Jul
12
2021
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What Are RSUs & How to Handle Them

By | Budgeting & Goals, Investing, Terminology | No Comments

You are probably pretty familiar with many of the standard offers in a job compensation package. When receiving an offer letter from a potential new employer, employees could typically receive a salary figure, paid vacation and sick day allowances, some type of health insurance, and, possibly, a retirement plan.

There may also be more unusual employment perks in the offer, such as the right to a creative sabbatical or tuition reimbursement.

Another benefit you may encounter is the opportunity to invest in company stock. Whether you’re a total investment newbie or someone who recites stock market terms in your sleep, the option to own some of your company’s stock could present an exciting opportunity to diversify your portfolio, help you reach your financial goals, and get an added benefit from the dedication to the company.

Equity compensation can come in many different forms. Two of the most common are employee stock options (ESOs) and Restricted Stock Units (RSUs).

Recommended: How Are Employee Stock Options and RSUs Different?

What is a Restricted Stock Unit?

So, what are restricted stock units?

Restricted stock units are a type of compensation offered to employees in the form of company stock. RSUs are not technically stock, though; they are a specific amount of promised stock shares that the employee will receive at a future date, or across many future dates.

Restricted stock units are a type of financial incentive for employees, similar to a bonus, since employees typically receive promised stock shares only when they complete specific tasks or achieve significant work milestones or anniversaries.

Know the Dates: Grant and Vesting

In the case of RSU stock, there are two important dates to keep in mind: the grant date and the vesting date.

Grant Date

A grant date refers to the exact day a company pledges to grant an employee company stock.

Employees don’t own granted company stock starting on the grant date; rather, they must wait for the stock shares to vest before claiming full ownership and deciding to sell, hold, or diversify stock earnings.

Vesting Date

The vesting date refers to the exact day that the promised company stock shares vest Employees receive their RSUs according to a vesting schedule that is determined by the employer. Factors such as employment length and specific job performance goals can affect a vesting schedule.

The employer that wants to incentivize a long-term commitment to the company, for example, might tailor the RSU vesting schedule to reflect the employee’s tenure at the company. In other words, RSUs would only vest after an employee has pledged their time and hard work to the company for a certain number of years, or the vested percentage of total RSUs could increase over time.

If there are tangible milestones that the employee must achieve, the employer could organize the vesting schedule around those specific accomplishments.

RSU Vesting Examples

Typically, the vesting schedule of RSU stock occurs on either a cliff schedule or a graded schedule. If you leave your position at the company before your RSU shares vest, you generally forfeit the right to collect on the remaining restricted stock units.

On a graded vesting schedule, an employee would keep the amount of RSUs already vested, but would forfeit leftover shares. If that same employee is on a cliff vesting schedule and their shares have not yet vested, then they no longer have the right to their restricted stock units.

Cliff Schedule

A cliff schedule means that 100% of the RSUs vest at once. For example, if you receive 4,000 RSUs at the beginning of your job, on a cliff vesting schedule you would receive all 4,000 on one date.

Graded Vesting Schedule

With a graded schedule, you would only receive a portion of those 4,000 RSUs at a time. For example, you could receive 25% of your RSUs once you’ve hit your two-year company anniversary, 25% more after five years at the company, 25% more after seven years, and the final 25% after 10 years.

Alternatively, a graded vesting schedule might include varying intervals between vesting dates. For example, you could receive 25% of your 4,000 total RSUs after three years at the company, and then the remainder of your shares (3,000) could vest every month over the next three years at 100 per month.

Are Restricted Stock Units Risky?

As with any investment, there is always a level of uncertainty. Even companies that are rapidly growing and have appreciating stock values can collapse at any time. While you do not have to spend money to purchase RSUs, the stock will eventually become part of your portfolio (as long as you stay with the company until they vest), and their value could change significantly over time.

If you end up owning a lot of stock in your company through your RSUs, you may also face concentration risk. Changes to your company can not only impact your salary but the RSU stock performance. Therefore, if the company is struggling, you could lose value in your portfolio at the same time that your income becomes less secure.

Adding diversification to your portfolio can help you minimize the risk of overexposure to your company. A good rule of thumb is to consider diversifying your holdings if more than 10% of your net worth is tied up with your company. Holding over 10% of your assets with your firm exposes you to more risk of loss. When calculating how much exposure you have, include assets such as:

•  RSUs

•  Stock

•  Other equity-based compensation

Are Restricted Stock Units Reported on My W-2?

Yes, restricted stock units are reported on your W-2.

The biggest difference between restricted stock units and employee stock options lies in the way that the Internal Revenue Service taxes them. While you owe tax on ESOs the moment you decide to exercise your options, RSU stock taxation happens at the time of vesting. Essentially, the IRS considers restricted stock units supplemental income.

When your RSUs vest, your employer will withhold taxes on them, just as they withhold taxes on your income during every pay period. The market value of the shares at the time of vesting appears on your W-2, meaning that you must pay normal payroll taxes, such as Social Security and Medicare, on them.

