone Should Have The best thing you can do for your future self and your loved ones is prepare for the worst. Create your estate plan with these three essential documents. We all have an estate, even if we’ve never thought about it. Each of our estates includes our financial assets, bank accounts, life insurance, pensions, real estate, cars, personal belongings, and even debts. Estate planning means putting a plan in place for how the physical and financial assets we described above will be transferred after either your death or a serious illness. It is crucial for everyone to prepare an estate plan, no matter what the value of your estate is. It will help others follow your wishes when it comes to protecting your family, loved ones, and assets—in case you’re unable to do so. Don’t know where to start? All you need for a basic estate plan are three essential documents. 1. Financial Power of Attorney A durable financial power of attorney document (POA) allows you to designate someone to handle your finances if you are unable to do so. The person you choose is considered to be your designated agent. If you don’t designate an agent, it may be difficult for someone—even your spouse—to do things on your behalf, such as pay bills, file taxes, or cash checks. Your agent’s signature will be required for every decision, so before choosing an agent, consider their schedule and where they live. Betterment can take direction from your agent if you have an approved POA on file with us. Note that we are not able to create a POA document for you—this is something your legal counsel can help you with. Your POA must clearly reflect that you allow your agent a sufficiently broad scope of capabilities, such that they are able to fully interact with the account. The POA must undergo an approval process with our estates team before it's considered to be valid. For more information, please contact us. 2. Advanced Health Care Directive An advanced health care directive allows you to designate someone to make medical decisions on your behalf. Again, this person is known as your agent and they can make decisions such as choosing a doctor, accessing medical records, and putting you on life support. Your agent’s signature will be required for every decision, so before choosing an agent, consider their schedule and where they live. Make sure your doctors have a copy of your advanced health care directive on file. Some entities may even require additional documentation or have specific procedures when dealing with agents. Make sure to check ahead of time to avoid putting your agents in a difficult position. 3. Last Will and Testament Your will is the document that determines who will inherit any of your assets if there is no joint ownership, or beneficiaries are not file at an institution. If you named beneficiaries for most of your assets, this document will mostly be reserved for your personal belongings. However, a will can help with other important decisions, such as naming a guardian to look after your children. You’ll also choose an executor in your will, which is the person who is charged with ensuring your wishes are carried out. Protect What’s Important An estate plan is an important step to help ensure that you and your assets are protected. We highly recommend speaking with an estate planning professional or an attorney to help you implement your estate plan. Once your estate plan is set up, you’ll want to review it every two years at least, or whenever there is a major life event such as marriage, divorce, or death—especially among your beneficiaries. Additionally, if there are any significant changes to estate planning laws, you’ll want to review your plan again. Betterment does not currently offer estate planning services. We do, however, encourage you to add beneficiaries to your Betterment account, which you can do in your account without any paperwork. Our Experts Can Help You Plan Our team of CERTIFIED FINANCIAL PLANNER™ professionals are ready to speak with you about planning for the next stage in your life. We offer five unique advice packages that help you review your current financial situation. Our Financial Checkup or Marriage Planning packages provide a perfect opportunity to discuss basic estate planning recommendations. -
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The “Best” IRA Rollover Offers Are Not What They Appear
The “Best” IRA Rollover Offers Are Not What They Appear Before you bite on one of the “best” IRA rollover offers, it's important to read the fine print and ask yourself a few questions. Financial companies advertise all types of offers to incentivize you to roll over your old accounts. The “best” IRA rollover offers might include free trades, cash bonuses, or even "retirement matches." But before you bite on one of these offers, it's important to read the fine print and ask yourself a few questions. What are their fees—and are they hidden? Money managers don’t offer cash bonuses out of generosity. Often, managers that offer the largest cash bonuses can only afford to do so because it also charges the highest fees. Within a few months, a company will have recouped the entire bonus, but its fees stay sky high. Our recommendation? Do a little math on how much you’ll be paying per year to keep your money with a manager before you take them up on the cash bonus. You’ll likely find that the bonus is a drop in the bucket when compared to the fees you’ll be paying over the five, 10, or even 30 years until retirement. Additionally, the advertised fees are not always the only ones, and any hidden fees tend to be buried. It’s better to learn about them before you commit than to be surprised later. Account closure fees, in particular, are a mainstay in brokerage fine print. You might as well deduct the account closure fee from the cash bonus, as that portion of the bonus is really only a loan from the provider that you’ll have to repay if you decide to leave. 2015 IRA Offer Case Study: Merrill Edge Let’s say you were considering a rollover for your $20,000 IRA and wanted to take Merrill Edge up on its 2015 (the company changes its offers periodically, but you can see their standard cash current offer page here): $100 cash bonus, plus 300 free trades. Merrill’s offer is a typical example of one from a big brokerage. Merrill’s Offer What You Actually Received $100 Bonus Your take-home bonus is actually only $50 after Merrill’s $50 account closing fee. 300 free trades You won’t use all of these trades, as you only have 90 days to use them, according to the fine print.1 (Most reasonable investors make less than 300 trades over three months.) $6.95 per trade after 90 days You could end up paying $312 in your first year alone. While the first three months are free, the next nine aren’t. We assume that in order to reinvest your returns as they come on, and keep your portfolio balanced, you make five trades per month.2 Even if you trade less, you can see how quickly the bonus evaporates. Net of your cash bonus and free trades, you’ll still pay Merrill more than $260, or about 1.3% of your balance, in your first year as a customer. It gets worse from there. In Year 2, without the benefit of the bonus and with commission on every trade, that fee would increase to roughly 2% of your original balance, depending on market changes. Compare that with a Betterment account, which would charge you almost 90% less—0.25% per year. Do I really want this company to manage my money? So, you’ve done the math and know exactly how much you’ll be paying in fees relative to the bonus they’re offering. Ultimately, however, the cost of the product is only one of several considerations when choosing a provider. You should ask yourself these questions before choosing a provider, even if the offer looks like it’s the best one out there. Does the provider offer an adequate level of guidance for your savings? Are you confident that your money is working as hard as it could be? How is the company’s customer service and website? Why Betterment Is Different Before any bonuses, Betterment costs you much less. We typically offer one to 12 months of our service as a free trial, depending on when you sign up, the offer you use, and how much you deposit. If you don’t like our service, you can always move it to another brokerage or wealth manager at the end of your trial, free of charge.3 But we think you’ll stay. Not only are our fees low, but we offer a superior investment experience—starting with personalized allocation advice for your money, a diversified portfolio of ETFs, and automated portfolio management—all of which is included in our low fee. No extra fees or hidden costs. For a $20,000 account at Merrill, the trading you would need to keep your funds invested and balanced would cost you roughly 2% of your balance in the second year. At Betterment, on the other hand, you would pay only 0.25%, for a savings of $350 for the year. Even as your account grows, the annual savings would remain significant.4 1 From Merrill Edge's original 2015 disclosure: “$0 trades begin within 5 business days of account opening and must be used within 90 calendar days; up to 300 trades per account. $0 trades are only applicable in the new account and are limited to online equity and ETF trades. Standard commission rates apply to trades in excess of the 300-trade limit or after 90 days.” 2 This is a very conservative estimate of how many trades Betterment performs for a customer. If the customer makes ongoing contributions, in addition to needing dividends reinvested, the number is significantly higher. 3 Betterment has no fees for closing an account. If you move investments outside of a rollover you will be responsible for any resulting tax liabilities. 4 We've updated our pricing structure since this article was published. Learn more at betterment.com/pricing. 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. -
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The Benefits of Tax Loss Harvesting+
The Benefits of Tax Loss Harvesting+ We’ve automated tax loss harvesting which can help you save on taxes over time. Learn about the benefits of TLH+. Tax loss harvesting is the practice of selling an asset that has experienced a loss. The sold asset is replaced by a similar one, helping to maintain your risk level and your expected returns. By realizing, or "harvesting" a loss, you can: Offset taxes on realized capital gains. Reduce tax liability by reducing your income. Realized losses on investments can offset gains and reduce ordinary taxable income by as much as $3,000 per year. We do this all for you—at no additional cost—with our automated Tax Loss Harvesting+ feature. You could benefit from Tax Loss Harvesting+ if... You are investing in a taxable investment account. You plan to donate to charity or leave your assets to your heirs. The IRS allows you to offset your realized capital gains with realized capital losses. The IRS allows you to reduce up to $3,000 from your ordinary income. We don’t recommend Tax Loss Harvesting+ if... Your future tax bracket will be higher than your current tax bracket. You can currently realize capital gains at a 0% tax rate. Under current law, this may be the case if your taxable income is below $39,375 as a single filer or $78,750 if you are married filing jointly. You are planning to withdraw a large portion of your taxable assets in the next 12 months. You risk causing wash sales due to having substantially identical investments elsewhere. -
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Is Financial Planning Different For Women?
Is Financial Planning Different For Women? For many women, financial planning is a daunting task that poses risk in the long term if overlooked. According to a recent study by Fidelity, women save 9.0% of their salary annually, yielding an average of 6.4% annual rate of return. In contrast, men save 8.6% of their salary annually, yielding an average of 6.0% annual rate of return. And yet, a breakdown by demographic of the average U.S. savings account balance found that households headed by men save an average of $35,000 per year, while households headed by women save an average of $17,000 per year. Median values are even more skewed: male-headed households save $9,200 per year, while female-headed households save $2,500 per year. Ultimately, women — especially women over the age of 50 — need to both proactively prepare themselves for economic disadvantages as well as unforeseen circumstances like health issues or joblessness in order to help ensure their financial stability. How wide is the gender wage gap? It’s a well-known fact that women make less than men, despite working more – as of 2018, white women make 77 cents for every dollar that men make. African American women make 61 cents on the dollar, and Hispanic women earn just 53 cents on the dollar. Wage gap aside, women also face hurdles when leaving the workplace to care for others, with 1/3 of women returning to the labor force being paid less than they were when they left. Women also tend to spend less time in the paid workforce, with the average woman working an extra unpaid 39 days a year compared to men, and spending 12 years out of the workforce to care for others. Additionally, women tend to live longer (most women expect to live for 25 years after retirement) than men, and are therefore often responsible for saving more retirement income, as well as for higher lifetime healthcare expenses. How does the wage gap impact financial planning? So, is financial planning different for women? Absolutely. These realities make retirement planning a daunting task for many women. On the plus side, recent studies have shown that women are better investors, with an outperformance of around 40BPS per year vs. men. In the same study by Fidelity in which over 8 million investment accounts were reviewed– their conclusion was that women achieved higher returns on average and were better savers from a financial planning perspective. The theory behind this phenomenon is that women around the world are responsible for the operation of the household, which mandates a longer-term view when it comes to planning for the future. These habits are reflected especially in the frequency of churn in a portfolio– men who trade tend to trade 55% more frequently than women. In essence, women tend to earn less-- though they work more-- since much unpaid labor is performed by women. The average woman will lose 12 years in the workforce due to having to take time off to care for others, and face lower wages upon returning. And yet, women will on average spend more time in retirement, which means they must save more than their male colleagues to attain the same quality of life. 3 Financial Planning Tips For Women Women shouldn’t have to suffer negative financial consequences for looking after their family or derail their retirement plans for having one. The overall lower lifetime earnings makes it critical for women, especially, to invest intelligently and make wise financial planning decisions from the very start. Aside from ongoing social forces seeking to have women’s unpaid and underpaid labor recognized and compensated, there are tangible actions that women can take to prepare for the financial realities they face. Secure access to financial advice. Financial planning is a difficult project to tackle alone- that’s why advice in this industry is so valuable. Traditionally, when finances were largely handled by men, women had little to no access to financial planning resources, or to an advisor. This clearly presents a huge obstacle to a woman’s financial independence and security, especially if the man exits the household. Thanks to the progress we’ve made in this sector over the last few decades, financial advice is now easily accessible to anyone. Learn more about what Betterment offers. Maintain a DIY financial plan. While an advisor is certainly a valuable and often necessary ally when it comes to finances, the final responsibility for our financial health still falls on us. It’s important to know where to start your financial plan in various areas of your life- for example, you would save for retirement much differently than you would save for a new car, a child’s education, or for medical expenses. There is no one-size-fits-all solution to staying on track for retirement, but Betterment can help you make better sense of the pieces you need to know. We take into account taxes, inflation, your risk appetite, investment horizons, and other personalized factors that change the way you should invest. Learn more here. Know the consequences of costly financial mistakes. Because many women don’t save enough for their own retirements and also often have the social obligation of caring for others, this can lead to an emergency need for readily available cash. Early Withdrawals From Retirement Accounts During these times, it can be very tempting to, for example, withdraw from a retirement savings account, such as a 401(k), to fund other expenses. However, actions like this could lead to negative tax consequences, and ultimately deplete the savings at a faster rate. In this instance, withdrawing money from a tax-deferred account before age 59.5 triggers a tax penalty of 10%, and regular income tax has to be paid on the entire amount of the withdrawal- essentially eroding the value of the contribution. Being aware of the caveats of early and one-time withdrawals is important, but another way you can avoid costly early distributions is to build a sizable emergency fund so that you're prepared in case anything unexpected happens, such as a medical emergency or job layoff. The Simple Truth During this Women’s History Month, it’s worth reflecting on how far women have come in taking charge of their financial futures and addressing social issues that leave them vulnerable to risk in the long term. However, despite this progress, there are still improvements to be made. By being mindful of the financial and economic gaps they face in comparison to their male counterparts, women can take the necessary steps to help prepare themselves for a successful, secure future. -
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The Benefits of Tax Coordination
The Benefits of Tax Coordination Once you’ve set up Tax Coordination for your Retirement goal, we will manage your assets as a single portfolio across all included legal accounts, using every dividend and deposit to optimize the location of the assets. Betterment’s Tax Coordination service is our fully automated version of an investment strategy known as asset location—and it comes at no extra cost to you. Our research shows that this strategy can boost after-tax returns by an average of 0.48% each year, which approximately amounts to an extra 15% over 30 years. Once you’ve set up Tax Coordination for your Retirement goal, we will manage your assets as a single portfolio across all included legal accounts, using every dividend and deposit to optimize the location of the assets. We’ll also rebalance in order to improve your asset location when we see opportunities to do so—without causing taxes. We’ll generally place assets that we expect to be taxed at higher rates in your tax-advantaged accounts (IRAs and 401(k)s), which have big tax breaks. We’ll generally place assets that we expect to be taxed at lower rates in your taxable account, since you’ll owe taxes on dividends and any realized capital gains each year. You could benefit from Tax Coordination if... You are investing in at least two of the following types of Betterment accounts for retirement: Individual Taxable account (Retirement or General Investing) Tax-deferred account (Traditional IRA, SEP IRA, or Betterment for Business 401(k) plan) Tax-exempt account (Roth IRA or Betterment for Business Roth 401(k) plan) You are investing for the long term and your coordinated goals have the same time horizon. We don’t recommend Tax Coordination if... Your federal marginal tax bracket is 12% or below. The accounts you plan to coordinate have different time horizons. You plan to make a significant withdrawal in the near future from only one of the accounts you are considering including in the goal using Tax Coordination. Learn More FAQ: Understanding Tax Coordination Tax-Smart Investing Using Asset Location How Asset Location Works at Betterment Tax Coordination: Our Asset Location Methodology Disclosure Statement We’ve automated asset location which can help you save on taxes over time. 41073 2019-03-21 12:07:01 2019-03-21 16:07:01 2021-06-29 16:19:12 2021-06-29 20:19:12 benefits-of-tax-coordination betterment_editors Display top featured image ira retirement-planning tax-strategy product-guide We’ve automated asset location which can help you save on taxes over time. Learn about the benefits of Tax Coordination to see if it’s right for you. Betterment for Advisors Now Offers Dimensional Funds https://www.betterment.com/resources/betterment-dimensional/ Thu, 11 Apr 2019 13:33:29 +0000 alexanderchoi https://advisors.betterment.com/?p=2467 Betterment for Advisors announced the addition of a new fund family that advisors can use to manage their clients’ investments, Dimensional Fund Advisors (Dimensional). Advisors who have access to Dimensional funds are able to design and manage Dimensional fund-based portfolios directly on the Betterment for Advisors platform. With a 37-year track record and $576 billion in firm-wide assets under management, Dimensional is a leading global investment firm that translates academic research into practical investing solutions that are widely recognized in the financial services industry. “We’ve long been admirers of the strong community that Dimensional has built among financial advisors,” said Jon Stein, Founder & CEO of Betterment. “Dimensional has been on the wish list since the early days of our advisor platform. We’re excited to deliver Dimensional funds in an efficient and low-cost way.” With this new launch, advisors with access to Dimensional funds can leverage Betterment’s core technology around integrated, automated portfolio management with Dimensional funds, saving advisors time and greatly improving the experience for their clients. Dimensional funds are available on the Betterment for Advisors platform with no additional per transaction trading fees. “We are constantly looking to help the advisors we work with deliver outstanding client experiences by providing them with solutions and access to value-added services,” Dimensional Co-CEO Dave Butler said. “We believe Betterment for Advisors has a strong track record of delivering innovative tools and technology. We’re excited to work with Betterment to help advisors advance their businesses.” Since its launch, Betterment for Advisors has continuously evolved its platform based on the feedback of advisors. The introduction of Dimensional funds follows a series of improvements and enhancements made to enable advisors to tailor investments for their clients on the Betterment for Advisors platform. These enhancements include improvements to its allocation advice, access to additional portfolio strategies including Flexible Portfolios, SRI Portfolio, BlackRock Target Income Portfolio, Goldman Sachs' Smart Beta Portfolio, and the Vanguard model portfolios. More broadly, other developments include a new robust advisor dashboard experience, access to commodities, a trust account opening feature, an ACATS tool, and much more. About Betterment for Advisors Betterment for Advisors is a leading digital-first wealth management platform. By combining our technology with an advisor's personal touch, we are reimagining what's possible in wealth management. Our automated, tax-efficient portfolio management, paperless back office, and intuitive user experience empower advisors to grow their businesses and build deeper client relationships. Hundreds of firms trust Betterment for Advisors to custody and manage client assets. For more information visit www.betterment.com/advisors. About Dimensional Fund Advisors Dimensional Fund Advisors is a leading global investment firm that has been translating academic research into practical investment solutions since 1981. Guided by a strong belief in markets, they help investors pursue higher expected returns through advanced portfolio design and careful implementation. With clients around the world, Dimensional has 13 offices in nine countries and global assets under management of US$576 billion as of March 31, 2019. Learn more at us.dimensional.com. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Determination of largest independent robo-advisor reflects Betterment LLC's distinction of having the highest number of assets under management, based on Betterment's review of assets self-reported in the SEC's Form ADV, across Betterment's survey of independent robo-advisor investing services as of August 20, 2018. As used here, "independent" means that a robo-advisor has no affiliation with the financial products it recommends to its clients. If you also have a 401(k) account through Betterment For Business, that account is subject to a separate fee schedule and is not included in your balance for determining eligibility for the fee tiers or subject to the fee cap mentioned above. -
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Is Term Life Insurance Worth It?
