Betterment Editors

Start small: A 3-step roadmap to building your 401(k) savings Mar 25, 2025 12:38:48 PM Building your 401(k) savings is about putting yourself first. Here are the steps you can take to start today. For many people, saving for retirement feels hard. It’s easy to put off saving when there are more pressing financial needs or when retirement feels far away. That’s totally normal to feel. Here’s the thing: You don’t have to choose between financial stability today and retirement security tomorrow. You can do both with the right plan in place. The 3-step roadmap to start saving for retirement It all starts with putting yourself first. But that’s often not what happens. Instead, many of us put our money towards: Spending on monthly purchases (groceries, bills, entertainment, etc) Paying off some debt with anything left over Saving for retirement with what’s left after that The problem with that is clear: by the time one covers monthly expenses and pays off some debt, they might not have anything left to save. The easiest way to remedy the situation? Flip that list on its head. Here’s a 3-step roadmap to start actively building your 401(k) savings: Start with a 2% contribution to your 401(k) Prioritize your high-interest debt payments Build a budget around your 401(k) savings and debt payments You may be thinking, “What if I don’t have enough money left to pay for expenses?” That’s a fair question, and in some cases, that may be true. But if you start by putting yourself in a position to save, you can always make adjustments as life changes. Let’s walk through each step… Step 1: Start small and build up your 401(k) contributions It's a common misconception that you need a substantial income to begin investing. In reality, starting with small, consistent contributions can lead to significant growth over time. Try starting with just a 2% 401(k) contribution rate: If you earn $60,000 per year, contributing 2% means setting aside just $1,200 annually—or about $100 a month ($50 per pay period). At first glance, $100 a month may feel like a lot. But if you break it down, it might be the cost of a couple of takeout meals or a few streaming subscriptions each month. Small, manageable changes can help you build a strong financial future without overwhelming you today. Let’s assume Natalie and Nathan both make $60,000. Natalie starts contributing 2% to her 401(k) today. After 10 years of consistent saving, she needs to stop making contributions (because of a life event). She reduces her rate to $0/month. During the previous 10 years, she contributed $12,000 out of her paycheck, and with an 8% rate of return on her investments, her balance grew to $300,173 by the time she was ready to retire. . On the other hand, Nathan put off contributing to his 401(k) for 10 years. He then saved $100/month over the course of 35 years, or $42,000 out of his paychecks. When it was time to retire, his account balance was $230,524. It may seem unlikely that Natalie ends up with more money after only contributing for ten years, but that’s the power of time in the market. As your financial situation changes, you can always adjust your contribution rate. If 2% feels like too much, start with 1%. It’s important that it feels manageable now. You can always increase when you’re ready if you get a raise or a promotion or pay off a debt. Step 2: Prioritize your high-interest debt payments OK, after deciding how much to contribute to your 401(k), step 2 is all about being strategic with paying off debt while investing. It’s about finding the right balance between immediate financial needs and long-term security. You can follow these steps: Prioritize high-interest debt first: For example, if you have credit card debt with a higher interest rate, it makes sense to prioritize paying it down. Take a close look at any debt with an 8%-plus interest rate. Next, pay lower interest debt: Lower interest debt may be things like a mortgage, student loans, or potentially a car loan payment. Here are some additional important considerations when it comes to debt: Make at least the minimum debt payments. This will help pay off debt faster and avoid issues like penalty fees or going into collections. Take a close look at high-interest debt: In some cases, if you have too much high-interest debt, you may want to hold off on saving for retirement until it feels manageable to you. If that’s the case, once you’ve paid off enough high-interest debt, you can begin investing for the long term. But if you mainly have low-interest debt, your 401(k) investment returns can outpace your lower-interest debt. Bonus: If you’re making qualified student loan payments, your employer may be able to contribute to your 401(k) on your behalf, even if you’re not contributing directly. Login to your Betterment account to see if your employer offers a match on your student loan payments. Step 3: Build a budget around your 401(k) savings and debt payments Now that you have an idea of how much you want to contribute to your 401(k) and how much debt you need to pay off, let’s build a budget around that. Budgeting is very personal and looks different for everyone. But to help start, you can use a budget framework like the 50/30/20 rule: 50% of income goes to essentials (housing, food, bills, etc) 30% goes to discretionary spending 20% goes to financial goals (a mix of debt repayment and retirement savings) The exact percentages may look different for you, but the 50/30/20 rule serves as a solid guideline. Here’s how to create your budget: To build a monthly budget around your 401(k) savings and debt payments: Add up your monthly 401(k) contribution and debt payments Next, add up all of your monthly living essentials like housing, food, and bills Finally, estimate your monthly discretionary spending, like entertainment and going out to eat Once you have a total budget, compare that to your monthly take-home income. If your budget is more than your take-home income, look for areas in your discretionary spending to cut first. If you can’t cut enough discretionary income, then review your debt payments and 401(k) contribution amount to rework them into a manageable budget. The goal isn’t to stretch yourself too thin—it’s to take small steps forward in saving for retirement and paying off debt while still being able to enjoy life. Start small today With the uncertainty of Social Security and rising inflation, relying solely on traditional savings accounts may not be enough. Your 401(k) helps you take control of your financial future—so instead of seeing it as an expense, think of it as paying your future self—there’s a good chance it will be your main source of income in retirement. Betterment is here to help you As always, we’re here to help you confidently plan for retirement with the tools and resources you need to make smart decisions for your money. Ready to start saving? Claim your account at betterment.com/accountaccess.

