How to invest for retirement through a robo-adviser

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Robo-advisers have been one of the fastest-growing sectors of the investment world over the last decade. The reason: they help investors develop an investment portfolio at low cost, typically well below what a traditional financial adviser charges for similar services.

Getting your retirement right is a big deal, and a robo-adviser can help you get there. These automated advisers can build an investment portfolio based on your needs, such as when you want to retire and how much risk you can stomach. It’s not only simple to get started, it’s easy to continue growing your wealth over time, too. You can start by adding money over time – ideally, on a regular basis – and the robo-adviser keeps you moving toward a more secure future.

Here’s what a robo-adviser is and how you can use one to invest for your own retirement.

What is a robo-adviser?

We all get nervous when it comes to our money, and that’s why the term robo-adviser seems so off-putting to some people. They don’t like the idea of some computer system managing their money. Not only does it not seem to fit their needs, but it may even feel downright dangerous to some. Those are reasonable concerns when you first encounter the idea of a robo-adviser.

However, a robo-adviser has been programmed to do what a human financial adviser does. A robo-adviser is just an algorithm, a computer process, that mimics the decision-making and considerations that a real, live adviser would make.

If you told your adviser that you needed money for a goal – buying a house, paying for a college education, retirement – a good adviser would select investments that meet those needs.

For example, if you needed money in the short-term, an adviser would select a financial product such as a CD that guarantees a specific return over a specific time frame, when you need it. If you have a longer-term goal such as retirement, then the adviser would select investments that better fit that goal and that deliver higher, long-term returns.

This process is exactly what a robo-adviser does, too. To build a portfolio that meets your needs, robo-advisers typically use exchange-traded funds (ETFs). ETFs are among the cheapest ways to invest, and they can be mixed and matched to create a wide range of portfolios that meet your individual needs and risk tolerance.

How to invest for retirement through a robo-adviser

Here are the things you will need to do to get started with a robo-adviser. Once you’ve selected a robo-adviser, you can get your account opened and funded in minutes. So it’s super easy to get started on your way to a more comfortable retirement.

1. Select a robo-adviser

Selecting a robo-adviser is actually one of the more difficult steps in the process, in part because the steps that follow are so easy. Robo-advisers compete on the features they offer and their management fees, and you’ll want to compare them across the following traits:

  • Management fee
  • Their funds’ expense ratios
  • The number of funds offered
  • The availability of tax-loss harvesting
  • The availability of automatic portfolio rebalancing
  • Goal-planning tools
  • Customer support

These traits are some of the most important, but you’ll also want to consider your own needs and whether a given robo-adviser fits those, rather than whether it’s the most popular.

For example, you may find it useful to have a yearly meeting with a certified financial planner to ensure that you’re on track to your goal. This popular feature may cost more, requiring an upgrade to your service, though some robo-advisers offer it as part of their base account.

To get you started, here are some of the most well-rated robo-advisers:

  • Betterment
  • Wealthfront
  • Ellevest
  • Schwab Intelligent Portfolios
  • Vanguard Personal Advisor

[READ: Bankrate’s list of top robo-advisers]

Betterment, Wealthfront and Ellevest are all independent robo-advisers, while Schwab and Vanguard offer these services as part of a broader product selection that includes ETFs.

2. Fill out an information sheet and risk questionnaire

After you’ve decided on a robo-adviser, you can move through the process relatively quickly. You’ll fill out a basic information sheet with your name, address and other personal information.

One important step in this process is a questionnaire that assesses your risk tolerance, and it’s the same kind of questions you would answer for a human adviser. The questionnaire gauges how much risk you’d be willing to take on in order to get a certain level of return.

It provides scenarios that ask you to envision how you’d react to, say, the stock market going down 20 percent: would you want to sell, buy more or do nothing? Would you be willing to accept a 10 percent loss in exchange for 20 percent gain?

At this point, some robo-advisers may also ask you about your financial goals. Maybe you want to buy a new car in a few years or a house, or perhaps you’re just amassing money without a specific goal other than retirement or financial independence.

The more honest you are about your goals and risk tolerance, the more the robo-adviser will be able to tailor your portfolio to meet them.

3. Determine how much you can invest

Based on your goal, the robo-adviser will construct a portfolio of funds that should get you there. The robo-adviser takes into account your risk tolerance, income and timeline when constructing the portfolio. So a lower risk tolerance would lead to safer investments, though they probably offer a lower overall return, while a higher risk tolerance leads to higher-return funds.