Is Term Life Insurance Worth It? Term life insurance is usually affordable and straightforward. That's why it can be the right choice for most life insurance shoppers, according to Policygenius. Term life insurance lasts for a set number of years (the “term”) before it expires and you're no longer covered. Why might you consider a life insurance policy that runs out? Because you may not need that financial protection anymore, and you don't want to pay for an unnecessary insurance policy. That's why term life insurance can be worth it for a majority of shoppers. Learn more about why you should consider a term life policy and who it's right for. In this article from Policygenius, you’ll find out the major reasons why you might consider term life insurance as part of your financial plan. This article was originally published on Policygenius.com. We’ve republished it for Betterment customers because we believe Policygenius offers balanced insights on life insurance. What exactly is term life insurance? Life insurance can be a good idea when you have a lot of financial obligations—i.e. kids, a mortgage, and other debt. Policygenius helps makes it easy to compare term life insurance policies to find one that covers your various needs. Term life insurance can be particularly worth it because it's usually the most affordable type of life insurance available that provides a tax-free lump sum of money for a financial safety net. It’s called "term" because the policy lasts a set amount of time and then expires, after which you will no longer be covered by it. You’ll have to buy a new policy or renew the old one before it expires if you want to remain covered after the initial term. There are two components of any life insurance policy that you should also know—or rather, you already know what these are, so this is just about sharing the professional lingo with you. The death benefit is a lump sum of cash paid out by the life insurance company when you die. If you’ve ever heard someone say, "I took out a one million dollar life insurance policy," that one million dollars is the death benefit. The beneficiary is the person or organization that will receive the death benefit. The beneficiary does not need to be a family member or even a human being—it can be a trust fund, or a non-profit organization, or a business partner. The other thing to know about the beneficiary is you don’t have to name only one. You can list several on your policy, and either distribute the death benefit among them as you see fit or order them like pageant contestants, with one "winner" and then a first runner up, second runner up, etc., so that if the first beneficiary is unable to receive the death benefit, there’s someone else on the list. At minimum, you should always choose a backup beneficiary. If the primary beneficiary isn’t able to accept the death benefit for some reason and you haven’t named any alternative beneficiaries, then the state will step in to help determine who should receive it. And nobody wants that. A rider is an add-on feature that extends the usefulness of the coverage in some way. Sometimes riders are included as part of the price, and sometimes they cost extra. Some riders can be better than others. Check out Policygenius’ guide to the most common life insurance riders. What’s good about term life insurance? First, what’s good about any type of life insurance is that it provides a lump sum of cash that can be used for pretty much anything: burial expenses, college tuition for your children, living expenses for your spouse, mortgage payments, other outstanding debt, a donation to a favorite charity, and so on. That lump sum will be tax-free if you buy the life insurance policy on your own and pay the premiums with after-tax dollars. (If your employer pays for it, the death benefit will still be taxed.) Here’s what’s good about term life in particular: It’s an easy-to-understand insurance product. This might not sound like that big of a deal, but once you take a look at all the varieties of permanent life insurance (see table), you’ll appreciate how straightforward term life can be. It’s usually much cheaper than any type of permanent life insurance. Realistically, the older you get the more any insurance is going to cost. But if you buy term life when you’re young and healthy, the monthly premium can cost as little as $30-40. You can further reduce the cost by only buying enough coverage for your specific needs, instead of for the rest of your life. Because the premiums are typically much lower than permanent, if you decide to abandon the policy at some point before the term ends, you won’t lose as much money as you would with a permanent policy. What’s bad about term life insurance? The strengths of term life are also its weaknesses, at least for some people. It ends at a predetermined point in the future. Let’s imagine you buy a 20-year term policy when you’re 30. When you turn 50 and it ends you will no longer be covered. You can of course buy a new one (and sometimes you can roll over your old one to get more years of coverage) but it will likely be more expensive because of your age and health. Although you can just stop paying for the policy and let it lapse at any time, you can’t cash in the policy early to get some money back, nor will you get any of your premiums back when the term ends. This is how it’s both cheaper and less complicated than permanent insurance. If you want to guarantee that you’re covered until you die no matter when you die, permanent is probably the way to go. If you want to be covered until your golden years, and then cash in the policy to get some of the value of it back, you might want to consider permanent. We think the drawbacks to permanent are too significant to offset these benefits most of the time, but every situation is different. What alternatives are there to term life insurance? Term life insurance is generally considered the simple, straightforward flavor of life insurance. There are typically no complicated rules or investment components — which is good, because life insurance isn't normally a good investment. The main alternative to term is permanent life insurance, which can cover you for your entire lifespan so long as you keep paying the premiums. But there are two things to keep in mind with permanent life insurance: It’s usually more complicated, partly because there’s usually an investment component mixed in with the death benefit, and partly because it can come in a variety of forms; there’s whole life, variable life, universal life, and variable universal life (yes, seriously). Permanent insurance is the Silly Putty of the life insurance industry, because it can be stretched and distorted into all sorts of shapes. This doesn’t necessarily make it bad, but it can make it complicated, and therefore easy to misunderstand, which in turn means it can be easy to buy the wrong policy or to spend more than you need to for adequate coverage. It’s typically much more expensive than term. All of that complication and longevity comes at a price, so you’ll likely spend far more on a permanent policy to get the same amount of death benefit as you would on a term policy. (This guide explains more about the difference between term and whole life insurance.) The other alternative is to self-insure, which means you’ve accumulated enough wealth to personally provide financial support to your dependents (or spouse, siblings, etc.) after your death. In an ideal world, self-insurance is the best because there’s no insurance to buy at all, but for most people it’s not a realistic alternative before your mid-50s at least—after you’ve built up some savings, sent the kids off to school, paid off your mortgage, hit your peak salary, etc. BASIC TERM LIFE BASIC WHOLE LIFE UNIVERSAL LIFE VARIABLE LIFE VARIABLE UNIVERSAL Duration 1-30 years Life Life Life Life Guaranteed Death Benefit? Yes Yes Yes Yes Yes Guaranteed Cash Value* No Yes Protected from risk, but can be depleted to pay premiums No No How Cash Value Grows (or Shrinks) N/A Earns interest at a predetermined fixed rate Variable rate determined by the insurer Subaccounts - pool of investor funds offered by the insurer Subaccounts - pool of investor funds offered by the insurer Premiums Can increase periodically OR be guaranteed level for the duration of the policy Level Varies, up to the customer (subject to federal tax laws) Level Varies, up to the customer (subject to federal tax laws) Notes No risk of losing coverage unless the insurer goes out of business, but no cash value when term ends No risk compared to other permanent types, but you can probably find better investment options elsewhere N/A Risk of ending up with expensive insurance policy with little to no cash value Risk of ending up with expensive insurance policy with little to no cash value *All permanent policies can be surrendered for their current cash value after a certain number of years, at which point the insurer will pay the accumulated cash value minus any loans and fees. Learn more about the different types of life insurance. Is term life insurance worth it? If you have anyone who is financially dependent upon you, and you don’t have enough money set aside to provide for their financial needs should you die tomorrow, then life insurance is absolutely worth it. It should likely be your top insurance priority. And since term is usually cheaper and simpler than permanent, it can be easier to fit it into both your present-day budget and your long-term financial strategy. This article originally appeared on Policygenius, a licensed insurance broker. Betterment is not an insurance broker and this article is not insurance advice nor an offer for particular insurance products or services. The content was not written by an insurance agent, and it is intended for informational purposes only, and it should not be considered legal or financial advice. Betterment makes no warranties or representations with respect to specific insurance offerings. -
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The Betterment Rollover: A Fast Track to a Better Financial Future
The Betterment Rollover: A Fast Track to a Better Financial Future Roll over a Traditional, Roth, or SEP IRA—and start yourself on the path to a better financial future. At Betterment, we’ll manage your account for you, without the hidden fees that you may be used to from other providers. We invest your money in a low-cost, globally diversified portfolio, and we offer personalized advice with your best interests in mind. Before us, there wasn’t an easy, automatic way for people to get advice and invest their money. We built our platform from the ground up to give customers an intuitive interface, designed to lead to better behavior and better expected returns. Take advantage of the benefits we offer by rolling over your old 401(k)s and other retirement accounts into an Individual Retirement Account (IRA) here at Betterment. Our Mission: Low-Cost Investing and Personalized Advice for Everyone We believe that everyone has the right to both low-cost investing as well as advice that is tailored to their situation. We offer services that we believe will help make everyone a smarter investor—and help them ultimately reach their goals. Personalized advice keeps you on track. Our retirement advice shows you how much to save for retirement based on your current age, your desired retirement age, where you plan to retire, and how much you’re saving across all of your retirement accounts—even those that are held somewhere other than Betterment. You can even include your spouse’s accounts in order to plan more accurately. Our globally-diversified portfolio balances risk and reward. Rollovers and deposits into IRAs at Betterment are instantly diversified across our global portfolio. We carefully select Exchange Traded Funds (ETFs) across 12 types of asset classes, which are invested in more than 36,000 stocks and bonds, which represent companies and governments in over 100 countries. Because no one can predict how each asset class, country, or company will perform in a given month or year, it’s often best to diversify across them all. This helps to balance out your returns over time. Tax-smart automation boosts your returns. While IRAs already offer many great tax benefits, our Tax Coordination feature helps take it a step further. TCP optimizes and automates a strategy called asset location. It starts by placing your assets that will be taxed highly in your IRAs, which have big tax breaks. Then, it places assets taxed at lower rates into your taxable retirement account. Our research shows that this strategy can boost after-tax returns by an average of 0.48% each year, which approximately amounts to an extra 15% over 30 years. Save money with our low fees. Our fees are a fraction of the cost of other services because of our cutting-edge technology. We are vertically integrated, meaning we are the registered investment advisor (RIA) and the broker-dealer through our affiliated entity, Betterment Securities. That means we handle the investment process from beginning to end, which allows us to charge lower fees than other investment services, which have to work with and pay third-party custodians. Additionally, all of our fees are completely transparent—we have no hidden costs. Fast track your 401(k) rollover. Ready to get on the path to a better financial future? When deciding whether to roll over a 401(k) account or other retirement accounts, 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. -
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How I Managed My Financial Goals When I Got Married
How I Managed My Financial Goals When I Got Married There are many different ways to manage money as a couple. The key is to have open communication, sooner rather than later. A few months before the wedding, one of my groomsmen asked me if I had thought about how my fiancée and I would combine finances. It sparked an interesting conversation, as he and I then realized we had very different views on the best way to manage money as a couple. Of course, every relationship is different and there is no silver bullet for reducing money-related stress within a partnership. However, we consider ourselves lucky to have found a system that works well for us early on. After all, a study found that financial problems were cited as a cause for the breakdown of relationships by at least one of the partners in 56% of divorced couples — a sobering statistic to be sure. In this article, I’ll share some of the personal finance practices that worked well for my wife and me: proactive budgeting, allocating every dollar in our budget to a goal, and speaking openly and often about our financial priorities. Here’s what worked for us: We quickly decided to join our finances. My wife and I met in college. After a few months of dating, we both knew we were in the relationship for the long haul and our approach to finances changed radically. Even before we moved in together, we made it a point to foster a philosophy of “what’s mine is yours.” One common way couples manage their finances is to set up a joint account from which all bills are paid, and each partner keeps a separate account for “mine” and “your” spending. In contrast, we approached budgeting in almost the exact opposite way— every expense was “ours,” and we also set our budgeting goals together. One month I might have needed a suit for a job interview and another month she might have needed some repairs done to her car. Either way, we considered both of these expenses as shared, and didn’t keep track of who paid for what. Of course, this approach might have complicated things if our relationship had not turned out as well as it had. If we had broken up a few months into our relationship, one of us may have felt cheated by the fact that more expenses were paid for by their account. However, I credit our approach to finances as part of the reason why our relationship was so solid in the first place. I don’t think my wife and I have ever had an argument about our finances, and by setting common goals and budgets early on, we were able to avoid one of the largest relationship stressors. 3 Tips For Managing Joint Finances Our strategy for managing finances has remained mostly the same since our college days. For budgeting, we use the envelope system, which relies on giving all of your cash a purpose. Every cent that flows into one of our accounts is earmarked for a specific need. One very tedious way of following this technique is to keep all your money in cash, and physically store it inside separately labelled envelopes (hence the name). If the grocery envelope has $100 on it, then that’s your budget for groceries until you have more cash inflow to distribute among your envelopes. Of course, you can simplify this system by having software track your cash digitally. 1. Develop a proactive vs. reactive budget. First, our budget is proactive rather than reactive. Many popular budgeting apps aggregate your transactions and let you see how much money was already spent on what, but they don’t actually help you plan out your future goals. We use the app YNAB, though a simple spreadsheet could get you most of the way there. Keeping track of your spending in such detail may sound taxing, but it has many benefits. By giving every dollar a job, we know what our spending will look like ahead of time, and we can focus on saving for the long-term. 2. Adopt the “envelope” system. Secondly, the envelope system helps you smooth out seasonal spending patterns over time. For example, we have a dedicated category for Christmas gifts to which we allocate a few dollars every month. Though buying holiday gifts may not seem top of mind in February, allocating to that category year round means that once December rolls around, we have a full “digital envelope” of cash solely dedicated to buying gifts. Though the physical spending may vary month-to-month, the amount we contribute to each category is very steady. I think of this as almost like a self-sponsored credit card, where we have low monthly payments every month, instead of a large payment all at once. 3. Speak openly and frequently about future priorities. Thirdly, taking a proactive approach to budgeting means that my wife and I regularly have conversations about our hopes and priorities for our finances. A budget that summarizes what you spent last month will do very little to make you think about your future goals, but our budget has categories for things like future vacations, a home-purchase, and school fees for children we don’t even have yet. Strange as it sounds, I think we’ve had some of the most enriching conversations of our relationship while doing our budgeting. There is no one-size-fits all solution for how to manage finances as a couple. Indeed, even initiating the conversation about managing money can be daunting. Yet, since communication is key, I remain a firm believer that early, open conversations about what works best for you and your partner are not only critical for the relationship but also an incredible opportunity to work towards your dreams, together. Whether you choose a proactive budget or a reactive budget, whether you begin merging your finances sooner or later (or at all), and whether you review and adjust your approach often or occasionally, take the fear out of talking money. More than anything, budgeting together is an opportunity to discuss what is most important to you—a chance to start on a path towards goals for which you are excited to reach together. Some might say those are the very best parts of a relationship. -
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Drivers of Investing: Time Value and Compound Interest
Drivers of Investing: Time Value and Compound Interest When it comes to investing, the longer you let your money grow and compound, the more money you can likely earn in returns. Have you ever wondered why banks pay an interest rate? Perhaps the most obvious answer is to entice you to keep your money with them. But, how are they able to pay an interest rate in the first place? And why do they want to hold your cash? The answer is the time value of money, or the fact that money you have today is more valuable than the same amount in the future because of its potential earning capacity. It may sound simple, but money that you have onhand today is valuable because you can do things with it. Of course, you could use it to buy something. But if you don’t need it immediately, you could also loan it out to someone, particularly to someone who wants to do something productive with it, and earn a return on it. Funding The Next Great Idea Imagine your friend is running a small business, say a coffee shop. Things are going well, and she wants to open another location. To do that she needs store space, new coffee-making equipment, and perhaps advertisements to announce the new location. This will be a big cash outlay. Cash that she doesn’t have onhand. You happen to have extra cash and agree that her plan to expand is a good idea, so you loan her money to grow the business, keeping in mind that all investing involves some financial risk. In this case, she agrees to pay you back the original loan in three years plus some interest. Now she has the funding she needs to grow and you have converted your unused cash into something that can generate more money for you. The demand for money, sometimes called capital, is exactly why money has time value. You can use cash that you have onhand to fund many productive activities -- like a friend’s coffee shop (a personal loan), a large established company (corporate bonds), or even theU.S. government (U.S. Treasury bills). The revenue generated from these activities can allow you to earn a return on your capital invested. Ultimately, it’s important to determine the level of risk you are comfortable with by weighing the potential consequences and returns. How Banks Pay Interest Now, let’s go back to the interest that you earn at the bank. Banks are able to pay you this interest because they are taking a portion of your money and loaning it out. In turn, they earn interest and pass a portion-- sometimes an exceedingly small portion-- along to you. Whether it’s you or your bank doing the lending, the dynamics are always the same: money is given to those in need of capital, and those people (or companies or governments) in need of capital, in turn, compensate the lender. It’s the need for money itself that gives money time-value. In other words, the sooner you have money the more valuable it is because you can start earning more money on it. What’s the right amount of interest? Now that we understand the underlying mechanics of why and how interest is earned on money, we might find ourselves asking, “Ok, but who decides what the interest rate is anyway?” At the most fundamental level, interest rates are set by the demand for capital compared to the supply of people willing to lend it. A good starting point for evaluating interest payments is to consider the amount you would get paid by someone who will almost certainly pay you back, for example, the U.S. government. In fact, the U.S. government holds auctions every week asking for loans—U.S. Treasury auctions. Yields for U.S. treasury debt are set during these auctions. These rates can serve as a good benchmark for other interest rates that you might see, like a certificate of deposit (CD) at a bank for example. Don’t settle for average. Knowing that yields on U.S. government debt are a good starting point for comparing interest rates, we can look at a couple of practical examples. If you are considering a one-year CD from a bank, you would want to compare its interest rate to the latest yield from one-year U.S. Treasury bills. At the beginning of February, the national average yield on a one-year CD was 0.64%, compared to 2.56% for Treasuries of the same maturity. This means that the average rate on a CD is not very good. As a smart investor, you know to use Treasury yields as a baseline to compare other interest rates and not to settle for yields that are substantially worse. If you were to compare your savings account rate, you would want to use the federal funds rate as a benchmark. This is the rate at which banks lend money to each other overnight. At the beginning of February, the effective federal funds rate was 2.4%. Compare that to the national average interest rate on a savings account of 0.09%. Again, as a smart investor, you know to compare your savings account rate to the federal funds rate and not settle for a meaningfully lower rate. Compounding, Or Why Rates (And Time) Are Important A key reason to pay attention to the interest rate you are receiving is the effect that compounding can have over time. Compounding happens when you earn interest not only on your original investment, but also on all the previous interest payments that you have received. It might not sounds like much, but over time compounding winds up having a meaningful impact on our wealth. To illustrate, let’s start with a simple example. Imagine you start with a penny, and every day it doubles in value for a month. So, on the second day you have 2 cents, on the third day you have 4 cents, then 8 cents, and so on. But before reading any further, how much would you expect to have at the end of those 30 days-- perhaps $100, $10,000, maybe even $100,000? Starting with 1 cent and doubling it every day would leave you with over five million dollars after 30 days! Take a look at the table below to see how your initial penny grew. Magic Penny: Growth of 1 cent over 30 days As you can see from above, the balance does not even break $100 until halfway through the month, and doesn’t reach $1mm until the third to last day. This extreme example illustrates the power of compounding over time. Returns start off slowly, but increase more and more as time goes on. Compounding in the real world. Of course, you would be hard pressed to find any investment that doubles every year, let alone every day. However, the impact on compounding is still profound. Below, you can see the growth of $10,000 over 30 years at a 5% annual interest rate. You’ll notice in the first few years the account grows at nearly a constant rate. However, after about five years you start to see the power of compounding kick in. In fact, by the final year you would earn over $2,000 from your original $10,000 investment and have an ending balance of over $43,000, compared to $25,000 if you earned the same interest rate with no compounding. Growth of $10,000 with 5% interest rate This figure represents the growth of a $10,000 investment with a 5% annual interest rate over the course of 30 years, based on whether compounding did or did not occur. Please note, the calculations assume a hypothetical annual interest rate of 5%. The hypothetical yield on this investment 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 investment returns can vary from those above. The time value of money is a fundamental concept for investing. As an investor, you should expect to earn money on your excess cash. You should also ensure that the amount you are earning is appropriate by comparing it to relevant benchmarks. Earnings from interest are particularly powerful as they compound over time. Compound growth affects all investments and is especially pronounced in retirement investments because of the long investment horizon. Investing early allows more time for your money to grow on itself. -
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6 Questions to Ask a Financial Advisor Before Signing Up
6 Questions to Ask a Financial Advisor Before Signing Up At the end of the day, an advisor should feel like an advisor—they're there to help answer your questions about your finances. Get these questions answered. Before you sign up with a financial advisor—or even an online robo-advisor like Betterment—you should get these six questions answered. If you’re sitting down one on one with a professional, bring a list with you. If you’re browsing a digital advisor’s website, make sure they provide clear answers. 1. How will I pay for the financial planning services provided to me? Many advisors make money through charging brokerage fees when they buy and sell funds, or through pushing their own products. You should know how your advisor is compensated for the services they provide. Consider avoiding financial advisors who exclusively sell their own funds, or who make more money through increasing trades and transactions. Betterment is a fee-based investment advisor, meaning we charge a flat annual fee for the services we provide. That’s it. No additional transaction costs charged by Betterment, no proprietary funds. 2. What qualifications do you have as a financial advisor? Whether you are planning to invest with a robo-advisor or a more traditional financial advisor, you should review their qualifications. Betterment’s Investment Committee is comprised of industry experts who have a plethora of investment credentials and decades of experience constructing portfolios based on tons of research. If you are going to interact with a human advisor on a regular basis, you should discuss with them their qualifications, too. We recommend engaging with a financial advisor who is a CERTIFIED FINANCIAL PLANNER™, a designation that professes to hold to a high standard in quality and ethical financial planning advice. 3. How will this financial planning relationship work? Asking this open-ended question will no doubt lead to a range of different answers, but it can set the tone for a long-term, high-quality relationship with your advisor. You should topics like how often you will interact, how frequently you will review your account, and what actions are required by you on an ongoing basis. The answers to these questions will vary, depending on advisor service levels, so it is important to make sure they sound realistic to you. For example, Betterment recommends you check-in on your investment allocations once per quarter, and if you feel more comfortable with having an in-depth relationship, you can opt for one of our Advice Packages. 4. Are you a fiduciary? If you hear anything but an unequivocal “yes, I am a fiduciary” in response to this question, then the advice you receive may not fully be aligned to your best interests. That may sound loaded, but when it comes to your finances, it’s not. Some financial advisors provide advice to their clients that does not live up to the fiduciary standard. In other words, some advisors do not prioritize your interests over their own. This is a big problem when you’re trying to make the right decision for yourself in a given situation. A fiduciary aims to work to put your best interests first. 5. What approach do you take to financial planning and investing? You’ll want to make sure your advisor’s investing approach aligns with your financial goals. If the approach of a prospective advisor sounds too unrealistic, it may not be the right one for you. For example, hedge funds may suit certain investors, but they are often too risky and expensive for most investors looking for a financial advisor. Betterment offers a goals-based approach to investing, and we use technology to lower fees, diversify your portfolio, and enable better investor behavior. Those key tenets drive how we construct our portfolios. 6. How should I evaluate the performance of my investments? A financial advisor should be as transparent as possible when it comes to measuring and displaying performance. They should have clear and understandable explanations for underperformance, or for any discrepancies between expected and actual returns of an investment. Ask a prospective financial advisor to walk you through the returns associated with portfolios at various levels of risk instead of asking generic questions like “what does your typical portfolio return?” Additionally, consider using time-weighted return statistics when comparing the performance of investments to each other, as time-weighted returns are unaffected by the amount and timing of deposits and withdrawals. The clearer and easier to understand performance, the better. The more complicated, the less likely you are to match the performance of your investments with your expectations. Remember that at the end of the day, an advisor should feel like an advisor—they're there to help answer your questions about your finances. At Betterment, we aim to do that in several ways. You can get one-on-one advice by purchasing an advice package or by signing up for our premium service. You can learn by accessing the insights and information we publish regularly in the Resource Center. You can also contact our support team, who are there to help you answer basic details about Betterment. -
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How Portfolio Rebalancing Works to Manage Risk
How Portfolio Rebalancing Works to Manage Risk Portfolio rebalancing, when done effectively, can help manage risk and keep you on track to pursue the expected returns you want to reach your goals. What is rebalancing? Over time, the value of individual ETFs in a diversified portfolio move up and down, drifting away from the target weights that help achieve proper diversification. Over the long term, stocks generally rise faster than bonds, so the stock portion of your portfolio will likely go up relative to the bond portion—except when you rebalance the portfolio to target the original allocation. The difference between the target allocation for your portfolio and the actual weights in your current portfolio (e.g. your actual allocation) is called portfolio drift. Measuring Portfolio Drift At Betterment, we define portfolio drift as the total deviation of each asset class (put in positive terms) from its target allocation weight, divided by two. Here’s a simplified example, with only four assets: Target Current Deviation (±) U.S. Bonds 25% 30% 5% International Bonds 25% 20% 5% U.S. Stocks 25% 30% 5% International Stocks 25% 20% 5% Total 20% Total ÷ 2 10% A high drift may expose you to more (or less) risk than you intended when you set the target allocation, and much of that risk may be uncompensated—meaning that the portfolio isn’t targeted higher expected returns by taking on the additional risk. Taking actions to reduce this drift is called rebalancing, which Betterment automatically does for you in several ways, depending on the circumstances, and always with an eye on tax efficiency. Cash Flow Rebalancing This method involves either buying or selling, but not both, and generally occurs when cash flows into or out of the portfolio are happening anyway. Cash flows (deposit, dividend reinvestment or withdrawal) can be used to rebalance your portfolio. Fractional shares allow us to allocate these cash flows with precision to the penny. Inflows: You may be rebalanced if you make a deposit, including when you auto-deposit or receive dividends in your account. We use the inflow to buy the asset classes you are currently under-weight, reducing your drift. The result is that the need to sell in order to rebalance is reduced (and with sufficient inflows, eliminated completely). No sales means no capital gains, which means no taxes will be owed. This method is so desirable that we’ve built it directly into our application. Whenever your drift is higher than normal (approximately 2% or higher), we calculate the deposit required to reduce your drift to zero, and make it easy for you to make the deposit. Although we show the deposit amount needed to bring drift back to 0%, smaller deposits also help reduce drift. In fact, the first dollars deposited have the largest impact on reducing drift. This means, for example, that depositing half the amount recommended to reduce drift to 0% will generally reduce drift by more than half. Portfolio Drift vs. Deposit Size The chart above is a hypothetical, illustrative example of the relationship between portfolio drift and deposits needed to rebalance without selling any assets. The blue line in the chart demonstrates the general relationship between deposit size and drift. As you can see, the first dollars of a deposit reduce drift by more than the last dollars. The dotted grey line shows what a linear relationship between drift and deposits would look like. Withdrawals (and other outflows) are likewise used to rebalance, by first selling asset classes that are overweight. (Once that is achieved, we sell all asset classes equally to keep you in balance.) We employ a sophisticated ‘lot selection’ algorithm called TaxMin within asset classes to minimize the tax impact as much as possible in taxable accounts. Sell/Buy Rebalancing In the absence of cash flows, we rebalance by selling and buying, reshuffling assets that are already in the portfolio. When cash flows are not sufficient to keep your portfolio’s drift within a certain tolerance, we sell just enough of the overweight asset classes, and use the proceeds to buy into the underweight asset classes to reduce the drift to zero. Sell/Buy rebalancing is triggered whenever the portfolio drift reaches or exceeds 3%. Our algorithms check your drift approximately once per day, and rebalance if necessary. Note: In addition to the higher threshold, we built in another restriction into the rebalancing algorithm for taxable accounts. As with any sell trade, our tax minimization algorithm selects the lowest tax impact lots, but stops before selling any lots that would realize short-term capital gains. Since short-term capital gains are taxed at a higher rate than long-term capital gains, we can achieve higher after-tax outcome by simply waiting for those lots to become long-term before rebalancing, if it’s still necessary at that point. As a result, it’s possible for your portfolio to stay above the 3% drift if we have no long-term lots to sell. Almost always, it’s because the account is less than a year old. In this case, we recommend rebalancing via a deposit to avoid taxes. The Portfolio Tab will let you know how much to deposit, as described above. Please note that for advised clients on our Betterment For Advisors platform, the drift threshold is 5% for portfolios that contain mutual funds. Allocation Change Rebalancing Changing your target allocation by moving the allocation slider and confirming the change will also cause a rebalance. Because you have chosen a new target allocation, Betterment will rebalance to the new target with 0% drift. This sells securities and could possibly realize capital gains. Moreover, if you change your allocation even by 1%, you will be rebalanced entirely to match your new desired target allocation, regardless of tax consequences. As with all sell trades, we will utilize our tax minimization algorithm to help reduce the tax impact. Additionally, before you confirm your allocation change we will let you know the potential tax impact of the change with Tax Impact Preview. Transaction Timelines If you’d like to turn off automated rebalancing so that Betterment only rebalances your portfolio in response to cash flows (i.e., deposits, withdrawals, or dividend reinvestments) and not by reshuffling assets already in the portfolio, please contact Customer Support. Our team will be happy to help you do this. -
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How’d the Market Do? That’s Harder To Answer Than You Think
How’d the Market Do? That’s Harder To Answer Than You Think In taxable investing, your after-tax return—the amount you “take home”—is what’s important. Yet far too many investors focus on market performance. Let’s look at the difference. Bill Gates once said, “You can achieve incredible progress if you set a clear goal and find a measure that will drive progress toward that goal.” So true! It’s something we as investors should pay more attention to. Investing, for almost all of us, is about working toward some goal. Which means we have to be able to measure our progress toward that goal with precision. One step in the process is measuring how the stock market has performed. How have your investments done? It sounds like an easy question, and it should be. But there are a few pieces of nuance to this puzzle that can throw investors off. Let’s look at the S&P 500 (SPY) over the last 25 years. It’s gone up about 6.5-fold during that time. This is usually what people cite when talking about market performance: Source: Bloomberg But the S&P 500 index pays a dividend. Dividends might seem small and can be easy to ignore, but because of how strong the magic of compounding is they can make an enormous difference over time. Here’s the same chart but with a additional form of measurement -- S&P 500 with reinvested dividends: Source: Bloomberg We can go a layer deeper. Inflation erodes purchasing power over time, so $1 today isn’t worth as much as the $1 you invested years ago. To measure how the purchasing power of your investments has grown over time, we have to look at total returns minus annual inflation. That offers a whole new way to measure returns: Source: Bloomberg And we can even take this a step further. Investment gains earned in a non-retirement account are generally taxed. When an investment pays a dividend, those payments are taxed, even if they’re reinvested. Here’s what happens when you factor in dividend taxes: Source: Bloomberg. Assumptions on dividend taxation include a long-term gains rate of 22%, and short-term gains rate of 34%, a federal income tax bracket of 28%, and a state income tax of 0.9%. This simulation of taxation does not account for changes in tax rules for dividends over the period. Add all this up, and you get wild differences in how you can answer the question, “What’d the market do?” Compound average annual return, 1993-2017 $1 in 1993 turned into by 2017 S&P 500 7.7% $6.4 S&P 500 with dividends 9.7% $10 S&P 500 with dividends after inflation 7.4% $5.9 S&P 500 with dividends after inflation and dividends taxed 6.8% $5.2 Source: Bloomberg, reflective of dataset for figures above. There are a few big takeaways from this. The most complete measure of returns—with dividends, after inflation, adjusted for taxes—is the most relevant when measuring progress toward your goals, because it offers the most honest look at how market returns have made you better off. It takes some work to calculate this number. The Federal Reserve publishes inflation data. Taxes vary by individual. But going through the effort to add up how you’ve truly done annually is vital to understanding how much progress you’re making toward achieving your goals. Taxes can be one of the biggest anchors to long-term compounded returns. The good news is that unlike inflation or market returns, they can be relatively in your control. Trading in and out of the market, particularly under the strategy of “taking a little money off the table,” might feel good in the short run but cost a fortune over the years. Compounding works by earning returns on your past returns. Paying taxes puts the brakes on that process, affecting your wealth not just in the year you pay taxes, but for years down the road as your money compounds off a smaller amount. Check out this article on how to think about market volatility, and you may become more comfortable riding out the market’s ups and downs rather than trying to strategically jump in and out. Compounding is not intuitive, so adding or subtracting a small amount from annual returns snowballs into something truly meaningful over time. It all depends on how you measure it. Those numbers are a universe apart, yet they grew out of fairly small changes in annual returns. I can’t help but look at these charts and both be humbled by the power of compounded and reminded of how important seemingly small things like fees, taxes, and inflation can be over time. “This may seem basic,” Bill Gates said about measuring, “but it is amazing how often it is not done and how hard it is to get right.” It’s the same in investing. Take the time to add up how you’ve truly done as an investor. The difference between how you did and how you think you did can be so huge you might totally change your perspective. -
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Why The Turbulence In The Stock Market?