Making sense of market volatility Mar 19, 2025 12:15:00 AM During times of market turbulence, it may be tempting to move your money to safer ground. But it’s important to consider the long-term impact of your decisions. As we've seen recently, the stock market can experience significant fluctuations, rising one day and declining the next. With market swings, tariff announcements, and policy changes flying about, you may be wondering what to do and whether now is the time to take action. You’ll hear from many financial advisors, including Betterment, that volatility is natural and often something you simply need to ride out. Which is true. While the temptation to move your money to safer ground is understandable, it’s important to consider the long-term impact of your decisions. You could miss out on growth opportunities or trigger a larger tax bill. Instead of taking immediate action, take a moment to think through your investing strategy, your financial needs, and potential next steps. Start with this question: When will I need my money? It’s impossible to time the market perfectly. But having a clear timeline for your financial goals allows you to prepare for volatile moments and even take advantage of them. A longer time horizon means you can afford to ride out downturns, while a shorter one may require different considerations. We’ll walk through four different scenarios based on time horizon and how you can align your volatility strategy with your financial goals. Staying invested at every stage in life If you’re not yet in the market: Waiting for the “perfect” time to invest often leads to missed opportunities. The best time to start is now, with a diversified portfolio that aligns with your goals. If you don’t need the money for decades: Whether we’re talking retirement, education savings, or just a healthy investing portfolio, if you’ve got decades to go, time is your greatest asset. Market volatility is normal, even if it feels chaotic. Staying invested and making consistent contributions over time will allow you to benefit from long-term growth and compounding. If you need the money in the next five to 10 years: Your investments still have time to recover from a downturn, but start thinking ahead. Make sure your portfolio reflects your risk tolerance while maintaining a focus on growth. As you get closer to your end goal, you may want to plan to shift toward a more conservative allocation of stocks to bonds, or even move money into a high-yield cash account. If you’re retired or nearly retired: In this retirement-specific case, you’re already drawing down on your investments (or will soon begin to). Remember that even though you’re “using” this money, you’ll be retired for a while, so you don’t want to miss out on growth entirely. “Have a plan that includes a mix of safe and growth-oriented investments. A cash or bond ‘bucket’ can cover short-term needs, while equities can support long-term growth,” says Betterment financial planner, Corbin Blackwell, CFP®. How Betterment can help you mitigate volatility While you can’t avoid market volatility altogether, you can take proactive steps to manage your money and financial needs during market downturns. Establishing a thoughtful investing strategy now will pay dividends in the future. Here are three things to consider as you determine your approach: Invest in a well-diversified portfolio: By investing in a diversified portfolio, your money isn’t riding the wave of any individual stock, asset type, or even a country’s performance. For example, the Betterment Core portfolio is globally diversified and has delivered 9.0% annual returns (after fees) since inception.1 Consider enabling tax loss harvesting: One silver lining strategy during market downturns is tax loss harvesting—a tax-saving tool that Betterment automates. TLH is the process of selling an asset at a loss (which can happen especially during market downturns) primarily to offset taxes owed on capital gains or income. Build and maintain an emergency fund: You should work to maintain 3-6 months of expenses. These funds should be stored in an account that’s relatively liquid but still provides some level of growth to help keep up with inflation. Depending on your preferences for risk, growth, and liquidity, we offer a few options: Emergency Fund, our investment allocation built specifically for this use case, with 30% stocks and 70% bonds BlackRock Target Income, our 100% bond portfolios Cash Reserve, our 100% high-yield cash account The big picture If you remember nothing else, remember this: The most important thing you can do is avoid making rash decisions based on short-term market movement. Betterment is here with you every step of the way, helping ensure you make the most of your money, whether the market’s up or down.

