Investing Archives | Page 10 of 232

Sep

2023

Unit Investment Trust (UIT) Explained Easily

What Is a Unit Investment Trust (UIT)?

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

A unit investment trust, or UIT, is similar to a mutual fund in that it’s a type of investment company that can hold a variety of securities, like stocks and bonds, that investors can buy as redeemable units. In fact, UITs belong to the same category as mutual funds and closed-end funds, in that they pool money together from different investors.

Similarly, unit investment trusts are designed to provide capital appreciation and/or dividend income, although without active trading of the securities in the portfolio. Unit investment trusts can offer some advantages to investors compared to mutual funds or exchange-traded funds (ETFs). There are, however, some potential downsides that could make them less attractive than other types of pooled investments.

Unit Investment Trust (UIT) Explained Clearly

A unit investment trust is a type of investment company that issues and invests in securities. The other two types of investment companies are open-end funds (i.e. mutual funds) and closed-end funds.

Similar to a closed-end fund, a UIT raises money from multiple investors, typically through an Initial Public Offering, or IPO. Each investor holds a unit in the trust that represents an ownership share and allows them to stake a claim to any capital appreciation or dividend income the trust generates. This type of trust can be established as a grantor trust or a regulated investment corporation.

Once the portfolio manager of a unit investment trust chooses which securities to invest in, the investment focus usually doesn’t change. That means there is typically no active investing management in terms of trading the underlying assets. The investments that a UIT chooses depend on its overall strategy and objectives. So, the risk and return profile of unit investment trusts can vary from one to another, based on the underlying holdings.

When a UIT matures, investors can do one of three things:

• Wait for the trust to liquidate its portfolio and receive their share of the proceeds

• Roll the investment over to a new UIT

• Receive a like-kind distribution of stock from the trust’s underlying investments

It’s important to keep in mind that UITs are not guaranteed investments. So, it’s possible that returns could be lower than expected or even negative if the trust fails to meet its objectives.

UIT Advantages and Disadvantages

Like any investment UITs have their advantages and disadvantages. As for advantages, investors may like that UITs offer a relatively easy way to diversify their portfolios with a single investment. They’re relatively easy to understand, too, and offer a degree of transparency into their holdings, so that investors can make better decisions relating to their investing strategy.

As for disadvantages? Perhaps the most obvious is that UITs are more or less fixed investments that do not change their investment mixes in an effort to adjust to the whims of the market. Some investors may prefer a more active approach to management in an effort to increase their returns.

Types of Unit Investment Trusts

Unit investment trusts can invest in a variety of different securities, but they tend to concentrate holdings in stocks and bonds. UITs generally come in one of two forms: Stock trusts and bond trusts.

These assets are held in the trust for a set time period until the trust is dissolved. A typical holding period would be anywhere from 15 months to two years, though some UITs may have an end date that’s farther in the future.

Investors can sell their holdings back to the issuing company at any time, but they can’t trade UIT shares as they would shares of a mutual fund.

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UIT vs. Mutual Fund

UITs differ from most mutual funds several ways, chiefly in that they sell a fixed number of shares or units when the UIT is first opened; and the trust has a set maturity date when the UIT is dissolved and investors can redeem their units.

As noted, a mutual fund is a company that pools money from investors and invests them in securities. There are many different types of mutual funds, including but not limited to bond funds, stock funds, blended funds, target-date funds, and index funds. Some mutual funds can be actively managed while index funds follow a passive investing strategy.

At first glance, a UIT and a mutual fund might seem like the same thing since they fall under the same investment company umbrella. And while they do have some features in common, there are other things that distinguish the two.

How Are UITs and Mutual Funds Similar?

UITs and mutual funds share common ground when it comes to diversification, regulation, and how they pass on capital gains or dividends to investors. A capital gain represents a gain between the price you initially paid for an investment and the price you receive when you sell it. A dividend is a percentage of an investment’s profits that are paid out to investors.

Since UITs and mutual funds are both types of investment companies, they’re subject to SEC regulation. This means they’re required to meet regular reporting requirements. While this can help to minimize the potential for fraud, investors are still encouraged to read each fund’s prospectus to ensure they understand what the fund invests in.

Recommended: How Do Dividends Work?

What Are the Differences Between UITs and Mutual Funds?