Why The Turbulence In The Stock Market? Turbulence in the market is normal, especially given several economic precursors that have some explanatory weight on the recent market trends. You’ve probably heard it on the news—we’re “entering the second week of a stock market sell-off.” By midday on Monday, the Dow Jones Industrial Average shed 1,000 points. Such a shift in direction after 12 months of record highs has caught many people off guard. And some investors’ internal alarm bells are ringing. It’s reasonable at this point to start asking questions: Why is the market performing this way now? Is there a legitimate reason to be worried? What causes a stock market sell-off like this? In the midst of the market turbulence, today we’ll peel back a few layers and look at several indicators for why the stock market may be behaving the way it is. 3 Economic Precursors to 2018’s Recent Market Changes 1. The Fed may raise interest rates faster than previously expected Since the economic recovery after the recession of 2009-10, the Federal Reserve has started increasing interest rates. In 2017, we saw rates increase. Analysts expected rates to rise in 2018 as well; however, recent economic data, as well as a new Fed Chairman, caused investors to worry that interest rates may rise faster than previously anticipated. Since we’re near full employment (according to the U.S. Department of Labor)—January’s 4.1% unemployment rate is the lowest in 17 years—and one estimate of the United States’ GDP growth was up to 5.4% in the first quarter (compared to 3% growth in previous years), the Fed has several indicators that the economy is healthy and may not need as much monetary support. It’s no surprise that rates would rise after being at record lows; however, expectations about how fast and how much they will rise may have changed. 2. Increased rates mean companies have financial adjustments to make. When interest rates rise, there isn’t just a market reaction; it has real consequences for how companies operate. Rising interest rates can make it more expensive for large public companies to borrow money. That added expense often has an impact on the valuation of those companies that end up borrowing at a higher cost. Their bottom lines change, and so do their valuations. When bond rates are rising, however, that doesn’t mean that the stock market automatically goes into free fall. Learn more about what bond rates rising have meant historically. 3. The possibility of rising inflation can lead to market hesitance In historical scenarios, strong GDP growth and rising interest rates have led to increased inflation—i.e. the cost of products and services inches upward. In recent years, inflation has been below 2%, but as the economic environment changes, some investors might be reacting to a possible rise in inflation, even though a slight rise in inflation need not necessarily mean lower returns. Is a market sell-off a bad thing for investors? The three points above can help us understand the recent change in market direction, but they don’t necessarily predict anything about the future. The recent turbulence stands as a good reminder that, as investors, we are compensated for taking risk, and that the path to higher returns is seldom a straight line. In times of increased volatility, investors should be sure to focus on the things they can control, like how much they’re saving and whether they are properly maintaining appropriate levels of risk for their goals. As we see changes in economic mechanics, as influenced by the Fed or other factors, market reactions in multiple directions are bound to occur. When investing, the key is to remember that holding for long-term growth, riding along market changes up and down is part of how you can reach long-term returns. -
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Managing Your Allocation As Your Goal Approaches
Managing Your Allocation As Your Goal Approaches Automatically adjusting your allocation is one area of advice where automation can play a particularly important role for investors. “Am I holding the right kind of investments in my portfolio?” “Am I taking on too much risk by staying invested in stocks?” “Am I being too conservative by holding bonds?” These are questions that are often on the top of an investor’s mind. And rightly so, especially when a major life goal, like retirement, starts to feel closer than it used to. Taking on too much market risk could lead to losses for investors who plan to use their money soon. But taking on too little risk may mean leaving returns on the table. It’s during the countdown of an investment’s time horizon when many investors begin to feel less certain of what their allocation should be. This is when professionally managed allocation advice can help you reach your desired outcome. In this article, we will: Describe how portfolio allocation advice works Demonstrate how automation enables advisors—like Betterment—to implement more precise allocation advice Illustrate how Betterment customers can stay on track by enabling us to auto-adjust their allocation as their investment approaches the date they wish to use the money. The Essentials of Understanding Allocation Advice Every account you hold has a portfolio, and that portfolio is defined by its asset allocation. That’s your specific weighting of stocks and bonds in your portfolio strategy, usually calibrated to control risk. One of the most important roles an investment advisor can play is helping you tailor your allocation based on your investment goals. In a conventional advisory setting, changes to your allocation might occur periodically—perhaps once per year—leading to a stairstep-like fall of your allocation’s risk (i.e., more bonds and less stock over time). At Betterment, adjusting an allocation is one area of advice where automation can play a particularly important role for investors. As long as you choose to follow Betterment’s advice, we will automatically adjust your allocation through time to control risk as you near the end of your goal’s investing timeline. Rather than downshifting risk every so often, leading to a series of stairsteps, Betterment’s automation makes incremental changes to your risk level, rendering a smoother path from a higher risk level to a lower one. The smoother the path, the closer you stay to your optimal allocation. The below chart is an example that shows the target allocation for a Major Purchase goal that an investor would have if she updated her target allocation annually compared to more frequent monthly updates. As you can see, the size of any individual portfolio change is smaller when allocation is updated monthly. Major Purchase Target Allocation through Time The quality of the allocation advice an advisor offers depends heavily on how effectively they enable you to execute on that advice. Betterment provides full transparency on how we’ve designed our allocation advice to work here, but more importantly, we help you execute the advice through automation. Automation enables more precise allocations. For most accounts, the ideal allocation is one that changes to reduce risk as you near your goal. While some investors prefer to make every allocation change themselves, automation can help adjust an allocation with as much efficiency as possible. Think of it like a plane’s automatic landing system; in weather conditions that can be hard for a pilot to navigate, the automatic landing system helps put a plane in position to land safely. Similarly, automatic adjustment of your allocation helps keep you on track to meet your goal. Allocation advice should be personal. The key with allocation advice is to base the advice on well-researched evidence for appropriate risk levels. At Betterment, for every account you open, we automatically provide allocation advice based on the type of goal assigned to an account and your investment horizon. Different investment goals are used in very different ways. For example, a retirement goal generally has a long time horizon, and, once you reach retirement, you will potentially spend that money for the next 30 years or more. This requires a very different portfolio allocation than if you are saving for a major purchase, like a house, where the investment horizon is generally shorter and you will spend the full amount at once on your down payment. Appropriate allocation advice will consider these factors for each goal and frequently reassess them to ensure risk remains in control. Allocation advice should be executed tax-efficiently. The problem with some forms of allocation advice is that they are not executed tax-efficiently. Any change to an allocation can involve selling investments, which may cause taxes. The ideal allocation advice adjusts the allocation in a manner that causes an investor to realize the fewest possible capital gains taxes. For Betterment customers, we use the cash coming in and out of your account, as well as market changes, to help avoid sales that might causes taxes. Deposits, withdrawals, and dividends help us guide your portfolio toward the target allocation without having to sell assets—which may result in taxes—to reach the right balance. Similarly, because our allocation advice allows a degree of drift from your target allocation, we can use changes in the market to help you balance your portfolio tax-efficiently and without unnecessary trading. If adjusting your allocation causes us to sell your investments, we use our TaxMin algorithm to minimize any potential tax impact. When we sell an investment, we first look for shares that have losses, which may be used to offset other taxes, then we sell shares with the smallest embedded gains (and smallest potential taxes). By auto-adjusting allocations, Betterment helps save you time—and much more. As explained before, your allocation advice is only as good its capacity for implementation. If you plan to follow our allocation advice but adjust your allocation yourself, it can be time-consuming and a challenge to make the necessary changes as tax-efficiently as you might want to. By allowing Betterment to auto-adjust your allocation based on our advice, you not only save time but also gain the tax-efficiency of a smoother path from higher risk to lower risk. Near the end of an investment’s term, when account balances are often at their highest, most investors want to feel certain about what their final balance will be. A market downturn at the end of your investment period will cause a worse dollar loss than a similar-sized downturn earlier on, when your balance was likely smaller. Auto-adjusting an allocation helps you gain greater certainty without having to worry about making major changes. It saves time and adds efficiency, but more importantly helps you gain peace of mind. And even as you automate your allocation, you can always know exactly how your allocation will change because Betterment provides full transparency on how our allocation advice varies by goal, and your account will always detail what your current allocation is. At Betterment, our goal is to help you feel confident that you are taking an appropriate amount of risk through the life of your investment and that, as allocations change in your account to control risk, they are being managed efficiently. -
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The Economy’s Performance vs. the Stock Market’s Outcomes
The Economy’s Performance vs. the Stock Market’s Outcomes What the economy is doing today tells you very little about what the stock market might do tomorrow. Today’s the 30th anniversary of the Crash of 1987. A common time for people to look at the stock market and wonder what comes next. Here’s one of the strangest and most frustrating things about investing: What the economy is doing today tells you very little about what the stock market might do tomorrow. Go back to January, 2010. President Obama summed up the state of the economy in his State of the Union Address: One in 10 Americans still cannot find work. Many businesses have shuttered. Home values have declined. Small towns and rural communities have been hit especially hard. And for those who'd already known poverty, life's become that much harder. This wasn’t hyperbole. The economy was about as bad as it had been in 30 years. Investors witnessing the pain inflicted on businesses and consumers at this time could say, “The economy is a mess, so I don’t want to invest in the stock market.” I wouldn’t blame them. That makes rational, logical sense. But the S&P 500 is up more than 200% since that speech. The market’s average annual return since 2010, at nearly than 13% per year, is about 40% higher than the long-term historic average. It was one of the best times to invest in modern history. Now go back to January, 2000. President Clinton summed up the state of the economy in his State of the Union Address: We begin the new century with over 20 million new jobs; the fastest economic growth in more than 30 years; the lowest unemployment rates in 30 years; the lowest poverty rates in 20 years; the lowest African-American and Hispanic unemployment rates on record; the first back-to-back surpluses in 42 years; and next month, America will achieve the longest period of economic growth in our entire history ... My fellow Americans, the state of our Union is the strongest it has ever been. This wasn’t hyperbole either. The economy was about the strongest it had ever been. Investors witnessing the strength of businesses and consumers at this time could say, “Everything's going right. Now is the perfect time to invest.” I wouldn’t blame them. That makes rational, logical sense. But three months after this speech the market peaked, and began one of the worst three-year periods in history. The S&P 500 fell nearly 40% by the end of 2002. It was one of the worst times to invest in modern history. Researchers at the Vanguard Group once crunched historical numbers to show how economic numbers like GDP growth, interest rates, government debt, corporate profit margins, and earnings growth correlated with stock market returns over the following year and 10 years. The answer for virtually every metric was: They tell you almost nothing. There is a huge disconnect between economic performance and stock market outcomes. There is a huge disconnect between economic performance and stock market outcomes. “Many commonly cited signals have had very weak and erratic correlations with actual subsequent returns, even at long investment horizons,” the researcher wrote. Things like GDP growth and interest rates in one year had literally zero correlation to what the stock market might do over the following year. One Vanguard researcher with a sense of humor tested the correlation between nationwide rainfall and subsequent stock market returns. It was actually a better predictor of what the stock market will do next year than things like GDP growth, earnings growth, and analysts’ estimates of future economic growth. The stock market is driven by a combination of companies earning profits and changes in investors’ moods about those profits. The latter is the most important driver, especially in the short run. When investors get optimistic they pay more for $1 of corporate earnings than they do when they’re pessimistic. And those mood changes often have no connection to what the economy is doing at the moment, for two reasons: One, moods are driven by hormones rather than data, persuaded by things like herd mentality and the fear of missing out. Two, moods look ahead to the future, anticipating what might happen next year with little care about what’s happening now. That’s likely why stocks performed so well in 2010 when the economy was doing so poorly. Investors were looking ahead at what might happen to company profits in 2011 and beyond. And the apparently felt pretty good about it. The point isn’t that investors should pay no attention to what the economy’s doing. But be careful when letting the view of what’s going on around you today guide what you do with your investments today. Instead, try to let two questions steer your thoughts about the market: Your individual goals. How long can you stay invested for before needing this money? Your tolerance for the market’s ups and downs. Are you able to handle the psychological sting of normal market volatility, particularly in the context of how long you can stay invested for? Those won’t tell you what the market might do next. But they’ll help you, as an investor, form a rational plan in a world where the economy’s influence on the stock market often seems to make no sense. -
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Introducing Our Smart Beta Portfolio Strategy by Goldman Sachs
Introducing Our Smart Beta Portfolio Strategy by Goldman Sachs A smart beta portfolio strategy reflects the underlying principles of Betterment’s core portfolio strategy, while seeking higher returns by deviating away from market capitalization in and across asset classes. When it comes to investing in the market, a portfolio strategy should be well aligned with your personal goals and disposition to bear market risks. If you are seeking to outperform a conventional, market-cap portfolio strategy, despite the potential to experience underperformance, our analysis shows there may be a more effective strategy for you. Today, we’re introducing a smart beta portfolio, sourced from Goldman Sachs Asset Management, to help meet the preference of our customers who are willing to take on additional risks to potentially outperform a market capitalization strategy. This smart beta portfolio strategy reflects the same underlying principles that have always guided the core Betterment portfolio strategy—investing in a globally diversified portfolio of stocks and bonds. The difference is that the smart beta portfolio strategy seeks higher returns by moving away from market capitalization weightings in and across equity asset classes. What is a smart beta portfolio strategy? Industry insiders often describe portfolio strategies as either passive or active. Most index funds and exchange-traded funds (ETFs) are categorized as “passive” because they track the returns of the underlying market based on asset class. By contrast, many mutual funds or hedge fund strategies are considered “active” because an advisor or fund manager is actively buying and selling specific securities to attempt to beat their benchmark index. The result is a dichotomy in which a portfolio gets labeled as passive or active, and investors infer possible performance and risk based on that label. In reality, portfolio strategies reside within a plane where passive and active are just two cardinal directions. Smart beta funds, like the ones we’ve selected for this portfolio, seek to achieve their performance by falling somewhere in between extreme passive and active, using a set of characteristics, called “factors,” with an objective of outperformance while managing risk. The portfolio strategy also incorporates other passive funds to achieve appropriate diversification. This alternative approach is also the reason for the name “smart beta.” An analyst comparing conventional portfolio strategies usually operates by assessing beta, which measures the sensitivity of the security to the overall market. In developing a smart beta approach, the performance of the overall market is seen as just one of many factors that affects returns. By identifying a range of factors that persistently drive returns, we seek market-beating performance while managing reasonable risk. When we develop and select new portfolio strategies at Betterment, we operate using five core principles of investing: Personalized planning A balance of cost and value Diversification Tax optimization Behavioral discipline The Goldman Sachs Smart Beta portfolio strategy aligns with all five of these principles, but the strategy configures cost, value, and diversification in a different way than Betterment’s core portfolio. In order to pursue higher overall returns, the smart beta strategy adds additional systematic risk factors that are summarized in the next section. Additionally, the strategy seeks to achieve global diversification across stocks and bonds while overweighting specific exposures to securities included in Betterment’s core portfolio, such as real estate investment trusts (REITs). Meanwhile, with the smart beta portfolio, we’re able to continue delivering all of Betterment’s tax-efficiency features, such as tax loss harvesting and Tax Coordination. Investing in smart beta strategies has traditionally been more expensive than a pure market cap-weighted portfolio. The Goldman Sachs Smart Beta portfolio strategy has a far lower cost than the industry average, with aggregate annual ETF expense ratios ranging from 0.11% to 0.24%, depending on the portfolio’s allocation between stocks and bonds. This is slightly more expensive than the core Betterment portfolio strategy, which has aggregate annual ETF expense ratios of only 0.07% to 0.16%, depending on the portfolio’s allocation. Note: Expense ratios data are from Xignite as of August 30, 2017 Because a smart beta portfolio incorporates the use of additional systematic risk factors, we typically only recommend this portfolio for investors who have a high risk tolerance and plans to save for the long term. Which “factors” drive the Goldman Sachs Smart Beta portfolio strategy? Factors are the variables that drive performance and risk in a smart beta portfolio strategy. If you think of risk as the currency you spend to achieve potential returns, factors are what determine the underlying value of that currency. As analysts, we can dissect a portfolio’s return into a linear combination of factors. In academic literature and practitioner research (Vanguard, Research Affiliates, AQR), factors have been shown to drive historical returns. These analyses form the backbone of our advice for using the smart beta portfolio strategy. Factors reflect economically intuitive reasons and behavioral biases of investors in aggregate, all of which have been well studied in academic literature. Most of the equity ETFs used in this portfolio are Goldman Sachs ActiveBetaTM, which are Goldman Sach’s factor-based smart beta equity funds. The factors used in these funds are equal weighted and include the following: 1. Good Value When a company has solid earnings (after-tax net income), but has a relatively low price (i.e., there’s a relatively low demand by the universe of investors), its stock is considered to have good value. Allocating to stocks based on this factor gives investors exposure to companies that have high growth potential but have been overlooked by other investors. 2. High Quality High-quality companies demonstrate sustainable profitability over time. By investing based on this factor, the portfolio includes exposure to companies with strong fundamentals (e.g., strong and stable revenue and earnings) and potential for consistent returns. 3. Low Volatility Stocks with low volatility tend to avoid extreme swings up or down in price. What may seem counterintuitive is that these stocks also tend to have higher returns than high volatility stocks. This is recognized as a persistent anomaly among academic researchers because the higher the volatility of the asset, the higher its return should be (according to standard financial theory). Low-volatility stocks are often overlooked by investors, as they usually don’t increase in value substantially when the overall market is trending higher. In contrast, investors seem to have a systematic preference for high-volatility stocks based on the data and, as a result, the demand increases these stocks’ prices and therefore reduce their future returns. There are some interesting hypotheses behind this preference. One suggests that investors treat high-volatility stocks as lotteries and are therefore willing to accept lower expected returns by paying a premium to gamble on these stocks. 4. Strong Momentum Stocks with strong momentum have recently been trending strongly upward in price. It is well documented that stocks tend to trend for some time, and investing in these types of stocks allows you to take advantage of these trends. It’s important to define the momentum factor with precision since securities can also exhibit reversion to the mean—meaning that “what goes up must come down.” How can these factors lead to future outperformance? In specific terms, the factors that drive the smart beta portfolio strategy—while having varying performance year-to-year relative to their market cap benchmark—tend to outperform their respective benchmarks when combined, with a high degree of persistence. You can see an example of this in the chart of yearly factor returns for US large cap stocks below. You’ll see that although the ranking of the four factor indexes varies over time, the ranking of the equally weighted index returns is relatively stable and performs better than the S&P 500 most of the years. Hypothetical Performance Ranking of Smart Beta Indices vs. S&P 500 This chart is for illustrative purposes only, and the factor returns it references are not necessarily the same factor returns in the Goldman Sachs Smart Beta portfolio strategy. The chart above compares annual returns (data from Bloomberg) for the period from January 2000 to August 2017 and is used to illustrate the points discussed in this article. For each year, we have ranked the annual performance of each factor alongside an equal weighting of all four factors, using the S&P 500 as a comparison. The returns for Momentum, Quality, Value and Low volatility are calculated from the S&P 500 Momentum Index, S&P 500 Value Index, S&P 500 Quality Index and S&P Low-volatility Index, respectively. “Equal weighting of all four factors” was calculated by Betterment by giving each factor corresponding to each index listed above an equal weight to yield the hypothetical performance figures. This calculation was not provided by Goldman Sachs Asset Management. This analysis is for illustrative purposes only and does not reflect or predict future performance. Moreover, this analysis does not include fees, liquidity, and other costs associated with actually holding a portfolio based on these exact indexes that would lower returns of the portfolio. Why invest in a smart beta portfolio? As we’ve explained above, we generally only advise using Betterment’s choice smart beta strategy if you wish to attempt to outperform a market-cap portfolio strategy in the long term despite potential periods of underperformance. For investors who fall into such a scenario, our analysis, supported by academic and practitioner literature, shows that the four factors above can persistently drive higher returns than a portfolio that uses market weighting as its only factor. While each factor weighted in the smart beta portfolio strategy has specific associated risks, some of these risks have low or negative correlation, which allow for the portfolio design to offset constituent risks and control the overall portfolio risk. Of course, these risks and correlations are based on historical analysis, and no advisor could guarantee their outlook for the future. An investor who elects the Goldman Sachs Smart Beta portfolio strategy should understand that the potential losses of this strategy can be greater than those of market benchmarks. In the year of the dot-com collapse of 2000, for example, when the S&P 500 dropped by 10%, the S&P 500 Momentum Index lost 21% (see chart above). Given the systematic risks involved, we believe the evidence that shows that smart beta factors can lead to higher expected returns relative to market cap benchmarks, and thus, we are proud to offer the portfolio for customers with long investing horizons and a high degree of comfort with the risks involved. To get started, create a new goal account and select the Goldman Sachs Smart Beta portfolio strategy. Or, if you’re not yet a Betterment customer, open an account with our smart beta portfolio strategy. Factors, as applied in investing, can mean different things. In the context of asset allocation, factors are drivers of return within broader asset classes used as a lens to uncover return potential and minimize risk. The Goldman Sachs Smart Beta portfolios examine market capitalization, rates, emerging markets, credit, equity style, commodities and momentum to seek to avoid taking unnecessary risk while pursuing the best opportunities to drive portfolio returns. -
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When Is the Best Time to Invest in the Stock Market?
