Betterment Resources | Original Content by Financial Experts

You Can Now Skip Individual Recurring Deposits Managing your Betterment auto-deposits just got easier. Now you can skip any individual auto-deposit in just a few easy steps. It gives me great joy to announce that you can now skip any individual recurring deposit before it happens. You can now skip any recurring deposit you’ve set up before it happens from a link in the email sent before your recurring deposit occurs. We’ve heard scenarios like this many times: I have an unusually high credit card bill I want to pay off (rather than save). I need to put a deposit down on my kids’ school tuition and need to skip this month. I need to pay taxes but otherwise want to continue saving regularly. Until today, if you had set up a recurring deposit with Betterment and didn’t want it to proceed, you needed to turn off your recurring deposit completely. This not only meant you needed to remember to come back and turn it on later, it also meant your plan would (incorrectly) be off track simply because you don’t want to save for one deposit. One of the cardinal rules of behavioral finance is never make someone make more decisions than necessary. If clients want to skip just one deposit, they should be able to do it. So from now on, you can skip any individual recurring deposit, so long as it is before 4 PM EST on the scheduled deposit date. How To Skip An Individual Deposit There are two places you can go to skip a recurring deposit. First, Betterment sends you an email a day before your scheduled recurring deposit takes place. In this email, you’ll find a link directly taking you to Betterment’s site where you can skip your upcoming deposit. Just click on it, sign in, and confirm. Second, you can see all pending recurring deposits on the “Transfer” tab of your Betterment homepage. So long as it is before 4PM EST on the deposit initiation date, you will have the option to hit the “skip” button on the right. Then, you'll see: Too many skips can knock you off track. For the vast majority of goals, missing one deposit won’t be enough to knock you off track. Our advice will automatically update to consider your new balance and the skipped deposit, and may slightly increase the recommendation for remaining recurring deposits (as you’d expect). But it is possible that skipping many recurring deposits will reduce the confidence that you’ll reach your target balance on the target date. However, you can always defer the goal a bit in order to make up for your current circumstances.

The Origins of the Racial Wealth Gap

The Origins of the Racial Wealth Gap Decades of voting, housing, job, and banking discrimination created a racial wealth gap in the U.S. One of the hallmarks of this country is an opportunity to become whatever you want to be. But if we look at the racial wealth gap, it unravels a historical narrative of unequal levels of opportunity that continue to impact us today. The Brookings Institute noted that “At $171,000, the net worth of a typical white family is nearly ten times greater than that of a Black family ($17,150) in 2016.” Mehrsa Baradaran, the author of The Color of Money, puts it best when she states, “The wealth gap is where historic injustice breeds present sufferings.” Looking at the racial wealth gap is like a cobweb. Each strand, or in this case, a reason for the racial wealth gap, can be overcome. But if you combine the strands—the reasons—it grows into a web. These strands are decades of voting, housing, job, and banking discrimination, to name a few, and years of this repeated pattern over generations creates a ripple effect that leads to racial wealth disparities today. A Case Study: How The U.S. Systematically Prevented Black Veterans From Military Benefits In World War II. Although there are many examples of how Black Americans were economically set back by the U.S., one tipping point in modern history is how lawmakers and business discrimination practices denied millions of WWII Black veterans access to GI bill benefits. The post WWII GI Bill benefits included low-cost mortgages, educational grants, and low-cost loans to start a business, which are all key wealth building and wealth transfer vehicles. Ira Katznelson, author of “When Affirmative Action Was White,” said, “there’s no greater instrument for widening an already huge wealth racial gap in postwar America than the GI Bill.” Here are some examples of how Black veterans were negatively impacted during this time period: Housing discrimination left many Black veterans out of the suburban housing boom after WWII. In New York and northern New Jersey, there were about 67,000 post WWII GI Bill mortgages: non-white people made less than 100 of these mortgages. Black people, as well as other ethnic groups, were denied access to vocational training and college education. Even Black veterans who were lucky enough to get GI Bill education benefits faced Jim Crow laws that prevented many from going to college. No access to education benefits hampered many Black veterans from getting better paying jobs. Low paying jobs, combined with living in neighborhoods where schools had fewer resources, had its ripple effect. Their children, the baby boomer generation, were less prepared for college, and their parents couldn’t afford to send them to school. Today, the lack of inherited generational wealth also means that: Fewer Black Americans are investing. More Black Americans have high amounts of student loan debt. More Black Americans have credit card debt, most of which have crippling interest rates. While many of these issues require systemic changes to law, business, and legal practices, there are also tangible strategies Black Americans can adopt now to take charge of their finances. We delve into some of those in Betterment's annual look at Black wealth.