The biggest differences between UITs and mutual funds concerns their structure and management. A UIT has a set beginning when shares are issued, and an end date when it matures — while an open-end mutual fund typically allows investors to continually buy and sell shares. Additionally, a unit investment trust issues a certain number of units when the trust is created while mutual funds can issue new shares periodically.

With UITs, the underlying investments remain largely or entirely the same until they mature. Mutual funds, on the other hand, can buy and sell underlying assets as needed to stay aligned with the fund’s objectives. So, mutual funds can be more adaptable if an underlying investment doesn’t perform as expected.

How to Invest in UITs

If you’re interested in investing with a unit investment trust, it’s possible to buy them directly from the issuer. UITs can also trade on an exchange, so you could purchase them through an online brokerage account.

Before buying a unit investment trust, however, there are a few things to consider. Specifically, look at the following when comparing UITs:

• Duration of the UIT

• Minimum investment requirement

• Underlying investments

• Investment strategy and objectives

• Fees

Also, consider the investment risks. Again, there’s no guarantee that a unit investment trust will perform as expected. And since the trust investments are fixed, your returns (or losses) more or less hinge on whether those investments do well.

It’s also important to think about how well the underlying investments match up with the other investments in your portfolio. If you’re already heavily concentrated in equities, for example, it may not make sense to choose an equity UIT since that could increase your exposure to some of the same companies. A bond UIT, on the other hand, might help to balance out your asset allocation.

Investment Costs

Don’t forget that investments often have associated costs, and they can come in a variety of forms. For instance, investors may be on the hook for broker fees, trading fees, management fees, and more. The specifics will depend on the individual investment, but investors should do some homework to see what potential investment fees they’re up against.

Unexpected Taxes

Taxes often catch investors by surprise, too. Be sure to review what types of taxes you might be on the hook for – with investments, it’s generally either income taxes or capital gains taxes – and plan accordingly.

Are UITs a Good Investment?

Whether a unit investment trust is a good investment for you personally can depend on what you need and expect a pooled investment to do for you.

If you’re an active trader, for example, then a UIT likely wouldn’t be a good fit. On the other hand, if you tend to take the longer view when investing or you prefer a buy-and-hold approach, you may find a unit investment trust fits well in your investment portfolio.

While you could benefit from capital gains distributions and dividends, keep in mind that unit investment trusts offer less flexibility than mutual funds or ETFs. Dividends, for example, can’t be reinvested the way they could with a mutual fund or index fund.

And, as discussed, investment fees are another important consideration when investing in a UIT. Since investment costs can reduce total return amounts over time, it’s important to understand all the costs associated with buying units and redeeming them when the trust matures.

Should You Consider Investing in a Unit Investment Trust?

Given their less flexible structure and set maturity date, unit investment trusts may be appealing to investors who take a longer-term approach and tend to prefer a buy-and-hold strategy.

If you’d like more flexibility with your investments, you may consider mutual funds or ETFs in place of UITs, which have a set beginning and end date and little or no active trading of the securities within the trust. You also might want to explore alternatives to trusts or funds, like cryptocurrency or investing in IPOs.

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The Takeaway

A unit investment trust, or UIT, are investment companies that are, in many ways, similar to a mutual fund. They can hold a variety of securities, like stocks and bonds, that investors can buy as redeemable units.

Given their less flexible structure and set maturity date, unit investment trusts may be appealing to investors who take a longer-term approach and tend to prefer a buy-and-hold strategy. If you’d like more flexibility with your investments, you may consider mutual funds or ETFs in place of UITs, which have a set beginning and end date and little or no active trading of the securities within the trust.

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FAQ

Are fixed unit investment trusts redeemable?

Unit investment trusts do issue redeemable shares or units, much like a mutual fund. As such, the UIT is able to purchase shares or units back from an investor at an appropriate valuation.

What is the difference between unit trust and investment trust?

A unit trust is a sort of investment fund that allows investors to pool their money for investment purposes. An investment trust is a company or entity that operates an investment fund.

Are UITs actively managed?

UITs are not actively managed, and have fixed investment holdings. Accordingly, investments are purchased at the onset, and held until the UIT matures.

Photo credit: iStock/Ridofranz

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Sep

2023

What Is Mark to Market and How Does It Work?

Mark to Market Definition and Uses in Account & Investing

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

The term “mark to market” refers to an accounting method used to measure the value of assets based on current market conditions. Mark to market accounting seeks to determine the real value of assets based on what they could be sold for right now.