In some cases, your employer will withhold a smaller percentage on your RSU stock than what they withhold on your wages. What’s more, this taxation is only at the federal level and doesn’t account for any state taxes.

Since vested RSUs are considered supplemental income, they could bump you up to a higher income tax bracket and make you subject to higher taxes. If your company does not withhold enough money at the time of vesting, you may have to make up the difference at tax time, to either the IRS or your state.

So, it might be beneficial to plan ahead and come up with a strategy to manage the consequences of your RSUs on your taxes. Talking to a tax professional before or right after your RSU shares vest could help you anticipate future complications and set yourself up for success come tax season.

How to Handle RSUs

If you work for a public company, that means that you can decide whether to sell or hold them. There are advantages to both options, depending on your individual financial profile.

Sell

Selling your vested RSU stock shares might help you minimize the investment risk of stock concentration. A concentrated stock position occurs when you invest a substantial portion of your assets in one investment or sector, rather than spreading out your investments and diversifying your portfolio.

Even if you are confident your company will continue to grow, stock market volatility means there’s always a risk that you could lose a portion of your portfolio in the event of a sudden downturn.

There is added risk when concentration occurs with RSU stock, since both your regular income and your stock depend on the success of the same company. If you lose your job and your company’s stock starts to depreciate at the same time, you could find yourself in a tight spot.

Selling some or all of your vested RSU shares and investing the cash elsewhere in different types of investments could minimize your overall risk.

Another option is to sell your vested RSU shares and keep the cash proceeds.. This might be a good choice if you have a financial goal that requires a large sum of money right away, like a car or house down payment, or maybe you’d like to pay off a big chunk of debt. You can also sell some of your RSUs to cover the tax bill that they create.

Hold

Holding onto your vested RSU shares might be a good strategy if you believe your company’s stock value will increase, especially in the short term. By holding out for a better price in the future, you could receive higher proceeds when you sell later, and grow the value of your portfolio in the meantime.

RSUs and Private Companies

How to handle RSUs at private companies can be more complicated, since there’s not always a liquid market where you can buy or sell your shares. Some private companies also use a “double-trigger” vesting schedule, in which shares don’t vest until the company has a liquidity event, such as an initial public offering or a buyout.

The Takeaway

It’s important to consider your unique financial needs when deciding what to do with your RSU stock. Your specific financial goals, the amount of debt you may hold, the other types of investments you might be making, are all factors to consider when weighing the pros and cons of selling or holding your RSU shares.

Whether you have RSUs or not, a great way to build a diversified portfolio is by opening an account with the SoFi Invest® brokerage platform, where you can buy stocks, ETFs, cryptocurrency, and even buy pre-IPO stock. When you work with SoFi Invest you have access to complimentary financial planning, which can help you make the most of your restricted stock units.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
IPOs: Investing early in IPO stock involves substantial risk of loss. The decision to invest should always be made as part of a comprehensive financial plan taking individual circumstances and risk appetites into account.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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Jul
09
2021

Pros & Cons of the F.I.R.E Movement

By | Budgeting & Goals, invest, Preparing for Retirement | Comments Off on Pros & Cons of the F.I.R.E Movement

Most people dream of the day that they clock into work for the very last time.In most cases, we imagine that’ll be when we’re a little more gray around the ears, but what if you could take the freedom and independence of retirement and experience it, say, thirty years earlier?

That’s the basic principle of the Financial Independence Retire Early (F.I.R.E) movement, a community of young people who aim to live a lifestyle that allows them to retire in their 30s or 40s rather than their 60s and 70s.

While it may sound like the perfect life hack, attempting to live out this dream comes with some serious challenges. This article will review the basic tenets of the F.I.R.E. movement and talk about the tactics people use to achieve their goal of early retirement.

These pros and cons can help you determine whether any strategies from the FIRE movement are a fit for your lifestyle.

What Is the FIRE Movement?

F.I.R.E stands for “financial independence, retire early,” and it’s a movement wherein people attempt to gain enough wealth to retire far earlier than the traditional timeline would allow.

The movement traces its roots to a 1992 book called “Your Money or Your Life” by Vicki Robin and Joe Dominguez, and started to gain a lot of traction, particularly among millennials, in the 2010s.

In order to achieve retirement at such a young age, F.I.R.E proponents devote 50% to 75% of their income to savings. They also use dividend-paying investments in order to create passive income streams they can use to support themselves throughout their retired lives.

Of course, accumulating the amount of wealth needed to live for six decades or more without working is a considerable feat, and not everyone who attempts F.I.R.E. succeeds.

F.I.R.E. vs. Traditional Retirement

F.I.R.E. and traditional retirement both aim to help people figure out when they can retire, but they have major differences.

Retiring Early

Given the challenge of saving enough for retirement even by age 60 or 70, what kinds of lengths do the advocates of the F.I.R.E. movement go to?