When Is the Best Time to Invest in the Stock Market? The media would have you think there are dozens of reasons to buy into or sell out of the market, but what the hard data shows is that most of the time, you should stick to a long-term investment strategy. There’s a saying we at Betterment love: Stock market pundits have successfully predicted 20 out of the past two market crashes. If you listen to the media, they’d have you think that there are dozens of potential reasons to buy into or sell out of the market—to tweak your portfolio—but, what the hard data shows is that most of the time, you should just stick to a solid strategy of investing in a globally diversified portfolio with tax optimization for the long term. Whether you’re a first-time investor getting started and have no clue where to begin, or an experienced investor with a nagging feeling that you could be doing better, the question “Is now the right time to invest?” (or its close cousin, “When should I withdraw?”) often comes up. At Betterment, our customer support team gets these types of questions a lot. People are constantly looking for advice on when to get into the market and when to get out. But the truth is, you don’t have to be a financial advisor to know that nobody can predict the best time to invest. If you message our team of licensed experts, they’d likely tell you that as advisors, they can’t predict the market any better than you can. Whether we analyze the market by asset class, by industry, or by recent events, the truth of the matter is that there is no best time to invest or stay out of the market; and those who try to time their investing strategy usually underperform a long-term investment approach. One of our senior customer support specialists Joe Wang says that he hears a wide range of reasons for why customers want to stop or start their investing strategy. Here are a few examples: “The market has gone up recently, so it must be due for a correction.” “The market is overvalued/at an all time high, so it isn’t safe to buy now.” “I’m expecting interest rates to go up/down, so I’m adjusting my allocation in increase stocks.” “Bonds are a bad bet right now.” “I’m anticipating a stock market crash in the near future.” As humans, our natural tendency is to worry about things that will harm us, and we often feel driven to do something about it. When it comes to investing, this often unconscious motivation can lead you to change your investment allocation to avoid an unpleasant scenario. But unfortunately, making allocation changes—as good as it feels in the moment—actually reduces returns, on average. Even “Experts” Have Difficulty with Their Emotions Human tendencies don’t disappear when you become a professional either. One member of our licensed experts team shared a past advisory experience working with portfolio managers on their personal investments: Even portfolio managers that are data-driven with their clients’ money tend to act differently with their personal dollars. When you have balance sheets north of $10 million, you’d think fund managers—who are experts in the space—would be calculated and judicious when it comes to investing. But even they can let their emotions get the best of them. They’d tell me, "I believe that valuations are high and I have invested through this before. I already know I’m not supposed to react, but I feel better moving to cash." There are any number of messy or insolvable worldly concerns that might have an affect on your portfolio. But most worries become irrelevant on their own, given enough time. The graph below illustrates historical “worries” that many investors have had, and how they correlated to market performance. In every case, investors anticipated these events would impact the market and their portfolio in some way, but as you can see, charted against that index’s actual performance, there’s no clear sign that led to change at all. Crashes often happen with no clear associated news on the day of, but when you step back to look years worth of data, the market went right on doing its thing, trending upward over time. Were there periods where the market dipped? Yes, of course. However, they didn’t last long enough to trouble the savvy long-term investor. Customer Worries Against a Total Market Index (W5000) Wilshire 5000 Total Market Full Cap Index© So what does that mean for the average investor? Even if you happen to “guess correctly” and avoid some downswings in the market, how much was plain luck and how much was solid prediction? Would you be able to replicate a prediction when even experts, with the advantage of time and information, get it wrong too? Let’s say you cash out at a fortuitous time and avoid a crash. Now you face the question of when to get back in. Can you guess correctly a second time, risking a re-entry into the market when it’s “too high?” At Betterment, we are strong proponents of the buy-and-hold strategy, because we know that over the long term with market timing, even if you win, you lose (hint: taxes). In other words, how much of your time and energy is it worth to frequently track your investments, make adjustments for a few percentage points in gains, then get hit with taxes? The Hidden Costs of Worrying, and What To Do Instead It’s easy for us to say, “Don’t freak out about what you can’t predict.” That’s a logical consolation. But when it’s your money, it’s not always easy to be logical. While you can know investing outcomes aren’t truly within our control, that doesn’t make it any easier to stop worrying. To hack into your own worry, you often have to go deeper than your rational mind. Here’s one way to think about it, borrowed from Stoic philosophy. According to Epictetus, it’s important to distinguish things that are under our control and things that are not. He advises to continually divide our moment-to-moment concerns into two buckets: the things we can control, and the things we cannot. Epictetus offers a reminder not to get upset by things we can’t influence, such as other people and external events, and to instead only focus on ourselves and our own behavior. When you worry, if the future situation you worry about comes true, you effectively live the bad experience twice. It is safe to say that worrying about a thing happening before it actually happens doesn’t make the experience any more pleasant. By reclaiming your energy every day from your sphere of concern (the range of things that appeal to your emotions) to your sphere of influence (the range of things you can affect) you are continually developing the essential Stoic skill of learning to let go of that which you cannot influence and accept things as they are. Every choice we make is an expenditure of some sort of time, energy, patience, or well-being. Over time, these expenditures add up to make us better or worse off. We’ve previously outlined some potential investing actions you can take to avoid knee-jerk reactions to market conditions. But here we’d like to offer additional approaches to how you can redirect your energy: Reach out to and spending time with friends (friendships compound beautifully, if you invest in them) Invest in your physical and mental health (being strong of body, and equanimous in temperament pays tremendous dividends later) Develop new skills or sharpen those that are out of practice (gains founded on steady progress, pursuit of meaning, and achievement last longer, and are more gratifying. Quality of life compounds, even better than money does. Your time and energy will be best spent on activities within your control that can improve your quality of life. Why worry endlessly about politics, world events, and market movements so much that it affects your ability to lead a happy life? You could be missing out on living a more fulfilling, better life. That result, in our opinion, would be a far more tragic loss than any market crash. -
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Long-Term Returns Have a Cost, and It’s Well Worth the Price
Long-Term Returns Have a Cost, and It’s Well Worth the Price We’re investors in the stock market because it has a long, time-tested history of generating big returns for those patient enough to let compound interest work its magic. Take a look at this chart. I’m always amazed by it, no matter how many times I’ve seen it. It’s the value of $1 invested in the S&P 500 index since 1950. One buck turned into $1,216, without any input, skill, or decisions from the investor who owned it. 1 Dollar in the S&P 500 Source: Robert Shiller, Yale University, author’s calculations. Includes reinvested dividends. You can call this chart The Reason We’re All Here. We’re investors in the stock market because it has a long, time-tested history of generating big returns for those patient enough to let compound interest work its magic. But ask yourself: Why are these returns even possible? Why are we so lucky to enjoy these returns? The Giant Bill You Never See but Pay Every Day Almost everything in the economy has a price tag. The nicer the thing, the higher the price. And the stock market, over time, is a pretty darn nice “thing.” Why doesn’t enjoying these big returns have a price tag? In fact, there is a big price tag on these returns. It’s just hard to keep track of. Everyone knows the stock market is volatile. But a chart like the one above doesn’t do a good job depicting how much chaos and misery investors had to endure to capture the full long-term return. This chart -- over the same time period as the one above -- shows how much the S&P 500 was below its previous all-time high on any given day (periods at 0% are when the market is at a new all-time high): S&P 500: Percent Below Previous All-Time High Source: S&P Capital IQ, author’s calculations. It’s a mess. Total chaos. During this period, when the S&P 500 increased more than 1,200-fold, the index spent just 6.2% of trading days at a new all-time high. Here’s how the rest of days fared: Percent of Total Trading days, 1950-June 2017 New all-time high 6.2% 0%-10% below previous all-time high 34.8% 11%-30% below previous all-time high 35.6% 31%+ below previous all-time high 23.4% Earning excellent long-term returns required putting up with having less money in your account than you did at some point in the past 93.8% of the time. That’s the cost of long-term returns in the stock market. Checking your account, wondering what happened. Remembering how much more money you used to have. Kicking yourself for not doing something different. Agonizing over whether the pursuit of long-term investing is actually worth it. Watching your net worth decline, sometimes by a lot, and fairly often. You don’t pay this cost in dollars and cents. Its currency is stress hormones. But it’s a very real cost. Bang for Your Buck A smart way to defray the cost of long-term stock returns is through diversification into less volatile assets, like bonds or cash. But the cost of long-term returns in the stock market will always send you a bill, no matter how much or little you own. There are two ways to view that cost. Consider it a fine, like something you should try to avoid and feel guilty for paying. Consider it the cost of admission, like something you are happy to pay because it’s worth the price. Many investors probably fall into the first camp. They trade in an out of the market, trying to avoid any declines. They consider a losing month, quarter, or year as a sign that they did something wrong or were cheated with bad advice, changing their investment strategy to avoid paying another fine. Fewer investors fall into the second camp. But it is, for most investors, the wisest way to invest. The long-term history of market growth even in the face of constant drawdowns is why. View market volatility as a fine, and you’ll spend your life jumping in and out of your investments, likely missing some of the best returns as you fret about paying the bill. View it as the cost of admission and you will likely realize over the course of many years that you may have purchased tickets to one of the greatest shows capitalism has ever produced, with encores for those who stay through the end. -
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Deriving an Assumption on Inflation
Deriving an Assumption on Inflation While our assumption on inflation comes down to a judgment call in the end, we take a thoughtful approach to balancing the information coming from what we believe to be the best sources of data. Expected annual inflation is a key assumption used by our retirement savings and withdrawal advice, which help you plan for the future. To make these calculations, we must assume a specific growth rate for investments, but the rate of return that really matters is the “real” rate of return—i.e. the return adjusted for inflation. This is because the prices of everything that you buy tend to increase over time, so if you want to maintain the same ability to spend, your plans must take into account the fact that goods and services will cost more in the future. An example from Investopedia (that we have revised a bit) helps to illustrate this concept. Say you have $20,000 and want to buy a car that costs this same amount. Instead of purchasing the car now, you could decide to wait and invest the money for 1 year so as to have a cash cushion after buying the car. Assuming that you can earn 5% interest over a 12-month period, you will have $21,000 in one year. So it seems as if you can generate $1000 in savings by delaying your purchase for one year. But say inflation on car prices over the same one-year period is 2%. That same car will cost $20,400 in one year. The actual amount of money that remains after you purchase the car will be $600, i.e., 3% of your initial investment of $20,000. Your purchasing power due to investing only increases by $600 instead of $1000. 3% is indeed your real rate of return as it accounts for the effects of inflation. Multiple factors can drive the inflation rate including economic growth, public policy, and monetary policy. As a result, no one knows with certainty how the prices of the broad set of goods and services that you purchase will increase in the future. There are many different, credible sources of data for developing views on how inflation will evolve over time. No one source is necessarily going to give you the “right” answer so it is important that you use the multiple sources of information that will help you filter signal from noise. While our assumption on inflation comes down to a judgment call in the end, we take a thoughtful approach to balancing the information coming from what we believe to be the best sources of data. These sources include: Forward guidance from the Federal Reserve Market expectations derived from the pricing of US Treasuries and Treasury Inflation Protected Securities (TIPS). Customers with differing views on inflation can also override our assumption via the Edit Assumptions panel, which can be found on the Plan tab of a Retirement goal. We discuss each of these sources as well as our overall thought process in more detail below, but our broad conclusions based on the present state of the data are as follows: The Federal Reserve explicitly aims for an annual inflation rate of 2% over time and has proven credible in keeping inflation anchored to this level. Macroeconomic projections from the Fed also indicate that long-term inflation forecasts remain near 2% if not below this level. As of May 2, 2017, almost all inflation expectation measures derived from market prices suggest that the market expects inflation to be below 2% across multiple short- and long-term horizons. Since these measures are volatile, we will be keeping a close eye on how market expectations evolve going forward, but inflation expectations seem to be well- contained at the moment. Based on all of these sources, we assume a 2% rate of inflation in our financial planning calculations. The Target Inflation Rate The Federal Reserve explicitly states that an inflation rate of 2 percent is most consistent with their mandate for price stability and maximum employment over the long-run.1 But what data are Fed officials using to evaluate ongoing inflation trends? While they monitor multiple measures of inflation, it is widely recognized that the Fed prefers to use the core Personal Consumption Expenditures (PCE) index.2 This core measure strips out volatile components such as food and energy, allowing the Fed to better gauge long-term trends. Note that the monthly, year-over-year percent change in core PCE, a commonly used measure of inflation, has been strongly anchored to 2% since the early 1990s. Through its implementation of monetary policy—the process of raising or lowering the costs of borrowing through the U.S. federal funds rate—the Fed has proven to be effective in anchoring the long-term inflation rate to 2%.3 Accordingly, at Betterment we account for this trend and model inflation to remain stable for the foreseeable future. PCE Core Inflation Source: Federal Bank of St. Louis FRED, author's calculations However, we recognize that inflation target changes are possible as a result of macroeconomic conditions, political climate, public policy and Fed policy. Indeed, the 2% explicit inflation target itself is relatively new (introduced by Ben Bernanke in January of 2012).4 To address this possibility and help ensure our inflation expectations remain as accurate as possible, we monitor both forward inflation projections and implied inflation rates from the fixed income securities markets. Forward Fed Projections The Fed distributes their macroeconomic projections to the public on each FOMC meeting date (just hours after). These reports include information about the distribution of projections across all 17 Federal Open Market Committee (FOMC) participants for real GDP growth, the overall inflation rate, overall PCE inflation, core PCE inflation and the Fed Funds rate. The median and central tendency5 forecasts for one, two, and three years ahead as well as longer-term are provided. The ranges on the forecasts one, two, and three years ahead are also provided. An example of the Fed report from the March 2017 FOMC meeting is shown below. We monitor these reports closely and focus on any significant changes in projections for PCE and core PCE inflation in particular for any indication that we need to be adjusting our views accordingly. At present, inflation projections are tame with the relevant inflation statistics all near 2% and below this level in many cases. Forward Fed Projection Table Source: Federal Reserve Board Inflation Breakeven Rates Given pricing in the TIPS and US Treasury markets, we can derive the market's expectation for inflation at different horizons. This expectation is often referred to as the breakeven inflation rate. For a given maturity, the breakeven inflation rate is the difference between the yield on a US Treasury note (bond) and the yield on an inflation-protected US Treasury security (also known as TIPS) with the same maturity. If we perform this calculation for a 5-year maturity, for example, we get the market's expectation for inflation over the next five years. How does this make sense as an expectation for inflation? The cash flows on TIPS are tied to the Consumer Price Index (CPI), another common gauge for inflation. The principal on TIPS rises with CPI while the coupon rate represents a real return (i.e., return above inflation). To the extent that the semi-annual coupon payments and the final redemption value of TIPS track increases and decreases in CPI, investing in TIPS serves as a perfect hedge against inflation. In contrast, US Treasury bonds are fully exposed to inflation risk. Thus, the yield spread of a US Treasury bond over TIPS with the same maturity—often referred to as the TIPS spread—represents the premium an investor demands for being subjected to the risk of inflation in the future. The markets, in fact, give us a term structure of inflation expectations as shown below. Term Structure of Expected Inflation Rates Source: US Treasury; author's calculations This gives us the market's expectation for future inflation over 5-year, 7-year, 10-year, 20-year, and 30-year horizons. We see that only the breakeven inflation rate for the 30-year horizon is just north of 2% as of 2017-05-02. Since breakeven inflation rates are based on a pricing measure that changes regularly, they can provide an early indicator of meaningful increases in inflation. But as appealing as these market-based measures might be, they are not without their drawbacks and therefore cannot serve as the sole basis for formulating our inflation assumptions. For one, breakeven inflation rates reflect factors that may have nothing to do with long-term inflation expectations. For example, TIPS are not as liquid as plain vanilla US Treasuries and their yields may, therefore, have an embedded liquidity premium. Changes in risk appetite which cause nominal Treasury yields to rise and fall can also influence the TIPS spread. Additionally, regardless of maturity, whether 5-year, 7-year, 10-year, 20-year or 30-year, inflation expectations based on the TIPS spread are volatile as clearly shown below. Our goal is to forecast long-term inflation and we do not want to get whipped around by transitory changes in market expectations. We would need to see sustained and persistent increases in breakeven inflation rates above 2% across the term-structure before we would consider an increase in our long-term expected inflation assumption. Expected Inflation Rates Across All Available Maturities Source: US Treasury 5-year, 5-year Forward Inflation Expectations Rate Another long-term measure of the market's expectations for inflation expectations is the 5-year, 5-year forward inflation expectations rate. This is a measure of what the market expects inflation to be over a 5-year period five years from now. In other words, it is an inflation breakeven rate that, as shown in the figure below, applies to the five-year period starting five years from the respective dates in the x-axis. This market-based measure of long-term inflation expectations is preferred by the Fed as it is less sensitive to cyclical factors like energy prices. It, therefore, gives a better indication of whether the market thinks that the Fed is meeting its goal of long-term price stability. Currently, this measure suggests an expected inflation rate of under 2%. This market-based measure is also volatile and is just one additional source of information about inflation rates that we watch. 5-year, 5-year Forward Inflation Expectations Rate Source: Federal Bank of St. Louis FRED Conclusions Long-term historical trends suggest that the Fed has been very effective at keeping the long-term inflation rate anchored at 2%. Current Fed projections show that policymakers are not anticipating that this will change anytime soon. Furthermore, almost all market-based measures currently indicate that inflation expectations fall below the Fed’s 2% target and we would need to see more sustained deviations above this target level before changing our expected inflation assumption. For all these reasons, we assume a 2% inflation rate in our financial planning models and research. 1 See https://www.federalreserve.gov/faqs/economy_14400.htm 2 See https://www.federalreserve.gov/faqs/economy14419.htm and https://en.wikipedia.org/wiki/Coreinflation for more on this preference. 3 See https://research.stlouisfed.org/publications/review/12/01/65-82Thornton.pdf for a historical perspective on this. 4 https://en.wikipedia.org/wiki/Inflation_targeting 5 The sample mean, excluding the three highest and three lowest projections. -
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You Received an Inheritance, Now What?
You Received an Inheritance, Now What? Receiving an inheritance can trigger mixed emotions. On one hand, you’ve experienced a tangible personal loss, while on the other you’ve received a monetary gain. Receiving an inheritance can trigger mixed emotions. On one hand, you’ve experienced a tangible personal loss, while on the other you’ve received a monetary gain. The difficulty in inheritances lies in deciding what to do with this sudden financial windfall. While inaction is the biggest pitfall facing heirs, a Lund university study suggests that an average inheritance is gone within five years as a result of financial mismanagement.1 Instead, heirs should consider investing these assets in taxable accounts, or in property assets. To help prepare, here are six practical steps for what to do when you’ve received an inheritance. 1. Resolve Taxes Your first consideration should be taxes. There’s a difference between estate taxes and inheritance taxes. Federal estate taxes apply for estates that exceed a high threshold—$5.45 million per individual for 2016. A number of states also levy estate taxes; some, like New Jersey, have very low exemption levels, meaning they apply to a lot of estates. An estate is responsible for paying federal and state estate taxes before any assets are distributed to heirs. But some states also apply inheritance taxes, which must be paid by the beneficiary—you. At present, only eight states have inheritance tax, and many beneficiaries are exempt, like children of the deceased. The best thing to do is consult a CPA or tax advisor to determine if you must pay inheritance tax. 2. Know the Pitfalls We tend to treat windfalls differently than we treat other money, according to behavioral economist Richard Thaler. It’s just one downfall of “mental accounting,” where we don’t think of every dollar as having equal value to another. A few pitfalls come with this line of thinking: Failure to save. Because we think of windfalls as “found money” and tend to put it in a different mental category than regular income, we don’t always spend or save it in the same way we do with earnings. Lottery winners are an obvious victim of this logic; one study found that winners only saved about 16% of their winnings.2 For heirs, the numbers are better, but not by much—one investigation found the average heir saved about 50% of an inheritance. Another study out of Denmark finds that the average inheritance is gone within five years, unless invested in financial assets or housing equity. An inheritance left in cash is particularly vulnerable to being spent, rather than saved. Bad spending behaviors. What’s alarming is that an inheritance is likely to crowd out good savings behaviors, the Danish study found. Here’s how it happens: An inheritance makes your cash balance spike. You spend a little on early splurges, and start to slack on long-term saving habits. This behavior snowballs, and a few months or years later, you face two consequences: the inheritance has been spent completely, and you’ve lost the good fiscal habits you had before. Buying without thinking long-term. Some people fall into the trap of using an inheritance for a big purchase, but then consequently over-extend themselves. For example, let’s say you use the inheritance for a down payment on a bigger house. Along with a bigger house comes new furniture, but also higher property taxes, home maintenance costs, homeowner’s insurance, and monthly utilities. Your monthly expenses can expand quickly while your income stays the same. 3. Consider Your Financial Goals and Invest Accordingly Knowing that these tendencies put both your inheritance and your hard-earned savings habits at risk, the best thing to do is set goals for putting the assets to work. Take time to look seriously at your short- and long-term goals, like paying down debts, and saving for a home or retirement. Inertia is your enemy when it comes to managing an inheritance, and the best way around that inertia is to outline a goal-based investing strategy. In goal-based investing, each goal will have different market risk exposures depending on the time you have set for reaching that goal. Goal-based investing matches your time horizon to your portfolio’s asset allocation, which means you take on the appropriate amount of risk. Short-term goals are better suited to less volatile assets such as bonds, while long-term goals are better suited to riskier allocations, with potentially greater returns. One goal may be to shore up your emergency fund, if needed. An adequate safety net is a must-have at any stage of life. Your windfall may also provide an opportunity to pay down debts, typically starting with any uncollateralized loans (for instance, credit cards or student loans), or loans on depreciating assets (like car loans). You may also consider paying off a mortgage, or refinancing to a better rate that can be achieved with more equity and a lower principal loan amount. A primary mortgage is typically a last priority, since you may receive tax benefits from mortgage interest, and have a better opportunity to put that money to work harder for you in a diversified portfolio with a higher expected rate of return. 4. Assess Your Retirement Contributions Make sure to contribute the maximum allowable amount to retirement accounts for the year. The amounts may be small compared to your overall inheritance, but retirement plans come with tax benefits that you’ll want to capture. With an employee-sponsored plan like a 401(k), you are limited to contributing from your salary, so increase your contributions to the limit, or even up to the amount where your employer will provide a matching contribution. You can also contribute up to $5,500 for yourself and another $5,500 for your spouse, if married, into a tax-deferred IRA account. If you’re a Betterment customer, its retirement investment strategy can help you figure out the right mix. 5. Invest for the Long Term Knowing that an inheritance left in cash tends to disappear, make sure to follow through with the long-term portion of your plan. If your emergency fund, debts and retirement plans are on track, the rest of your savings is probably best invested in a taxable brokerage account, according to Betterment’s goal-based investment method mentioned above. If you have a more specific goal in mind, like a home purchase in the near future, consider an investment strategy for a major purchase goal. And if you do decide to use the inheritance for a major purchase—like a house—give careful consideration to what your normal income allows, as far as ongoing monthly expenses. The goal is to nurture your good savings habits over the long term. 6. Establish Estate Planning Wealth needs protection. If this is your first time investing or having substantial assets, you’ll want to set up some safeguards to manage and protect your wealth. Take time to double-check that you’ve set beneficiaries for all of your investment accounts. It’s also a good time to create a will and appoint a power of attorney, if you haven’t already. If you have children, you may also want to set up a trust for dependents. Basic estate planning isn’t always fun, but it’s a crucial step. Putting your inheritance to work on your short- and long-term financial goals is a great way to avoid spending down an inheritance left in cash. But to truly avoid the pitfalls of inheriting, be mindful of maintaining your long-term savings habits. The best outcome is to use an inheritance to get ahead on your financial goals, while still nurturing good day-to-day spending and savings behaviors. In this case, knowing is certainly half the battle. 1 The Effect of Unexpected Inheritances on Wealth Accumulation: Precautionary Savings or Liquidity Constraints?, pg. 13. 2 Estimating the Effect of Unearned Income on Labor Earnings, Savings and Consumption: Evidence from a survey of Lottery Players, Pg. 16. Research shows the average inheritance is spent within five years. Here are six steps to invest smartly and avoid the most typical inheritance pitfalls. 27194 2016-05-23 10:22:04 2016-05-23 14:22:04 2019-10-05 16:41:22 2019-10-05 20:41:22 received-an-inheritance betterment_editors Display top featured image inheritance Research shows the average inheritance is spent within five years. Here are six steps to invest smartly and avoid the most typical inheritance pitfalls. Should You Invest, Or Pay Off Debt? https://www.betterment.com/resources/invest-or-pay-off-debt/ Thu, 14 Jul 2016 16:05:17 +0000 nholeman https://www.betterment.com/?p=27727 Should you invest your money or use it to pay off existing debt? It’s a tough question, and one we receive often at Betterment. As a fiduciary, it’s our responsibility to advise our clients on what to do based on what’s in their best financial interests, regardless of how we as a business are impacted. With this in mind, it may be prudent for some of our readers not to invest with us—at least not just yet. So, where to start? You can follow our five-step action plan to develop a solid debt payoff and investment strategy. Our 5-Step Action Plan: Always Make Your Minimum Debt Payments on Time Take Advantage of Your Employer-Sponsored Retirement Plan Pay Off High-Cost Debt Build Your Safety Net Save for Retirement 1. Always Make Your Minimum Debt Payments on Time First things first: You should prioritize paying at least the minimum amounts due on your required debt payments on time. Not doing so can lead to penalties, extra interest, and higher finance charges, in addition to ruining your credit score. Negative information, such as excessively late payments or collections, generally stay on your credit report for up to seven years. If you are having trouble staying current on all of your debts, consider consolidating or restructuring to make your payments more manageable. Also consider calling individual creditors to negotiate your rates and payments; you may be pleasantly surprised that your actions can result in more favorable terms. 2. Take Advantage of Your Employer-Sponsored Retirement Plan Check to see if your company offers to match any percentage of your contributions to an employer-sponsored retirement plan, such as a 401(k). If it does, and you’re eligible to sign-up for the plan, then you should participate and take advantage of that free money. Match programs generally work like this: Let’s say you’re participating in your employer-sponsored 401(k) plan by contributing 6% of your pre-tax income, based on an annual salary of $80,000. After a year, you’ll have contributed $4,800 to your 401(k) account. If your employer offers a dollar-for-dollar match for up to 6% of your contributions (i.e., 100% match on the first 6%), then you’ll pocket an additional $4,800 just for participating, for a total of $9,600 in contributions for the year. Any match is free money, and that return beats out many investment alternatives. Keep in mind that matched contributions come in various shapes and sizes. Match formulas can even be tiered based on income and employee tenure, so check your company’s benefit guidelines regarding the relevant thresholds. 3. Pay Off High-Cost Debt After continuing to make timely bill payments and evaluating your eligibility for matched retirement plan contributions, your third goal should be to pay off high-interest debt. For most people, the most expensive debt is associated with credit card or unsubsidized student loan debt. The average American has $4,400 in credit card debt and the average interest rate on those cards is around 15%. The graduating class of 2015 averaged $35,000 in student loan debt, more than any class in history. This high-interest debt is an emotional burden and drag on your finances, which is why eliminating it from your balance sheet is a top priority. At Betterment, we consider any debt costing above 5%* in interest or finance charge fees to be high-cost debt and it should be paid off before general investing. Others may use a higher number (e.g., 8%), but we take a more conservative view here. So if you have debt that’s costing you over 5% in fees, pay it off as fast as you can. Start with the highest-interest debt first. 4. Build Your Safety Net After your high-cost debt is gone, you should begin building a safety net fund for financial emergencies. We recommend saving three to six months of living expenses, including your monthly housing payments, bill payments, utilities, and other recurring monthly bills. A safety net can provide a financial buffer and prevent you from turning to your credit cards or tapping into your home equity for a line of credit when unexpected expenses occur. A safety net also provides some wiggle room in case your income is interrupted as a result of job loss or medical emergencies. If you don’t have high credit limits or access to additional liquidity in the form of a line of credit from your home equity, you could consider building a starter safety net fund while paying off high-cost debt. After paying your regular bills, see if you have any cash left over to allocate toward a savings account. Any amount saved can go towards building a solid safety net fund. 5. Save For Retirement With your high-cost debt eliminated and safety net in place, you are now ready to invest for the long-term. By the time you reach 59½ years of age, or when you’re allowed to withdraw from your 401(k) penalty-free, that 401(k) match alone may be insufficient to support your post-retirement lifestyle. That’s why you’ll want to start saving for retirement early. Here are some points to consider: How Much to Save: To get this number, you need to consider factors such as when you want to retire, your future Social Security benefits, inflation, taxes, and estimated investment returns. Where You Should Save: To optimize to which accounts you want to direct your money, you should factor in your future tax bracket and investment account fees. If deriving these numbers sounds like a complicated task, it’s because it is. That’s why we built our retirement planning tool, which can help tell our clients how much you need to save for a comfortable retirement. We take into account when and where you plan on retiring, as well as your current and anticipated income (for example, Social Security benefits). Knowing how much you need and actually investing to reach that goal requires follow-through. Make investing for your retirement a priority and be careful not to sacrifice funding it through wasteful spending that can restart the debt cycle. Prioritize What's Important Balancing how to attack paying off debt versus investing requires prioritizing what’s important and putting your money to work as efficiently as possible. Hopefully, Betterment’s steps have helped take the guesswork out of your action plan, so that you can start eliminating debt, benefitting from your retirement plans, building a safety net, and investing for retirement. Of course, there’s no specific timeline to achieving these steps; that depends on your unique financial circumstances and priorities. However, we suggest you stay the course and be diligent with our five-step framework. Get Started with Betterment With a Betterment account, you can sync all of your accounts to make our five-step plan even easier to follow. You can easily sync your accounts (including savings accounts, retirement plans, and debts) to view all of your finances in one place. If you’re a property owner, you can also add your real estate owned to get an even better sense of your overall wealth.This way, you can see as your net worth increase as you get closer to reaching your goals. You’ll also want to complete your retirement plan, to understand how much you need to save for a more comfortable retirement. We make it easy to automate deposits, create new Individual Retirement Accounts (IRAs), or roll over existing retirement accounts. We handle investments so you don’t have to, and we offer a globally diversified portfolio of index-tracking exchange-traded funds (ETFs), with personalized advice in a goal-based investing framework. With powerful tax efficient features such as tax loss harvesting, everything we do is designed to help you save money on taxes while you’re investing for your long-term investing goals. Get started today. *From 1928-2015, the U.S. stock market has returned an average of 9.5% per year. However, that return is not guaranteed and fluctuates from year to year. When you pay off your high-interest debt, that interest savings is guaranteed. It is the guaranteed savings that makes paying off debt so attractive, even if the rate is slightly lower than what you might expect from investing. -
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Investing in Your 50s: 4 Practical Tips for Retirement Planning
