Author Topic: Betterment Retirement Calculator/Projections - why so low??  (Read 530 times)

Yukon Cornelius

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Betterment Retirement Calculator/Projections - why so low??
« on: February 04, 2021, 12:35:33 PM »
I am in my 20's and have so far loved using Betterment to save for retirement. It is so user-friendly and the articles on MMM helped give me the courage to give it a try. However, I am a bit confused about there projections for Roth IRAs. Why are they so low? The projection on my IRA looked great, they said I had a 95% chance of reaching my goals. However the total projected amount at my time of retirement many years from now seemed comically low. How could I reach my goal with such a small projected sum? The answer - Social security was part of the final goal reaching assumption. Once I choose "None" under Social Security assumptions, the whole projection changed and they said there is no chance that I will be able to retire on this amount.

What is getting me is how low their projections are. I plug the same numbers into any other retirement calculator: amount saved, current age, age of retirement, monthly contribution - and I get WAY higher numbers! The only way for me to get the same numbers that Betterment is projecting is if I only assume a 3% annual return.

Why is this? Its has been making me worried about continuing with Betterment. I want to reach out to Betterment about it but to have a retirement planning meeting with one of their advisors is going to cost my family $400. I can't find anything out on the internet about why their predictions are so small.

Here is Betterment's Retirement calculator for instance and it is giving me the same crazy low numbers:
https://www.betterment.com/retirement-calculator/

In need of some help,
-Cornelius

cool7hand

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Re: Betterment Retirement Calculator/Projections - why so low??
« Reply #1 on: February 05, 2021, 04:37:55 AM »
Forgive us, but I think we need more details to understand what you mean by projections are "so low". Is it possible that Betterment is just too conservative? Or does its fee structure delay your time horizon? Maybe share real numbers.

Yukon Cornelius

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Re: Betterment Retirement Calculator/Projections - why so low??
« Reply #2 on: February 05, 2021, 07:36:48 AM »
25 years old with a current balance of 8k. I am putting in 275 a month and it prediction is that by 2066 when I am 71 I will have a balance of 384k having deposited 156k into the account over the years. Portfolio is 95% stocks and 5% bonds.

When I put these same numbers into other retirement calculators it shows much higher numbers. For instance on Dave Ramsey's retirement calculator I plug in these same numbers with the addition of a 9% annual return assumption and it gives me a prediction of 2.7 million. Whereas Betterment projects 384k. The only way I can get that number from Ramsey's calculator is to assume a 3% annual return.

https://www.daveramsey.com/smartvestor/investment-calculator

I realize that Betterment is accounting for inflation at 2% and has some more nuanced aspects to its calculations than a simple compounding interest calculator like Ramsey's but still I don't know why there is such a great disparity.

RWD

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Re: Betterment Retirement Calculator/Projections - why so low??
« Reply #3 on: February 05, 2021, 08:51:05 AM »
For instance on Dave Ramsey's ...
Well there's your problem! Jokes aside, you should disregard virtual everything from Dave Ramsey.

Not sure exactly what is going on with Betterment calculator. When I try putting numbers in it just says what the projected income is, not the actual account balance. The assumptions link isn't very helpful either as it doesn't say anything about expected returns.

For simple projections of account balance I like to use a compound interest calculator (example). $8k + $3.3k/yr for 46 years at 3% results in a $350k balance. If I use 7% (a common expected inflation-adjusted real return) instead the end result is $1.2 million. Expected return on investment has a huge effect when you're talking about such a long period (4+ decades!) of compounding.

MustacheAndaHalf

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Re: Betterment Retirement Calculator/Projections - why so low??
« Reply #4 on: February 05, 2021, 09:16:53 AM »
It's possible they are using price/earnings ratio to predict future returns.  Flipping the 10-year price/earnings (CAPE), you get about 3%.  But to extend that for 45 years seems like an exaggeration considering Portfolio Visualizer's maximum timeframe (1972-2021) shows a 10.6% return.  It's probably closer to the midpoint of those numbers.
https://www.portfoliovisualizer.com/backtest-asset-class-allocation

You could also work backwards, and look at Vanguard's nest egg / spending calculator.  Given a portfolio value and annual spend %, it predicts your success rate.  Taking the number you were given, 380k, and guessing at 36k spending (9.5% withdrawal rate!), a retirement portfolio has just a 27% chance to last 30 years.
https://www.vanguard.com/nesteggcalculator

ChpBstrd

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Re: Betterment Retirement Calculator/Projections - why so low??
« Reply #5 on: February 05, 2021, 10:06:59 AM »
It says the assumptions include:

-Retire at 68 (um, I was thinking 45, but can't change that)
-Pay a combined state/fed tax rate of 20% (gee I only paid about 9% last year with sky high earnings)
-All income you draw from investments will be taxed as ordinary income (interesting assumption that LT capital gains tax law will change for the worse)
-AA will become more conservative over time (does that mean today's bond rates are locked into the equation?)

If these are unrealistic assumptions, use networthify, nerd wallet, or firecalc. To really nerd out, and if you understand probability, there is no substitute for portfolio visualizer.

shinn497

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Re: Betterment Retirement Calculator/Projections - why so low??
« Reply #6 on: February 05, 2021, 12:21:18 PM »
Betterment's calculator is post tax AND post inflation. Their portfolio is also internationally diversified, which also lowers returns.  They assume about a 6.8-7% rate of return before inflation, which means it is something like 5% after inflation. This article shows their assumptions, although I do believe it is PRE inflation. . Dave Ramsey assuming 9% is not bad but also a bit misleading as that is pre inflation.

I don't consider either of these to be bad. Some of the really high 9%,10%, and even 12% future expected returns are based on the recent run of US large cap value stocks. It is irrational to assume that this will continue in the future even more so if you are as underdiversified as to only invest in the SP500. Even investing in VTI is underdiversified as the market cap weighting underweights small cap stocks.

Betterment overweights to value, over weights to smaller cap, and internationally diversified you. IT is probably one of the better weightings for maximized risk adjusted returns, highest diversification, and greatest assurance of outcome. Other mixes lose one of those things.

Ok so using portfolio visualizer, I put in 8k and added in 275$ monthly, with no inflation increases. After 40 years I got 614, after inflation, and, after 45 years, 859. There were huge variances however. The lowest value, at 45 was 451k and the highest was 1.5 million. The real expected returns were 6.8%. And this was based on real data with betterment's actual all stock portfolio. Bond percentages would mean lower returns but less variance.

I also use the Betterment retirement projector, it is one of my biggest gripes. That being said. I like the platform as a whole and consider it the best investing solution, even over vanguard. As the decisions it encourages will help you be a better investor. I also am a big fan of Dave Ramsey, as his personal finance is great and got me to 78k right now (95k including my EF and car savings).

If I wer you I would try to increase your retirement contributions just a little bit. If you can get to 500$ a month by age 30, you will definately retire a millionaire. 1k a month even better. Also bear in mind that, in the future, your income will go up as you increase. Calculators can not account for that.