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.

Here’s How Other Millennials Are Saving For Retirement

How To Avoid Money Fights

How To Avoid Money Fights If you’re like most people, you probably don’t look forward to talking about finances with your partner. Here’s one piece of advice you can start using today. Couples in healthy marriages are twice as likely to discuss money dreams together. But, discussing money can be difficult, which is why so many couples avoid it entirely. How can you start to have productive, healthy conversations with your significant other? Answer: a monthly financial check-in. Below are tips on how to do it right, and why it works. What’s a monthly financial check-in? A monthly financial check-in is time set aside for you and your partner to talk openly about any financial topics you want. It’s an opportunity to look back on the previous month and to plan ahead for the next month. There are no strict rules on what you can and can’t discuss, as long as it’s money-related. Some common examples might be: Upcoming large expenses: Coachella, friends coming to town, or a wedding. Financial goals: Buying a home, saving for college, or retirement. Important tasks: Updating your W-4, opening a new credit card, or combining your finances in a joint cash account. Why monthly check-ins work so well. The key is balance. You want to talk about money, but it’s not healthy to have it creep into every conversation. A recurring monthly check-in solves both these problems. Some people don’t like talking about finances at all. A monthly check-in gives you a safe space to start the conversation. Other people think and talk about money all the time, which can be draining on a partner. Unless the matter is urgent, you can make a note and wait to bring it up until the next monthly check-in. 3 Tips To Make Them Effective Choose a fun location: Try a new coffee shop or head to your favorite sandwich spot. Finance isn’t always fun, so tying your monthly check-in to something exciting can help. Set a time limit: Don’t let your monthly check-ins drag on for too long. Talking money can be mentally draining, so try limiting your check-ins between 30 and 60 minutes. Avoid placing blame: For example, if your partner went over budget last month, don’t berate them. Instead, discuss how you can plan better next month. Being smart with money is hard enough on its own. Don’t make it harder by adding relationship stress to the mix. If one of your next financial discussions involves which joint account you should park your short-term cash at, consider opening a joint Cash Reserve account. Start saving for your future together with a cash account that features a variable rate up to 0.75%*, no monthly transaction limits, and FDIC insurance up to $2 million once deposited at our program banks†. It doesn’t get better than this.

What is Dollar-Cost Averaging?

