Retirement-replacement-betterment

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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. Social Security might be enough—although a pandemic or other disaster can deplete these funds faster than expected. 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.

How to decide which accounts to withdraw from first In retirement, taxes are usually one of your biggest expenses. For example, when you withdraw from your taxable accounts, you only pay taxes on the capital gains, not the full amount you withdraw. You want as much tax-free money as possible, right?

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. Pull money from tax-free accounts. 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. Remember, higher taxes mean larger withdrawals and less money staying invested. We use several factors to help you estimate your spending when you retire, including how your earned income will grow over time, what the local cost of living will be like, and what your spending habits look like before retirement.

Growth of Real Earned Income How much you spend is strongly related to how much you earn, but your income could change during your life for multiple reasons, including raises and inflation. A young worker with 40 years ahead of them should plan on earning more just before they retire. It can be enlightening to learn how much less you need to save if you move somewhere less expensive in retirement.

We assume that the cost of living in that ZIP code will be the same at the time you retire as it is now, adjusted for inflation. Spending Prior to Retirement It can be difficult to predict exact expenses in retirement. Although you may no longer have a mortgage or be supporting children, those expenses are typically replaced by new activities or hobbies, as well as travel and medical expenses.

Generally at low income levels you consume a higher proportion all of your income, but as net income rises that proportion falls. Estimates of the wealthy find that they often consume less than half of their net income. Critically, once you're retired, you're no longer saving, so you don't need as much income to support the same level of consumption. As you take less gross income, your average tax rate falls, as well.

No Specific Assumptions on Required Minimum Distributions Required Minimum Distributions occur in tax-deferred retirement accounts after you reach a certain age. Distributions from these accounts are generally taxed at ordinary income rates in retirement. Aside from planning that distributions will be taxed appropriately, we do not specifically calculate or handle Required Minimum Distributions RMDs in this retirement planning advice.

How long will your retirement be the time until end of life? Accounting for all sources of retirement income Income in retirement can come from multiple sources. We need to understand all sources before we can figure out how large your nest egg needs to be. The main sources for most people are Social Security and investment income or withdrawals from retirement accounts.

However, some people may have additional sources such as rental property or a pension. The extent of this government benefit varies by both your level of lifetime earnings and when you decide to start claiming Social Security income. We estimate Social Security income according to the U.

Inputs for their rules include current income for you and your spouse separately , assumptions for growth rate of your earned income, assumptions for inflation, and the age you and your spouse, if applicable choose to retire. Generally, we assume you start benefits in the year you retire. If you retire in between ages 62 and 70, we assume you start Social Security benefits at the retirement age you choose, unless you specify a different age.

In general, each year you delay claiming Social Security benefits after age 62 but before age 70 increases your benefits. There are no benefits to delaying claiming Social Security after age However, if you input a retirement age greater than 70, we assume any SS benefits you receive before you actually retire are spent instead of saved.

We assume COLAs are constant in retirement at the assumed level of inflation, but you can override this setting when editing assumptions within your Betterment account. Finally, given the projected deficits in the Social Security trust funds , some customers prefer to plan for retirement assuming partial or zero income from Social Security. According to the Social Security Administration, zero benefits are not likely, but the SSA does currently predict that younger workers may only receive three-fourths of benefits because of the deficit.

There are several other important assumptions that are used in our Social Security calculations: We use full retirement age as defined by the SSA rules and your date of birth. Note that the SSA. Earnings history is also estimated using this growth rate in the opposite direction i. Social Security continues until life expectancy for each person. No survivor or disability benefits are assumed.

Other Income Sources Often, retirees also have income from other investment sources, such as rental properties, pensions, or annuities. Some manually synced accounts are assumed to have no fund fees. Investment Income If Social Security and other sources of income are not enough to meet your spending needs, the resulting gap needs to be filled by your savings and investments.

We assume you will need to make withdrawals from your portfolio each year to make up this gap, making adjustments for taxes and planning for the variability of markets. We estimate your future tax rate based on your specified spending income in retirement see Section I. Your withdrawals will come from growth on the holdings you have when you start a retirement goal as well as future deposits into your investment accounts working toward retirement.