Taxes made simple: Getting the most out of your retirement accounts Mar 18, 2025 10:59:42 AM Practical tips to help you optimize your taxes when it comes to retirement planning. When it comes to taxes and your retirement account, a little planning and knowledge can go a long way. This guide covers key planning areas to help optimize your taxes through retirement accounts. In this guide, we cover: Reporting and filing taxes: Traditional and Roth accounts Contribution limits for traditional and Roth accounts Tax benefits of traditional and Roth contributions Reducing your tax bill with the Saver’s Credit Managing withdrawals and Required Minimum Distributions (RMDs) Reporting and filing taxes Taxes aren’t always fun, but here are a few tips to make them easier. How to report traditional and Roth contributions on your taxes When you contribute to a retirement account, whether it’s a 401(k) or an IRA, the way you report it on your tax return depends on the type of account: Traditional accounts: These contributions are generally tax deductible because they're made with pre-tax dollars, so you’ll report them on your tax return. This means that when you contribute to your traditional 401(k) or IRA, your taxable income is reduced by the amount of your contribution, which can lower your tax bill for the year. However, you’ll pay taxes on withdrawals later in retirement. Roth accounts: If you're contributing to a Roth 401(k) or an IRA, those contributions are made with after-tax dollars, so they don't lower your current taxable income. You won’t report these contributions on your tax return. Wondering if an IRA is right for you? Read our blog to see the potential benefits of an IRA in addition to your 401(k). Three practical tax filing tips When you’re ready to file, keep these tips in mind to help everything go smoothly. 1) Use tax preparation software or consult a professional Filing your taxes accurately is essential to capture all your retirement-related benefits. Whether you opt for user-friendly tax software or choose to work with a tax professional, the goal is to ensure you’re making the most of every deduction and credit available. 2) Keep detailed financial records year-round Staying organized is key! Keep a detailed record of all your contributions, receipts, and financial statements throughout the year. This practice not only simplifies tax filing but also ensures you don’t miss any valuable deductions or credits. Plus, some tax preparers will charge an extra fee for disorganized files and paperwork. 3) Use electronic filing for faster refunds If you’re looking to streamline the process even further, consider filing electronically. E-filing is fast and secure, and typically leads to quicker refunds, allowing you to reinvest your money sooner. Contribution rules and limits for 401(k)s and IRAs Each year, the IRS sets limits on how much you can contribute to your 401(k) and IRA. Staying within these limits not only helps you avoid penalties but also ensures you’re making the most of any tax advantages that are available to you. If you’re 50 or older, you’re allowed to make “catch-up contributions.” These extra contributions can boost your retirement savings and offer additional tax advantages—whether you’re in a traditional or Roth account. It’s a smart way to ensure you’re on track as retirement draws nearer. For the 2024 tax year, contribution limits are: 401(k) contributions: Under age 50: You can contribute up to $23,000. Age 50 and older (Catch-up contribution): You can add an extra $7,500, bringing your total to $30,500. IRA contributions: Under age 50: The contribution limit is $7,000. Age 50 and older (Catch-up contribution): The limit increases to $8,000. Tax benefits & savings of retirement accounts At Betterment, we help you automate much of your retirement savings. But even with automation, it’s still good to know the details about the tax benefits so you can select the account type that’s right for your goals. Tax benefits of traditional and Roth contributions There are three potential tax benefits that come from retirement plan contributions: Immediate tax savings (Traditional accounts): Because traditional 401(k) or IRA contributions are made with pre-tax dollars, they lower your taxable income for the year. If you are maxing out your contributions, you could see a significant reduction in your current tax bill, which could even move you to a lower tax bracket, depending on your income level. Tax-deferred growth (Traditional accounts): The money in your traditional 401(k) or IRA grows tax-deferred until you withdraw it in retirement. This allows your investments to compound without being eroded by annual taxes, potentially leading to a larger nest egg. Tax-free withdrawals (Roth accounts): Because Roth 401(k) and IRA contributions are made with after-tax money, qualified withdrawals in retirement are completely tax-free. This can be especially beneficial if you expect to be in a higher tax bracket later on. Reducing your tax bill with the Saver’s Credit For those with low- to moderate-income, the Saver’s Credit is a real game-changer. This credit rewards you for putting money into your retirement accounts by reducing your tax bill directly. It’s like getting a bonus just for saving for the future. You're eligible for the credit if you meet the following: Age 18 or older Not claimed as a dependent on another person’s return Not a student The amount of this credit — 10%, 20%, or 50% of contributions, based on filing status and adjusted gross income — directly reduces the amount of tax owed. Triple tax savings from Health Savings Accounts (HSAs) HSAs are often overlooked as a retirement planning tool. These accounts offer a triple tax advantage: Tax-deductible contributions: These contributions lower your taxable income, reducing the amount of income on which you pay taxes for that year. Tax-free growth: Your investments can increase in value without being taxed annually, allowing your earnings to compound more effectively over time. Tax-free withdrawals for qualified medical expenses: You can withdraw funds to cover eligible healthcare costs without incurring taxes on those amounts. This makes HSAs a powerful way to cover healthcare costs in retirement while also benefiting from significant tax savings. Withdrawals and required distributions Saving for retirement is just the start. As you get into your 50s, it's wise to start planning for how and when to take distributions. Tax implications of early withdrawals Taking money out of your retirement accounts before age 59½ can come with a hefty tax penalty. Not only will you owe regular income tax on the amount, but you might also face an extra 10% penalty. It pays to plan ahead and avoid tapping into your funds prematurely. If you’re in your 50s, check out these four practical tips to help plan for retirement. Understanding Required Minimum Distributions (RMDs) For those aged 73 and older, the IRS requires you to start taking a minimum amount from your retirement accounts each year—known as Required Minimum Distributions (RMDs). Missing an RMD can lead to significant penalties, so it’s important to calculate and plan for them. To learn more about the details of RMDs, read our blog, What is a required minimum distribution?