That can be useful in a business setting when a company is trying to gauge its financial health or get a valuation estimate ahead of a merger or acquisition. Aside from accounting, mark to market also has applications in investing when trading stocks, futures contracts, and mutual funds. For traders and investors, it can be important to understand how this concept works.

What Is Mark to Market?

Mark to market is, in simple terms, an accounting method that’s used to calculate the current or real value of a company’s assets, as noted. Mark to market can tell you what an asset is worth based on its fair market value.

Mark to market accounting is meant to create an accurate estimate of a company’s financial status and value year over year. This accounting method can tell you whether a company’s assets have increased or declined in value. When liabilities are factored in, mark to market can give you an idea of a company’s net worth.

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How Mark to Market Accounting Works

Mark to market accounting works by adjusting the value of assets based on current market conditions. The idea is to determine how much an asset — whether it be a piece of equipment or an investment — could be worth if it were to be sold immediately.

If a company were in a cash crunch, for example, and wanted to sell off some of its assets, mark to market accounting could give an idea of how much capital it might be able to raise. The company would try to determine as accurately as possible what its marketable assets are worth.

In stock trading, mark to market value is determined for securities by looking at volatility and market performance. Specifically, you’re looking at a security’s current trading price then making adjustments to value based on the trading price at the end of the trading day.

There are other ways mark to market can be used beyond valuing company assets or securities. In insurance, for example, the mark to market method is used to calculate the replacement value of personal property. Calculating net worth, an important personal finance ratio, is also a simple form of mark to market accounting.

Mark-to-Market Accounting: Pros and Cons

Mark to market accounting can be useful when evaluating how much a company’s assets are worth or determining value when trading securities. But it’s not an entirely foolproof accounting method.

Mark to Market Pros	Mark to Market Cons
• Can help establish accurate valuations when companies need to liquidate assets • Useful for value investors when making investment decisions • May make it easier for lenders to establish the value of collateral when extending loans	• Valuations are not always 100% accurate since they’re based on current market conditions • Increased volatility may skew valuations of company assets • Companies may devalue their assets in an economic downturn, which can result in losses

Mark to Market Pros

Mark to Market Cons

• Can help establish accurate valuations when companies need to liquidate assets

• Useful for value investors when making investment decisions

• May make it easier for lenders to establish the value of collateral when extending loans

• Valuations are not always 100% accurate since they’re based on current market conditions

• Increased volatility may skew valuations of company assets

• Companies may devalue their assets in an economic downturn, which can result in losses

Pros of Mark to Market Accounting

There are a few advantages of mark to market accounting:

• It can help generate an accurate valuation of company assets. This may be important if a company needs to liquidate assets or it’s attempting to secure financing. Lenders can use the mark to market value of assets to determine whether a company has sufficient collateral to secure a loan.

• It can help mitigate risk. If a value investor is looking for new companies to invest in, for example, having an accurate valuation is critical for avoiding value traps. Investors who rely on a fundamental approach can also use mark to market value when examining key financial ratios, such as price to earnings (P/E) or return on equity (ROE).

• It may make it easier for lenders to establish the value of collateral when extending loans. Mark to market may provide more accurate guidance in terms of collateral value.

Cons of Mark to Market Accounting

There are also some potential disadvantages of using mark to market accounting:

• It may not be 100% accurate. Fair market value is determined based on what you expect someone to pay for an asset that you have to sell. That doesn’t necessarily guarantee you would get that amount if you were to sell the asset.

• It can be problematic during periods of increased economic volatility. It may be more difficult to estimate the value of a company’s assets or net worth when the market is experiencing uncertainty or overall momentum is trending toward an economic downturn.

• Companies may inadvertently devalue their assets in a downturn. If the market’s perception of a company, industry, or sector turns negative, it could spur a sell-off of assets. Companies may end up devaluing their assets if they’re liquidating in a panic. This can have a boomerang effect and drive further economic decline, as it did in the 1930s when banks marked down assets following the 1929 stock market crash.

Mark to Market in Investing

In investing, mark to market is used to measure the current value of securities, portfolios or trading accounts. This is most often used in instances where investors are trading futures or other securities in margin accounts.

Futures are derivative financial contracts, in which there’s an agreement to buy or sell a particular security at a specific price on a future date. Margin trading involves borrowing money from a brokerage in order to increase purchasing power.

