Most readers know that I am a big fan of Betterment. I have been investing my money with them for a few years now and have had zero complaints. While I do like the ease of automatic investing as well as their low fees, what I enjoy most is that they are always innovating.
I get email updates from them all of the time about new features they are starting to offer clients. The other day, I received another such email and had to share it with you. They have come out with two new features, RetireGuide and TLH+ for all customers. Not sure what either of these are? No worries as I’m about to tell you!
When it comes to retiring, the biggest issue most people face is making their money last over the course of 15 or more years. The gold standard is to amass a large enough portfolio so that you can live off of the income it generates each year and never touch the portfolio balance. The problem with this is that you need a sizable portfolio.
For example, if a retiree wanted $75,000 a year to live on and was earning 2% from their investments (which isn’t a stretch in today’s world) that equates to a portfolio of $3,750,000!
There are plenty of studies out there that talk about the 4% rule, which tells investors that they can safely withdraw 4% of their portfolio in the first year of retirement and then adjust it going forward, based on inflation. While you will draw down your principal, you should never (hopefully) run out of money using this strategy.
Of course, this rule isn’t foolproof and many stories now are claiming the 4% rule to not even be applicable today.
So what is an investor to do? Luckily, Betterment is here to help out with their RetireGuide. It basically works like this: based on the size of your portfolio, Betterment crunches the numbers and determines how much you can withdraw each month and not run out of money.
The algorithm that they use reduces the chances of you running out of money to less than 1%. A little background here – when I worked for a high net worth financial planning firm, we modeled this out as well. The only difference is that we modeled to get the client to a minimum 80% certainty of not running out of money. There is a lot of wiggle room between a 20% chance of running out of money and less than 1% chance. So to me, Betterment is blowing the doors off of the competition.
They are able to reduce the odds so low by using a dynamic withdraw rate. This means the amount of money you get each month from your portfolio will vary. While this might sound a little scary, fear not. On a portfolio of $1 million, the monthly income amount ranges from $3,000 up to $7,000. That is the equivalent of between $36,000 and $84,000 a year of income.
What’s better is that you can play with the monthly amount you receive to see how it affects your portfolio and if you will run out of money or not. Here is a great video that shows you everything in great detail:
With the ability to sync up to 13,000 accounts on a daily basis, your number will always be accurate. And, you can include your Social Security statement file from SSA.gov. This will make the projections even more accurate.
Tax Loss Harvesting+
When Betterment first started out, they offered tax loss harvesting, but only to clients that had a certain balance invested. Those days are long gone as Betterment now offers tax loss harvesting for all clients. Note that I had to choose to turn this on for my portfolio, so if you are a current client, you may need to log into your account and do the same.
Some readers might be wondering what exactly tax loss harvesting is. It is a strategy to help you reduce your taxes on your investments by selling some losers and having that loss offset some gains you realized from selling securities that have appreciated in value. For the average investor, it is probably too much information when you really dissect it all – think calculus to a middle school student.
The important thing to know is that tax loss harvesting is a good thing and Betterment takes it one step further than most. If you are interested in reading more about the details, click here for their white paper. Again, just know that it might be over your head. I encourage you to give it a read though as you might learn something. Or you might find something that will help you fall asleep easier! Here is a little tease though if you are still on the fence:
So what does all of this mean for investors? It simply means that Betterment continues to over-provide on services (like RetireGuide) and products for the everyday investor. As I mentioned in my full review of the service, Betterment offers to average investors what is usually only reserved for the high net worth investor.
If you are interested in signing up for a Betterment account, click here.
Readers, what are your thoughts in RetireGuide and Betterment in general?
[Photo Credit: TheDigitalWay]