How Auto-Enrollment in a 401(k) Plan Works: Benefits and What It Means for Your Retirement Savings Feb 6, 2025 2:36:18 AM The best time to start saving for retirement is…now. Features like auto-enrollment and auto-escalation make it easy to save for your golden years with little effort on your part. If you’re unfamiliar with these features, keep reading to see how they can help you start saving today for tomorrow. While auto-enrollment and auto-escalation have been around for years, some employers are now required to turn on these features due to SECURE 2.0, legislation aimed at helping employees save for retirement. These features are designed to automatically enroll employees into their company’s 401(k) plan and increase contributions over time. So, how does auto-enrollment work, and what does it mean for your retirement savings plan? Scroll down to learn more about: What is auto-enrollment Benefits of auto-enrollment How to check if you've been auto-enrolled in your company’s 401(k) Changing your contribution rate How Betterment at Work can help you optimize your saving strategy What is auto-enrollment in a 401(k)? There are plenty of reasons why people hesitate to set money aside for retirement—daily expenses, not knowing how much to save, not knowing how to sign up, to name a few— but auto-enrollment can make it easy to get started. Companies will auto–enroll new hires at a default rate—typically 3-8%—which you can adjust at any time. Once your money is in the market, you’ll benefit from a little thing called compound interest: The interest your money earns also accrues interest over time. Let’s explore other ways auto-enrollment makes saving for retirement easy… Benefits of auto-enrollment in a 401(k): Automatically save for retirement: Starting a new job can be overwhelming with so many new benefits to consider (healthcare, life insurance, etc), but with auto-enrollment, you can start saving for retirement immediately without having to take any action. Employer match contributions: If your employer offers a match, auto-enrollment ensures you won’t miss collecting this sweet financial boost. Tax advantages: Good news! Since 401(k) contributions are made pre-tax, this lowers your taxable income —which can help you hold onto more of your hard-earned cash. Early and consistent long-term saving: You can stay on track with minimal effort, thanks to auto-escalation. If you’re auto-enrolled, your default rate will increase 1% each year, to a maximum set by your employer (no greater than 15%), unless you adjust the contribution rate yourself. Whenever you log in and adjust your contribution rate, auto-escalation is turned off. By incrementally upping your contribution rate, auto-escalation ensures you’re saving more over time—and simplifies the decision-making process. How to check if you’ve been auto-enrolled in your company’s 401(k): If you’ve never logged in before, you’ll first have to activate your account. Visit betterment.com/accountaccess to get started. Once you’re in, you can see the status of your account by selecting the “Retirement” goal from the left-hand side of the screen. Click on “Activity” to review your past contributions. It’s a good idea to monitor your contribution rate, and increase it when you can. Many experts recommend contributing 10–15% of your paycheck towards retirement so you have enough to live on. 10-15% may sound like a lot, so start with anything you’re comfortable with. Many auto-enrollment plans enroll employees at a low contribution rate, like 3% – but it’s important to keep in mind that that’s just a starting point. The point of auto-escalation is to keep it moving into that sweet spot of 10-15% over time. As always, Betterment is here to help you confidently plan for retirement, with the tools and resources you need to make smart decisions for your money. Remember, small, consistent contributions can really add up. With auto-enrollment and auto-escalation, you can put your savings on auto-pilot, so you can focus on the rest of your life. Get started

How employer 401(k) matching works and why it matters Dec 5, 2024 2:03:08 PM Learn how employer 401(k) matching can boost retirement savings, and why this benefit is essential for a secure financial future. A 401(k) match is one of the most valuable benefits employers offer—yet many employees don’t really understand how it works, or how to take advantage of it. In 2023, 68% of U.S. employees surveyed in our Retirement Readiness Report received a 401(k) match—of those who didn’t, a whopping 92% named it as the benefit they’d most like to receive. So, what makes a 401(k) match so enticing? Below, we’ll explore: Different types of 401(k) matches How to make the most of a 401(k) match Vesting schedules How Betterment can help you take advantage of your employer match What is a 401(k) match? A 401(k) match is when employers contribute to your 401(k), matching a percentage of your salary—to help grow your retirement savings. But not all matches are created equal. Knowing what kind of match your employer offers is important, and there are a few variations, including: Dollar-for-Dollar Match: The employer matches each dollar contributed to the 401(k), up to a specified percentage. This amount varies by employer but typically ranges from 3-6% of the employee's salary. Here’s an example: Jack makes $80,000/ year, and puts $8,000 annually into his 401(k), which is 10% of his salary. His employer contributes up to 3% of his salary, or $2,400. Jack’s total contribution for the year, with the employer match, is: $10,400. Partial Match: The employer matches a percentage of the employee’s contributions. For example, the employer might match 50% of contributions, up to 6% of the employee’s salary. Let’s take a look, using Jack’s $80,000 salary: Jack contributes 10% of his salary, or $8,000. 6% of his salary is $4,800. If his employer contributes 50% up to 6% of his salary, the employer contribution is: $2,400/ year. Jack’s total contribution, with the employer match, is: $10,400. Tiered Match: The employer matches a percentage of contributions up to a limit, then offers a different percentage above that threshold. For example, the employer might match 100% up to 3% of the employee's salary, and then 50% on the next 3%. Jack contributes 10% of his $80,000 salary to his 401(k), which is $8,000 per year. His employer matches 100% of the first 3%, which is $2,400, plus 50% on the next 3%, which is $1,200. The employer contribution is $3,600 for the year. Jack’s total contribution, with the employer match, is $11,600. 