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
- Savings Advice Methodology and Assumptions
- Withdrawal Advice Methodology and Assumptions For Retirement Goals
- Graph Explanation
- Goal Status – On Track or Off Track
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 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 Quovo, our third-party data provider for synced external accounts. Quovo 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 Quovo’s proxy tickers only for securities that pass a threshold confidence level of similarity. Quovo’s methodology may change over time, and Betterment will continuously evaluate any such changes.
Savings Advice Methodology and Assumptions
- The monthly contributions estimate is based on a 60% likelihood of the portfolio value reaching the goal target at the end of the investment term.
- Calculations assume 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 held.
- Savings advice 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.
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.
- 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.
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