Investing in Your 50s: 4 Practical Tips for Retirement Planning In your 50s, you’ll want to assess your retirement plan, lifestyle, future earnings, and support for your family. Then, practice goal-based investing to help ensure your objectives are met. As you enter your 50s, you may feel like your long-term goals are coming within reach, and it’s up to you to make sure those objectives are realized. Now is also a perfect time to see how your investments and retirement savings are shaping up. If you’ve cut back on savings to meet big expenses, such as home repairs and (if you have children) college tuition, you now have an opportunity to make up lost ground. You might also think about how you want to live after you retire. Will you relocate? Will you downsize or stay put? If you have children, how much are are you willing to support them as they enter adulthood? These decisions all matter when deciding how to strategize your investments for this important decade of your life. Four Goals for Your 50s Your 50s can be a truly productive and efficient time for your investments. Focus on achieving these four key goals to make these years truly count in retirement. Goal 1: Assess Your Retirement Accounts If you’ve put retirement savings on the back burner, or just want to make a push for greater financial security—the good news is that you can make larger contributions toward your retirement accounts after age 50, thanks to the IRS rules on catch-up contributions. For instance, if you participate in a 401(k), 403(b), 457, or SARSEP plan, the IRS allows you to contribute up to $6,000 over the plan limit per year (up to $18,000, depending on your plan) after you turn 50. You can also contribute an additional $1,000 toward your Individual Retirement Account (IRA) and Roth IRA in addition to the $5,500 limit after age 50, and an extra $1,000 per year into your HSA after age 55 to cover medical expenses. If you’re already contributing the maximum and still want to save more for retirement, consider opening taxable or retirement accounts outside of your company retirement plan, such as a traditional or Roth IRA. You may also wish to simplify your investments by consolidating your retirement accounts with IRA rollovers. Doing so can simplify recordkeeping and make it easier to implement an overall retirement strategy. Plus, by consolidating now, you’ll avoid complications after age 70, when you’ll have to make required minimum withdrawals from all the tax-deferred retirement accounts you own. Goal 2: Evaluate Your Lifestyle and Pre-Retirement Finances When you’re in your 50s, you may still be a ways from retirement, however you’ll want to consider how to support yourself when you do begin that stage of your life. If you’ve just begun calculating how much you’ll need to save for a comfortable retirement, consider the following tips and tools. Tips and Tools for Estimating Income Needs Make a rough estimate of how much you spend on housing, food, utilities, health care, clothing, and incidentals. Nowadays, tools such as Mint and Prosper include budgeting features that can help you see these expenditures. Subtract what you can expect to receive from Social Security. You can estimate your benefit with this calculator. Subtract any defined pension plan benefits you expect to receive. Subtract what you can safely withdraw each year from your retirement savings. Consider robust retirement planning tools, like ours, which can help you understand how much you’ll need to save for a comfortable retirement based on current and future income from all sources, and even your location. If there’s a gap between your income needs and your anticipated retirement income, you may need to make adjustments in the form of cutting expenses, working more years before retiring, increasing the current amounts you’re investing for retirement, and re-evaluating your investment strategy. Think About Taxes Your income may peak in your 50s, which can also push you into higher tax brackets. This makes tax-saving strategies more valuable than ever. If you’d like to reduce your tax exposure, consider: Putting more into tax-deferred savings vehicles like 401(k)s or traditional IRAs. Donating appreciated assets to charities. Implementing tax-efficient investment strategies within your investments. For example, tax loss harvesting is the practice of selling a security that has experienced a loss—and then buying a similar one to replace it. Long used by DIY investors, high-balance investors, and private wealth managers, tax loss harvesting is a strategy that Betterment offers to customers at no additional cost. Define Your Lifestyle Your 50s are a great time to think about your current and desired lifestyle. As you near retirement, you’ll want to continue doing the things you love to do, or perhaps be able to start doing more and build on those passions. Perhaps you know you’ll be traveling more frequently. If you are socially active and enjoy entertainment activities such as dining out and going to the theatre, those interests likely won’t change. Instead, you’ll want to enjoy doing the all things you love to do, but with the peace of mind knowing that you won’t be infringing on your retirement reserves. Say you want to start a new business when you leave your job. You’re not alone; more than 25% of new entrepreneurs starting businesses in 2014 were between the ages of 55 and 64 according to the 2015 Kaufmann Index.1 To get ready, you’ll want to start building or leveraging your contacts, creating a business plan, and setting up a workspace. You may also wish to consider relocating during retirement. Living in a warmer part of the country or moving closer to family is certainly appealing. Downsizing to a smaller home or even an apartment will cut down on utilities, property taxes, and maintenance. You might need one car instead of two—or none at all—if you relocate to a neighborhood surrounded by amenities within walking distance. If you sell your primary home, you can take advantage of a break on capital gains —even if you don’t use the money to buy another one. If you’ve lived in the same house for at least two out of the last five years, you can exclude capital gains of up to $250,000 per individual and $500,000 per married couple from your income taxes, according to the IRS. Goal 3: Chart Your Pre-Retirement Investment Strategy After you’ve determined how much you’ll need for a comfortable retirement, now’s also a good time to begin thinking about how you’ll use the assets you’ve accumulated to generate income after you retire. If you have shorter-term financial objectives over the next two to five years—such as paying for your kids’ college tuition, or a major home repair—you’ll have to plan accordingly. For these milestones, consider goal-based investing, where each goal will have different exposure to market risk depending on the time allocated for reaching that goal. Goal-based investing matches your time horizon to your asset allocation, which means you take on an appropriate amount of risk for your respective goals. Investments for short-term goals may be be better allocated to less volatile assets such as bonds, while longer-term goals have the ability to absorb greater risks but also achieve greater returns. When you misallocate, it can lead to saving too much or too little, missing out on returns with too conservative an allocation , or missing your goal if you take on too much risk. Setting long investment goals shouldn’t be taken lightly. This is a moment of self-evaluation. In order to invest for the future, you must cut back on spending your wealth now. That means tomorrow’s goals in retirement must outweigh the pleasures of today’s spending. If you’re a Betterment customer, it’s easy to get started with goal-based investing. Simply set up a goal with your desired time horizon and target balance and Betterment will recommend an investment approach tailored to this information. You may also wish to read this article to more fully understand the benefits of goal-based investing. Goal 4: Set Clear Expectations with Children If you have children, there’s nothing more satisfying than watching your kids turn into interesting adults with passions to pursue. As a parent, you’ll naturally want to prepare them with everything you can to help them succeed in the world. You may be wrapping up paying for their college tuition, which is not easy given that it can cost up to $9,400 annually on average, and total expenses at private colleges average nearly $44,000 a year, according to the College Board. As your kids move through college, take the time to have a serious discussion with them about what they plan to do after graduation. If graduate school is on the horizon, talk to them about how they’ll pay for it and how much help from you, if any, they can expect. Unlike undergraduate programs, graduate programs assess financial aid requirements by looking at only the student’s assets and incomes, not the parents’, so your finances won't be considered. You’ll also want to set expectations about other kinds of support—such as any help in paying for their health insurance premiums up to a certain age, or their mobile phone plan, or even whether toward major purchases like a home or car. It’s great to help out your children, but you’ll want to make sure you’re not jeopardizing your own security. Your 50s may demand a lot from you, but taking the time to properly assess your investments, personal financial situation, lifestyle, and, if applicable, your support for children, can be truly rewarding in your retirement years. By tackling these four goals now, you can meet your current responsibilities and increase your chances of a more financially secure and comfortable life in the decades to come. -
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3 Ways Betterment Caters to Couples
3 Ways Betterment Caters to Couples Are you one half of a “Better Couple”? Discover the top three features that benefit couples who invest with Betterment. At Betterment, we want to help you achieve your personal financial and retirement goals, regardless of your relationship status. But if you’re one half of a couple and thinking about investing in a taxable account, rolling over your old 401(k) or IRA, or starting a new IRA with Betterment, then there are additional features that may be right for you—and they are available to all current and new customers. Access to a Team of Experts Regardless of whether couples are cohabiting or married, separate Betterment accounts tied to one household can now benefit from access to our financial experts. By householding, which looks at a couple’s Betterment balances as one total, you may be able to access our team of licensed experts and CFPⓇ professionals to help you monitor your accounts, answer your financial questions, and give you advice. This service may be available to you if you combine Betterment balances through house-holding. For example, let’s say you have $70,000 and your spouse has $30,000 at Betterment. Individually, you wouldn’t qualify for the Betterment Premium plan because of the $100,000 balance minimum. However, if you household, we consider both of your balances, giving you a total of $100,000, which qualifies you for the Premium plan. Read more about the Betterment service plans. To take advantage of this house-holding feature, simply contact Betterment Customer Experience. Tax-Efficient Tools For couples, Betterment includes tax-efficient features for investment accounts. By turning on Tax Loss Harvesting+ (TLH+), investors are able to offset taxes on both gains and income because the sold security is replaced by another optimal asset in an investor’s portfolio. Our tools are so advanced they’ve even been shown to provide two times the tax benefit, versus methods used by other automated services. For married couples, TLH+ is designed to prevent inadvertent wash sales (where securities are sold and repurchased shortly thereafter) between two separate accounts or one joint account, and it allows the IRS to consider Betterment joint account activity as one. When you enable TLH+ on your Betterment account, you’ll be asked for your spouse’s Betterment account information so that we can help optimize your investments across your accounts. Long-Term Planning with Built-In Retirement Planning Advice Within Betterment, couples can stop questioning how much money they’ll need to live happily ever after, together. Betterment’s retirement planning advice recommends to couples how much they need to save for retirement based on their income—including Social Security income, their 401(k)s and other savings, and when and where they plan to retire. Our built-in toolset stays updated with your current Betterment account and synced external account balances, and it’s always available for couples to revise. We use the information we already know about you as a couple, as well as a few extra inputs, to help personalize your plans and determine how much your current savings plan may allow you to spend together in retirement. Couples can adjust nearly all the inputs in their retirement plans, including the ZIP code of where you plan to retire. By adjusting variables like this, Betterment can offer as many personal retirement scenarios as desired. Betterment's planning advice makes key calculations to provide a roadmap that is as accurate as possible. We even analyze scenarios for taxes, and always provide a range of outcomes—from worst case to likely case—in order to help provide a more accurate view of what’s in store for you. To get started, just start a retirement goal by selecting "Add New" once you log in. Read important information about Tax Loss Harvesting+. Betterment is not a tax advisor. This information is provided for educational purposes only. -
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3 Tips for Managing Money Effectively as a Cohabiting Couple
3 Tips for Managing Money Effectively as a Cohabiting Couple Unmarried couples living together likely have just as much joint financial responsibility as married couples. Here are three practical tips to help couples manage money together. Cohabiting couples are on the rise, and not just in expensive real estate cities, such as New York and San Francisco, but across the nation. Back in the 1960s, the number of cohabiting couples (if they even admitted it; cohabitation was illegal in many states) made up less than 1% of households But over the last 50 years, the number of unmarried couples living together has increased by nearly 900%. The average marrying age has also increased by almost eight years for both men and women, from their early to late 20s, if and when couples tie the knot. As if dividing chores and sharing a bathroom (or a remote control) weren’t hard enough, many couples must now also handle finances as if they’re married; a serious and potentially uncomfortable subject to tackle, given the non-legally binding nature of their living situation. For those considering moving in with a significant other, or wishing to have more clarity in a shared financial life, here are three practical ways designed to help manage and invest together. 1. Take Turns Managing the Finances Paying the bills and managing accounts can be a mutual responsibility that leaves both partners feeling empowered, involved, and accountable. If one person in the relationship is more organized, or just enjoys doing it more, there may be a temptation to delegate the bill-paying role as a sole responsibility. The problem with this, however, is that if anything should happen to the designated partner, the other could be left without a clue about how to access bills and shared financial information. To balance this situation, try periodically switching who manages the finances—this includes getting acquainted with every aspect of the process from logging in (try using secure password management software, such as LastPass or 1Password), to allocating funds. Take turns handling the accounts and paying bills every three or six months, for example. That way, if there is an illness, emergency, or unexpected breakup, either person can pick up where he or she left off more easily, with personal finances experiencing very little disruption. 2. Split Bills By Income Dividing bills 50/50 can work if you make roughly the same amount of money. But when income levels in the relationship are vastly different, the potential exists for resentment or bruised egos to develop. Here, emotional support and understanding one another is key. Neither partner should feel punished for losing a job, taking a low- or no-pay internship, or experiencing income disparities beyond control. One solution is to split bills in proportion to take-home pay. This is easily managed with spreadsheet software, such as Google Sheets, and helps to balance the household obligations more fairly. Consider this simple example: After taxes, Perry takes home $7,500 monthly, while Andy takes home $5,000 monthly, for a combined total of $12,500. Their apartment rent is $2,300 a month, with utilities at $600, a total of $2,900. Because Andy brings home 40% of the combined household income, his monthly obligation is $1,160, or 40% of the total combined housing expense of $2,900, while Perry contributes $1,740, or 60% of $2,900. This strategy also helps to relieve some of the lifestyle pressure on the partner with less income, and opens up opportunities to set goals together, such as establishing an emergency fund or saving for retirement. 3. Use a “Three-Pot” System Financial independence is possible even if you are one half of a cohabiting couple. One tactic is a “three-pot” system. Consisting of two separate individual accounts and one joint account, this strategy can help avoid any unnecessary tension, or worse, a power struggle between finances. Once you decide how your respective incomes are to be divided for shared expenses such as the household bills, you can then keep any personal funds, well, personal. Both members of the couple should be mature enough to manage personal expenses without having to answer for them, while simultaneously doing their part for the household. A three-pot system can also allow one person to occasionally “treat” the other without added drama. Sharing a household comes with a new joint commitment to money management. Your finances shouldn't have to be a source of difficulty, and cohabiting couples must be honest about their financial habits and expectations. No matter what you decide to do, decide together that cohabiting is an opportunity for a partnership where both of you can thrive emotionally as well as financially. -
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Why’d I Do That? Never Forget with the Investing Journal
Why’d I Do That? Never Forget with the Investing Journal The Investing Journal is a Betterment feature that allows customers to add personal notes to transactions. To our algorithms, your $1,000 withdrawal on May 17, 2014, is just another record in the database. But to you, it was a graduation present for your son or daughter, or cash for unexpected car repairs. The decisions and transactions you make in your Betterment account tell a story of your financial life, but until recently there was nowhere to record the color of that story. The Investing Journal is a new Betterment feature that allows customers to add personal notes to transactions. This lets you document why you made a given decision, never forget what caused it, and help you learn more about yourself. And, of course, it helps us improve our advice by understanding the needs and motivations of our customers. Record the “Why” of Your Decisions The Investing Journal allows you to annotate each withdrawal or allocation change you make in your account. Any time you complete one of those transactions, you’ll see this optional form, which you can use to record a category and any details, similar to what you might write in the “memo” field on a check. When you review your transactions on the Activity tab, you’ll see your notes along with the normal automatically generated descriptions. As we expand the feature, you will see your notes show up in more places throughout the app. By annotating your transactions with the Investing Journal, your Betterment account will become a more informative and transparent experience, reflecting your history and decisions. If you get to the end of the year and wonder how you ended up ahead of schedule or have some catching up to do, you can reference the series of decisions that got you there. You’ll never have to look at your statement at the end of the year and wonder, “Why did I withdraw $500 in February?” Learn More from Your Experience; Never Forget Why In addition to personalizing your financial experience with Betterment, recording the reasons behind your decisions is a great way to learn about yourself as a saver and investor. Seasoned investors will often cite their years of experience through business cycles and investing fads as the reason they are able to make good decisions today. It clearly helps to have witnessed moments of uncertainty and see that it turned out OK, or to have taken risks and felt the payoff. But research shows that investors often lack an accurate understanding of what has happened, and the lessons we learn can only be as good as our understanding of the facts. Our memories are not a perfect record of what happened, and psychologists have shown that the errors are not random. For example, the peak-end rule originally offered by Nobel Laureate Daniel Kahneman describes how we typically remember the most extreme and most recent events in a sequence. Applied to investing experience, this would mean that investors typically remember the most extreme periods of gains or losses as well the most recent performance of their portfolio, but mostly forget the average periods in between. The problem is that these salient memories are not a good summary of the overall experience, so using them to inform decisions about the future is risky. Another way our memory plays tricks on us is the hindsight bias, which describes how unpredictable events seem obvious in retrospect. For example, imagine a time when the market has declined 3% over the previous two weeks. It is very difficult to predict whether it will continue downward, rebound, or stay where it is. When looking back at how things turned out, however, many will be tempted to say, “I knew it all along!” Many well-designed experiments in sports, politics, and finance show that the outcome only feels inevitable after the fact. Our predictions in the moment are not nearly as good as we feel they would have been afterward. When we don’t put our predictions in writing, it’s easy to feel more prescient than we are and become overconfident as a result. For customers who make frequent ad-hoc deposits or withdrawals, the Investing Journal can help to paint a clearer picture of where all that money is coming from and where it’s going. Consider a customer reviewing the progress she has made in the last year on her house down payment goal. She might discover by reviewing her Investing Journal memos that many of the unanticipated withdrawals were for car repairs. Identifying the total impact of those expenses could lead to creating a new more appropriate “Car Repairs” goal or revising the savings rate for the downpayment goal. Using the Investing Journal to record your thoughts and feelings at the time of each investment decision is a great way to build a more accurate impression of your investing experience. What Motivates You? Help Us Offer More Personalized Advice Finally, we want to provide the most personalized advice possible to all of our customers. By asking customers to categorize the motivation for their actions (if they choose), we can differentiate between otherwise similar events. Consider one withdrawal motivated by fears about the markets and another being made to make a down payment as planned. The first is a good opportunity for us to encourage a buy-and-hold long term perspective to help maximize returns, while the second is cause for congratulations. To offer advice that matches each of our customers’ needs, we need to listen and understand their goals and motivations. The Investing Journal is a small step toward an exciting future of doing that in a much more comprehensive fashion. The Investing Journal turns a generic list of transactions into a personal history of your transactions. Recording the reasons behind each action you take helps build a more accurate understanding of your own saving and investing experience. And as we learn more about the motivations behind each customer’s actions, our data and behavioral team can continue to improve the Betterment experience. -
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The SEC and FINRA Get It Right on Automated Investing
The SEC and FINRA Get It Right on Automated Investing What is automated investing? Government regulators focus on automated investing and ways consumers should evaluate a service. Here's what you need to know. The U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) recently released a joint investor alert about automated investment companies—and the investment industry’s primary regulators got it right. The alert highlighted that investing tools have limitations, and people need to be keenly aware of where they are putting their money. This is not a recent issue—new investing tools have been introduced for decades. But now something different is happening. Faster, cheaper computing has allowed for rapid innovation with personal investing—making it easier for all consumers to invest in low-cost, diversified portfolios. The joint alert is one of the first publications from either the SEC or FINRA that recognizes the category of automated investing, which we created when we launched in May 2010. What is automated investing? If you’re new to Betterment, we are the leader of the automated investing revolution. We use smart technology to manage and optimize your investment portfolio. The result is more transparency, more access to your money, and less stress. Best of all, we have brought to everyone a level of investing sophistication that was once only available to the super wealthy. Since we welcomed our first customer in 2010, we have grown in size to nearly 100,000 customers and today manage more than $2.3 billion of their money. It’s validation that consumers want and are using the kind of investment automation we provide. As with every new and popular technology, there is a period of consumer education and trust building. The joint alert recognizes many of the benefits of automated investing, including low costs, ease of use, and broad access. The alert also rightly points out important limitations of some automated investing services of which consumers should be mindful. While there are several tech-based investment companies out there that are considered automated investment services—or robo-advisors—no other service is quite like Betterment. Our technology is different than any other company’s. When we built our smarter technology five years ago, we worked from the ground up, creating a vertically integrated system where we handled both the advice and brokerage portions of investing. By handling both aspects, we mitigated many unnecessary fees and functional inefficiencies that exist at other investment management firms. We are, in fact, the largest major automated investing service to be structured in such a cost-efficient way, and we pass those savings on to our customers. Betterment is different than other investment managers Betterment’s advice is free of conflicts: We don’t operate our own funds, advise a cash asset that we earn returns on ourselves, or receive compensation from any of our fund providers. There are no middle-men or incentive structures at Betterment that add extra friction or costs for trading. Our investment selection process is transparent, and we strive to always use the lowest total cost of ownership and most tax-efficient funds available. Our management fees are straightforward, based on a percentage of a customer’s balance. Betterment allows investors to customize multiple goals, each with personalized allocation for their needs: The joint bulletin highlights an issue we love to talk about—personalized investment advice—mentioning in several places that automated investment tools are limited in the degree to which they accommodate individual circumstances. Every customer who signs up for an account at Betterment can personalize multiple goals with an allocation of stocks and bonds that is modeled exactly for his or her age, time horizon, and goal type. If you have any questions about the SEC’s guidance and the extent of our advice, we always make our advice methodology transparent and readily available for every investor to read. Betterment’s underlying assumptions are always updated to current data points: Advice is not a static event; it requires constant assessment and reassessment. We use technology to continuously update our advice to investors based on their balance and how they are saving so that it continues to incorporate each individual’s current realities accurately. We also update our risk-free interest rate forecasts quarterly, using data provided by the U.S. Department of the Treasury. The underlying algorithms are tested, modeled, and constantly monitored. This means our savings advice and outlook are always tracking to the most current figures. As automated investing grows as an industry, there will be more companies vying for consumers’ attention. We are happy that the SEC has recognized what we have believed all along, and we support the SEC’s efforts to educate consumers. Betterment is setting the standard for what automated investing should be: transparent, personalized, without conflicts of interest, and aligned with customers. Everyone should have access to low-cost and smart investing advice—Betterment is providing exactly that. It’s ‘Investing Made Better.' -
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How Married Couples Should Approach Co-Managing Wealth
How Married Couples Should Approach Co-Managing Wealth Merging finances is about communication—and knowing how your spouse’s financial life affects you. Whether you’re engaged, a newlywed, or planning your golden wedding anniversary, it’s never too early (or too late) to improve the way you and your spouse manage your financial relationship. Disagreements over money are one of the most common causes of marital strife, studies show, but honest communication and smart planning can help avoid serious conflicts.1 Along with communication, it is important to understand key technical aspects of joint money management. There are entire books devoted to these topics, but here are some suggestions to get you pointed in the direction of marital money bliss. Communication Comes First First things first for new couples: You and your spouse will need to agree on how to pay the bills and save for future goals, such as a new home or retirement. You also want to address the separate debts or obligations that you bring to the relationship. And, each spouse should know what will happen, at least financially, in the event of the disability or death of the other. One way to address this challenge is to take the “yours, mine, ours” approach, also known as the three-pot approach. To preserve some financial autonomy, you and your spouse might each maintain credit cards and checking accounts in your own names to cover personal expenses or debt repayments. However, the bulk of your monthly income would go into a joint account to cover your monthly bills and shared expenses. You may also want to open joint savings accounts for important long-term goals, such as a down payment on a house. Ideally, both you and your spouse would contribute a proportionate share of your earnings to these accounts. Your Credit History and Joint Borrowing Saving for a new home is one thing—applying for the mortgage is another. When you apply for a line of credit together, lenders will look at both of your credit histories. If either of you has any issues‚ such as a high debt-to-income ratio or a poor credit rating, that will affect your ability to qualify for a loan together. Likewise, if you share a line of credit together (whether a mortgage or credit card), you are both equally responsible for any debts you incur. However, each partner still maintains his or her own credit history, which is tied to his or her Social Security number. That means that even if your spouse’s history and spending affects your joint borrowing, your personal credit history is still something you need to protect on your own. Tackle Retirement Planning As a Team If you both have 401(k) plans, see if it’s possible for both of you to make the maximum contribution. For married couples, even if one member of the family earns far less than the other, he or she can still contribute as much as the full amount of earned income up to the $18,000 annual limit. That might mean some artful budgeting throughout the year to get there. Remember, in 2016 each member of a married couple can contribute up to $18,000. If you are 50 or older, you can make an additional catch up contribution of $6,000, bringing the total to $24,000 for each spouse. Also, when making asset allocation decisions, don’t overlook how your spouse’s retirement savings are invested—particularly with regard to your ages and retirement dates. This type of “silo investing” could lead to an asset allocation that’s either too aggressive or too conservative for your combined situation. Or you could end up with a retirement portfolio that’s overly concentrated in one or both of your employer’s company stock. Love and Taxes While many couples find it’s advantageous to file their federal taxes as Married Filing Jointly, there are some instances where it makes more sense to file separately. If you’re married and filing together, you complete one shared tax return and jointly take responsibility for the income reported and taxes owed. However, filing separately may be beneficial if you need to separate your tax liability from your spouse’s, or if one spouse has a significant itemized deduction. Review Your Disability Insurance Coverage Good health and the ability to earn a living are things many of us take for granted. But what happens if a long-term illness or serious injury prevents you or your spouse from going to work? While your employer may provide short-term and long-term disability insurance, in many cases, these group policies pay only 50% to 60% of your salary and do not replace commission or bonus income. Therefore, you may want to consider purchasing separate individual long-term disability insurance policies. These policies can provide the cash you need to cover your essential living and medical expenses and may also pay for training or other assistance that will allow you to return to work. Adequate Life Insurance Here again, your employer may provide some life insurance coverage, but it is rarely enough to protect your spouse or your children the way you would like to. In addition, this coverage is not permanent, which means that you would be uninsured if you were to leave (or lose) your job. Therefore, you and your spouse may both want to consider buying a separate term life or whole life insurance policy. Even if one spouse does not work outside the home, a modest term life insurance policy on that person would cover the cost of full-time childcare and housekeeping, should that become necessary. Keep Your Will and Beneficiary Forms Updated Beneficiary designation forms—not your will—determine who inherits your retirement savings and life insurance benefits. So, make sure your beneficiary forms are up to date. If you have children, you may also want to name them—or trusts in their behalf—as contingent beneficiaries of your retirement accounts. This would ensure your retirement savings pass to them if something were to happen to both you and your spouse. Your will governs what happens to your non-retirement assets, so if you haven’t created a will, commit to getting it done as soon as possible. This is especially critical if you have children. You can find templates for simple wills online, or you can hire an attorney if you’re not comfortable doing this yourself. 1https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3230928/ The content on this post is not intended to provide tax, legal, accounting, financial, or professional advice, and readers are advised to seek out qualified professionals that provide advice on these issues for specific client circumstances. -
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Betterment Customers Stay the Course, Steer Clear of Behavior Gap
Betterment Customers Stay the Course, Steer Clear of Behavior Gap Research from Betterment’s behavioral team shows that most investors with Betterment achieve full investment returns and do not attempt to time the market. Betterment strives to help customers reach Behavior Gap Zero—a way of saying that bad behavior doesn’t interfere with achieving optimal returns.1 To help our customers reach that goal, we’re always seeking to understand their motivations and decisions, and how those actions can make an impact on their investment returns. However, measuring that impact is a multifaceted task, so we are starting with one simple question: How do allocation changes, or changing the weight of stocks to bonds in a goal, affect returns? Under what circumstances are customers making allocation changes, and are customers improving or reducing their returns with these changes? Key Finding: Market Timing Hurts Returns After sifting through the data, we found these key points: In 78% of accounts, customers made less than one allocation change per year, consistent with occasional changes in financial circumstances. Across all accounts, 67% of customer accounts have Behavior Gap Zero. Account holders who are more active appear to make allocation changes in reaction to the market, and underperform as a result. We observe an average behavior gap of 22 basis points across all accounts; however, we noted a skewed distribution, and 74% of accounts are better than this average. Below, we first detail the ways our smarter technology is making allocation selection easier than ever for investors. Second, we review the results of our behavioral research. Together, these illustrate the unique ability and dedication we have at Betterment to understanding and assisting with the behavioral components of investing. What makes this data unique? Most existing studies of the behavior gap in investing look at cash flows into and out of different funds. This is a necessity because most investing platforms require that an investor move funds from one vehicle to another to adjust risk. Existing studies generally show that those cash flows mistime the market, on average: rushing in after periods of success and retreating when returns are down. But cash flows are a muddy measurement of risk preferences. Investors may move assets because of fees, manager reputation, to consolidate investments, or because they need the money to spend. For investors, adjusting risk allocation at Betterment is as simple as dragging a slider to change the proportion of stocks and bonds within the portfolio. As a result, we can focus on how investors change allocations while filtering out other confounding changes, which allows us to measure the resulting impact on returns with great clarity. Automated Allocation: A New Paradigm We understand the reality of changing financial circumstances and accordingly, we make our allocation change as easy and efficient as possible. Adjusting portfolio allocations has traditionally been full of frictions: phone calls to advisors, fees for trades, and uncertain tax consequences. Betterment customers experience none of those frictions, and as a result, have a new level of freedom and power to adjust their allocation to meet their financial needs. Imagine a career change that pushes plans to buy a house back by three to five years, or a family change, such as a divorce or death, that makes retiring a few years later seem like the right decision. These changes in the time horizon of the investing goal mean that stock allocation should be increased accordingly. On the other hand, if an investor needs the money sooner than originally expected, more bonds are appropriate to minimize uncertainty around the withdrawal date. Betterment reduces certain costs and barriers to allocation changes (e.g., fees, fund choices, taxes) so that our customers always have the right portfolio for their financial situation. What we don’t want to encourage, however, are allocation changes in response to market movements or guesses about what the market will do in the future. As long-time Betterment customers know, we discourage market timing at every turn. With this research, we wanted to answer two questions: Are customers trying to time the market? If so, how is that affecting their returns? Examining Customer Behavior The data below shows allocation changes as they coincide with market performance (dark blue line) during just the last two quarters of 2014. Each bar shows the average direction and magnitude of allocation changes over the previous seven days. Note that these averages include only the small number of customers who made a change over the 7-day period— typically five out of every 1,000. When focused on the tiny subset of customers who were active, we do see some behavior that looks like market timing. How do we know this? If these investors were making allocation changes purely in response to idiosyncratic changes in their financial circumstances, the average change would stay close to 0% and we wouldn’t see any correlation with market performance. Allocation Changes and Market Performance Data Shows Subset of Active Users Only We see that changes followed the market to some degree in the second half of 2014, but what about a more systematic trend? If we use all of our data since 2010, we can look for such systematic patterns.2 The plot below shows the proportion of allocation changes moving toward stocks or bonds based on market performance in the preceding week. We see that when the market is up between 0% and 3% in the preceding week, the average change increases the stock allocation by 6%. When the market is down more than 2% in the preceding week, the average allocation change is toward bonds by 5%. Remember, more than 99% of customers do not make an allocation change during a given 7-day period, so this pertains to the decisions of the small number who do make changes. Proportion of Allocation Changes Moving Toward Stocks or Bonds Based on Market Performance How is this affecting returns? Perhaps these active customers are actually improving their returns by making changes? To measure the effect of allocation changes on a customer’s returns, we compared the returns the customer experienced as a result of actual allocation choices to an individualized benchmark. For the benchmark, we used the average time-weighted allocation chosen by the customer. Then, we compared each customer’s actual returns resulting from actual allocation levels over time to the benchmark: the returns that would have resulted if the customer had been at the average allocation constantly from day one. In both cases, we used time-weighted returns, so cash flows into or out of the account did not have an effect. As an example, imagine a customer who funds a five-year home-buying goal and sets the allocation to 70% stocks. After one year, the customer increases the allocation to 95% to chase the performance of surging U.S. equity markets. A more volatile second year makes the prospect of losses more salient, and the customer sets the allocation back to 70%. By the end of the third year, the account had earned 18%. In this analysis, we compare that actual 18% time-weighted return to a hypothetical account with a constant 78.33% allocation over the same period (the time-weighted average of 70, 95, and 70). By doing this analysis on every account, we find making allocation changes reduces returns, on average. By doing this analysis on every account, we find making allocation changes reduces returns, on average. Across all Betterment accounts, the mean gap between actual returns and the average allocation returns was 22 basis points. However this includes all the accounts that made no allocation changes, and whose gap would by definition be zero. Looking only at the accounts that made at least one allocation change, the average gap is 41 basis points. The figure below shows that each additional allocation change (up to four) increases the average behavior gap by about 16 basis points. Only 22% of accounts have made more than one allocation change per year. Nearly half have never made even one, so there is no possibility of a behavior gap, as we define it. Overall, two-thirds of customers have no gap, and three-fourths have a behavior gap smaller than the 22 basis point average. Behavior Gap and Allocation Changes IRAs Are Different Interestingly, we see customers making fewer allocation changes in their retirement goals in IRA accounts, and their returns are closer to the ideal as a result. Betterment customers make 48% fewer allocation changes in their IRA accounts and see 50% smaller behavior gaps, on average. We see two potential explanations for this difference. First, it’s likely that our customers’ retirement horizons don’t change very often, so there are fewer legitimate allocation changes than in many of the shorter-term taxable savings goals. Second, the findings are consistent with prior research showing less activity in retirement accounts, possibly because they are perceived as more “off limits.”3 It’s worth noting that a preference for changing allocation inside a taxable account versus an IRA, all else being equal, is highly tax-inefficient behavior, as investors are not taxed on realized gains inside an IRA. The returns analyzed here are not after-tax, so the findings actually understate the gap that results from frequent trading in a taxable account, which we’ve written about in the past. If an investor is going to market time (and we advise against that!), doing so in a taxable account is particularly ill-advised, as compared to an IRA. How does this apply to individuals? Does this mean that an investor should never make an allocation change? Not at all. If an investor’s financial goals or constraints have changed, an allocation change may be the right thing to do. In that case, we recommend going to the Advice tab in your Betterment account, entering the new time horizon or target balance, and adjusting accordingly. Using allocation changes as a tool to try to time the market, or in reaction to periods of bullish or volatile markets, is where we see trouble. These kinds of changes only make sense if an investor know exactly what the markets will do next, and that is not something most of us should be betting on. 1 The “behavior gap” is a term coined by financial planner and journalist Carl Richards and has become a popular way to refer to the loss of investor returns due to bad timing decisions. 2 While the average market movement has been upward over the period Betterment has been available to investors, it has been marked by drawdowns of up to 20% in the S&P 500 since 2010. 3 Barber, B. M., & Odean, T. (2000). Trading is hazardous to your wealth: The common stock investment performance of individual investors. The Journal of Finance, 55(2), 773-806. -
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Should You Factor Home Equity into Your Retirement Plan?