401(k) Match on Student Loan Payments: With new SECURE 2.0 legislation, employers can now make 401(k) contributions based on qualified student loan payments. This means your student loan payments can unlock retirement savings—even if you’re not contributing directly to your 401(k). Over the last decade, student loan debt has increased by 56%, making it harder for many to save for retirement. Betterment is proud to have been the first to offer a 401(k) match on student loan payments. If Jack earns $80,000 per year and pays $500 per month toward his student loans, totaling $6,000 annually. His employer offers a 100% match on contributions up to 4% of his salary—whether he allocates contributions solely to student loan payments or splits them between student loan payments and 401(k) contributions. Based on Jack’s payments, his employer will contribute $3,200 per year directly to his retirement plan. How to maximize your employer match Once you’ve determined what type of 401(k) match your employer offers, you’ll want to make sure you’re getting the most out of it. Here are some things to keep in mind: Get started as soon as possible: First, you’ll need to claim your 401(k) if you haven’t already. The sooner you start saving, the longer your contributions will have to grow, compounding over time (think of it as a snowball rolling downhill). Contribute enough to get the full 401(k) match: Don’t leave money on the table. Although some experts recommend contributing 10–15% of your paycheck, you can start smaller, increasing when it works for you. Pro tip: If you get a raise, you might want to consider increasing your contributions. Review vesting schedules: Some employers require you to stay with the company for a certain time before the matched funds are completely yours. We’ll dig into more on that below. Traditional vs. Roth 401(k) contributions with a 401(k) match If your employer offers a traditional 401(k) and a Roth 401(k), you can choose where to put your money. With Betterment, employer matching contributions go into a traditional 401(k), but this can vary with other plan providers. These contributions are tax-deferred. You won’t have to pay taxes on them until you withdraw the funds in retirement. Understanding vesting schedules You’ll want to read up on your company’s vesting schedule, so you know when you fully “own” your employer’s contributions to your 401(k). Immediate vesting means there is no waiting period. Once the employer contributions land in your account, they are fully yours. If you leave the company, you can take 100% of the matched contributions with you. With graded vesting, you gradually gain “ownership” over the employer match contributions. For example, you might get 25% after the first year, 50% after the second, and so on. Understanding your company’s vesting schedule is critical for making long-term career decisions. If your employer contributes to your 401(k), Betterment can help you track contributions, optimize your saving strategy, and ensure you’re making the most of your match. Ready to get started? Claim your account at betterment.com/accountaccess. Want to check to see if your employer offers a match? Log in to review your account.

How to turn your retirement savings into retirement income Aug 16, 2024 11:52:34 AM An income strategy during retirement can help make your portfolio last longer, while also easing potential tax burdens. Retirement planning doesn’t end when you retire. To have the retirement you’ve been dreaming of, you need to ensure your savings will last. And how much you withdraw each month isn’t all that matters. In this guide we’ll cover: What a retirement income plan is How much to withdraw each year Which accounts you should withdraw from first Why changes in the market affect you differently in retirement How to handle a market downturn when you’re nearing retirement How Betterment helps take the guesswork out of your retirement income What is retirement income planning? You’ll likely spend decades saving and investing for retirement. But when that big moment comes, what happens next? If you’ve been diligently setting aside cash, you might have upwards of a million dollars to manage. That’s certainly something to be proud of: It puts you in a great position—and also comes with new responsibilities. Think of it this way: You’ve been getting a paycheck from your employer regularly for 30 to 40 years. Now you’re the one cutting those checks. So,how do you make the most of your assets? What is the best way to turn them into a stream of sustainable income that will, hopefully, last you through retirement? “Retirement income planning” is a broad phrase to help you think about how to prepare for the “spend down” years (as opposed to the “saving up” years). Financial professionals used to refer to the “three-legged stool” of retirement income planning: Social Security, a pension, and personal savings. Considering that pensions are hardly used anymore, and the future of Social Security is murky, we’re more-or-less down to one leg: personal savings. But in today’s world, personal savings can incorporate a few different cash streams – personal investment accounts, Individual Retirement Accounts (IRAs), and of course – a 401(k). All of which can play a role in your retirement income plan. Why changes in the market affect you differently in retirement Stock markets can swing up or down at any time. They’re volatile. When you’re saving for a distant retirement, you usually don’t have to worry as much about temporary dips. But during retirement, market volatility can have a greater effect on your savings. An investment account is a collection of individual assets. When you make a withdrawal from your retirement account, you’re selling off assets to equal the amount you want to withdraw. So say the market is going through a temporary dip. Since you’re retired, you have to continue making withdrawals in order to maintain your income. During the dip, your investment assets may have less value, so you have to sell more of them to equal the same amount of money. When the market goes back up, you have fewer assets that benefit from the rebound. The opposite is true, too. When the market is up, you don’t have to sell as many of your assets to maintain your income. There will always be good years and bad years in the market. How your withdrawals line up with the market’s volatility is called the “sequence of returns.” Unfortunately, you can’t control it. In many ways, it’s the luck of the withdrawal. Still, there are ways to help decrease the potential impact of a bad sequence of returns. How to limit bad timing from ruining your retirement The last thing you want is to retire and then lose your savings to market volatility. Consider taking some steps to try and protect your retirement from a bad sequence of returns. Adjust your level of risk As you near or enter retirement, it’s likely time to start dialing down your stock-to-bond