Some early retirees blog about their experiences and offer tips to help others follow in their footsteps. For instance, Mr. Money Mustache is a prominent figure in the F.I.R.E. community, and advocates achieving financial freedom through, in his words, “badassity.”

His specific advice includes reshaping simple (but expensive) habits—like eliminating smoking cigarettes or drinking alcohol, and limiting dining out.

Of course, the basic premise of making financial freedom a reality is simple on its face: spend (much) less money than you make in order to accumulate a substantial balance of savings.

Investing those savings can potentially make the process more attainable by providing, in the best-case scenario, an ongoing passive income stream. However, many people who achieve F.I.R.E. are able to do so in part because of generational wealth or special circumstances that aren’t guaranteed.

For instance, Mr. Money Mustache and his wife both studied engineering and computer science and had “standard tech-industry cubicle jobs,” which tend to pay pretty well—and require educational and professional opportunities not all people can access.

In almost all cases, pursuing retirement with the F.I.R.E. movement requires a lifestyle that could best be described as basic, foregoing common social and leisure expenses like restaurant dining and travel.

Traditional Retirement

Most working people expect to retire sometime around the age of 65 or so, which is also when traditional retirement accounts and benefits start to kick in. For those born after 1960, Social Security benefits can begin at age 62, but at a significantly lesser amount than if they wait to reach 67, their full retirement age, to file.

They typically save much of their retirement funds in specialized, tax-incentivized retirement accounts, like 401(k)s and traditional IRAs, which carry age-related restrictions that have a de facto impact on most folks’ retirement age. For example, 401(k)s generally can’t be accessed before age 59 ½ without incurring a penalty.

Even a traditional retirement timeline can be difficult for many savers. Recent data from the Federal Reserve shows that approximately a quarter of Americans have no retirement savings whatsoever.

Still, nearly 40% of Americans want to retire before they reach age 55, according to a survey from Hearts & Wallets. Online calculators and budgeting tools can help you determine when you can retire—and are customizable to your exact retirement goals and specifications.

Recommended: How Much Should You Have Saved for Retirement by 40?

Financial Independence Retire Early: Pros and Cons

Although financial independence and early retirement are undoubtedly appealing, getting there isn’t all sunshine and rainbows. There are both strong benefits and drawbacks to this financial approach that investors should weigh before undertaking the F.I.R.E. strategy.

Pros of the F.I.R.E. Approach

Benefits of the F.I.R.E. lifestyle include:

•  Having more flexibility with your time. Those who retire at 35 or 40, as opposed to 65 or 70, have more of their lifetime to spend pursuing and enjoying the activities they choose.

•  Building a meaningful, passion-filled life. Retiring early can be immensely freeing, allowing someone to shirk the so-called golden handcuffs of a job or career. When earning money isn’t the primary energy expenditure, more opportunities to follow one’s true calling can be taken.

•  Learning to live below one’s means. “Lifestyle inflation” can be a problem among many working-age people who find themselves spending more money as they earn more income. The savings strategies necessary to achieve early retirement and financial independence require its advocates to learn to live frugally, which can help them save more money in the long run—even if they don’t end up actually retiring early.

•   Less stress. According to a study by the American Psychological Association , money is one of the leading stressors for nearly two-thirds of Americans. Gaining enough wealth to live comfortably without working could wipe out a major cause of stress, which could lead to a more enjoyable, and healthier, life.

Cons of the F.I.R.E. Approach

Drawbacks of the F.I.R.E. lifestyle include:

•  Unpredictability of the future. Although many people seeking early retirement thoroughly map out their financial plans, the future is unpredictable. Social programs and tax structures, which may figure into future budgeting, can change unexpectedly, and life can also throw wrenches into the plan. For instance, a major illness or an unexpected child could wreak havoc on even the best-laid plans for financial independence.

•  Some find retirement boring. While never having to go to work again might sound heavenly to those on the job, some people who do achieve financial independence and early retirement struggle with filling their free time. Without a career or specific non-career goals, the years without work can feel unsatisfying.

•  Fewer professional opportunities. If someone achieves F.I.R.E. and then discovers it’s not right for them—or must re-enter the workforce due to an extenuating circumstance—they may find reintegration challenging. Without a history of continuous job experience, one’s skill set may not match the needs of the economy, and job searching, even in the best of circumstances, may be difficult.

•  F.I.R.E. is hard! Even the most dedicated advocates of the financial independence and early retirement approach acknowledge that the lifestyle can be difficult—both in the extreme savings strategies necessary to achieve it and in the ways it changes day-to-day life. For instance, extroverts might find it difficult to forgo social activities like eating out or traveling with friends. Others may find it challenging to create a sense of personal identity that doesn’t revolve around a career.

Investing for F.I.R.E.

Investing allows F.I.R.E. advocates—and others—to earn income in two important ways: dividends and market appreciation.