Should You Factor Home Equity into Your Retirement Plan? The answer depends on how much equity you have built up in your home—and what you expect your retirement expenses to be. The answer depends on how much equity you have—and what your retirement expenses will be. For many people, their home is their most valuable asset. So, it’s no wonder they would want to count any built-up equity in that home as part of their retirement nest egg. However, as we have seen in the last decade, the housing market can be up or down, which revives an age-old question: Should you consider your home to be an investment you can tap for retirement or simply another cost of living? The answer depends on how much equity you have built up in your home—and what you expect your retirement expenses to be. Your Home and Retirement: It Depends On Your Equity In the past, traditional thinking was that home equity created savings for the retirement years and an inheritance to pass on. Unfortunately, more recent trends show an inclination to spend rather than build equity, with homeowners taking out home equity lines of credit (HELOCs) during the good times of rising home values and low interest rates. Before the latest foreclosure crisis in 2007, homeowners used refinancing to pay other debt, make home improvements, and pay for vehicles, education, medical expenses, taxes, real estate, or stock market investments. This spend out of equity resulted in millions of homeowners eventually going underwater (having negative equity) when home values dropped. More than 8.2 million homeowners entered the foreclosure process from January 2007 to December 2011, according to data by RealtyTrac. Today, as home prices rebound all around the country, home values are increasing and so is homeowners’ equity. But while home equity is certainly an asset on the balance sheet, should it be counted as an asset in the retirement plan? Alex Benke, CFP®, Betterment’s Director of Advice Products, takes a conservative approach to planning. “Your retirement home is a place to live in, not a place that provides income,” he said. “If you plan to move to a smaller place, then you can consider that extra equity part of your plan, but don't forget taxes, fees, and commissions from a sale. Otherwise, Benke said, savers should not consider any part of the house in the plan for income, except in extreme situations where a reverse mortgage is the only option. This should not be something you plan on while you’re still saving and not yet retired. Homeowners who have more than 50% equity in their home can safely factor those funds into a long-term retirement plan to pay for future living and care expenses, says financial advisor Rick Winters, president of Winters Financial Group in Westlake Village, Calif. Under any circumstances, relying on home equity as a major source of net wealth can be a risky gamble—especially for older homeowners—should the market take another tumble and home prices drop sharply again. Under any circumstances, relying on home equity as a major source of net wealth can be a risky gamble—especially for older homeowners—should the market take another tumble and home prices drop sharply again. How to Factor Your Equity into Your Full Financial Picture To determine how home equity should be factored into the retirement pot, many advisors will first look at a homeowner's balance sheet. The first step is for the homeowner to calculate his or her net worth—the value of everything owned less the cost of everything owed—and then figure out how much a comfortable retirement is going to cost. Will that be $1 million or $5 million? Then the question is: Where is it going to come from? If a homeowner who is near retirement age has already decided to sell the home and include the proceeds in the retirement nest egg, then the cost of replacement housing has to be added into the cost of retirement. If a homeowner near retirement does not plan to sell, then the home equity should not be included into the retirement savings calculation. Possible Solutions: Downsizing and Refinancing In the past, the typical homeowner’s plan has been to stay in the family home until retirement and then downsize into a smaller home or retirement community. These days, however, that plan might benefit from a more rapid timeline. After doing the math, it may be that selling sooner and becoming a renter could provide more flexible and liquid assets that can be invested in an investment portfolio for retirement. “It depends on how much debt they have on the property, the area they live in, how long they have lived in the house, and where are they moving to,” Winters said. Another option for pre-retirees may be to refinance the current home and lock in a lower interest rate in order to lower the mortgage payment, thus decreasing expenses in retirement. Both downsizing and refinancing may allow the homeowner to tap existing equity in the home and add it to the retirement fund for future expenses or investment in other opportunities. -
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3 Steps to Improve Your Online Data Security
3 Steps to Improve Your Online Data Security Betterment is likely only one of a host of apps you use online—and employing good security hygiene when you’re online is more important than ever. Creating a password that’s hacker-resistant might be your best defense for keeping your personal data safe. The vast majority of data compromises aren’t caused by company-wide breaches, but by something we as individuals can control—our passwords. A 2013 study conducted by online security company Trustwave found that, out of 3 million passwords analyzed, 50% reached the barest minimum level of security. Betterment is likely only one of a host of apps you use online—and employing good security hygiene when you’re online is more important than ever. Know what you’re up against. Hacker programs, such as Hashcat, work by guessing passwords very rapidly—up to 8 million per second. This is called a ‘brute force’ hack because the computer basically tries to force its way into your account. There are four especially easy types of passwords to crack: A password that’s all numbers A password fewer than eight characters A password that contains an actual word (there’s ‘dictionary attack’ software that methodically tries only the likeliest passwords—such as all the words in a dictionary) Common letter-to-number substitutions, like 0 for O or 3 for E If your password falls into any of those categories, it might be like using a cheap luggage lock on your front door. Another hacker technique involves first finding out the ramifications for an acceptable password, and then plugging exactly those variables into a hacking program. Again, most people use only the bare minimum password requirements, which makes hackers’ lives much easier. Once they know that your password requires a special character and a capital letter (and an attempt to set up a new password on the website in question will tell them), they can insert those variables into their program, and then it’s just a matter of time before the program finds your combination. Hackers have also discovered that the most common way to satisfy those requirements is by adding suffixes (used the vast majority of the time), and after that, prefixes. Even in rarer cases where the special symbols are inserted within a password, thieves know that most people use common symbol substitutions: $ for S, 1 for L, or @ for A. And if you’re using a password that means anything to you at all, think again. Skilled hackers will sometimes do what’s called ‘spidering’: they’ll comb your social networking pages or blog to make guesses. In fact, if you can remember your password, chances are it’s easily hackable. Note that combining words, like thisismypassword, used to be a way to outsmart hackers, but these days, those are easy to hack, too. So now that you know what you could be up against, here’s how to lock out the hackers. Best Practices 1. Length and randomness are your friends. A longer password takes more work to hack. When you combine letters and numbers, be sure to include both uppercase and lowercase letters, as well as special characters, because it makes a password tougher to guess. In fact, using a randomizer, like this one from Norton, will create a tough password that doesn’t follow any of the patterns that hackers expect. You can also use a password strength tester to see how your concoction measures up. 2. Storage is key. Can’t remember that password? That’s a good sign—but to make sure your new password isn’t impossible for you to access, store it in a password manager like 1Password, LastPass, or Dashlane. Not only will managers like these log in to sites for you by typing in those complex passwords, but they’ll lock them all behind one master password, making them safe from anyone snooping on your computer. 3. Abbreviate a sentence. If you’d still prefer a password you can remember in the moment (and don’t want to access your password manager every time you need to get into a site), another technique is to make up a sentence and abbreviate it. For instance, “My mom’s chicken and waffles are the best—in Toledo!” could become “Mm’sc&wsatb—iT!” Looks silly, but it works. (Hint: Don’t actually use that one.) Keeping Secrets Security questions are meant to help verify who you are if you’ve lost a password. However, it doesn’t take much more than a Google search these days to find out what city you were born in or what your first dog’s name was… and suddenly those questions aren’t very secure. Invent false answers instead—maybe your favorite pizza toppings or movies. Good Hygiene To keep your passwords secure, you’ll need to practice good password hygiene. That means using a new password for each website (according to this study, 73% of us don’t). Otherwise, if one is hacked, then the hacker can try it on another one of your sites, and the virtual door is open to everything you have. You’ll also want to stay updated on major breaches in the media and change your passwords often, or as necessary, to keep your data safe. -
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After Law School: Balancing Student Loans with Retirement Saving
After Law School: Balancing Student Loans with Retirement Saving Given the rising cost of education in the United States, new graduates face the challenge of balancing the competing interests of paying off student loans versus investing in other financial goals, such as retirement. When and how you pay off your loans are personal decisions determined by a number of factors, so real-life examples are often helpful for getting you started. We sat down with Nathan Howard, corporate counsel at student loan refinancing company CommonBond, to get his take on how he is handling the pay-or-invest balance in his life. Background on Howard’s Graduate Student Debt Recent law school graduate Nathan Howard After Howard earned his undergraduate degree, he went straight to law school at Drexel University and graduated in 2012. By the end of his grace period, he owed nearly $70,000 for his juris doctor degree, with an interest rate of about 6.8%. While that’s a hefty liability, Howard ended up better off than many of his law school peers; the average debt held by a recent law school graduate is about $140,000, according to the New America Foundation, a non-profit public policy group. He says a few things helped him out there: He attended a state school for undergrad, so he completed his undergraduate degree with almost zero debt. He selected a graduate school that offered an attractive financial aid package. He borrowed up to the Stafford Loan limit of $20,500 annually for grad students (that includes both subsidized and unsubsidized Stafford loans) for each year of law school, and he borrowed additional federal student loans. If you’re still researching graduate schools and you’re somewhat flexible, consider that some schools might be willing to put together aggressive financial aid packages of scholarships and grants. “It helped that I was willing to go just about anywhere in the U.S.,” Howard said. Pick a debt repayment plan and build a safety net fund. After graduation, Howard’s high-level financial goals were to pay off his loans, save for retirement, live a modest lifestyle, and save for buying a home. He also needed to accommodate the high cost of living in a city while making his student loan payments of $788 per month. While Howard was unable to set aside money for retirement in the first year out of school, he was able to make a budget and create a savings goal for a safety net fund of six months’ worth of living expenses. “It was definitely tempting to start throwing money at the loans right away, but everything I read underlined the importance of a safety net fund,” he said. “And that proved out in that first year when, for example, I had to sink $1,000 into car repairs unexpectedly.” Once that was taken care of, Howard had to tackle the student loans, which he started repaying in early 2013. First, he had to pick a repayment plan. He decided to go with the standard 10-year plan because he could afford the monthly payment, and there wasn’t anywhere else he was going to get a fixed 6%+ return on his money. To save on his payments, Howard set up auto-pay and received a 0.25% discount on the interest rates, lowering his interest rate to 6.55%. One piece of good news for graduates in this category: When taxes come due, you might be able to benefit from the Student Loan Interest Deduction. Your eligibility for this deduction is mainly determined by your Modified Adjusted Gross Income (MAGI); this deduction could earn you a few hundred dollars toward your loans or other goals. (Read the IRS guidelines here.) Balance retirement investing and student loan prepayment. With his safety net fund fully funded, Howard could now assess where to put his money to maximize his long-term portfolio. First, he started to prepay his student loans. While staying on the 10-year plan, Howard whittled down his balance by aggressively prepaying the loans, setting higher-than-minimum payments and devoting extra cash to loan payments. With his risk profile, he found the fixed return on investment of 6.55% made sense as he saves for other goals. Now, Howard is considering refinancing his debt, but he thinks the borrower protections and repayment flexibility of federal loans currently outweigh his refinancing options, which would mean consolidating the loans with a private lender. To get his retirement savings started, Howard plans to max out the yearly $5,500 limit in a Roth IRA account this year, despite the fact that he has many other competing interests. Roth IRAs come with both future tax benefits and the potential to serve as a housing down payment, or as funds for certain qualified expenses. While Howard would only use it as a last resort, he finds the flexibility comforting. Plan for future saving. When deciding what to do with your money, you want to optimize both long and short-term goals. That means what you actually do will depend very much on who you are and what you want. Howard said that this order of priority has been very helpful in evaluating his goals for the future: Contribute to his 401(k) plan up to the employer match. Pay down debt (high-interest debt first). Max out an IRA. Max out 401(k) beyond the employer match. Open taxable investment accounts. -
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Don’t Wait to Have This Conversation with Your Parents
Don’t Wait to Have This Conversation with Your Parents Help your parents consolidate—and automate—their accounts in order to save time and money. Just at the point where you finally feel your own mid-life finances are under control (401k, Roth IRA, emergency fund, 529 savings account—check!), it’s time to start getting involved with your aging parents' finances, or so it seems. Starting the conversation about money can be hard—if not downright tricky. It’s fraught with emotions, hard decisions, and, of course, money itself. Not to mention, even when you have the conversation with your parents, it may not cover all the bases. According to a study conducted by Fidelity in 2012, 65% of adult children and parents said that discussing retirement readiness is important, and yet just 11% of children believe the conversations they had about retirement planning were detailed. If you find yourself being asked to step in and offer guidance to your parents for planning their golden years, here are some tips for how to manage. Get Comfortable With the Subject As your parents age, it’s important to open the channels of communication with them because you’ll be increasingly responsible for knowing where their assets are, their general retirement strategy, and how to manage issues that arise. Use your own financial planning as a way to get the conversation started. Pinpoint Future Events If your parents plan to move to a different neighborhood or state, sell their house, pay for a major event or education, or leave or receive an inheritance, you should at least have an idea that these things may be on the horizon because they could change how and when they plan to invest, manage tax burdens, or liquidate certain investments. Estimate Expenses After taking these potential future changes into account, you and your parents should get a rough idea of how much they will spend once they stop working. Downsizing, plans for more travel, eliminating a commute, and medical expenses can all cause monthly expenses to fluctuate considerably in either direction, but it will help for you to have a feel for how much money your parents need to cover their spending. Identify All Potential Income Sources If your parents have pensions, annuity income, or are receiving Social Security, help them tally up these monthly payments to determine how much of their expenses will be covered by guaranteed income. The remainder will have to be funded by income generated by a retirement income investment portfolio, part-time work, or another source of income. Organize Accounts One of the most challenging things about managing retirement is figuring out where everything is and how to streamline the logistics of accessing money. This can be especially difficult if your parents have multiple accounts from former employers. You might offer to help them consolidate their accounts in order to save time and money. For example, your parents might want to consider rolling over old 401ks into an IRA, or perhaps setting up one checking or savings account where they can deposit all pension and Social Security payments. Confirm an Investment Strategy Hopefully your parents already have an investment strategy in place, but if they don’t, now is a good time to evaluate their goals and determine the investment approach that will give them the best chance of reaching those goals, whether that means purchasing an annuity, hiring a financial advisor, or using a retirement-oriented portfolio. Of course, retirement can’t be planned perfectly to the letter. Life expectancy, market performance, and a host of other unexpected events are impossible to predict and can throw wrenches in even the best laid plans. However, you can help your parents make a smoother transition to retirement by being aware of their plans and by building a trusting relationship with both them and their advisors (e.g., lawyers, accountants, financial advisors, etc.), all of whom will be essential in helping execute a sound financial strategy. Just remember, if you're worried your parents have not saved enough, that might be your own perception. According to the Fidelity study, most children underestimate the value of their parents' estate by more than $100,000, on average. If you'd like to refer your parents to Betterment today, get started today. -
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Compare Investment Managers: A Quick Guide
Compare Investment Managers: A Quick Guide Betterment offers you more features and benefits for your money than other services. Take a look. A common question we hear is, “You guys are great—but what’s the difference between Betterment and other investment managers?” When we delve into the answer—whether on the back of a napkin or in conversation—we list the values that set us apart: we are smarter and more efficient, which should result in better net investor returns. To help you compare, we selected four management types and their cost structures and features. In the table below, you can see Betterment costs a fraction of other kinds of investment managers while offering more automated features. The same $500,000 investment at Betterment costs around 1/10th of what it would cost to manage with a traditional manager, according to published fee data. Our assumptions are detailed at the bottom of the table. Our comparison of the total costs and benefits to manage a $500,000 investment: Management type: Automated DIY ETFs Mutual Funds Traditional Manager Example services Betterment TD Ameritrade, Scottrade, E*Trade, Vanguard, Fidelity Vanguard, Fidelity, Schwab, State Street, T. Rowe Price Manually managed portfolios Minimum investment None None None $100,000+ Annual trading fees1 None $408 None Varies Average fund expense ratio2 0.12% 0.63% 1.16% 1.16% Internal fund trading cost3 0.005% Varies 1.44% Varies Management fee4 0.25% or 0.40% depending on the plan you choose None None 0.99% Cost per year $1,350 $3,558 $5,800 $10,750 Automated tax loss harvesting % X X X Automated rebalancing % X % % Automated dividend reinvestment % X % % Next-day deposits % X X X Automatic tax-optimized lot selection % X X X Fractional shares % X X X Personalized allocation advice % X X % Goal-based investment accounts % X X X Account syncing % X X X Our philosophy starts with passive investing and we only use index-tracking ETFs in our portfolio, hand-selecting every fund based on cost, correlation, and liquidity. With our algorithm-based advice, every customer receives personalized allocation adapted for his or her investment goals. Learn more about Betterment's investment services and portfolio. 1Assumes quarterly rebalancing across a 12-fund portfolio for a total of 48 trades annually for DIY investors with an average fee of $8.50 per trade; ETF trading fees can typically range from $0 to $20 for DIY investors, according to Wall Street Journal. Trading fees for mutual funds can vary widely and may not always be disclosed. For RIAs, pricing plans vary and some advisors may pass on trading costs to their clients. Costs may vary by provider. 2Read about Betterment's fund expenses. For other columns, we used the fund weighted average total expense ratio of ETFs (0.63%) and average for open-ended actively and passively managed funds (1.16%) found in the 2013 Lipper Quick Guide to OE Fund Expenses. The overwhelming majority of assets in the United States are invested in mutual funds, including funds under management with an advisor, which is why we used this expense ratio. With the exception of Betterment, all fund expenses are illustrative and are not specific to any of the listed companies Traditional Manager column. 3 For Betterment ETFs, internal fund trading costs are calculated as the average tracking error of our portfolio, which would reflect decreases in NAV due to trading costs. For mutual fund fees, we used a study of funds’ annual expenditures of 1,758 domestic equity funds over 1995-2006 from Shedding Light on “Invisible” Costs: Trading Costs and Mutual Fund Performance, by Roger Edelen, Richard Evans and Gregory Kadlec, Pg. 2. 4 We used Betterment’s stated management fee of 0.25%, 0.40%, or 0.50%, depending on the plan you choose. We used a 0.99% management fee for advised portfolios, based on average fee provided in the PriceMetrix 2014 The State of Wealth Management 4th Annual Report, Pg. 5. Costs may vary by provider. -
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The Truth About Student Loan Refinancing and Your Money
The Truth About Student Loan Refinancing and Your Money Lowering your interest rate by even 1 percentage point can save you thousands in interest payments over the life of your loan. When it comes to student loans, most people don't realize that they don't need to be stuck with high interest rates, impersonal lenders, or confusing payment plans. Even savvy borrowers may be put off by the complex eligibility requirements and unclear ROI that often accompany refinance and consolidation loan options. Refinancing, however, is an important consideration for anyone who’s serious about managing his or her money – it can save you thousands of dollars to put towards your other financial goals. Why look into refinancing now? Because it gives you the chance to choose a new loan that better fits your present financial needs and lessen the burden of student debt. Put another way, the sooner you refinance, the sooner you can save more money. How refinancing and consolidation work When you refinance a student loan, you are paying off your old loan through a new loan that covers the outstanding amount you owe. Consolidation simply means refinancing multiple loans into one new loan. In either case, you have the freedom to select a whole new loan, with a new term, a new rate, and a new lender, so that you can pay down your debt at rate that fits your lifestyle. For example, let’s say a typical lawyer graduates with $140,000 in debt, and he or she is paying at a rate of 7% over a 15-year term. Refinancing that debt to a new 10-year loan at a rate of 5.99% reduces his or her overall interest payments from about $83,000 to just more than $46,000—that's over $36,000 in savings. An added benefit to consolidation is simplicity: you’ll be making all your student loan payments on one monthly bill to one loan servicer. Since many people who borrow to finance their degrees must take out multiple loans at different terms and rates – e.g., a mix of Stafford Loans, Direct Unsubsidized Loans, Direct PLUS Loans, private loans etc. – consolidation means you no longer need to calculate your debt at different rates, terms, or monthly payment amounts. The benefits: savings, flexibility, and better service Savings From a financial standpoint, the main benefits of refinancing are: the chance to save money on your loans and the ability to take full control of your repayment plan. Depending on the level of your debt, lowering your interest rate by even 1 percentage point can save you thousands in interest payments over the life of your loan. Lowering your interest rate by even 1 percentage point can save you thousands in interest payments over the life of your loan. Flexibility Beyond a better rate alone, the chance to choose a new term offers a new flexibility to support your savings goals: choose a shorter term loan if you want to save on total interest payments, and choose a longer term loan if you want a lower monthly payment. How does this work? For one, lenders typically charge higher rates on loans with longer terms because they incur more risk. Therefore, you can probably get a better rate simply by consolidating to a loan with a shorter term, e.g., moving from a fixed 25-year term to a fixed 10-year loan. On the other hand, if you need lower monthly payments now in order to support your present goals, consider refinancing to a longer term. (This carries some net savings caveats – see “Why it May Not Be Right for You” below.) Better Service Another issue you can overcome with refinancing is the headache of a lender who doesn’t make your loans transparent or easy. The pain points in traditional student lending are well known, so we’ll steer clear of customer service horror stories to focus on the positive: refinancing means you don’t need to be stuck with your lender. Since you’re already signed up with at least one lender, you know from experience what kinds of changes and improved services you’d like to see. Take time to vet new lenders for their customer service offerings and payment options. Even better, many lenders will offer a discount of 25 basis points on your interest rate when you set up automatic payments for your loans, increasing your savings potential and offering additional peace of mind that you’ll never miss a payment. Why it may not be right for you You should be especially careful when considering your refinancing options if You’re on a nonstandard repayment plan. You’re near the end of your loan repayment term. The reason? In the first case, many refinancing options do not offer special repayment plans – if you’re on the U.S. government’s Income-Based Repayment Plan, for instance, you’ll find very few refinancing options that offer the same flexibility. On the other hand, if you’ve been aggressively paying down your student debt or you’re nearing the end of your loan’s term, be careful when crunching the numbers on refinancing. Refinancing to a longer term means that you pay interest for more months, thus increasing the overall cost of interest payments as compared to the same loan – same principal and interest rate – with a shorter term. You might be seeing lower monthly payments but actually paying more in interest over the life of your loan. This still may not be a bad choice if you need the lower monthly payments in the short term, and if you’re satisfied that the tradeoff in long-term savings is worth it for added spending flexibility now. Should you do it? There are many calculators out there to help you understand what refinancing student loans can do for your personal loans. Beyond what the calculators say, consider refinancing in light of your personal financial and investing goals so that you can determine the best repayment plan in order to you build wealth at your target pace. A final consideration is any effect on your taxes, as significant changes in your student debt may alter your payments come April. -