It’s a similar situation with your investment timeline. If you’re investing for retirement and you have a few decades before you need the money, the portfolio is likely to offer a higher-risk, higher-return portfolio – think more stocks and fewer bonds. Your longer time horizon gives you time to ride out the stock market’s ups and downs, resulting in an expected higher long-term return.

If you have a short-term goal such as a down payment on a house within three years, then the robo-adviser will make a portfolio to hit that timeline. For short timeframes, a portfolio will likely consist of less risky investments such as bonds and money market funds. These will offer lower returns, but won’t usually fluctuate as much, so the money is likely to be there when you need it.

Based on these factors, the robo-adviser helps you decide how much to invest to meet your targets. But the final decision is always in your hands. You’ll have to decide how comfortable you are with committing money to the strategy and how much you’ll be able to contribute.

[READ: Use Bankrate’s retirement calculator to figure out how much you need]

4. Deposit money regularly

After you’ve set up your plan, you’ll be able to set up how much money you want to contribute to it. One choice is to commit money regularly to your retirement plan. You’ll take advantage of an investment strategy called dollar-cost averaging, in which you average your purchase prices over time. Unless you follow the market closely, this strategy could be the optimum one for you. If you have a 401(k) account, then you’re already undertaking this strategy there.

So find an amount that you can save regularly, set up the robo-adviser to withdraw that amount and then sit back and let the investments work. While this step looks easy, it will become harder when the markets fall, because you’ll be tempted to stop contributing and wait until things look “safe.” But the best returns are made when everyone is panicked, such as in 2008-2009.

5. Retire comfortably

If you’ve set up your account and are contributing regularly, then you’re taking the steps to a comfortable retirement. As your income grows, you should consider adding more to your robo-adviser account and keep the progress going. Regular investments should put you on track to a financially secure future and maybe even financial independence (and an early retirement).

Why let a robo-adviser manage your money?

Robo-advisers have become so popular because they meet investors’ needs and do so at a low cost. Those are two of the largest reasons to consider checking into robo-advisers to better learn what they have to offer.

Robo-advisers use the same decision-making tools that a human adviser would to select investments for you. Many robo-advisers allow you to set specific goals, and when you want to meet that goal, as well as how much risk you’re willing to take on. Then the robo-adviser selects the funds to create an investment portfolio that should meet that goal.

Robo-advisers perform these tasks for a lower cost than traditional advisers. Because the financial decision-making is automatic, it can be cheaper to create an algorithm that does it all through software. That often saves investors money in reduced expenses, which can then be invested.

For example, a traditional adviser might charge 1 percent of your assets (annually) to manage your money. On a $10,000 portfolio, that’s $100. Now, that may not sound like much, but what if you have a $100,000 portfolio? The adviser is likely making the same kinds of decisions about where to invest, but since you have more money, you’re paying more for those decisions — $1,000 to be exact.

A robo-adviser lowers those costs substantially. A standard robo-adviser may charge 0.25 percent of your assets annually. In other words, on a $10,000 portfolio, that’s $25. On a $100,000 portfolio, it’s $250. If you want a higher level of service, for example, consultations with a human adviser, some firms offer a higher price point, often around 0.4 percent or 0.5 percent. For instance, Ellevest offers this premium tier, as does Betterment, but you’ll need a higher level of assets (think $50,000 and up) to get in the door.

However, at least one reputable robo-adviser offers the robo-adviser service for free. Schwab Intelligent Portfolios nevertheless offers a comprehensive set of services for investors.

These management fees usually cover everything that the robo-adviser does, including any trading costs, and special features such as tax-loss harvesting (if offered), in which the service sells investments that have lost money in order to receive a tax benefit. Many robo-advisers also offer auto-rebalancing as part of their management fee, so if your account moves too far away from its target allocations, it will be adjusted automatically.

However, regardless of which robo-adviser you select, there’s one additional fee –  the fees on the ETFs selected by your robo-adviser called expense ratios. Typically these fees range from 0.05 percent of assets to 0.15 percent annually. The good news: ETFs are among the cheapest possible ways to invest and robo-advisers are generally good about selecting cheap funds.

So robo-advisers offer many of the portfolio services of a human adviser at a much lower cost.

Bottom line

Robo-advisers help take the cost out of planning for retirement, while still giving you the high-quality experience of a traditional adviser. That’s helped drive their huge growth over the last decade, and their simplicity should help them continue to gain acceptance with investors.

As you’re exploring the world of robo-advisers, determine what your needs are — do you need a human sometimes? — and then find a robo-adviser among the many that meets them as best as possible.

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Written by
James Royal
Senior investing and wealth management reporter
Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more.
Edited by
Senior wealth editor