Dividends

Shareholders earn dividend income when companies have excess profits. They’re generally offered on a quarterly basis, and all one has to do to earn them is simply hold shares of a stock.

However, because dividend payments depend on company performance, they’re not guaranteed, those relying on them to live should have other income sources (including substantial savings accounts) as a back up income stream.

Market Appreciation

Investors can also earn profits through market appreciation when they sell stocks and other assets for a higher price than what they initially paid for them.

Even for those who seek retirement at a traditional pace, stock investing is a common strategy to create the kind of compound growth over time that can build a substantial nest egg. There are many accounts built specifically for retirement investing, such as 401(k)s, IRAs, and 403(b)s.

However, these accounts carry age-related restrictions and contribution limits which means that those interested in pursuing retirement on a F.I.R.E. timeline will need to explore additional types of accounts and saving and investing options.

For example, brokerage accounts allow investors to access their funds at any point—and to customize the way they allocate their assets to maximize growth.

The Takeaway

Whether you’re hoping to retire in a traditional fashion, shorten your retirement timeline, or are just looking to increase your wealth to achieve shorter-term financial goals, like buying a new car—investing can be one of the most effective ways to reach your objectives.

A great way to get started is by opening an account on the SoFi Invest® brokerage platform. SoFi Invest allows members to learn the ropes as they go, joining a community of other people interested in finance who are doing the exact same thing—and who are invited to gather at exclusive events and educational experiences.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Jul
09
2021

DINK: Living the Dual Income No Kids Lifestyle

By | Budgeting & Goals, Growing Wealth, invest, Investing | Comments Off on DINK: Living the Dual Income No Kids Lifestyle

More and more Millenials and Gen Xers are waiting to have kids, or opting not to have kids at all. This choice is partly financial since it requires some financial resources to raise a child.

According to the most recent data from the U.S. The Department of Agriculture, a middle-income couple (before-tax income between $59,200 and $107,400), can expect to spend about $233,610 to raise a kid from birth to age 17.

Often known as DINKS, couples who choose not to have children may enjoy some significant financial advantages.

What Does DINK mean?

DINK is short for “dual income, no kids” or “double income no kids.” It refers to households where there are two incomes and no children. The two incomes can either come from both partners or one partner having two incomes.

Some couples opt to wait longer before having kids, so they fall into the DINKY, or “dual income, no kids yet” category.

The Significance of Dual Income, No Kids

Without the added expense of children, DINK couples might have more disposable income available for spending and investing. Marketing campaigns for luxury vacations, homes, and other high-end items often target DINK couples.

However, just because a household has two incomes doesn’t automatically mean they have more money.

There are some reasons why they may still struggle financially, including:

•  Their two incomes are not very high

•  They live in an expensive area

•  They have spending habits that eat up a large portion of their income

Why are More Couples Choosing the DINK Life?

One of the main reasons couples choose to wait or forgo having children is the cost. When the Great Recession hit in 2008, many Millennials were just graduating from college or starting their careers.

The recession made it challenging to get jobs and begin investing for the future. Gen Xers lost 45% of their wealth during this time. On top of recovering from the recession, nearly half of Millenials and a third of Gen Xers have a significant amount of student loan debt.

These factors have made it difficult for young people to achieve financial milestones and start families. Some couples choose to wait a few years before having kids after they get married for non-financial reasons. They prefer to use their time as a young couple to travel, make life plans, and enjoy an untethered lifestyle.

Structuring a DINK Household

There are many costs associated with having children, including clothing, food, healthcare, and education. Partners who don’t have children might instead choose to splurge or save up for early retirement.

DINK couples with disposable income have many options for how to spend or invest their money. Some couples may choose to buy nice cars, while others may enjoy going out to eat.

They also potentially have more free time to travel and spend money. In general, clothing, food, or travel that may have been too expensive for couples with children can be accessible for DINK couples.

A couple with no children doesn’t need as many bedrooms or as much space in terms of housing. They can either choose to save money by renting or buying a smaller place to live. They can also choose to use the extra space for other purposes, such as a home gym, art studio, or rent out a room for extra income.

Kids also take up a lot of time and have fairly rigid schedules. Some DINK couples may choose to take more time off for travel and leisure, while others might choose to work longer hours or find ways to earn supplemental income.

In addition to purchasing and leisure options, dual income couples have the opportunity to invest their extra money. They might purchase stocks, bonds, real estate, or explore other opportunities.

Money Management Tips for Couples

Learning about each other’s financial habits and goals is important so that couples can get on the same page, whether they’re planning to have children or not. It also helps to have productive conversations about finances.

Establishing open and honest communications before having kids may make things easier in the long run. There are some crucial areas for couples to work on if they want to live a successful DINK lifestyle or get their finances set up before having children:

Paying Off Debts

Before setting off on a lavish vacation, it’s wise for DINK couples to have a plan to pay off high-interest debts such as credit cards and student loans.