allocation. Invest too heavily in stocks, and your retirement savings could tank right when you need them. Betterment generally recommends turning down your ratio to about 56% stocks in early retirement, then gradually decreasing to about 30% toward the end of retirement. Rebalance your portfolio During retirement, the two most common cash flows in/out of your investment accounts will likely be dividends you earn and withdrawals you make. If you’re strategic, you can use these cash flows as opportunities to rebalance your portfolio. For example, if stocks are down at the moment, you likely want to withdraw from your bonds instead. This can help prevent you from selling stocks at a loss. Alternatively, if stocks are rallying, you may want to reinvest your dividends into bonds (instead of cashing them out) in order to bring your portfolio back into balance with your preferred ratio of stocks to bonds. Keep an emergency fund Even in retirement, it’s important to have an emergency fund. If you keep a separate account in your portfolio with enough money to cover three to six months of expenses, you can likely cushion—or ride out altogether—the blow of a bad sequence of returns. Supplement your income Hopefully, you’ll have enough retirement savings to produce a steady income from withdrawals. But it’s nice to have other income sources, too, to minimize your reliance on investment withdrawals in the first place. While there still is Social Security—it’s future is murky. Maybe you have a pension you can withdraw from, too. Or a part-time job. Or rental properties. Along with the other precautions above, these additional income sources can help counter bad returns early in retirement. While you can’t control your sequence of returns, you can control the order you withdraw from your accounts. And that’s important, too. How much should you withdraw each year Deciding how much to withdraw annually from your 401(k) once you’re retired involves balancing anticipated expenses with available savings. You’ll want to consider tax implications, market fluctuations, inflation, health/longevity, and additional income streams (more on this below). A good place to start is with the 4% rule, which entails withdrawing 4% of your retirement savings in the first year, then adjusting the amount annually for inflation. Keep in mind: the 4% rule typically assumes your portfolio is split almost evenly between stocks and bonds, and that your funds are held in a tax-deferred account, such as a traditional IRA or 401(k), where withdrawals are taxable. Although the 4% rule has been popular for decades, it's applicability has been challenged in recent years. Longer lifespans, healthcare costs, inflation rates, and additional income streams have all changed the economic landscape. Ultimately, there is no one-size-fits-all answer to how much you should withdraw annually in retirement. A financial advisor can help you create a roadmap that’s right for you in retirement. Which accounts to withdraw from first In retirement, taxes are usually one of your biggest expenses. They’re right up there with healthcare costs. When it comes to your retirement savings, there are three “tax pools” your accounts can fall under: Taxable accounts: individual accounts, joint accounts, and trusts. Tax-deferred accounts: individual retirement accounts (IRAs), 401(k)s, 403(b)s, and Thrift Savings Plans Tax-free accounts: Roth IRAs, Roth 401(k)s Each of these account types (taxable, tax-deferred, and tax-free) are taxed differently—and that’s important to understand when you start making withdrawals. When you have funds in all three tax pools, this is known as “tax diversification.” This strategy can create some unique opportunities for managing your retirement income. For example, when you withdraw from your taxable accounts, you only pay taxes on the capital gains, not the full amount you withdraw. With a tax-deferred account like a Traditional 401(k), you usually pay taxes on the full amount you withdraw, so with each withdrawal, taxes take more away from your portfolio’s future earning potential. Since you don’t have to pay taxes on withdrawals from your tax-free accounts, it’s typically best to save these for last. You want as much tax-free money as possible, right? So, while we’re not a tax advisor, and none of this information should be considered advice for your specific situation, the ideal withdrawal order generally-speaking is: Taxable accounts Tax-deferred accounts Tax-free accounts But there are a few exceptions. Incorporating minimum distributions Once you reach a certain age, you must generally begin taking required minimum distributions (RMDs) from your tax-deferred accounts. Failure to do so results in a steep penalty on the amount you were supposed to take. This changes things—but only slightly. At this point, you may want to consider following a new order: Withdraw your RMDs. If you still need more, then pull from taxable accounts. When there’s nothing left in those, start withdrawing from your tax-deferred accounts. Pull money from tax-free accounts. Smoothing out bumps in your tax bracket In retirement, you’ll likely have multiple sources of non-investment income, coming from Social Security, defined benefit pensions, rental income, part-time work, and/or RMDs. Since these income streams vary from year to year, your tax bracket may fluctuate throughout retirement. With a little extra planning, you can sometimes use these fluctuations to your advantage. For years where you’re in a lower bracket than usual–say, if you’re retiring before you plan on claiming Social Security benefits–it may make sense to fill these low brackets with withdrawals from tax-deferred accounts before touching your taxable accounts, and possibly consider Roth conversions. For years where you’re in a higher tax bracket, like if you sell a home and end up with large capital gains–it may make sense to pull from tax-free accounts first to minimize the effect of higher tax rates. Remember, higher taxes mean larger withdrawals and less money staying invested. How Betterment helps take the guesswork out of your retirement income If all of the above sounds confusing, you’re not alone. It’s why we developed a dynamic income solution specifically for retirees. Our expert-built technology factors in the unique goal details that you provide when creating your retirement account to help advise you on the optimal amount for withdrawal over the coming year, with the intention of fostering year-to-year income consistency. And it’s all managed through our existing platform, making for a seamless process. You can even set up automatic withdrawals from your Betterment account to your checking account, helping you maintain a personalized payment schedule.