In both cases, your retirement accounts likely may include accounts invested with Betterment and those held at an external firm. Projecting Current Retirement Balances Because we know your current retirement account balances and types, we use these balances to make projections and adjust for taxes using your current tax rates and what we assume tax rates might be like during your retirement.

Notably, this means we assume all traditional retirement accounts have zero cost basis. If you have made after-tax contributions to your traditional retirement accounts, this assumption will cause us to overstate the taxes you will owe. Learn more about after-tax returns. For existing Roth retirement accounts, we assume no taxes are paid while saving or withdrawing, because you have already paid the taxes before contributing.

This assumption is likely to overstate your tax rate make your tax higher than it is in certain situations, such as the case of all savings being in a Roth IRA which is not taxed on withdrawal. But given the choice, we have decided to be conservative in this projection. Using this tax rate, we estimate the total tax you will pay on your withdrawals of these balances, and we add that to the amount you need to have saved when you retire.

This is to make sure you have enough saved for all your taxes in retirement, too. Calculating Required Savings The great thing about compound interest and investing is that there is a difference between how much you plan on spending and how much you are expected to need to save in order to spend that much.

Once we know your target balance, our advice decides how much you should save to reach that total balance, and we break that down by month or year. We give you advice about an appropriate risk level, which is based on your time until retirement, but you can tailor your allocation as you see fit. If you follow the recommended allocation of stocks and bonds in your Betterment accounts for your retirement goal, we offer to automatically adjust your risk level over time as you near retirement.

Prioritizing Retirement Account Savings Saving intelligently for retirement can be boiled down to maximizing expected spending in retirement per dollar saved today. Prioritizing which accounts you save into depends on your specific tax situation and access to retirement accounts. Betterment is not a tax advisor and does not cover all potential accounts, nor do we have your tax return and all details about your situation.

The recommendation is guidance only, and it should not be considered personal tax advice. Contact a qualified tax advisor to understand your personal situation. If you do not add existing plans, we assume you do not have them available.

You should keep these values up to date each year to get the most accurate advice from Betterment. If these values change during the year but you do not update them, the advice may not be applicable to your changed circumstances. Contact a qualified tax advisor if you have questions. As a self-employed individual, you have access to various other types of retirement accounts.

Betterment does not support these types of accounts, and thus they are not included in our prioritization of which accounts to save into.

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An investment account is a collection of individual assets. So say the market is going through a temporary dip. 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. There will always be good years and bad years in the market. Still, there are ways to help decrease the potential impact of a bad sequence of returns. How to keep bad timing from ruining your retirement The last thing you want is to retire and then lose your savings to market volatility. Invest too heavily in stocks, and your retirement savings could tank right when you need them.

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.

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. Social Security might be enough—although a pandemic or other disaster can deplete these funds faster than expected. 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.

If you follow the recommended allocation of stocks and bonds in your Betterment accounts for your retirement goal, we offer to automatically adjust your risk level over time as you near retirement. Prioritizing Retirement Account Savings Saving intelligently for retirement can be boiled down to maximizing expected spending in retirement per dollar saved today. Prioritizing which accounts you save into depends on your specific tax situation and access to retirement accounts.

Betterment is not a tax advisor and does not cover all potential accounts, nor do we have your tax return and all details about your situation. The recommendation is guidance only, and it should not be considered personal tax advice. Contact a qualified tax advisor to understand your personal situation.

If you do not add existing plans, we assume you do not have them available. You should keep these values up to date each year to get the most accurate advice from Betterment. If these values change during the year but you do not update them, the advice may not be applicable to your changed circumstances.

Contact a qualified tax advisor if you have questions. As a self-employed individual, you have access to various other types of retirement accounts. Betterment does not support these types of accounts, and thus they are not included in our prioritization of which accounts to save into. HSAs are only available to IRS eligible individuals with qualifying high-deductible health insurance plans.