Without kids, home loans, and other monthly bills, couples may have more available funds to tackle their debt and. Once they’ve paid down the debt, they can use the extra money they’ve saved from monthly interest payments to invest or spend elsewhere.

Creating Sustainable Spending Habits

Whether a DINK couple is waiting to have kids or doesn’t ever plan on having them, practicing sustainable spending habits is crucial for financial success. If a couple is always in debt, having kids probably won’t change that.

Similarly, not having kids could make it tempting to go out to eat or travel a lot. Having conversations about the type of lifestyle each person wants both now and over the long-term helps make day-to-day spending choices easier.

Traveling Smart

Travel is a huge draw for many DINK couples, but it can quickly get expensive. If couples want to travel a lot, they might consider staying in less expensive places and skipping the luxury trips.

If luxury is important to a couple, they might think about only going on one big trip per year and taking advantage of points, credit cards, and other offers to maximize their ability to see the world.

Planning Ahead and Investing Early

The more couples can figure out what they want in life and get their finances organized, the easier it is to plan their finances. If they plan to have kids in the future, they might consider saving now for college and other child-related expenses that may come later.

Factoring in future raises, inheritances, and other additional income or expenses is also helpful. Even if couples don’t start with high incomes, the earlier they can start saving, the more their portfolio has time to grow.

Consolidating Stuff

Just as couples without kids may not need to live in a large home, they may not need as many things. DINK couples might choose only to have one car or bicycle. There might be other items that each person has been buying for themselves that could be shared.

Acquiring New Skills

Couples without kids may choose to invest some of their time and money into additional training and education. If they plan to have kids in the future, this might help them move up the career ladder or earn a larger salary when the kids do come.

Getting Wise About Taxes

DINK couples can make smart financial choices to minimize their taxes. Contributing to an HSA or putting pre-tax income into a 401K can help reduce the tax burden. Owning a home may also provide tax breaks to some homeowners.

The Pros and Cons of a DINK Lifestyle

There is nothing dinky about the DINK lifestyle. Not having kids or waiting to have kids presents a huge financial opportunity for couples. However, if they aren’t smart about their savings and spending, couples may risk running into financial trouble.

Pros of Becoming a DINK Couple

•  More free time and money to travel for work or pleasure.

•  Ease of mobility—moving or traveling to a new house, city, or country is more manageable without kids.

•  Disposable income to spend on cars, clothing, food, or other items.

•  Ability to save money by living in a smaller house and not paying for children.

•  Opportunity to save and invest extra income.

Cons to Remaining a DINK Couple

•  Potential for overspending and splurging on travel and luxuries rather than saving and investing.

•  DINK couples may be in a higher income bracket and have to pay more taxes.

•  There may be less family support for caregiving as they age.

Planning for a Life Without Children

Life without kids might be an excellent decision for many couples. The extra free time and money can be used in many meaningful ways.

However, couples need to be on the same page about whether they want kids, and there are some things to keep in mind about a childless future.

Couples will need to figure out:

•  How they’ll spend their retirement years,

•  Who will visit or take care of them when they’re older,

•  And who they will leave their money and assets to after they die.

Saving up extra money for caregivers, retirement, and unforeseen circumstances can be an intelligent strategy for DINK couples. DINK couples must also make sure that they create an estate plan, so that their assets get distributed according to their wishes after they pass away.

Key Financial Baselines to Keep in Mind

When doing financial planning for the future, a few things are certain. Couples will have to pay taxes, and they’ll need food, shelter, and basic necessities. Beyond that, there are some baselines couples can look to as they plan for retirement, investing, home buying, and any kids they might plan to have.

•  Using the 4% rule, most couples will need at least $1 million in savings at retirement according to AARP.

•  $435,400: The average price for a new home in the United States

Although these numbers may sound like a lot of money, couples with two incomes and no children can start early saving some of their extra cash and take advantage of compound interest over time.

If they start early and are savvy about their savings and spending, couples can potentially retire early and enjoy more free time for travel and personal pursuits.

Planning for the Ultimate DINK Lifestyle

Going kid-free has many upsides, but it’s important to be money smart, plan, and work together to create a prosperous and secure future. Investors who are planning to never have children or to wait to have them, often have more disposable income to put toward their financial goals.

If your financial goals include building a portfolio, a great way to start is by opening a SoFi Invest® brokerage account. The SoFi app lets you keep track of your budget, investment accounts, favorite market assets, and goals all in one place. SoFi also has a team of professional financial advisors available to help you get started and reach your goals.

Learn more about SoFi’s investment options and get your future started today.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Typical Retirement Expenses to Prepare For

By | Budgeting & Goals, Growing Wealth, Preparing for Retirement | Comments Off on Typical Retirement Expenses to Prepare For

Sleeping in until noon. Spoiling the grandkids with gifts and freshly baked cookies. Traveling around Western Europe to sip wine and eat croissants. Many people dream about how their retirement years will play out. These goals are 100% attainable—as long as retirees have saved enough during their working years.

