Confused about Betterment vs Vanguard returns..

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jayk238
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Confused about Betterment vs Vanguard returns..

Post by jayk238 »

I'm new to investing and am only now getting into the game.

I want to allocate assets in a relatively safe vehicle that will allow me to retire comfortably.

I am a physician and currently make 330k a year. I just started at this valuation. I am 2 years out of residency and 34 years old

I currently have my funds primarily in Vanguard retirement at 2055 index funds with expense ratio of .16

My calculations generally expect me to have approximately 2 million in retirement at age 65. I expect to save 86,000 a year the first 10 years to get to about a million dollars (with the idea of spending half that money on buying properties with it) and calculate that with the remainder half as principle and adding about 36000 a year I will be able to save to 2 million by the time I retire.
These estimations come from assumptions of 3% return (the number that I understand is most reasonable net after taxes, inflation fees)

Just for fun I went on betterment today and when they ask me my age, and when I will retire and my income they are predicting a whopping 10 million dollars (NET fees).

Where are they getting this from? Even if I were to only reinvest my returns to the stock market and magically have returns of 6% (net fees etc etc) I still won't make 10 million.

Can anyone please explain how to make these assumptions and if/why betterment is predicting better returns and if they are any better in reality?
PFInterest
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Re: Confused about Betterment vs Vanguard returns..

Post by PFInterest »

maybe they are projecting 10% return.
b42
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Re: Confused about Betterment vs Vanguard returns..

Post by b42 »

Welcome to the forums!

If you have the time I'd look at this wiki link: https://www.bogleheads.org/wiki/Getting_started

If you check the sticky in the forum "Asking Portfolio Questions", you can format your current portfolio and add in other information so we have a more complete picture of your situation. For example, are student loans in the equation? Do you have access to a retirement plan at work? Etc.

In general projections can vary widely, especially when you are talking about decades. Most likely Betterment is simply using a higher rate of return. I think the more appropriate question is what is Betterment doing differently that would get them this "projected" amount?

You mention that you would prefer to allocate assets conservatively, but then mention buying multiple properties. Do you have expectations that real estate investing would be more profitable, albeit more risky?

Without more information, I think the following is the best strategy:

1. Pay off any outstanding student loan, credit card, or high interest debt.
2. Maximize any tax-advantaged accounts before investing in a taxable account.

Most on this forum advocate a do-it-yourself approach that tends to work well if you stick to it. The Target 2055 Retirement fund is an excellent starting point, and arguably if you wanted to you could just stick with the one fund for the next 30 years if you choose.
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TinkerPDX
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Re: Confused about Betterment vs Vanguard returns..

Post by TinkerPDX »

At least one reason for the discrepancy is you are using real return (by incorporating inflation) and they are not.

Also, your expected return before inflation is probably lower than Betterment's (though maybe more useful than theirs, likely based on historical returns, which many doubt we'll match moving forward, but that's another thread).
Last edited by TinkerPDX on Tue Jan 31, 2017 3:37 pm, edited 1 time in total.
jf89
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Re: Confused about Betterment vs Vanguard returns..

Post by jf89 »

They seem to be using a little over 8.5% returns annualized over that entire period. Using 3% I get just under $3 million at age 64. That seems a bit misleading to me for them to report such a number without some sort of footnote stating their assumptions. Either way, I'd use your lower number for planning.

Edit: I just reread your post and took out $500,000 after ten years as you stated. That gets me to your $2 million at age 64 using 3% and $10 million using 9.9% (were you able to tell their calculator that you were pulling out money in one specific year?)
"Save as much as you can, diversify diversify diversify, and you can't go wrong with tech stocks" | -First investing advice I recall from my parents in the 90's (two outta three ain't bad)
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jayk238
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Re: Confused about Betterment vs Vanguard returns..

Post by jayk238 »

Hi guys!

Thanks for your excellent responses.

So I pay 18000 in loans a year. My goal is to have everything forgiven in 10 years (7 years left) with the Public Loan Forgiveness plan or whatever if I work at a nonprofit.
I know things can change etc etc

I also pay approx 7000 into pension a year

My goal to purchase real estate is to keep it simple and only buy two properties which I plan to live in. I will not be using them for investment purposes.