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Retirement Income Shouldn’t Be a Guessing Game
Retirement Income Shouldn’t Be a Guessing Game Betterment’s Retirement Income goal takes the guess work out of your most important retirement question: Will I run out of money? When it comes to creating a cash flow strategy for retirement you need the answer to one important question: “Will I have enough money to last a lifetime?” In today’s low-yield environment—and given most people’s longer lifespans—your retirement savings need to keep working for you long after your earning years are over. And you need to know how much of it you can withdraw safely to stay the course over the coming decades. That may sound like a complicated formula—but Betterment has been working hard on this problem to make it easy for you to get the answers. We launched an online retirement income solution that features an automated, dynamic withdrawal strategy, built on top of a low-cost, fully liquid portfolio with dynamic asset allocation. A Dynamic Approach to Retirement Income Betterment’s investing team has developed an income solution to provide dynamic retirement planning. Unlike traditional services, our income advice and allocation adjusts over time with your age, portfolio value, risk, and your withdrawal rate. Your money is invested in our globally diversified portfolio of 12 asset classes. Based on sophisticated algorithms, our Retirement Income service factors in your personal information to offer the optimal risk allocation across our globally diversified portfolio of ETFs and advises on the optimal amount for safe withdrawal for the coming year, while balancing the dual concerns of maximizing total income, and year-to-year income consistency. Both allocation and income advice are offered through Betterment’s existing portfolio and platform—so no matter your level of investing expertise, it’s time-efficient and easy to manage. The result is that income is variable, changing from year to year depending on portfolio balance and other factors. Over time, this flexibility can extend your capital if necessary, preventing the portfolio from being depleted prior to the end of your selected time horizon. To be sure, this kind of variability might not work for every retiree, but as part of a total of a total return strategy, this income goal is designed to extend money for as long as you it need to last. Expert Design The design for Betterment’s Retirement Income was led by product manager Alex Benke, CFP®, who is a second-generation financial planner and spent 10 years at J.P. Morgan before joining Betterment, and Lisa Huang, who holds a Ph.D in Physics from Harvard University and worked as a quantitative strategist at Goldman Sachs. Benke and Huang evaluated various withdrawal methods at a wide range of allocations using a Monte Carlo simulation for testing thousands of trial-run market scenarios. As part of their analysis, they tested the viability of the popular but flawed 4% rule—finding that a dynamic withdrawal and allocation strategy is clearly a better solution to maximize total income while virtually guaranteeing that the money will last for the specified period. Why Betterment’s Solution Is Better Many of the existing retirement services and strategies rely on static withdrawals—outmoded for today’s low-yield environment, global economy and people’s longer lives. The shortcomings of other services can mean that you may miss out on much needed growth, or, as with annuities, you get some predictability at the cost of liquidity, which can be constraining. Consider the failings of the 4% rule—a popular retirement strategy developed in the 1990s and designed to provide a steady stream of income—which, under current conditions is expected to lead to portfolio depletion about 30% of the time, analysis by Benke and Huang showed. Read more here on why the 4% rule is broken. Betterment’s innovation is to make income advice fully dynamic—regularly adjusting in response to multiple variables—and to fully automate that advice, integrated with our efficient, low-cost global portfolio. Just as the income advice, so goes the underlying asset allocation, fully dynamic, adjusted along a glide path over time to reflect a shifting risk tolerance. Our advice for a safe annual withdrawal rate would generally range from 2% to 10%, based over time on a host of factors, including your portfolio's balance. We advocate a yearly adjustment to your auto-withdrawal setting (i.e. income) to stay on track with advice. Our model was designed to maximize total withdrawals while minimizing withdrawal variation. What Do We Mean by 'Safe'? With the 4% rule, and other strategies, a less than 10% chance of ruin (i.e. your balance is zero) was historically considered safe. But our research showed that with current market conditions, the 4% rule actually leads to ruin about 30% of the time. Not so safe after all. Betterment's Retirement Income is designed so that you have less than 4% chance of running out of money. Furthermore, the chance of your withdrawal amount falling below a 2% threshold of your initial balance is only about 10%. Using our advice means your chance of running out of money is 4% or less. In other words—you are more than 96% likely to have income throughout your chosen time horizon by following our advice. Unlike products like annuities, any remaining investments are fully liquid—meaning your heirs will have access to the money, even if income is no longer necessary. Understanding Variable Income: An Example Margaret is a 65-year-old college professor, and she is likely to live to 85 based on her family history and health. Using Betterment’s income service, her $500,000 Roth IRA is allocated for a 20-year time horizon at 56% stocks and her expected monthly withdrawal this year is $1,941—an annual rate of 4.65%. This is not her only income—she also has income from Social Security, a pension, and 401K. If the markets go up: In the first year, her Betterment portfolio grows by 7% and her new balance is $510,000 even after a year of making withdrawals. She’s a year older, however, and now her new recommended allocation is slightly less risky. Margaret’s monthly withdrawal rate will now be about $2,062 (about 4.85% of the new portfolio balance, but about 4.95% of the original value). If the markets go down: If instead the markets were down 7%, her new balance would be $443,338 after the withdrawals. The new withdrawal rate will be $1,791 per month, or $150 lower than the original starting withdrawal amount, and 4.30% of the original value. Although the withdrawal amounts do change depending on Margaret's portfolio performance, her average withdrawal over 20 years is expected to be around $2,503 assuming an average market return of 6%. It's exactly this dynamic withdrawal strategy that virtually guarantees that her capital will last for the full 20 years. To be sure, every retiree can customize his or her time horizon. How to Get Started To get started, any Betterment customer who has designated herself as a retiree can access a goal type called Retirement Income. With this goal, Betterment’s algorithm then calculates a safe withdrawal amount and advises an allocation. Lastly, retirees can set up an automatic withdrawal from their Betterment income goal to their checking account to maintain fluid cash flow on a personalized payment schedule. The Results Monthly income may be a formula after all—but the peace of mind knowing that your money is more than 96% likely to last for however long you specify goes far beyond a spreadsheet. Like all our services, our income solution receives all the benefits of Betterment—security, automated investment management, global portfolio diversification, and tax efficiency. We believe we’ve developed an innovation that works for you, combining personalization and control with security and trust. -
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Why the 4% Rule Is Broken
Why the 4% Rule Is Broken There are fundamental flaws in the popular 4% rule for retirement income, including its reliance on a higher yield environment. In today's economy, you need a better, more dynamic approach to planning your retirement income. For the last 20 years, many retirees have relied on the so-called 4% rule when determining how much of their nest egg to spend each year. As the name implies, the rule is notable for its simplicity: as long as you withdraw no more than 4% of your initial portfolio, adjusted for inflation, you shouldn't run out of money. That rule is now being called into doubt—and for good reason. In today’s more volatile, lower-yield climate, this flat-rate withdrawal approach can put you at greater risk of outliving your money, or living on less than you could. Recent research has caused considerable debate, and sparked some much-needed innovation around that old guideline. A rigorous new study led by Betterment’s quantitative portfolio specialist Lisa Huang finds that applying the 4% rule under current market conditions is expected to prematurely deplete a retirement portfolio 30% of the time, assuming 3% inflation and a 30-year retirement.1 To arrive at this conclusion, we ran a Monte Carlo simulation to test thousands of trial futures, with the results presented in the chart below. Our research led to the creation of Betterment’s new retirement income product, released in April 2014. Our online retirement solution automates withdrawals, calculated based on a dynamic formula, fully integrated with an automated, low-cost, liquid portfolio. The algorithms are optimized to ensure that there is less than a 4% chance of running out of money—and a 90% chance that the annual withdrawal amount never drops below 2% of the initial portfolio balance (with the annual withdrawals expected to be above 4% on average, often significantly so.) The quest for stability Credit for the 4% rule belongs to Bill Bengen, a financial planner in California, whose research on the topic was first published in the Journal of Financial Planning in the early 1990's. Bengen came up with a formula for what seemed to be a safe withdrawal rate that would accomplish the top goals of retirees: Provide a fixed rate of withdrawal, like an annuity Rely on an easy-to-use withdrawal formula (unlike, say, required minimum distributions) Minimize retirees’ risk of running out of money However, while the 4% figure remained fixed in the public's imagination, the rates it relied on were anything but. Twenty years ago, the yield on a three-month Treasury bill was 6%. So while Bengen’s model called for a 50/50 stock allocation, even those with a more conservative asset allocation could still draw down 4% annually adjusted for inflation, and reasonably expect to preserve their capital. Even in 2002, the 5-year US Treasury yield was still 4.5%. That’s no longer the case—today a three-month Treasury is .04% and a 5-year is around 1.67%. In fact at least one paper has speculated that the apparent success of the 4% rule during the last 20 years may have been dependent on specific market conditions—which have become less and less favorable—and called its success an “anomaly.” It makes sense that the rule’s rise to popularity was a happy accident when you consider that the first decade after Bengen created his model was an exceptional time of low inflation and high corporate earnings in the U.S. A fly in the ointment But even without changes in the economic climate, the last couple of decades have highlighted several other, fundamental flaws in Bengen's approach: The 4% rule is based on the portfolio’s initial balance; subsequent market performance isn’t dynamically factored into the withdrawal rate—even though it can dramatically affect the portfolio’s balance. Flat-rate withdrawals that ignore dramatic market changes can lead to premature portfolio depletion. Likewise, a flat withdrawal rate doesn’t take into account personal changes in health or lifestyle that naturally occur with age. Many retirees need more flexibility in their cash flow to handle the inevitable ups and downs of life. In particular, an unfavorable market climate in the early years of retirement, coupled with a rigid withdrawal formula, increases the risk of asset depletion, because capital preservation during those early years is critical to the portfolio’s ongoing growth. Conversely, if returns are higher than expected in the early phase of retirement, but your withdrawals are static, you run the risk leaving money on the table at the end of your life that could have been used for greater enjoyment in previous years. The quest for a sustainable spending model Understandably, many retirees prefer fixed withdrawal rates because they’re predictable—that’s why annuities are popular. But several companies, including Betterment, find that retirees fare much better with a dynamic withdrawal strategy over the long-term (without the restrictions of annuities). Betterment’s Retirement Income service continually factors in a retirement portfolio's balance, projected inflation as well as retirees’ personal information, to come up with a dynamic asset allocation and spending plan that retirees can follow automatically—or further customize with a few clicks on their digital dashboard. Learn more about Betterment's new Retirement Income service. Generally, you can expect to withdraw more than 4% per year, depending on your age and risk profile. The initial portfolio starts with a 56% stock allocation and we use highly responsive algorithms within the product to factor in portfolio performance and create a glide path that’s designed to stave off longevity risk and preserve capital. By contrast, the two other companies that now offer retirees a similar, dynamic spending model only approach the issue from a financial planning standpoint, as opposed to advice that is actually implemented in an automated fashion. Last fall, Vanguard announced a new dynamic spending model for retirees which combines aspects of the 4% rule with the percentage-of-portfolio approach, in which you calculate a new withdrawal percentage each year, but don’t factor in inflation. This hybrid strategy sets a floor and a ceiling for withdrawals, based on the prior year. And in March 2014, J.P. Morgan Asset Management announced a dynamic retirement income withdrawal strategy. This proprietary model combines five key factors (including life expectancy, assets and forward-looking market projections) to create a customized portfolio and spending plan that retirees can adjust as needed with their advisers. However, neither of these two products are currently integrated with a live portfolio that automates the advice and the glide path—as well as the withdrawals—the way Betterment does. Out with the old, in with the new Dealing with a variable retirement income from year to year is a relatively new idea. Fortunately the Betterment model is designed to provide stability. The algorithms are optimized to balance the dual objectives of maximizing lifetime withdrawals, and keeping the withdrawal amount within a consistent range year after year. Best of all, by working with some natural ups and downs in your income from year to year, you’re actually improving your overall outcome. With the Betterment income strategy, there is less than 4% chance you will run out of money. 1We found the expected failure rate of the 4% rule under current conditions to be 31% when applied to a Betterment portfolio with a 30% stock allocation. Though analysis marshaled in support of the 4% heuristic in the 1990's tended to recommend a 50% stock allocation (e.g. the seminal Trinity study from 1998), these studies generally assumed a simple two-asset allocation between an S&P 500 fund and high grade bonds - sometimes referred to as the "naive" portfolio. The Betterment portfolio, with global diversification in both the stock and bond basket, has both higher volatility and higher expected returns at the same allocation to stocks. A 50% stock naive portfolio has the expected volatility of a 33% stock Betterment portfolio and the expected returns of a 26% stock Betterment portfolio. Accordingly, to test the assumptions of the 4% rule as applied to a two-asset portfolio at 50% stocks, we are highlighting the Monte Carlo results using a 30% stock Betterment portfolio. Notably, we found that applying the 4% rule even to a 50% stock Betterment portfolio is expected to fail 21% of the time under modern market conditions. -
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Why Index Fund Portfolios Win
Why Index Fund Portfolios Win A groundbreaking study by Rick Ferri of Portfolio Solutions and Alex Benke of Betterment sheds new light on why index portfolios beat active investing. The debate over active and passive investment strategies, now more than 60 years old, shows no signs of ebbing. If anything, this controversy has spawned a cottage industry, including dedicated blogs, sparring matches, and even a yearly scorecard—Standard & Poor’s Indices Versus Active, or SPIVA. Despite the volume of data and opinion fueling each side, the bottom line remains that index funds predominantly outperform comparable active funds. But until now the industry hasn’t fully explored the following question: Given that index funds tend to outperform active ones, will an all index-fund portfolio likewise outperform a portfolio of comparable actively managed funds? Now, Alex Benke, CFP® and product manager at Betterment, Rick Ferri, CFA, founder of Portfolio Solutions, have tackled just that issue in an innovative new study. Alex Benke (left) and Rick Ferri discuss their research for a Dow Jones video. In their analysis, originally released as a white paper in June 2013 and in the Journal of Indexes in July 2013, Benke and Ferri pitted all index-fund portfolios against portfolios holding comparable actively managed funds under six different conditions. The results demonstrate that “a diversified portfolio holding only index funds in all asset classes is difficult to beat in the short-term and becomes more difficult to beat over time,” the authors wrote. The study documents yet another significant advantage of investing in index funds—and it unearthed several other insights that can serve as guiding principles for all investors. Index funds perform better together One of the first compelling new insights to emerge was that an all index portfolio tends to perform better than just the sum of its parts, compared to an active portfolio. This surprising result emerged from the following test: The authors created a basic 60-40 portfolio with three of the most commonly held asset classes: 40% in a broad U.S. equity fund, 20% in a broad international equity fund, and 40% in a U.S. investment-grade bond fund. They then compared this all-index portfolio to 5,000 portfolios of randomly selected, comparable actively managed funds over a 16-year period (1997 to 2012). Read details on the experimental methodology in our white paper. The basic result was eye-opening, but not unexpected: The all index-fund portfolio outperformed the active ones 82.9% of the time during the 16-year period. The median annual shortfall of the losing active portfolios was -1.25%, and of those that outperformed, the median outperformance was 0.52%. (The authors note that while outperformance of actively managed portfolios is clearly possible, it wasn’t robust enough to make up for the downside.) But what really stood out was the combined performance of the index funds. When the authors examined the individual performance of each index fund in the portfolio, they all tended to outperform comparable active funds—but the result was higher when taking the three index funds together. Table 1. Estimated winning percentage of an all index fund portfolio over 16 years (1997-2012) VTSMX (US equity: 40%) 77.1% VGTSX (Int’l equity: 20%) 62.5% VBMFX (US bonds: 40%) 91.5% Weighted 40%/20%/40% 79.9% Scenario 1 Results 82.9% As the authors wrote, “index funds, when combined together in a portfolio, have a higher probability of outperforming actively managed funds than they do individually,” a phenomenon that was persistent in every scenario they tested. While the weighted outperformance of the individual funds was 79.9%, the outperformance of the index portfolio as a whole was 82.9%. Indexing long-term boosts returns Next, the authors looked at the difference in the probability of an all index-fund portfolio outperforming an all-active portfolio in the short-term versus the long-term. The authors tested the same basic three-fund index portfolio as above, in three five-year periods ranging from 1998 to 2012, as well as that entire 15-year period. Again, the results weren’t unexpected (as buy-and-hold investors could guess). In the long-term scenario, the outperformance of the all-index portfolio was higher than the average of each of the three five-year periods tested. But here another striking phenomena emerged: The outperformance average for the three five-year time periods was 76.5%; but if you held onto the index-fund portfolio for 15 years, it outperformed a comparable active portfolio 83.4% of the time—a significant difference. Reflecting real-world behavior Needless to say, few investors actually stick to simple three-fund portfolios. To give their research more real-world validity, Ferri and Benke then added more asset classes to create equally weighted five-fund and 10-fund index portfolios, which they then tested against portfolios of comparable actively managed funds (also equally weighted). Table 2. Index fund portfolio win rates and percentages by the number of funds 2003-2012 Run 1: Three-fund portfolio 87.7% Run 2: Five-fund portfolio 87.8% Run 3: 10-fund portfolio 90.0% But there was an unexpected twist to the results: It turns out that adding additional asset classes to the active portfolio actually reduced both its potential for loss, and its upside potential. The median win became smaller, and the median loss became smaller. Thus it seems that the more diversification there is in actively managed fund portfolios, the less variation there is relative to an all index fund portfolio. How many funds do you need? The real trouble for investors seems to lie in the assumption that more funds equals better performance. The authors note that many investors often hold more than one actively managed fund in each asset class (e.g. an investor might have a couple of U.S. equity funds to diversify fund companies or managers) to hedge their bets. Is this a good idea? No. In fact, as more active funds are added per asset class, this study found, the more an all index-fund portfolio is likely to outperform an all actively managed portfolio. In other words: Multiple active funds within each asset class skunk performance. Adding funds to increase overall diversification helps the performance of an all index fund portfolio, as above, but when active investors add funds within asset classes it actually decreases an all-active fund portfolio’s performance. Three guiding principles Thus, Ferri’s and Benke’s research demonstrated the indexing advantage from the fund level to the portfolio level. It also surfaced three powerful insights that can serve to guide investors in their real-life choices. An all index portfolio is greater than the sum of its parts. Index funds, when combined together in a portfolio, have a higher probability of outperforming actively managed funds than they do individually. An all-index portfolio performs best over longer time periods: an all-index portfolio held for 15 years significantly outperformed the average of three five-year periods. Adding more funds within an asset class in an actively managed fund portfolio typically results in even worse underperformance relative to an all index-fund portfolio. But of course, the merits of these conclusions hinge on the integrity of the methodology, which sought to level the playing field as much as possible between active and index funds. Transparent methodology In devising research conditions to deliver results that would be most useful for real investors, Ferri and Benke sought to imitate certain real-life conditions that investors face. They only used funds that were actually available to investors during the time periods tested (avoiding so-called survivorship bias). They used a common 60-40 equity asset allocation for both index and active test portfolios. The three-, five- and 10-fund index portfolios tested were based on the most common passive (mostly) Vanguard funds. The authors also made an effort to level the playing field between index and active funds in order to focus as much as possible on actual performance. They excluded sales loads and redemption fees from active fund performance, because the fees have a negative impact on returns. They selected the index fund share class with the highest expense ratio when two or more share classes existed. The authors did not rebalance the portfolios in any of the tests; and they analyzed pre-tax performance even though index funds tend to have better tax efficiency. How active funds were chosen The authors used a random portfolio selection process to run 5,000 simulated trials of available actively managed fund portfolios, except in one experimental condition. In one of the test conditions, the authors applied a low-fee filter to the active funds, because so much research has documented that fees are the leading cause of underperformance. But when they ran simulated trials only using funds that are in the lowest 50% in terms of their expense ratios (and excluding front-end and deferred load funds), the authors note: A common belief in the investment community is that low-fee actively managed fund portfolios have a meaningfully higher chance for outperforming an all index fund portfolio. We find no evidence to support this view. The authors conclude that future research could deepen this exploration by taking into account a longer time horizon (in this study, the authors were limited to a 16-year period because many index funds didn’t exist prior to 1997). And they recommend applying other filters to better hunt for alpha among active funds. For example, new data shows that active managers who are truly active outperform those who are less active but still charge high management fees for their services. Perhaps this or other factors—e.g. funds with higher ratings or bigger AUM, the fund managers’ ages or education—could become other filters that might shed light on active funds’ top performance. In the mean time, the jury's no longer out: An all index-fund portfolio statistically wins. -
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This Couple Retired in Their 30s. Could You?