Unfortunately, not all Americans know what to expect when it comes to cost of living during their retirement years, and they may not know how to budget for typical expenses in retirement like housing and transportation. It can be difficult to transition from a saving mindset to spending, once you’ve stopped working.

Here’s a look at typical retirement expenses so individuals can get a handle on how much they’re likely to spend, how much they need to save for retirement, and figure out when they can retire.

Average Retirement Expenses

Americans aged 65 and older spend an average of $48,106 per year, or $4,008.83 per month, according to the Bureau of Labor Statistics. More specifically, those aged 65 to 74 spend $52,928 annually, while spending drops for people aged 75 and older spend to $41,471 annually.

Retirees typically spend less than the American average, which is $61,749 per year, or $5,145.75 per month. Retirees even tend to spend less than people nearing retirement aged 55 to 64, who spend $66,139. The typical budget for a retirement couple needs to cover that amount every year for a retirement that could stretch over two or three decades.

Recommended: Average Retirement Savings by Age

Drilling down to specific categories can help retirement savers determine benchmarks for their own budget.

Housing and Living Expenses

Housing and living expenses, such mortgage payments, insurance, and maintenance costs, are typically among the highest costs retirees will face.

In 2021, Americans aged 65 and older spent an average of $4,847 annually on housing-related costs, including property tax, maintenance, repairs, insurance and other expenses. On average, utilities, fuel and public services cost an additional $3,743, and miscellaneous costs related to household operations were another $1,219. Renters spent an average of $2,471 per year on their dwellings.

These expenses can vary dramatically by location and housing type. For example, housing costs are typically much higher in a coastal California community than in a cooler real estate market in a state with relatively low property taxes, such as Wyoming, South Carolina, or Colorado.

Transportation

Many retirees want an action-packed retirement full of entertainment, socializing, visiting family and traveling the country. That means that transportation costs can be a major factor in retirement expenses, especially early in retirement.

Americans spend an average of $10,160 per year getting from point A to point B, but retirees spend a little less. Those over age 65 spend an average of $6,618 annually on transportation, or $551.50 per month. People aged 65 to 74 spend $7,851 per year, and people 75 and older spend $4,963 per year. These numbers cover everything from buying a car to filling up the gas tank to purchasing a bus pass, and could be significantly higher for those who spend a lot of time traveling.

Retirees who don’t own a car may still need to factor the cost of public transportation into their annual retirement costs. Buses, taxis, and trains cost older generations an average of $441 per year.

Healthcare

Americans’ healthcare costs—including health insurance, medical services, medical supplies, and prescription drugs—increase as they grow older. With age comes aching joints, injuries from falling, and sometimes chronic diseases like arthritis, diabetes, or Alzheimer’s. On average, Americans spend $5,204 on healthcare per year, but this is one area where retirees spend more than their younger peers.

People over age 65 spend an average of $6,719 per year, or $559.91 per month, on healthcare. Those aged 65 to 74 pay $6,792, and people aged 75 and older spend slightly less—$6,619.

Costs vary from person to person depending on their genetics, injuries, and lifestyle choices. For example, if heart disease runs in the family or you are a smoker, you may want to save extra for retirement healthcare costs.

If you have a high deductible health insurance plan, consider saving with a health-savings account (HSA), which offers tax-advantaged savings to specifically cover healthcare costs.

Food

People over age 65 spend $6,303 annually, or $525.25 monthly, buying food. Those aged 65 to 74 spend $6,992 per year, and those over 75 spend $5,294. This includes both food at home and at restaurants and fast food chains.

An individual’s food costs will vary depending on their diet and habits. For example, people who buy organic vegetables will likely spend more on produce than people who don’t. There’s also a good chance that eating at home more frequently will cost less than eating out five times per week.

Entertainment

Having fun isn’t just for the young. People over 65 spend an average of $2,282 annually on entertainment, or $191.16 monthly, on fees and admissions to places like museums, theater performances and movies. Entertainment expenses also include hobbies and food and toys for pets.

People aged 65 to 74 spend $2,556 per year. Once they hit age 75, however, the amount they spend on entertainment drops to $1,889, perhaps as mobility decreases.

4 Steps to Set Up a Retirement Budget

Once you’ve got an idea of what your retirement expenses will look like, you can start to save and budget for them in a comprehensive way. Since every retirement looks different, there is no average retirement budget, but these are the steps to create a budget that works for you.

Here are some easy steps to take to get a head start on your retirement budget, so that you know how much you need to save.

Step 1: Make a List of Expected Monthly Expenses

Most expenses can fit into one of three categories: fixed, variable, and one-time. Fixed expenses are things like mortgage/rent, property taxes, and your car payment.

Others, like some utility bills, might be variable, changing from month to month. Likewise any meals and entertainment expenses, medical expenses, pet care and personal care expenses may be variable.

