Today’s question comes from Amy. She asks:
“I’m in my late 30s, and feel like I’m on the upside of a weird roller coaster. Three years ago I was borrowing money from my Roth IRA to make rent, this year I’m trying to figure out the best way for my husband and I to invest $100K so that it’s not just sitting in a checking account. I know that’s not everyone’s problem, and I don’t even know if it counts as a problem, but that’s where I’m at.
I opened a Betterment account 6 months ago at the recommendation of the entire internet, it seems. But I don’t really see why it’s useful. I don’t think I can use tax loss harvesting if I’m buying vanguard funds and also investing in them via my 401k. Without TLH, is it any better than having bought directly from vanguard? I’ve lost $400 since I invested, and I just don’t know if I should keep it or invest more.
So is Betterment a good idea if you’re investing in Vanguard funds directly? Thanks so much for helping me get started in all this!”
When you open an account with Betterment what you’re really doing is investing with Vanguard. Because that’s what they’re doing for you: Investing in Vanguard (mostly).
You’re already investing. And you’re already investing with Vanguard, so you probably know Vanguard is a really good place to invest.
What you don’t want to be doing is putting your money in expensive mutual funds. The most practical way to invest is to put your money in index funds. Because index funds match the returns of the market and have the lowest fees.
And Vanguard’s index funds average just 0.14% in fees. The industry average is 0.64%.
Okay. So when you invest with Betterment they’re investing in Vanguard index funds for you and charging you a fee to do it.
For accounts over $100,000 it’s 0.15%. And for accounts with less than $100,000 it’s more. And on top of that fee you’re also paying the Vanguard fees. Most people don’t know that.
That means if you’re putting your money in Betterment and you have over $100,000 you’re paying more like 0.31% in fees. That’s what they’ve said anyways.
So here’s what it comes down to: Either you’re paying Betterment 0.31% in fees to invest in Vanguard index funds, or you’re paying Vanguard 0.14% in fees to invest in Vanguard index funds.
And if you decide to invest in Vanguard the easiest way to do it is with something called lifecycle funds. They’re funds that have stock index funds and bond index funds inside them.
Most people who invest will want to invest in both stocks and bonds. If you’re younger you might just want stocks for growth but as you get older you want stocks for growth and bonds for stability. And lifecycle funds have both.
If you want to invest directly in stocks you can put your money in their S&P 500 or total stock market index fund. And you can invest in bonds by putting your money in their total bond market index fund.
Doing that means paying even lower fees. About 0.05%. And the difference between a fee of 0.31% and 0.05% might seem small but it’s not.
Because if you invest a $100,000 lump sum it means you’ll pay an additional $52,857.56 in fees over 30 years (assuming a 7% return).
And here’s the other thing. You don’t say, but let’s pretend you and your husband want to retire with $2 million so you can generate $80,000 a year in income.
If that money is with Betterment you’re paying $6,200 a year in fees and with Vanguard $1,000. Which means you’re saving $5,200 a year.
Here’s another way to think about that: The additional $5,200 a year in fees is 6.5% of the $80,000 you’re living off of.
Now if you were someone trying to decide between investing with Betterment or not investing at all then invest with Betterment. But if you’re already investing with Vanguard just do that because it will save you money.