What is Dollar-Cost Averaging? Although it’s not always the most optimal investment strategy, choosing to dollar-cost average into the market has behavioral and psychological benefits that may help you over the long run. Dollar-cost averaging (DCA) is the practice of regularly investing a fixed amount of money over a period of time, regardless of market activity. For example, if you choose to invest $100 on the 15th of the month, every month for 1 year, you would be implementing the investment strategy of dollar-cost averaging. You don’t vary the dollar amount you choose to invest ($100), or the timing of the investment (on the 15th of each month), based on market activity. Types of Dollar-Cost Averaging There are two types of dollar-cost averaging: voluntary and involuntary. Voluntary DCA is when you have a specific amount of cash to invest, but are choosing to parcel it out over a period of time, rather than investing it all at once. Involuntary DCA is when your ability to invest depends on when you have the money to do so. Perhaps you set up auto-deposits, so that you can invest as you earn more money over time with each paycheck. The major difference between these two types of DCA is that involuntary DCA implies that you could not have invested sooner, while voluntary DCA is an investment strategy where you could have, but chose not to. Real Life Example Let’s pretend you have $1,200 sitting in cash that you can invest right now. You choose to invest that $1,200 by investing $100 per month for a period of one year. This would be an example of voluntary DCA. Now, let’s pretend you don’t have any money to invest right now, but through your paychecks you earn $100 per month that you could invest. You invest $100 per month for a period of one year. This is an example of involuntary DCA. Should You Dollar-Cost Average? This question really only applies to voluntary DCA and not involuntary DCA. If you don’t have any money sitting around to invest, then you’ll need to wait until you have the money to invest. For involuntary DCA, the choice becomes whether to invest that money as soon as you earn it, or to let that money build up over time so that you can invest the entire balance. An optimal strategy for involuntary DCA is to schedule auto-deposits as soon as you get paid. If you do have money sitting around to invest, the question then becomes, should you invest it all right away, or should you DCA it into the market over time? There are a couple of answers to this question. The Head vs The Heart The expected total return of markets is positive over time. Therefore, from a purely unemotional investment strategy perspective, it makes sense to invest your cash immediately and not DCA into the market. Studies show that a lump-sum investment will outperform DCA roughly two-thirds of the time and will consistently outperform DCA across global markets. Yet, we all know that leading with the head is easier said than done. Luckily, following one's heart can come with its own set of benefits. Since DCA is a fixed rule, independent of market performance, it is unemotional, diversifies your purchase price, and makes you less susceptible to the counterproductive behaviors people often have when investing. More specifically, DCA can make you less susceptible to the disposition effect, which is the tendency to sell assets that have increased in value, while keeping assets that have dropped in value. People significantly dislike losing more than they like winning, which is more formally known as loss aversion. This goes hand in hand with helping to reduce your susceptibility to anchoring bias, which is when you attach yourself to an irrelevant stock price and begin making investment decisions based on that irrelevant stock price at a later date. Additionally, DCA can prevent you from trying to time the market—which is generally a losing investment strategy over the long run. It also minimizes your chances of feeling regret and may reduce any potential anxiety that you “bought in at the top.” Maybe most important of all, DCA can help you establish good investment habits. After all, choosing to DCA into the market is better than never investing your cash at all. Make A Decision To recap, if you have a pile of cash sitting around to invest, studies show that investing it all right away is the optimal decision the majority of the time. However, choosing to voluntarily DCA into the market has many behavioral and psychological benefits that can have a positive impact on your investing behavior. The most important thing is picking your approach and getting started. It’s better than doing nothing and leaving your cash out of the market completely.

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.