One-time or non-recurring expenses are costs that don’t occur regularly. These might include a new roof, a vacation, or a wedding. You may want to set some money aside for unexpected emergencies (like that new roof), and have other funds earmarked for non-essential, one-time expenses (like a wedding or vacation).

Gather this information from bank statements, credit card statements, receipts and bills. Take a look at what you spend now, then deduct expenses you won’t have at retirement (perhaps you’ll eliminate a car payment or pay off your mortgage by then). Tally what’s left to get an estimate of your projected expenses and create a line-item budget.

Step 2: Estimate Retirement Income

Take a look at projected monthly withdrawals from Social Security, retirement accounts, pensions, real estate investments (like a rental property), and any savings or part-time income. Total them up to figure out what your monthly income will be.

Step 3: Compare Expected Expenses to Expected Income

In an ideal world, your expected income will be a larger number than your expected expenses. There are two ways to reconcile expected retirement expenses with expected retirement income: Either reduce expenses, or increase income.

Is downsizing a possibility? What about going from two cars to one? Perhaps streamlining entertainment expenses? On the other hand, increasing the amount you save can be helpful in bringing anticipated retirement costs and retirement income into balance. Or ,you may consider taking on a part-time job when you retire to increase your monthly income.

Step 4: Contribute to a Retirement Account

You may already have retirement savings in your company-sponsored 401k plan or a similar retirement plan. But those who don’t have access to one, or want to increase their savings can also save in an individual retirement account like a Traditional IRA or Roth IRA.

The earlier you start saving, the better, so you can take advantage of the power of compound interest, the returns you earn on your returns. Let’s say you make an initial investment of $1,000 into your IRA and add an additional $100 each month for a year. At the end of the year, you’d have $2,200, right?

Not so fast. You may have contributed only $2,200 to your IRA, but if your account earns an average rate of 8% compounded annually, you have actually saved $2,280.

Compounding interest grows exponentially. After five years you’ve contributed $7,000 to your account, but saved $8,509.25. After a decade, you’ve contributed $13,000 but saved $19.452.80.

Step 5: Figure Out When You Can Retire

Once you know how much you need, and how long you’ll need to save to get there, you can make a plan for a realistic timeline for when you can actually retire. Keep in mind that the plan will likely change over time as you get closer to retirement, depending on how much you’re able to save and how your retirement goals change.

The Takeaway

Budgeting for retirement can feel overwhelming, but taking it step by step allows you to create a plan for a retirement you’ll enjoy.

Ready to start saving to cover your retirement expenses? Consider an investment account on the SoFi Invest® Brokerage Platform. Investors can buy stocks, exchange-traded funds, cryptocurrency, and even fractional shares. SoFi members also have access to SoFi Financial Planners who can provide personalized insights and financial advice so members can make the most of their retirement savings.

Learn more about how SoFi Invest can help you save for retirement.

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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.

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Cash-Out Refi 101: How Cash-Out Refinancing Works

By | Budgeting & Goals, Home Ownership, mortgage | No Comments

A cash-out refinance is one way for homeowners to access a lump-sum of cash. The process involves borrowing a new mortgage for a larger amount than the existing mortgage. The borrower receives the difference in cash. It is only possible to do a cash-out refinance if the borrower has sufficient equity (ownership) in their home. Generally, lenders limit cash-out refinances to 80% of the equity a borrower has built in their home.

The Basics of How Cash-Out Refi Works

Here’s a hypothetical scenario to illustrate how a cash-out refinance could work:

Let’s say you have a home valued at $300,000. You owe $100,000 on your current mortgage and have $200,000 in equity. In this case, you want to borrow $40,000, so you apply for a cash-out refinance for $140,000.

In this scenario, $100,000 of the refinanced mortgage would go toward paying off your existing mortgage along with applicable costs (if any) due at closing, with the remaining $40,000 received in cash.

Upon closing on the cash-out refi, you will have a completely new mortgage and the terms, including the interest rate, term, and monthly payment may all be different than the previous mortgage.

If you’re in need of cash for home repairs or for any other reason, a cash-out refinance is not your only option. Here, we will examine the cash-out refi process, the pros and cons of a cash-out refi, and other options for getting a lump sum loan.

What Is Cash-Out Refinancing Used For?

Technically, a cash-out refinance can be used for just about anything. Some uses for a cash-out refinancing include home renovations, funding a downpayment for a second home, or paying off credit card debt or other high-interest debt.

Ideally, a cash-out refi would result in a lower interest rate than the existing mortgage; however, it’s important to examine your personal financial situation to determine the best outcome for you.

If a lower interest rate is your goal, but you are unable to get it, there are other options that may be worth considering.

Cash-Out Refinancing Eligibility

In addition to having equity in the home, lenders consider a variety of factors to determine eligibility for a cash-out refi. Here are a few examples of what lenders may look at:

Credit score: A higher credit score could help borrowers secure a more competitive interest rate on their cash-out refi.

