Intro: How Does Betterment Work?


Betterment is by far one of the most popular robo-advisor services out there. Over 100,000 investors use a Betterment account to manage their money, and reviews for Betterment have been overwhelmingly positive since the company launched in 2010.

If you’re thinking of opening your own Betterment account, you might be asking yourself, “How does Betterment work?” We’ll explore how to use Betterment here, including how to open a Betterment account, as well as how Betterment allocation, transfers, and withdrawals work.

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Image Source: Betterment.com



How Does Betterment Work? Getting Started

First, let’s look at the basics of how to use Betterment. Anyone over the age of 18 with a bank account can create a Betterment account. To get started with your Betterment account, go to Betterment.com and click “Get Started.”

You’ll be asked to input your age, retirement status (either retired or not retired), and annual income.

Betterment will ask you to select your first goal. You can choose to save money as a safety net, for retirement, or for general investing. Betterment calculates how much you’ll want to save for each goal based on your age and income.

Once you select a goal, you’ll be shown a graph with Betterment’s allocation recommendations for your particular goal.

After reviewing the recommended goals and allocation, you’ll be taken to set up your Betterment account. Once you’ve created a Betterment account, you can set up additional goals.

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Types of Goals

Once your account is set up, you’ll want to know how to use Betterment to achieve your personal investment goals. Betterment makes it easy to set goals and save for more than one purpose. Your goals are like sub-accounts, each with their own separate portfolio.

The first type of goal Betterment suggests is a safety net. Betterment calculates a goal total for a solid 3-6 month emergency fund. This fund is designed to be relatively conservative, but also grow enough to keep up with inflation.

Your next priority is your retirement fund. The program will ask you a few simple questions about when you want to retire and how much you want to save. As you grow closer to retirement age, Betterment’s allocation will choose less and less risk.

You can also set personalized goals for other expenses. Say you want to save $20,000 to buy a house in five years. You can use your Betterment account to set up a fund designed to reach this goal.

If you’re saving without a specific target or goal in mind, Betterment offers a general investing option. This is recommended for those who want to save money to pass on to future generations, or for unknown future expenses. Depending on your age, Betterment will make this fund more aggressive or more conservative.

The program will help you reach your goals by making recommendations about how often you should make Betterment deposits and how much to deposit.

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Betterment Account Types

Once you’ve selected a goal, you’ll choose an account type for that specific goal. For most goals, the Individual account is best.

However, if you’re saving for retirement, you have other options. You can create a Rollover account to transfer an existing IRA or roll over your 401(k) to your Betterment account. You can also choose to open a new IRA account.

There are two other options for your Betterment account—Joint Account or Trust. These are fairly self-explanatory. A Joint Account is a jointly owned account that can be used for any investment goal, while a Trust is an account set up in the name of an existing trust.

Deposits and Withdrawals

To start investing, you’ll need to deposit money into your Betterment account. Betterment only accepts electronic ACH transfers. When you sign up for Betterment, your Betterment account and your bank account are linked, allowing for easy transfers to Betterment. You can also set up automatic deposits, so money transfers to Betterment straight from your checking account each month.

With your checking account and Betterment account linked, it’s easy to make both deposits and Betterment withdrawals.

Deposits into your Betterment account are generally invested the next business day. Betterment withdrawals take 4-5 business days to process.



Betterment Allocation and Risk

Once you’ve established goals and chosen your Betterment account type, the program automatically calculates how aggressive you should be with your investments. Betterment’s allocation is based on your target amount and time.

How does Betterment work to adjust your risk? The program balances your portfolio with a variety of stocks and bonds. For a more aggressive investment, Betterment allocates more money into stocks. For a conservative investment, the money goes into bonds.

If you’re saving for a long-term goal, such as retirement, Betterment recommends a more aggressive strategy. As you get closer to your end date, Betterment’s allocation changes automatically. Betterment transfers more money into safer bonds so your money is there when it’s time to withdraw.