HSAs allow for pre-tax contributions and tax-deferred growth. Additionally, if withdrawals from the account are used for qualified healthcare expenses, the withdrawal is also income tax-free. If you include your HSA in your retirement goal, Betterment makes the assumption that you will be using the account as a vehicle for long-term healthcare savings, and that any withdrawals from the HSA will be for qualified medical expenses.

Prioritization Based on Matching Contributions and Tax-Advantaged Accounts As mentioned above, our guidance seeks to maximize your expected spending in retirement per dollar saved today. We account for the potential positive impact of an employer match. For Betterment for Business k plan participants, we prompt you to tell us your match information. We prioritize the account type with the better projected outcome after taxes and fees.

To project the better after-tax outcome of the account type possibilities, we factor in how much time you have between your current age and your retirement age. By default, we assume that external employer-sponsored plans have a 0. If you have a Thrift Savings Plan account synced without information on fees, we assume that there are no management fees and a fund expense of 0. If you have an HSA, we assume that the account has a fee of 0.

These fee assumptions can be overridden by the customer. Generally, lower fee accounts are more favorable. We only prioritize account types we expect you to be eligible for. We utilize IRS guidelines for the most current tax year for contribution limits and income phaseouts. We do not consider contributions made in the calendar year following the current tax year.

We estimate your marginal federal income tax rate based on your gross income, marital status, standard deduction, age, and age of spouse. We assume you are not blind, which means we assume you are not eligible for the increased standard deduction associated with being legally blind. Some k accounts may also allow for loans or distributions in a broader set of circumstances.

Some k plans may also offer specific educational and advisory services to participants. The desirability of contributing to a k may also depend on the range of investment options offered within the k. To learn more about these various benefits, you should contact your plan administrator about whether such features are relevant to your personal situation. In our retirement advice, we incorporate information about k fees you provide or those of Betterment for Business k plans , but not the actual fees on investment options available in externally synced employer-sponsored plans.

These recommendations stand regardless of whether you utilize Betterment accounts to fund your goal if recommended to do so. Our recommendations could be different if the assumed fees in our projections were different. Actual client experience may vary. Interpreting Your Retirement Projection Chart When viewing your retirement goal and our advice on retirement saving and spending, you should note several assumptions and aspects of our visualization. We assume a management fee of 0.

Premium plan customers have an assumed management fee of 0. All current investments and recommended additions to your accounts from present day forward assume the expected returns of the Betterment Portfolio Strategy, according to your current target allocation.

This includes synced external accounts, regardless of whether they have the same allocation as your current target allocation. In the case that you have opted in to having Betterment automatically adjust your allocation, our projections will include adjustment over time. The contributions line on the graph shown in black on the Advice tab in your account , is not inflation-adjusted. This experience and any marketing of the experience are provided by Betterment LLC. The articles and client support materials available are educational only and not investment or tax advice.

We want you to know a few things: Who Provides What Service? Investment Advice: Advisory services for traditional investments e. Betterment LLC does not require clients to maintain a minimum investment account balance. However, accounts below a certain balance may have certain restrictions. For more information, please see additional disclosure. For further details regarding the custody of assets, including cash, held at Gemini Trust Company, please see your Gemini user agreement.

Past performance does not guarantee future results and the likelihood of investment outcomes are hypothetical in nature. Furthermore, investing in digital assets is highly speculative and volatile, and only suitable for investors who are able to bear the risk of potential loss and experience sharp drawdowns. Digital assets are not legal tender and are not backed by the U. Digital assets are not subject to SIPC protections.

Before investing, consider your investment objectives and Betterment LLC's fees and expenses. Betterment LLC's internet-based advisory services are designed to assist clients in achieving discrete financial goals. They are not intended to provide comprehensive tax advice or financial planning with respect to every aspect of a client's financial situation and do not incorporate specific investments that clients hold elsewhere. Not an offer, solicitation of an offer, or advice to buy or sell securities in jurisdictions where Betterment LLC is not registered.

Who Provides the Market Data? Market Data by Xignite. All Rights Reserved. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.