How To Invest When You Have Family Members With Disabilities

How Banks Fail in Helping You Save Money

How Banks Fail in Helping You Save Money You may not realize it, but our financial lives are shaped by a great divide: banking vs. investment managers. In between lies most people’s pinnacle challenge: saving for the future. I have the good fortune of being able to question the institutions that shape my financial life. I studied economics in school. I earned a CFA credential while working in consulting. I started a financial tech company when I found problems that the industry seemed content to leave unsolved. But not everybody can afford to question the institutions they work with. To most Americans, the bank is the bank. It’s where you put your paycheck, who you talk to for a car loan, what form you look at when you file your taxes. Your 401(k) is your 401(k); who provides it, what the investments are, what fees are charged—these are questions that most people only get to ask on occasion, if they ask them at all. Today, I see millions of people tied to two kinds of institutions often misaligned to their needs. The first is banking. Neither banks nor credit unions have a fiduciary duty to put their clients’ interests first. Instead, they have a proclivity for charging extra fees and an unjust ability to earn profit on the rates loaned out by the Federal Reserve as their clients lose their savings to inflation. The second is investment managers. Whether a 401(k) plan, an advisor, or a broker, investments are still designed mostly for institutions and the wealthy, and the managers are often far too focused on asset allocation when Americans’ real financial outcomes are most determined by savings. While I have critiques for each group, the greatest problem to me is the fact that there are two. Somewhere in between their bank and their investment manager, Americans lose out on the most important element of finance: Saving their cash. Make no mistake; your savings is what matters. It’s what matters when paying down debt. It’s what matters for starting a business. It’s what matters for securing a healthy retirement. And yet, banks typically don’t help you become a better saver; they encourage holding cash at the ready for spending and sell you loans when you don’t have enough. Meanwhile, most investment managers pay little attention to your saving; they focus on larger deposits, like retirement money withheld from a paycheck. Between working with a bank and an investment manager, we, as a nation, fail to save enough for the things we need. The everyday American deserves a cash advisor. The truth about the future is that saving is all we have. Younger generations can’t count on Social Security the way Baby Boomers still do. And the pension plans of yesteryear are gone. Not only that, students today are graduating with more student loan debt than ever before, and no other part of life is becoming cheaper. Houses, cars, kids—they’re all becoming more expensive, not less. The average American aged 35-44 has $133,100 in debt according to Money. As a nation, we’re mostly deep in the red, not the black. To avoid debt, to save enough for retirement, to successfully navigate inevitable emergencies, Americans need a partner who has their best interests at heart not just in investment advice but for managing their cash. For helping you manage the day to day, so that, at the end of the month, you’ve actually saved more for the future. We need a cash advisor perhaps more than any other kind of financial advisor. For years, RIAs have encouraged their clients to outline their financial goals, to set a budget, and to save enough to fund each of their goals. But what have we been able to do to help ensure our clients’ success? Coaching, support, suggestions—yes, RIAs have led in this arena. But is it working? Americans today are saving less than they ever have. And even worse, they’ve seen limited wage growth and increasing inequality at the same time. Forget budgeting. Cash advice must automate the act of saving. What investment managers and banks silently have agreed on is that saving each month is the client’s responsibility. It’s the client’s money, and so, it’s theirs to set a budget. To me, the suggestion to “set a budget” is a failure of advice. It implies a lack of empathy for how a wallet really works or how human minds decide to spend. These are the facts: The world gives us many reasons to spend, and it offers far fewer reasons to save. Store sales. Credit card rewards. Low interest rates. The world creates many reasons to buy things. Meanwhile, no part of the industry solves saving. Banks and investment managers leave it to their customers to solve. The solution is having an advisor that puts the work in to do what real humans struggle with: Automating your savings. Helping to keep your spending in check. And nudging you toward your long-term goals. Ask any financial engineer and she’ll tell you that predicting the right level of cash you need each month is no great feat. As predictive modeling and advanced technology goes, your cashflow isn’t a big mystery. The choice to build that business so that everyday Americans can live better? Now, that is a different story. America’s future depends on how we save cash. Who will solve it? You can look at national debt, student debt, Social Security insolvency, or growing income inequality. As a country we need ways to help people save, and so far, the answer I see suggested most is Mint, a budgeting tool from Intuit that only helps if you’re already good at budgeting to begin with. And if you’re not, it mostly serves to sell you credit cards or investment apps. And I don’t blame Mint; it’s great for budgeting, just not for the reality of saving. Will you trust a bank to help? Maybe one of the new online banks or app-based banks? Banks have every opportunity to change how we save for our goals, and yet, they won’t. They thrive when you’re using your debit cards and taking out loans. They love it when your savings sit growing at less than 1% while they’re loaning your money at 4%. When we, as a nation, need every ounce of the risk-free rate we can get to save for our goals, banks prove again and again that they’re not problem-solving, they’re taking advantage. So, who would you rather work with? The solution I see is that we have to turn to those whose interests align with our own. I want to see fiduciaries get into the business of managing cash and savings. I want registered investment advisors and CFP® professionals to become true cash advisors. To use innovative technology at scale. Yes. To drive empirically better behavioral outcomes. Absolutely. To make a profit. It’s a must. But, at the core, we need advisors acting in their customers’ best interests; not just for already-wealthy individuals, but for everyday Americans looking to save their way to wealth.