How to invest during market highs Jul 25, 2024 8:29:52 PM Betterment experts weigh in on how to override anxiety, and be invested when the market climbs. While we invest for our own reasons, we get into the market to take advantage of potential price appreciation and income produced by financial assets. But anxiety can get the best of even the most eager investors. What if I buy when the market peaks, and then immediately declines? Sound familiar? As any investor knows, psychological aspects can cloud one’s judgment when it comes to money. We’re encouraged to minimize risk and maximize returns, whenever possible. So, a market that’s going up-up-up, can leave some investors feeling hesitant about paying premium prices—instead of opting for undervalued stocks, or lower price points. So how do we override the Fear of Purchasing at All-time Highs (or FOPAH, for short)? Is it best to dive in, or wait for a potential pullback? Our investment experts believe one of the best things you can do is face your fear, wading into the market. In practice, it can take a long time before that pullback comes, during which there may be further positive market returns. For instance, between 2012 and 2017, the S&P 500 did not experience a pullback greater than 12%. Oftentimes when a pullback does arrive, it’s not heralded as a positive outcome—but an ominous event, accompanied by scary headlines that spark new fears of further downturn. This can all lead to additional hesitancy around buying stocks. While there's no "perfect" time to invest, we can still be confident that choosing a diversified portfolio of investments is a smart way to help achieve long-term financial goals. To ease your fears, work out approximately how much time you’ll need to save up for your own goals. Long-term goals, like saving for college or a deposit on a house, can take time. And that’s a good thing! The longer your time horizon (the period of time you plan to keep your savings invested in the market), the more confident you can be that your money will grow by the point you want to withdraw it. Even if the market has already recently run up when you go to invest, a prolonged time horizon should help quell a pullback in the nearterm. Despite volatility, the stock market tends to trend upwards over longer periods. By maintaining a long-term perspective, you can position yourself to benefit from the market's long-term growth potential, which can outweigh short-term losses. Dating back to 1988, if you decided to invest on any given trading day, 65% of those days would have resulted in a positive investment return over the following month. The share of days with positive returns goes up as that trailing holding period extends. Historically, no matter when an investment was made between 1988 and 2009, the market was higher 100% the time just 15 years later. Short-term goals, like saving for a vacation or a home reno, have a shorter time horizon—meaning your money has less time to grow in the market. However, it's worth remembering that historically, investing at all-time highs has not resulted in lower future returns compared to investing on any other given day. After the S&P 500 reaches an all-time high, average returns tend to be slightly higher than during periods when the index has not soared so high. Practical steps to help ease your anxiety: Set up recurring deposits: When you commit to investing a fixed amount of money at set intervals over time, your losses could potentially be smaller if the market does dive in the near term. Plus, you will still have cash ready to buy at lower prices. While this comes with the risk of later buying at higher prices, it can help override the emotional pressure of trying to time the market. Diversify: Consider adding other asset classes, regions, and company sizes in your portfolio (as we do at Betterment). Our automated portfolio rebalancing is designed to maintain your investment portfolio's target asset allocation over time. Betterment continuously monitors your portfolio to see if the current allocation deviates from your target allocation—due to market fluctuations or changes in the value of your investments. Our auto-adjust feature can also help right-size the risk level of your portfolio by reducing the share of the portfolio allocated to more volatile stocks, and increasing the share allocated to bonds as your time horizon shortens.

How an IRA can fit into your retirement strategy Jul 23, 2024 11:15:03 AM You already have access to a Betterment 401(k) through your employer. But if you’re not sure what the difference is between your 401(k) and IRA, we’ll lay it all out for you here. An Individual Retirement Account (IRA) is a type of investment account with tax advantages that helps you prepare for retirement. Depending on the type of IRA you invest in, you can make tax-free withdrawals when you retire, earn tax-free interest, or put off paying taxes until retirement. The sooner you start investing in an IRA, the more time you have for the earnings on your investment to compound before you reach retirement age. If you’re planning for retirement, it’s important to understand your options and learn how to maximize your tax benefits. Your employer already offers a 401(k) through Betterment—nice! But you may also want to have an IRA too, for a more robust plan. In this article, we’ll walk you through: What makes an IRA different from a 401(k) The types of IRAs How to choose between a Roth IRA and a Traditional IRA Timing your IRA contributions IRA recharacterizations Roth IRA conversions Let’s start by looking at what makes an Individual Retirement Account different from a 401(k). How is an IRA different from a 401(k)? When it comes to retirement planning, the two most common investment accounts people talk about are IRAs and 401(k)s. 401(k)s offer similar tax advantages to IRAs, but just about anyone can open an IRA. A 401(k) is what’s known as an employer-sponsored retirement plan: It’s only available through an employer. Other differences between these two types of accounts are that: Employers may offer a matching contribution into your 401(k) account, based on what you contribute 401(k) contributions come right out of your paycheck 401(k) contribution limits are significantly higher If your employer matches contributions to a 401(k), they’re basically giving you free money you wouldn’t otherwise receive. It’s typically wise to take advantage of this match before looking to an IRA. With an IRA, you determine exactly when and how to make contributions. You can put money into an IRA at any time over the course of the year, whereas a 401(k) almost always has to come from your paycheck. Note that annual IRA contributions can be made up until that year’s tax filing deadline, whereas the contribution deadline for 401(k)s is at the end of each calendar year. Every year, you’re only allowed to put a fixed amount of money into a retirement account, and the exact amount often changes year-to-year. For an IRA, the contribution limit for 2024 is $7,000 if you’re under 50, or $8,000 if you’re 50 or older. For a 401(k), the contribution limit for 2024 is $23,000 if you’re under 50, or $30,500 if you’re 50 or older. These contribution limits are separate, so it’s not uncommon for investors to have both a 