The betterment calculator does not allow me to do any of these things. it just asks for my salary, age, retirement age and then says I can make x amount on retirement. I found the number so large I was shocked- and wondered if I had miscalculated all this time.

is it possible that somehow they are also utilizing some sort of algorithm to enhance returns or is this just pie in the sky numbers to entice me?

Because theoretically I could look for aggresssive returns in the mutual fund choices that Vanguard offers and use those but they are high risk!
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Nate79
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Re: Confused about Betterment vs Vanguard returns..

Post by Nate79 »

No one knows what will be the future returns for the market. So whether Betterment or Vanguard or whoever will be correct will only be known in hindsight.
jacoavlu
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Re: Confused about Betterment vs Vanguard returns..

Post by jacoavlu »

jayk238

you've put lots of hard work into becoming a physician and you've made it - congrats!

Now, you should plan to have a lot more than 2 million in the bank when you retire. A plan to have a million in 10 years is great, but to then go another 20 years and only have another million?

Where will you be spending all your money between years 10-30 that you can only save 10% of your income?

Your goal should be to have way more in the bank when you retire, and maybe even to hit that before 65.

(coming from another young physician)
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jayk238
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Re: Confused about Betterment vs Vanguard returns..

Post by jayk238 »

Thanks for the reply!

Well I understand that I should have more than 2 million - but my goal once I buy the things I want is to slowly work less - and pay enough for living expenses, some savings, lots and lots of travel, mortgage etc. I figured that by 50 if I even halve my work hours and make half as much I can accomplish this.

I did this because I am assuming that 2 million is more than enough? I expect to have a pension to pay out 46k a year in retirement (federal) ( I do both federal and private employment- contract). I also expect social security to kick in and make 20k from that. The total would amount to 66k from these investments alone. At 2 million providing 2% return I expect about 30-45000 in additional income giving me about 90-105 a year in income in retirement. I cant imagine needing more than that....

we are childless and dont intend to have kids
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PhysicianOnFIRE
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Re: Confused about Betterment vs Vanguard returns..

Post by PhysicianOnFIRE »

Welcome to the forum. It's fun to start doing some long-term planning, isn't it?

I think you'll likely end up with something between $2 Million and $10 Million depending on a myriad of factors, but I think you're selling yourself short on $2 Million after 30 years, which will likely be worth less than $1 million due to today's dollars.

I'm also a physician, earn a bit more than you (but not that much more) have 2 kids and a net worth that exceeds $2 million after ten years in practice. It doesn't have to be a long slog. We've benefitted from excellent market returns, lower student loan balances (finished med school 15 years ago), geographic arbitrage, etc... but I have every after tax dollar that I've earned.

The White Coat Investor is a good place for you to start to learn more.

:beer
-PoF
Topic Author
jayk238
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Re: Confused about Betterment vs Vanguard returns..

Post by jayk238 »

Thanks for the response!

Just curious- how much have you saved per year to have 2 million over 2 years? Is your wife working?

What investment plans have you utilized?

I love whitecoat investor! Ive bough the book and have been using the website for the past few years- I used his advice to read books on investments and so forth and thats what brought me here!
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PhysicianOnFIRE
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Re: Confused about Betterment vs Vanguard returns..

Post by PhysicianOnFIRE »

jayk238 wrote:Thanks for the response!

Just curious- how much have you saved per year to have 2 million over 2 years? Is your wife working?

What investment plans have you utilized?

I love whitecoat investor! Ive bough the book and have been using the website for the past few years- I used his advice to read books on investments and so forth and thats what brought me here!
Glad to hear you're familiar with WCI. I've written a couple guest posts for him, so you've probably read something from me, too. The link above takes you to another guest post I've written for another site.

To answer your questions, single income household, Boglehead style 4 fund portfolio with some slice / dice / tilt, and apparently everything we've spent over a decade has been balanced out by investment returns.

:beer
-PoF
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