How Much to Save: Our Advice Guides You Towards Your Goals

How Much to Save: Our Advice Guides You Towards Your Goals A good financial plan has to adapt over time to be successful. Here’s how Betterment helps you do that. Voyager 1 and Rosetta were two very different space probes that achieved their missions in my lifetime. How they accomplished their missions is a lesson in planning. Voyager 1 was a bullet. Aim. Adjust for wind, gravity, friction. Fire. Pray. When Voyager was launched in 1977, we needed to get everything exactly right. Once it left Earth, it’s fate was sealed. Whatever path it would take… was set. A lot of unexpected events can happen across the millions of miles it was set to journey. Rosetta’s mission was magnitudes harder: it had to catch a comet. Launched March 2, 2004, Rosetta took 14 years to accelerate and catch it’s target. It used a lot of the same methods as Voyager, but finding the right path to take with so many moving bodies in the inner solar system is orders of magnitude harder than the bullet shot that was Voyager 1. Rosetta needed the ability to adjust as time went on and to deal with unforeseen changes. Rosetta was a guided missile: over half of its launch weight was taken up by fuel. That cost a lot at launch time, but it gave it the ability to adjust along the way, to make course corrections, and to opportunistically change its future position. It could avoid obstacles that would have ended Voyager. "Voyager 1 and Rosetta were two very different space probes... How they accomplished their missions is a lesson in planning." How Voyager and Rosetta were managed reflect different approaches to planning, including financial plans. My life now is so different than what it was five years ago. I have a dog, a mortgage, and a child. I work for a startup. I can’t imagine what my life will be like 5 years from now. I can’t plan like Voyager, I have to plan like Rosetta. So, when I plan, I need to expect some future flexibility: Some ability to opportunistically make the most of circumstances when they come up. The humility to let go of some ambitions when my priorities change. How Betterment Guides Your Investment Deposits One of the questions Betterment helps customers answer is “How much do I need to save?” We could provide you with a simple number, say $750 per month. That number is a bullet calculation. It will likely never be perfectly right in hindsight. For any given goal you set up at Betterment, our own advice and projections forecast that there is roughly a 20% chance you’ll be within ± 5% of your target balance if you took our initial advice and never refreshed it. But, since there’s a 60% likelihood of reaching your target based on our initial deposit recommendation, our saving behavior needs to be future-flexible—to account for how the future actually pans out. So what does being future-flexible look like? How much extra fuel might you need? In this article, we describe how our deposit recommendations really work. We make deposit recommendations by simulating possible futures. The analysis we’ll describe in this article—the analysis that informs how much we recommend you deposit—is based on our hypothetical simulations of Betterment’s recommended portfolios’ expected investment returns, because that assumed rate of growth informs how much we recommend you deposit. We do simulations to be highly realistic about our deposit advice. Not only that, we simulate the portfolios’ returns using our standard projection methodology taking into account our advice for portfolio allocations based on your goal, and assumptions about an individual’s savings behavior. In this article, to make our examples easier to understand, let’s assume your goal is for a major purchase with a target of $100,000 in 10 years. To be clear, our simulations, which are month by month, will assume that your portfolio follows our recommended portfolio strategy and target allocation. They also assume that the hypothetical returns include immediate dividend reinvestment, which is built into how Betterment operates—and a flat 1% risk-free rate of return. Further, we assume performance is net of the 0.25% annual management fee. The different scenarios you’ll see come from the distribution of possible expected returns. We generate 100 such portfolio return paths, and then for each path simulate the behavior of an individual using either a ‘regular’ deposit strategy or a ‘ratchet’ deposit strategy. In the ‘regular’ case, the individual saves the amount we recommend every month. In the ‘ratchet’ case, she saves the greater of our recommended amount, or their previous months amount. The recommended amounts vary based on the simulated portfolio performance. Since this is an illustration of how deposit recommendations should work—not actual portfolio performance—we’ve simplified for your convenience. Remember that these simulations should be considered illustrative and hypothetical. It’s better to be precisely right than approximately wrong. Let’s start by looking at how our savings advice might change over time. We’ve done a single backtest before that examines a possible poor market scenario, but a more thorough analysis, like a Monte Carlo simulation, offers a much richer view of how advice should change in response to future scenarios. The charts below show how we’ve put this kind of analysis into action at Betterment in our advice on saving. Our recommendation changes over time in response to positive or