401(k) and an IRA. What are the types of IRAs? The challenge for most people looking into IRAs is understanding which kind of IRA is most advantageous for them. For many, this boils down to Roth and/or Traditional. The advantages of each can shift over time as tax laws and your income level changes, so this is a common question for even advanced investors. As a side note, there are other IRA options suited for the self-employed or small business owner, such as the SEP IRA, but we won’t go into those here. As mentioned in the section above, IRA contributions are not made directly from your paycheck. That means that the money you are contributing to an IRA has already been taxed. When you contribute to a Traditional IRA, your contribution may be tax-deductible. Whether you are eligible to take a full, partial, or any deduction at all depends on if you or your spouse is covered by an employer retirement plan (i.e. a 401(k)) and your income level (more on these limitations later). Once funds are in your Traditional IRA, you will not pay any income taxes on investment earnings until you begin to withdraw from the account. This means that you benefit from “tax-deferred” growth. If you were able to deduct your contributions, you will pay income tax on the contributions as well as earnings at the time of withdrawal. If you were not eligible to take a deduction on your contributions, then you generally will only pay taxes on the earnings at the time of withdrawal. This is done on a “pro-rata” basis. Comparatively, contributions to a Roth IRA are not tax deductible. When it comes time to withdraw from your Roth IRA in retirement, your withdrawals will generally be tax free—even the interest you’ve accumulated. How to choose between a Roth IRA and a Traditional IRA For most people, choosing an IRA is a matter of deciding between a Roth IRA and a Traditional IRA. Neither option is inherently better: it depends on your income and your tax bracket now—and in retirement. Your income determines whether you can contribute to a Roth IRA, and also whether you are eligible to deduct contributions made to a Traditional IRA. However, the IRS doesn’t use your gross income; they look at your modified adjusted gross income, which can be different from taxable income. With Roth IRAs, your ability to contribute is phased out when your modified adjusted gross income (MAGI) reaches a certain level. If you’re eligible for both types of IRAs, the choice often comes down to what tax bracket you’re in now, and what tax bracket you think you’ll be in when you retire. If you think you’ll be in a lower tax bracket when you retire, postponing taxes with a Traditional IRA will likely result in you keeping more of your money. If you expect to be in a higher tax bracket when you retire, using a Roth IRA to pay taxes now may be the better choice. The best type of account for you may change over time, but making a choice now doesn’t lock you into one option forever. So as you start retirement planning, focus on where you are now and where you’d like to be then. It’s healthy to re-evaluate your position periodically, especially when you go through major financial transitions such as getting a new job, losing a job, receiving a promotion, or creating an additional revenue stream. Timing IRA contributions: Why earlier is better Regardless of which type of IRA you select, it helps to understand how the timing of your contributions impacts your investment returns. 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 achieve greater returns over time. Consider the difference between making a maximum contribution on January 1 and making it on December 1 each year. Then suppose, hypothetically, that your annual growth rate is 10%. Here’s what the difference could look like between an IRA with early contributions and an IRA with late contributions: 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. 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. What’s an IRA recharacterization? You might contribute to an IRA before you have started filing your taxes and may not know exactly what your Modified Adjusted Gross Income will be for that year. Therefore, you may not know whether you will be eligible to contribute to a Roth IRA, or if you will be able to deduct your contributions to a Traditional IRA. In some cases, the IRS allows you to reclassify your IRA contributions. A recharacterization changes your contributions (plus the gains or minus the losses attributed to them) from a Traditional IRA to a Roth IRA, or, from a Roth IRA to a Traditional IRA. It’s most common to recharacterize a Roth IRA to a Traditional IRA. Generally, there are no taxes associated with a recharacterization if the amount you recharacterize includes gains or excludes dollars lost. Here are three instances where a recharacterization may be right for you: If you made a Roth contribution during the year but discovered later that your income was high enough to reduce the amount you were allowed to contribute—or prohibit you from contributing at all. If you contributed to a Traditional IRA because you thought your income would be above the allowed limits for a Roth IRA contribution, but your income ended up lower than you’d expected. If you contributed to a Roth IRA, but while preparing your tax return, you realize that you’d benefit more from the immediate tax deduction a Traditional IRA contribution would potentially provide. Additionally, we have listed a few methods that can be used to correct an over-contribution to an IRA in this FAQ resource. You cannot recharacterize an amount that’s more than your allowable maximum annual contribution. You have until each year’s tax filing deadline to recharacterize—unless you file for an extension or you file an amended tax return. What’s a Roth conversion? A Roth conversion is a one-way street. It’s a potentially taxable event where funds are transferred from a Traditional IRA to a Roth IRA. There is no such thing as a Roth to Traditional conversion. It is different from a recharacterization because you are not changing the type of IRA that you contributed to for that particular year. There is no cap on the amount that’s eligible to be converted, so the sky’s the limit for those that choose to convert. We go into Roth conversions in more detail in our Help Center. So what’s right for you? Since your employer offers a 401(k) through Betterment, it’s typically best to start there. Some employers auto-enroll new hires, meaning that paycheck contributions start automatically. Whether your employer auto-enrolls or not, you’ll need to start by claiming your 401(k) account. Once you claim your account, you can set or adjust the contribution rate. Get started here: betterment.com/accountaccess. After you’ve got your 401(k) up and running, you might want to consider contributing to an IRA as well. On your dashboard, select “Add new” in the left-hand navigation, then choose: IRA. Follow the prompts to select which type of IRA you want, and sync a bank account to contribute from. You’ll have access to the same investment options available in your 401(k). Retirement can feel hard to plan for, but Betterment has plenty of investing options to make it easy to save for. We’re here to help you work towards for the retirement of your dreams.