This Couple Retired in Their 30s. Could You? An early retirement requires more than a couple million stashed away. By minimizing taxes on income and gains, you can live well—and your money can keep growing. It’s finally happened: you’ve landed a $2 million windfall—from an IPO, inheritance, or selling your screenplay—the kind of money you always dreamed of. Can you afford to quit your job? Is this the moment for an early retirement? We talked to Jeremy Jacobson, 39, who retired a year ago thanks to the nest egg he and his wife saved for 10 years. They have no plans to rejoin the workforce, because they expect their money to last another 60-plus years. They even want to have kids. Is this plan realistic—or even smart? We analyzed Jacobson’s strategy for financial independence, and compared it to a more conservative view from wealth advisor Steve Merrell, co-founder of Monterey Private Wealth in Monterey, CA. If your strategy is built around a modest drawdown rate, minimal taxes, and harvesting gains, it’s not only possible to keep your windfall growing while you enjoy a better quality of life—you may even be able to aim for an early retirement like Jacobson’s. In fact, while neither Jacobson nor Merrell is affiliated with Betterment, both of their methods for sustaining a windfall are predicated on generating steady returns for many years, with minimal effort and stress—which is what the Betterment portfolio is designed to do. Scenario #1: Total financial independence Jacobson was in his mid-20s and working as an engineer at Microsoft when he decided that total, long-term financial independence was his goal. And he knew it would take about 10 years to achieve it. He and his wife saved between 50% and 70% of their income for a decade. They lived modest lives on good incomes, he says, choosing to minimize the three expenses that are dominant for most Americans: housing, food, transportation. He declined to reveal how much they saved in total, but our estimate (based on details he discussed in several emails and an interview) is that he has at least $1.2 million in his portfolio. Make your money last Jacobson also did a lot of research (see the Reading List, below). One guiding principle that emerged from his self-education was the 4% rule, he said, referring to a common rule-of-thumb for “safe” asset decumulation, especially for retirees. But in order to live on a 4% drawdown from a relatively modest stash like $1 million or $2 million, you have to be smart about your tax strategy and your lifestyle. Those were the next considerations in Jacobson’s plan. (You can read additional details on his blog.) Minimize taxes As U.S. citizens and residents of Washington State (although they’re traveling in Mexico now), Jacobson and his wife Winnie Tseng pay federal but not state taxes. Jacobson figured out that the first $20,000 of your income is tax free if you take the standard deduction, and personal exemptions of $3,800 each. By keeping their marginal tax bracket low, they could also claim up to $70,700 in dividends and long-term capital gains tax free. Thus, they could live on about $90,000 tax free—but they choose not to. “Our lifestyle requires about $850,000 invested,” Jacobson says. Currently, his financial plan requires that they live on 4% of that, a bit less than $36,000. In addition, they rely on tax-gain harvesting. They take about $30,000 per year in long-term capital gains, and reinvest those to raise their basis and keep their investments growing—also tax free. His example: You buy $100,000 of Microsoft stock at $100 a share. Hold it for a year and sell the stock for, say, $130,000, which yields a tax-free gain of $30,000. You’d then buy $130,000 of, say, Berkshire Hathaway, hold that for at least a year. Once you sold BRKA, your new basis is $130,000, so that $30,000 remains tax-free forever. Spending vs. growth But it takes more than tax planning to make your money last. Jacobson and his wife are comfortable for now, traveling in countries that allow them to live an affluent lifestyle for a much lower cost of living than in the U.S. That lifestyle might not appeal to many investors (see Scenario #2, below), but Jacobson’s low-cost, itinerant path is allowing his money to “bloom,” as he puts it. By one analysis (he uses this calculator), there is a 20% chance that he could end up with $85 million in 30 to 40 years, and a 50% chance it could top $30 million. “I’m ok with that,” he says. He’s also weighing a shift to an all-stock portfolio, despite the additional risk involved. “Today we are at roughly 70% total market stock fund, 15% mid-term bonds, 15% REITS, plus individual dividend-paying stocks,” Jacobson says. He’s considering reducing the bond portion of his portfolio a) to lower his taxable income and b) for the promise of greater long-term growth. “If we invest all in stocks, we should be able to leave behind a bigger endowment,” he says. “This could be the difference between funding a small charity hospital in one town and funding a nationwide family of charity hospitals.” It’s hard to offer advice to a guy like Jacobson on how to run his finances. He clearly has his situation under control. But if you’ve got less time on your hands, and want to benefit from a diversified portfolio with the ability to seamlessly adjust your exposure to stocks versus bonds with no trading fees—with similar results to his current strategy—that’s what Betterment is here for. Scenario #2: Using a windfall to boost quality of life Wealth advisor Steve Merrell offers a more cautious plan for dealing with a windfall of $2 million—an amount he believes would not allow most people to quit their jobs. While he doesn’t rule out the possibility of an early retirement, Merrell suggests running the numbers and projecting your cashflows in order to plan for contingencies—everything from kids to school costs to a possible setback like an illness or accident. “You’d want a pretty firm grounding before stepping off the track completely.” Merrell thinks a smarter way to handle $2 million is to consider it as life-long supplementary income, by using part of it to create an annuity of sorts by withdrawing, say, a 20% chunk to generate extra income over time and setting aside the rest. By annuitizing part of your windfall, in effect, "it gives you more freedom to do what you’re already doing, then you can make other choices about your life," Merrell says. We wrote about how to create a happiness annuity from a windfall, and Merrell’s strategy is similar—with the added benefit that by not touching 80% of your stash, you’ll end up with substantial wealth by the time you retire. The question you want to ask of any portfolio is: Do I want to keep that money working for me, or do I want to spend it? “It could be the difference between the Volkswagen now, versus the Ferrari later,” Merrell says. That’s the beauty of compound interest. “Simple returns are very modest compared to what compound interest can do,” he says. For example, if you kept $1.6 million of your $2 million invested in a diversified portfolio, you have various options with the remaining 20% ($400,000). Let’s say you put that $400,000 into tax-exempt bonds, with a yield of 2.5%. That’s a modest bump of about $800 per month or about $10,000 a year, tax-free. Or, assuming you’re 35 and plan to retire at 65, you could spread that same $400,000 over the 30 years of your remaining working life, and enjoy an additional $19,000 a year, in which you’d spend down the full $400,000. Depending on your financial plan, tax strategy, and lifestyle, financial independence could be within your grasp, as Jeremy Jacobson’s story shows. Or, you could opt for a more traditional route with arguably less risk—and possibly less reward. Now all you need is the windfall. Reading List As Jeremy Jacobson was crafting his financial strategy, his research included several well-known books, blogs, and other resources: • Your Money or Your Life • The Four Pillars of Investing • Berkshire Hathaway annual shareholder letters • Mr. Money Mustache • Early Retirement Extreme JLCollinsNH.com 1Read our full returns disclosure. -
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Fractional Shares Are Essential to Efficient Investing
Fractional Shares Are Essential to Efficient Investing Fractional shares are an efficient way to diversify every penny in your investment account. Here’s how we do it. Investing builds wealth. Holding cash doesn’t. While this is a radical simplification, it reflects a core investing principle: Over the long term, the more you have in the market, the more opportunity you have to earn returns. Or, to put it another way: if you’ve allocated money for investment, then all of that money should always be invested, precisely in the way that you intend. At Betterment, we use fractional shares to make this happen. But in some investment services, that’s not the case. Some of your money may be sitting on the side, uninvested, and not working for you. Let’s look at why that is, and how our consistent use of fractional shares puts you and your money in a more advantageous position. Never leave money out of the market As you may know, trading on an exchange can only happen in whole shares, which is why many investing platforms only allow you to trade whole shares. But this is not really an efficient way to do things. For example, imagine that you have a portfolio with 12 ETFs, and one share of each ETF costs $100. Now you make a $90 deposit (or your ETFs pay a total of $90 of dividends). With a platform that only uses whole shares, you cannot use any of that cash—read: zero dollars—to add to your investments because it’s not enough to buy a single share of anything. So that 90 bucks will just remain uninvested, waiting for additional cash, before you can buy even a single share. As deposits and dividends flow through this account over time, it will always have some amount of pesky cash remainder sitting there. This is sub-optimal investing and a wasted opportunity over the years. Technology means less waste As efficiency junkies at Betterment, we can’t stand the thought of even a penny sitting on the sidelines not earning returns. Inefficiency is our enemy. That’s why, when we launched our service in 2010, we put a lot of work into supporting fractional shares. The full investment of every dollar according to your desired asset allocation means that your money is getting absolutely the most value possible out of investing. This is part of our thoughtful application of technology. It means an investor with a $2,500 account receives the same diversification benefit as one with a $2.5 million account (and we don't require a minimum balance). Down to 1/1,000,000th of a share You can’t go to market and buy or sell fractional shares. However, a Betterment customer’s trades and resulting positions can be fractional—down to 1/1,000,000th of a share—putting every dollar to work while allowing every investing goal to be perfectly diversified according to its target allocation. This is part of Betterment’s unique sophistication. In practice, it also makes our service equal opportunity for all investors. It means an investor with a $2,500 account receives the same diversification benefit as one with a $2.5 million account (and we don't require a minimum balance). And every investor has the benefit of automatic, perfectly allocated dividend reinvestment, with no odd amounts just being wasted in cash. How it works To see how fractional shares look in a real-life example, here’s how $100,000 is actually invested at a 70% stock allocation in our portfolio. Ticker Price per share (from 10/31) Percentage in 70% stock portfolio Dollar value in $100,000 portfolio How many shares required? SHV $110.24 0 $0 0.000 VTIP $49.47 0 $0 0.000 AGG $107.9 10.4 $10,400 96.386 LQD $115.2 5.2 $5,200 45.139 BNDX $50.05 10.3 $10,300 205.794 VWOB $77.75 4.2 $4,200 54.019 VTI $91.39 12.9 $12,900 141.153 IVE $81.75 12.9 $12,900 157.798 IWS $63.7 4.1 $4,100 64.364 IWN $94.58 3.6 $3,600 38.063 VEA $40.85 30.1 $30,100 736.842 VWO $41.87 6.3 $6,300 150.466 Note: For clarity in the table, we’ve rounded to three decimal places, but our algorithms trade to six decimal places. What does our fractional share platform mean for you? You are more likely to reach your goals faster because all the money you have available for investment is always working for you. If you want to invest $100,000 that's what we do. Not $99,987 or other smaller amount. You choose exactly how much to invest; we do all the math for you. You never have to think about the cost of any individual asset when you make deposits or withdrawals from your portfolio. Your goals are properly diversified on an ongoing basis. We’ve already discussed how Betterment strategically uses your cash flows (dividends, deposits) to rebalance your goals, keeping your tax bill low by minimizing the need to rebalance by selling. Betterment’s trading algorithms work with six decimal points of precision, using all incoming funds (even odd amounts like dividends) to shore up any imbalances in your positions, no matter how tiny. And if you have an investment account with leftover cash just sitting there, ask yourself: If I didn’t want that money invested, why would I have put it there in the first place? -
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The Single Most Important Question To Ask a Financial Advisor
The Single Most Important Question To Ask a Financial Advisor Steve Lockshin, one of the top-ranked financial advisors in the U.S. talks to Betterment about finding an advisor: what to ask, red flags to look for—and why online advisors offer an advantage. Financial advisor Steve Lockshin pulls back the curtain on his industry in the way only an insider can. In his new book Get Wise to Your Advisor (Wiley, 2013), he reveals how some of the biggest Wall Street institutions push their advisors to sell products that are not in an investor’s best interest—and how that can undermine your personal success. Instead, Lockshin advocates for transparency in the industry, and says many people may not need a financial advisor at all, given the emergence of modern online financial advisors like Betterment. His pursuit of making the system work for consumers—not advisors—has earned him the distinction as one of the top 3 financial advisors in the nation by Barron’s for the third straight year. We spoke with him recently about the state of the financial advice industry—and what you should be looking out for when on the hunt for an advisor, whether it’s an online service or a person. What’s the first mistake most people make when choosing an advisor? People tend to believe investing is complex and that they have to have someone to do the work for them. Investing is actually much easier than many investors fear it may be. With so many goods and services on the market—both investment products and financial services—the key is to find a signal in the noise. Simple solutions are often the best solutions. Do most people need an advisor? It’s very possible to handle your investments and savings on your own — if you have one thing: That’s called discipline. Much like dieting, most of us know what to eat and how to exercise; yet often we need something or someone to assist us with our discipline. A good live financial advisor can help with discipline. That’s why I also like Betterment—it’s a simple solution for automating your investing and savings that keeps you on track. How much should an advisor’s fee add to your all-in costs? You can get very good financial advice for as little as .15%—or about $150 for $100,000—invested for your assets under advisement. Make sure you know what you’re paying. Trust, but also verify. The industry is riddled with conflicts of interest, buried fees and unnecessary complexity. However, by asking a few questions, and doing just a bit of homework, you can find the right fit. A good advisor can be worth their fee if they help you make great decisions (and keep you from making poor choices). The cost shouldn’t exceed 1.0% of your assets under advisement. What is a fiduciary, and how do you know if your advisor will fulfill that role? You don’t. That’s one of the most frustrating parts of the current state of the financial advice industry. A fiduciary is a very important distinction investors should rely upon and means he or she has no conflicts of interest with you. There is a simple question you should ask anyone who claims to be one: “Do you make commissions on my account or do you make more by selling me one product over another one?” Beware the advisor that claims to be a fiduciary and who is still paid commissions that differ by product (in fact, most fiduciaries won’t even employ commissions as a compensation tool)! How does automated investing fit in with the traditional advisory model? Software-based investing is still a new field, but it is very well-poised to serve a wide variety of investors at a low cost. I invested in Betterment (as both an investor in the company and as an individual investor in the strategies) because I truly believe that low-cost, disciplined investing is an important resource and Betterment does it well. Unlike human investors, software is unemotional and can help you do things you might not want to do on your own. If your financial advisor is merely acting as a gatekeeper to asset allocation and fund selection—things I deem to be commodity services—consider using automated investing and saving money. -
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Why Couples Have Money Fights
Why Couples Have Money Fights You want to be a team when it comes to your money...but you're not. Here, a smart way to make some real progress. Yet another study about couples and their money has found (drrrrrum roll) that many people aren’t feelin’ the love when it comes to their finances. Worse, couples seem deeply confused (or in denial) about their financial connection: A 2013 study from Fidelity Investments found that 81% of couples describe themselves as “one financial entity,” 92% as good financial communicators. Yet 55% say they don’t make day-to-day decisions jointly, and only 28% are completely confident that either partner is ready to assume responsibility for their joint retirement finances, if necessary (i.e. 72% are not). What’s responsible for such a strong perceptual gap, and how can we close it? After all, this isn’t some trivial lack of compatibility, like disagreeing about who leaves the top off the toothpaste. Financial teamwork is crucial in order to minimize mistakes and maximize your assets (and end money fights). Lives in transition Like many previous studies, this one points to the fact that many women aren’t as involved in the family finances as they could be. Some 24% of women say they have the primary responsibility for the day-to-day finances, but only 19% say that about retirement planning. This is an increase over years past, but it's still low. So is the answer for couples to increase their communication around money and build up their confidence together so that both people feel included, empowered and on the same page? Nah. That feel-good stuff…feels good, but it doesn’t get to the source of the disconnect, which is that we’re in a period of transition that may require a more pragmatic division of labor in order for couples to co-exist happily and succeed financially. Divide and conquer Long-term relationships are built on the strengths and weaknesses that each partner brings to the table (the bed, the grocery store, the laundry room). You’ve probably seen your share of imbalances, and you probably do make trade-offs that (one hopes) add to the smooth functioning of the family. The trouble is, you and your mate may not always know how to conduct similar negotiations regarding money—because in most cultures (for centuries) money has been a male domain. Case in point: You know that women weren’t allowed to vote until about 100 years ago, but they didn’t get the right to have a credit card in their own names until 1974. Now, suddenly (or at least in the last decade), women are making advances in education and earning power that have given them greater financial clout. According to the Census Bureau, more women are earning college and graduate degrees, compared to men, putting themselves on a higher-earning trajectory. But many women still don’t have commensurate financial management skills or confidence (this survey isn’t the only one to show that women’s confidence lags men’s). Does this put women behind—or men in a stronger financial position? Not necessarily, as men’s responses to questions like the ones in this survey likely reflect the male tendency to express overconfidence in their abilities (a common flaw, especially in the financial realm). Wearing new hats (or pants) The truth is that many couples today are dealing with an uneven distribution of skills, some outdated perceptions, and gender role hangovers. In most surveys, like this recent one from Fidelity, women tend to identify as the chief household budgeters; men tend to identify as the long-term planners and investors—but those are also the default roles in many relationships. But as men’s and women’s capabilities and interests shift, it’s essential for individual couples to identify which partner, really, is the best equipped to rein in the grocery budget or manage the 401k, rather than default to pre-existing conditions or belief systems. Studies like this one imply that women are somehow not involved or are unwilling to be involved in money management—as if that’s the main hurdle preventing couples from making fully formed financial plans. But the street goes both ways. These days it’s essential for both partners to expand their view of who can or should do what in order to enjoy the financial success you've always dreamed of—together. -
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The Difference Between Vanguard and Betterment
The Difference Between Vanguard and Betterment I’ve been asked a lot in the last few months in the transition from my old role at Vanguard to my new role as Chief Growth Officer at Betterment – what’s the difference between the two companies? In short, Vanguard makes great stuff. Betterment is solely focused on making stuff great for you. Betterment’s mission is clear: to put you in better control of your money and your life through personal advice, cutting-edge technology, and a fully flexible approach—no minimums, no trading fees, and access to your money at all times. What does that mean? At Betterment, the first question we ask is, What do you want to achieve? We think your investments should be based on your situation and what you want out of life. That’s why we recommend asset allocations based on your personal goals, and we don’t force you into a cookie-cutter product, like a Target Date Fund. We think you deserve a user experience that is clean and doesn’t burden you with things you don’t need. It’s why we make the investing process so seamless: adjust your asset allocation with a simple slider between stocks and bonds and activate our sophisticated investment selection process. What’s more, we think your investment returns need to be measured in how you reach your goals, in addition to the numeric return. That’s why we deliver quarterly statements that not only report your numeric returns, but also report on how you are tracking against the life goals that you set. You value your time. So do we. We think you need not spend more than a few hours a year on your investments in order to reach your goals. Vanguard Makes Great Stuff. Betterment Makes Stuff Great For You We’re big fans of Vanguard here at Betterment. They make fantastic investment products. It’s why we use some of their funds in our portfolios. However, as an advice provider, their advice offerings are a bit different. Their traditional financial advisor service model differs from our technology-based service model, which speaks to their cost structure, but more importantly it demarcates how we think about the advice space – advice isn’t a nice to have, we think it’s a must-have for most investors. If you don’t want that offering, you are left on your own to choose your funds or pick a mass-marketed product like a target date or lifestyle fund. We think that there is an opportunity in that space. This isn’t an indictment of Vanguard at all. Quite to the contrary, it is a fantastic company with a noble mission. I spent nearly three years there and it was some of the most rewarding time in my career. I have many friends there across senior levels of the company (and I miss them all dearly). I’ve even had the luxury of lunching with Jack Bogle on a couple of occasions, as his former research assistant worked on my team. On a historical basis, Betterment and Vanguard share more than they differ. Both are unique companies that are dedicated to democratizing and demystifying the way people invest. When Jack Bogle founded Vanguard in 1975, the whole financial world (including the SEC) thought the idea of an at-cost mutual fund company was nuts. At Betterment we think everyone should have an efficient way to invest with access to customized investment advice. Additionally, that advice should be easy to understand and simple to manage. Naysayers have also called us nuts – but we know we’re in good company! At Betterment, we admire Vanguard’s mission of transparency, fairness, and equality. We think we’re the next generation of that mission: a great product that’s built specifically to address your needs and unique situation. 1We've updated our pricing structure since this article was published. Learn more at betterment.com/pricing. -
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Making the Most of Windfall Gains
Making the Most of Windfall Gains One of the fundamental truths about personal finance, is the fact that our problems with money have little to do with mathematics. We know we have to spend less than we earn. We know that credit card debt, with its double digit interest rates, is bad for our long term success. We know that saving for retirement is important and that compound interest is our friend. We don't save as much as we should for retirement because we can't picture ourselves in forty years and needing that growth. We don't see ourselves spending months to pay down a debt we accrue in just minutes. It's not that we're bad at math, we're bad at psychology. As we approach tax season, you will probably get a tax refund. Last year, the average tax refund was nearly three thousand dollars. I don't care how much money you make, that counts as a windfall. The problem with a windfall like that is that you are not psychologically prepared for it. You have a tendency to see it as a bonus rather than what it really is - an accumulation of last year's overpayment of taxes. To hijack your instinct to simply spend this "free" money (that in reality you worked really hard for), put it to work before you get it. Boost Your Retirement Fund Right before you file your taxes, you should know how much of a tax refund you'll get from the Treasury. Use the money to boost your IRA. Better yet, max out your IRA from the beginning of the year to make an extra $705 more. Pay Down Debt You can't build on your net worth if you're anchored to high interest credit card debt. Pay down expensive consumer debt. Credit card companies absolutely love it when you only pay the minimums because it means they get to keep extracting money from your wallet every single month. Your mind may tell you you're able to buy a couch and only pay $20 a month, but the math says you'll still be paying for that couch even after you've trashed it. Treat Yourself We can't always outsmart ourselves and the psychology of money goes way deeper than our conscious minds will admit (it's why we eat late night snacks even though we know it's bad for us). Why not give in a little so you don't give in the whole way? Treat yourself to something nice and then put the rest towards something "responsible", like paying down debt or saving for your retirement. Depending on the size of your windfall, this could be a nice vacation or just the latest gadget you've had your eye on. By treating yourself a little bit, you enjoy the fruits of your labor (or luck) so you don't feel compelled to blow the whole amount. Remember that ultimately this is a question not about self control or intelligence, but simple psychology. Windfalls are tricky to deal with because we don't think of them as "earnings" or "regular money," we think about it as a bonus and how we should treat ourselves. In the end, money is fungible: A dollar from a windfall is no different than a dollar from work or found on the ground. Use those dollars to get closer to your biggest goals. Anything else is a waste. -
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A Smart Way to Boost Your Retirement Savings (Hint: More Income)
A Smart Way to Boost Your Retirement Savings (Hint: More Income) Thanks to the recent recession, and the slow job market recovery, it is little surprise that many are turning to side projects and hobbies to earn a little extra money. With a plan, a few extra hours a week, and a decent amount of effort, it's possible to start a small side business, or monetize your hobby. What's difficult is managing your time once you start adding multiple projects into the mix. Turn Off the TV According to the American Time Use Survey (2011) the #1 leisure activity of those 15 and older is watching TV. On average, Americans watch 2.8 hours of TV per day. That's almost three hours. Most people come home from their regular jobs, maybe eat something, and then plop down in fornt of the TV for the evening. Even if you don't watch TV for that long each day, stop and think about how you are spending your time. Do you spend a lot of time on Facebook? One of my problems is that for the longest time novels were my TV. I love a good fantasy/sci-fi adventure. But I'd spend three or four hours a day reading these books that did little beyond entertain me. Keep a time diary for a week or two, and be scrupulous about recording how you spend your time. When I did this, I was shocked. There's nothing wrong with taking an hour or so to yourself to unwind each day, but I was spending three hours at a time entertaining myself. No wonder I was always falling behind! Realize where your time-sucks are and remedy the problem. Instead of watching TV for almost three hours when you get home from work, cut the TV time to one hour -- and spend the other 1.8 hours working on your side project or hobby. Prioritize There are times when, no matter how hard you try, there just isn't time to get everything done in one day. At times like these, you need to prioritize. First of all, figure out where your work fits into the priorities. If you need your job in order to pay the bills and stay afloat financially, that's your first priority. So make sure you are right with your work before you tackle something else. Next, prioritize the tasks related to side project or hobby. Figure out what needs to be done first, so that you can build on it the next day. Sometimes, you have to let your side project or hobby slide for a little bit. Look for ways to break tasks down into bite-sized bits, order them so that you continue to make progress. Eventually, if your side project takes off, you can re-evaluate your priorities and maybe even move work lower on your list. Take Care of Yourself It's important to take care of yourself during this time. You need adequate sleep to do well at your job, as well as to create a successful side project. You also need to take care of your body, and build your relationships. It's not always easy, but sometimes you just need to stop, say no, and relax for half an hour, or spend an evening out with your significant other. This will help you re-charge, and get you ready to tackle the next day. What are some of your ideas for balancing work with your other projects? -
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How to Manage a Mortgage
How to Manage a Mortgage Borrowing as much as possible to buy a home may be the American dream of the past, but purchasing real estate is still a big goal for many people (not to mention a good investment). Make sure you're managing your mortgage correctly. Recent years have brought about lower interest rates, and more opportunities for homeowners to better manage their mortgages. However, managing your mortgage requires more than just blindly rushing forward to refinance. You need to pay careful attention to your situation, and what you think might happen next with your life and your finances. Watch Out for the Adjustable Rate Right now, it might make sense to get an adjustable rate mortgage when you buy a home, or even to refinance to an adjustable rate. Often, adjustable rate loans have lower rates than fixed rate loans. This makes them attractive to many homebuyers, as does the thought that the rate might fall a little bit lower. At some point, though, rates will start rising again -- especially if national debt issues prompt higher yields for Treasury securities. Don't become too complacent. Have a plan for refinancing to a fixed rate if you know that you will be in your home for awhile. That way, you won't get caught with higher payments when mortgage rates start to head higher. Refinance Right One way to manage your mortgage and bring down costs is to refinance to a lower interest rate. However, it's important to pay attention to the way you refinance. If you don't refinance right, you could end up paying more. Will you recover the loan costs? Refinancing usually comes with its own costs. From loan origination fees to appraisal costs, there might be expenses. If you can't get a no-cost refinance, consider how long you will be in your home. Will you be there long enough for the interest savings to offset the cost of the loan? What are you doing with the term? Another consideration is the term of the loan. If you only have 15 years left on your mortgage, don't refinance back out to 30. The best way to reduce your costs is to only refinance what you have left on your mortgage -- or even shorten the term. A shorter term with a lower interest is almost always a win. Should You Pre-pay on Your Mortgage? If you are bent on getting rid of your mortgage debt as quickly as possible, it might make sense to pre-pay it ahead of schedule. Paying down a mortgage at 3.76% is a better investment than a savings account yielding 1% for example. You can make extra payments to the principal each month, and reduce what you owe significantly. Just make sure there is no pre-payment penalty attached to your mortgage. On the other hand, you might be able to get better long-term results in the stock market. Instead of pre-paying your mortgage, it might make sense to take the extra money you have and invest it in low-cost investments like index funds and ETFs, or even to invest in dividend stocks. However, you need to realize that there is a chance of loss with this route, whereas you have a risk-free return when you pay down your mortgage (in the form of interest savings). Look at your unique situation, your mortgage, and run the numbers. With the right management, you can reduce costs and get the most for your money. -
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Diversification Explained
Diversification Explained A diversified portfolio should be diversified at two levels: between asset categories and within asset categories. There’s a handy little story on the SEC website that helps explain it: Have you ever noticed that street vendors often sell seemingly unrelated products - such as umbrellas and sunglasses? Initially, that may seem odd. After all, when would a person buy both items at the same time? Probably never - and that's the point. Street vendors know that when it's raining, it's easier to sell umbrellas but harder to sell sunglasses. And when it's sunny, the reverse is true. By selling both items- in other words, by diversifying the product line - the vendor can reduce the risk of losing money on any given day. Before I delve into the trade-offs of different allocations, it’s helpful to outline how this works in a Betterment account. Eight ETFs A diversified portfolio should be diversified at two levels: between asset categories and within asset categories. All Betterment customers invest in the same portfolio – a blend of stock and bond index exchange-traded funds (ETFs) that are efficient, liquid, and provide conservatively balanced exposure. They encompass thousands of companies in the US and overseas. We’ve taken care of this decision, because frankly, it’s complex, time-consuming, and really, really hard to get right. Our investment advisory panel, made up of industry experts including economics professors and CFAs, took a critical eye to the stocks out there and selected the best mix of assets for someone looking for steady, long-term growth (which should be all of us!). Two Baskets In a nutshell – these assets make up our two baskets “Treasury Bonds” and “Stock Market”. When you deposit money with Betterment, it is seamlessly invested in a blend of the two. One Handy Dial Betterment gives you control over the next level of diversification: the proportion of your money invested in each of these baskets. Setting the allocation between these two portfolios is the single investment choice Betterment customers make. It’s important because if you don't include enough risk in your portfolio, your investments may not earn a large enough return to meet your goal. Too much risk and the money for your goal may not be there when you need it. Help! How do I make such an important decision? Don’t worry, tell us what your goal is, how much you need and when you think you will need it (as well as extra contributions you think you can make over time, such as regular auto-deposit). Betterment will make a recommendation for your asset allocation. -
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Betterment Launches On Stage At TechCrunch Disrupt
Betterment Launches On Stage At TechCrunch Disrupt Betterment officially launched our product on stage as a Battlefield Finalist at the TechCrunch Disrupt conference in New York. Today was a HUGE day for Betterment. We officially launched our product on stage as a Battlefield Finalist at the TechCrunch Disrupt conference in New York, NY. Only a handful of companies from a pool of over 500 applicants were selected to present on the "Battlefield" stage in front of a panel of technology industry experts to see who has the best startup idea. It was nerve-racking, but we made it through the first two rounds of competition today. On Wednesday we will find out if we made it to the final round of competition. We would sincerely like to thank TechCrunch for inviting us to launch our product at the conference--the exposure is invaluable for us as we try to help everyone save and invest better. We also want to thank all of the customers who have been signing up now that our doors are open for business. Above all else, we want to make sure you have a spectacular customer experience and never even consider going back to your old bank savings account. If you like your Betterment account, tell a friend because there's a good chance they will like it too. If you run into any issues with your account, let us know and we will make it right. It's that simple. Read TechCrunch's recap of our presentation: https://techcrunch.com/2010/05/24/betterment-wants-to-be-your-new-savings-account/#ixzz0ouWufJca
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