negative market movements. Underlying our simulation is an investment goal ten years away with a target stock-to-bond allocation that follows our recommended moderate glidepath. You can see that there is a wide spread of recommended monthly deposits over time and that most paths involve changing how much you save. In general, that’s not a bad recommendation because most of us are likely to make more money over time. Gentle increases to how much we recommend depositing makes for fairly acceptable advice. Yet, notice the far right side of the figure. If you were to experience poor performance leading up to the date of your goal, the only thing we can do is recommend to increase your deposit abruptly. The figure above shows Betterment’s recommended deposit amounts for a sample goal following our glidepath. The figure is based on the hypothetical simulations mentioned above, and is meant to show how our auto-deposit recommendations are likely to vary over time due to realized returns being higher or lower than planned for (based on our own projections). The graph is in no way meant to guarantee any type of investment performance. When we analyze such problematic possibilities in these unfriendly scenarios, we can start to find ways of making the smart pivots of a Rosetta-like journey. For instance, let’s assume any increases of >2% per year more than our starting recommended deposit amount are unacceptable (i.e., too much acceleration), and any increase of more than 6% over a 12 month period is also unacceptable (i.e. too much jerk—read more). Using these assumptions, we see unacceptable change at some point in time in 55% of the possible scenarios. Let’s be honest: that is a high rate for having to change your savings amount up by an unexpected and unacceptable amount. As an advisor, we don’t like making that kind of recommendation, and as an investor, you’re not likely to be able to follow it. Instead of settling for such a high hit rate, we should expect to have to change over time and let those expectations shape our advice on how much you should save and invest. Making More Rosetta-like Savings Recommendations What can we do to help reduce the need for these bumps up and down? How about a simple behavioral strategy, called a savings ratchet. A savings ratchet means you increase how much you save when you have to, but never decrease it afterwards. Below we show the month-to-month changes from a regular (downward adjusting) strategy versus a ratchet (only adjust upward) strategy. The figure above shows Betterment’s current recommended auto-deposit amounts for the hypothetical sample goal used in the simulations. It shows how our recommendations are likely to vary over time due to differences in projected and actual returns. The “ratchet” is a variant of Betterment’s savings advice, which will only increase over time, as explained below (versus regular goal savings advice that might decrease auto-deposits for a variety of reasons). The “ratchet” figure is hypothetical in nature, and not meant to guarantee any type of investment performance. Rather, it is meant to indicate how a “ratchet” strategy recommends only increasing deposits over time. As shown in the graph, ratcheting savings rates can produce greater final portfolio values, with only slightly more in total deposits. The ratchet uses market downturns as catalysts to help save more, but it doesn’t use performance above expectations as a reason to save less. As a result, future market drops can have a much smaller effect, and we don’t need to save more. The hypothetical ratchet strategy above sees unacceptable increases in only 24% of the simulations we ran, or less than half the original strategy. This chart shows final portfolio values for the simulations described above. You can see that for the total deposits made using a ratchet strategy, the range of final portfolio values has a broader possible range, compared to the regular strategy. However, please note that these are only simulations, and do not fully reflect the chance for loss or gain. Actual results of applying these strategies can vary from the results above. A missile like Rosetta makes the most of ongoing optionality. So does Betterment. Optionality is when you reserve the right to do something in the future, like when you pay for just the option to buy a certain security at a certain price in the future. Financial plans shouldn’t be bullets like Voyager 1: we’re likely to miss if we actually set it and forget it. Plans should be guided. But we need to strategically use fuel—our deposits—in a way that maximizes optionality in the future. Optionality isn’t free. A ratchet savings strategy does require more in deposits over time. But the optionality has value in that the other choice is to stick with the relatively high possibility of needing to deposit more than you have to reach your goal too close to its date. In the case of Betterment’s deposit recommendations and our advice for saving in general, we try to guide toward greater optionality: Maximizing your ability to adjust your goals as they change and re-prioritize where your savings are going. Sometimes that means realizing you won’t achieve certain goals you care about. But often it means purchasing some future optionality you’re not sure you’ll need. This post was inspired by The Constant Reminder and Hurricanes and Retirement.

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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