If you want to change your funds allocation in Betterment, the program provides a simple slider tool. You can choose to invest more heavily in stocks or bonds. Betterment will tell you whether your allocation is aggressive, moderate, or conservative based on your goals.

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Meeting Your Goals with Betterment

Let’s say you’ve set up your Betterment account and started saving. For the most part, you can leave your money alone and let Betterment do the work for you. But if it looks like you’re not going to meet your goals, Betterment offers automatic advice.

Betterment gives you a few options to help you meet your goals. You can adjust the amount you direct deposit into your Betterment account each month. You can also do a one-time deposit. If all else fails, you can adjust the time frame for a more realistic goal.

While Betterment gives you suggestions for meeting your financial goals, you also have the freedom to play with your investments and make any changes you’d like. You have full reign to adjust your stock allocation in Betterment, change your time horizon, and increase or decrease your deposit amounts.

As you make these changes, Betterment will let you know if you’re still on track to meet your goals according to their calculations.



How to Use Betterment to Save for Retirement

One of the most common reasons people want to start investing is to save some money for retirement. How does Betterment work to help you save for retirement? Your Betterment account can help you reach your retirement goals in a few ways.

Included with every Betterment account is a feature called RetireGuide. RetireGuide walks you through the key decisions you’ll have to make to save for retirement.

RetireGuide first asks about when you plan to retire, your income, and your current retirement savings. The program also asks how much you’d like to spend each year in retirement.

Using this information, Betterment calculates the amount you need to save for retirement. Betterment gives you a savings and spending roadmap to guide you through the process.

If you already have a retirement savings account and don’t want to transfer to Betterment, you can still use RetireGuide to help you plan. RetireGuide combines information from your Betterment account and other accounts to give a complete picture of your investments.



Betterment Transfers

Whether you’re transferring accounts into or out of Betterment, the process can be a bit complicated. The required steps will vary depending on the type of Betterment account and the account to which you’re transferring.

In most cases, you will simply contact the receiving financial institution and give them your Betterment account number. You’ll have to fill out some paperwork with the receiving institution as well.

If you’re making a transfer from Betterment to another account and the transfer amount is more than $250,000, the transfer paperwork will need to be medallion signature guaranteed.  This simply adds a level of protection and security.

There are no fees for transferring out or closing your Betterment account. Betterment transfers shares from taxable accounts directly to your new financial institution and uses the direct transfer process for IRAs. This means that when you transfer from Betterment, you don’t have to worry about tax penalties.

If you have an account with another brokerage and want to transfer to Betterment, you may be out of luck. While Betterment accepts certain ETFs, you cannot transfer shares of mutual funds or single stocks. Transfers to Betterment are reviewed by their team, so expect to wait a little while before you can start using your Betterment account.



How Does Betterment Work? Betterment Demo

Now that we’ve covered how to use Betterment, you might be itching to try it out yourself. Luckily, you can play around with Betterment before opening your own Betterment account, thanks to the Betterment demo.

In Betterment’s demo, you have full access to all the features of Betterment through a demo user account. This lets you see exactly what the program looks like once you’ve opened your Betterment account.

In the Betterment demo, you can more fully explore how to use Betterment. Click on the “Advice” tab to see a graph showing how your Betterment account will grow over time. Adjust your stock/bond allocation to see how this changes your outlook.

Several of the accounts in the Betterment demo have no money invested. You can play with these to figure out how much you might have to put into a Betterment account to reach your goals.

The Betterment demo gives a good picture of what using the program will be like and allows you to really dig into the program. Betterment’s user interface is intuitive, and there are plenty of visuals. You can see exactly how your money will grow and whether you’re on track to reach your goals.

Ultimately, what makes Betterment such a popular service is its simplicity. It doesn’t take long to figure out how to use Betterment. The simple user interface, combined with Betterment’s hands-off approach to investing and automated allocation, make using Betterment to invest your money easy.

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