Loan-to-value (LTV) ratio: This is a percentage reflecting the difference between the outstanding principal balance of the current mortgage versus the current appraised value of your home. Using the example from above, a person with a home with an appraised value of $300,000 and a $150,000 remaining principal balance on their existing mortgage has a 50% loan-to-value ratio. ($150,000 / $300,000 = 50%.)

Appraisal value: Some refinances will require a property valuation—typically a recent appraisal. However, some lenders may find an alternative to a full appraisal, like a virtual valuation, so confirm requirements with the lender.

Seasoning: Seasoning relates to the age of a mortgage. If a mortgage is at least 12 months old, lenders generally consider the mortgage “seasoned.” If a mortgage is not considered fully seasoned, it may not be possible to apply for a cash-out refi.

Pros of Cash-Out Refinancing

Potentially lower rates: Borrowers with a strong, established credit history may be able to refinance to a lower interest rate than they might secure with other types of loans like a home equity line of credit.

Improved credit score: If the money is used to pay off higher-interest debt like credit cards, this could potentially offer a credit score boost.

Mortgage interest deductions: Mortgage interest for cash-out refinance loans may be tax deductible, depending on what the money is used for. Consult with a tax professional for more details as they apply to your unique situation.

Cons of Cash-Out Refinancing

A reduction in equity: Increasing the secured lien on your home reduces the amount of available equity. Downward market fluctuations can further reduce the amount of available equity in your home. These are important considerations when determining the purpose and amount of a cash-out refi.

Length of loan: If the term on the cash-out refi is longer than the remaining term on the current loan, this could extend the overall length of repayment, which could result in increased interest over the life of the loan.

Risk of foreclosure: Anytime someone uses their home as collateral, it’s at an increased risk. In the event there are issues with making payments, the bank could foreclose on the home.

Closing Costs: Borrowers will often have to pay closing costs, anywhere from 3% to 5% of the total loan amount (including the old loan and the amount that is cashed out) , which can add up quickly.

Are There Other Options?

A cash-out refinance isn’t the only option if a homeowner is in need of cash. Here are a few to consider.

Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit (HELOC) is a revolving line of credit that uses the borrower’s house as collateral. Borrowers typically don’t take a lump sum HELOC unless they know they can pay it back. Instead, with a HELOC, the borrower is given a credit limit, and because the credit is revolving, they can use it, pay it back, and then tap into it again. HELOCs typically offer variable rates that could change over the course of the loan.

Home Equity Loan

A home equity loan also uses the borrower’s house as collateral, but offers a lump sum payment. Home equity loans often have a fixed interest rate, and are typically chosen when a borrower knows how much cash they will need up-front. A home equity loan is separate from the mortgage and often offers different terms.

Personal Loan

Personal loans are typically unsecured, which means that they do not require existing assets (like your home) as collateral. This usually means higher interest rates than loans that are secured by collateral.

Making the Right Choice for Your Finances

When determining the right option for you, consider your decision from a few angles. One of the factors in determining the right loan for you is the amount of time it will take to pay back the additional funds needed. No matter what you choose, it’s wise to consider the all-in costs of each possible option.

There are many important factors to consider when taking cash out of your home. Determine what you need the money for, and for how long. Compare the costs to the money potentially saved by refinancing to a lower interest rate. And shop around to find the right option for you.

Cash-Out Refinancing FAQs

Here are some of the most frequently asked questions when it comes to cash-out refinancing.

Are There Limitations on What the Cash Can Be Used For?

With a cash-out refinance, the money can be used for pretty much any purpose. While the money from a cash-out refinance can be used for anything, remember that borrowing a cash-out refinance loan means removing equity and using your home as collateral. So, while you can use the money for anything, some uses are wiser than others.

How Much Can you Cash Out?

Generally, lenders will limit borrowers to 80% of the equity they have in their home. Keep in mind that this may vary based on a lender’s policies. VA loans are an exception to this, they allow borrowers to take out 100% of the equity in their home.

Does a Borrower’s Credit Score Affect How Much They Can Cash Out

A borrower’s credit score may influence how much they are able to borrow. In general, to borrow a cash-out refinance, lenders will expect a minimum credit score in between 600 and 640. Some lenders may offer cash-out refi loans to borrowers with lower credit scores as well. Each lender will have their own requirements around minimum credit scores, so compare options.

The Takeaway

Cash-out refinancing is an option that allows homeowners to tap into the equity in their home. The general process involves borrowing a new mortgage where borrowers can use their existing equity to secure a lump-sum payment.

The money can be used for nearly any expense, from paying off high interest debt to financing a renovation.

Borrowing a cash-out refinance does come with risk, importantly that the borrower is removing equity from their home and the house is used as collateral.

Other alternatives to consider depending on individual financial circumstances include a HELOC, personal loan, or home equity loan.

Curious about SoFi’s competitive cash-out mortgage refinancing rates? Learn more.

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Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status and and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, years of professional experience, income, and a variety of other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Financial Protection and Innovation under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

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