Is a Robo-Advisor Right for Your Retirement?
If you've been saving for decades using a traditional retirement account, the idea of switching to a robo-advisor now may seem unnecessary. Or you may assume these online advisors are best suited for savers just starting out on their investment journeys. But did you know robo-advisors can help make it easier to reach your retirement goals and maintain your lifestyle once you get there?
Here's how a robo-advisor can help with four of the most common retirement concerns.
1. Are my savings on track toward my retirement goals?
Let's say you're 55 and plan to retire in a decade. You've been socking away the annual maximum in your 401(k)—including catch-up contributions—as well as contributing to a Roth IRA, but you're still unsure if you'll have enough to retire at 65.
When you invest with a robo-advisor, you may answer a series of questions about your existing savings, the pace of your contributions, your target savings goal, and your risk tolerance. Factoring in your responses and some assumptions about various asset-class returns, the robo-advisor can help you assess whether or not you're on track to reach your retirement goals by your target date. If you're at risk of missing your goal, it can also recommend ways you might get back on track.
2. Do I have the right mix of investments?
Another challenge retirees and near-retirees face is figuring out the appropriate mix of investments based on their time frame and risk tolerance—along with when and how to shift to a more conservative allocation as they approach and enter retirement.
For example, those nearing or in the early years of retirement might need a more aggressive mix of investments to help extend the life of their savings. But those deeper into retirement may want a more conservative mix to guard against a significant market decline without adequate time to potentially recover.
Fortunately, building a diversified portfolio tailored to an investor's age and retirement goals is a core function of most robo-advisors. Not only will a robo-advisor recommend an appropriate asset mix for your situation, but if you invest a minimum amount, some robo-advisors will also offer automated portfolio-management features like rebalancing and tax-loss harvesting. Together, these features can help maintain your target asset allocation in the most tax-efficient way possible.
3. How long will my savings last?
When it's time to tap your retirement investments for income, a robo-advisor can help you figure out how much you can afford to withdraw without depleting your savings too soon. And if your retirement savings ever veer off course, a robo-advisor can alert you to the issue and provide suggestions to help get you back on track.
4. How can I minimize taxes?
Generating retirement income in a tax-smart way can be a challenge. Not only do you have your retirement savings to consider, but you also have to factor in other income sources like pensions and Social Security benefits. On top of that, required minimum distributions (RMDs) from tax-deferred retirement accounts kick in when you reach age 73—potentially upending the withdrawal strategy you established in your first few years of retirement.
A robo-advisor can help you manage this complexity by suggesting withdrawals across accounts and, if it makes sense, harvesting losses to help minimize your tax bill. Some robo-advisors will even estimate a tax-smart monthly withdrawal amount based on your portfolio value and time horizon.
Bottom line:
A robo-advisor can help ease the burden of managing your portfolio as you transition to retirement—and help you figure out how to tap your assets in tax-smart ways.
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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
Investing involves risk, including loss of principal.
Diversification, asset allocation and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.
The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.
Neither the tax-loss-harvesting strategy nor any discussion herein is intended as tax advice, and Schwab Asset Management does not represent that any particular tax consequences will be obtained. Tax-loss harvesting involves certain risks including unintended tax implications. Investors should consult with their tax advisors and refer to the Internal Revenue Service ("IRS") website at www.irs.gov for the consequences of tax-loss harvesting.