Understanding mark to market is important for meeting margin requirements to continue trading. Investors typically have to deposit cash or have marginable securities of $2,000 or 50% of the securities purchased. The maintenance margin reflects the amount that must be in the margin account at all times to avoid a margin call.

In simple terms, margin calls are requests for more money. FINRA rules require the maintenance margin to be at least 25% of the total value of margin securities. If an investor is subject to a margin call, they’ll have to sell assets or deposit more money to reach their maintenance margin and continue trading.

In futures trading, mark to market is used to price contracts at the end of the trading day. Adjustments are made to reflect the day’s profits or losses, based on the closing price at settlement. These adjustments affect the cash balance showing in a futures account, which in turn may affect an investor’s ability to meet margin maintenance requirements.

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Mark to Market Example

Futures markets follow an official daily settlement price that’s established by the exchange. In a futures contract transaction you have a long trader and a short trader. The amount of value gained or lost in the futures contract at the end of the day is reflected in the values of the accounts belonging to the short and long trader.

So, assume a farmer takes a short position in 10 soybean futures contracts to hedge against the possibility of falling commodities prices. Each contract represents 5,000 bushels of soybeans and is priced at $5 each. The farmer’s account balance is $250,000. This account balance will change daily as the mark to market value is recalculated. Here’s what that might look like over a five-day period.

Day	Futures Price	Change in Value	Gain/Loss	Cumulative Gain/Loss	Account Balance
1	$5				$250,00
2	$5.05	+0.05	-2,500	-2,500	$247,500
3	$5.03	-0.02	+1,000	-1,500	$248,500
4	$4.97	-0.06	+3,000	+1,500	$251,500
5	$4.90	-0.07	+3,500	+5,000	$255,000

Since the farmer took a short position, a decline in the value of the futures contract results in a positive gain for their account value. This daily pattern of mark to market will continue until the futures contract expires.

Conversely, the trader who holds a long position in the same contract will see their account balance move in the opposite direction as each new gain or loss is posted.

Mark to Market in Recent History

Mark to market accounting can become problematic if an asset’s market value and true value are out of sync. For example, during the financial crisis of 2008-09, mortgage-backed securities (MBS) became a trouble spot for banks. As the housing market soared, banks raised valuations for mortgage-backed securities. To increase borrowing and sell more loans, credit standards were relaxed. This meant banks were carrying a substantial amount of subprime loans.

As asset prices began to fall, banks began pulling back on loans to keep their liabilities in balance with assets. The end result was a housing bubble which sparked a housing crisis. During this time, the U.S. economy would enter one of the worst recessions in recent history.

The U.S. Financial Accounting Standards Board (FASB) eased rules regarding the use of mark to market accounting in 2009. This permitted banks to keep the values of mortgage-backed securities on their balance sheets when the value of those securities had dropped significantly. The measure meant banks were not forced to mark the value of those securities down.

Can You Mark Assets to Market?

The FASB oversees mark to market accounting standards. These standards, along with other accounting and financial reporting rules, apply to corporate entities and nonprofit organizations in the U.S. But it’s possible to use mark to market principles when making trades.

If you’re trading futures contracts, for instance, mark to market adjustments are made to your cash balance daily, based on the settlement price of the securities you hold. Your cash balance will increase or decrease based on the gains or losses reported for that day.

If the market moves in your favor, your account’s value would increase. But if the market moves against you and your futures contracts drop in value, your cash balance would adjust accordingly. You’d have to pay attention to maintenance margin requirements in order to avoid a margin call.

Which Assets Are Marked to Market?

Generally, the types of assets that are marked to market are ones that are bought and sold for cash relatively quickly — otherwise known as marketable securities. Assets that can be marked to market include stocks, futures, and mutual funds. These are assets for which it’s possible to determine a fair market value based on current market conditions.

When measuring the value of tangible and intangible assets, companies may not use the mark to market method. In the case of equipment, for example, they may use historical cost accounting which considers the original price paid for an asset and its subsequent depreciation. Meanwhile, different valuation methods may be necessary to determine the worth of intellectual property or a company’s brand reputation, which are intangible assets.

Mark to Market Losses

Mark to market losses occur when the value of an asset falls from one day to the next. A mark to market loss is unrealized since it only reflects the change in valuation of asset, not any capital losses associated with the sale of an asset for less than its purchase price. The loss happens when the value of the asset or security in question is adjusted to reflect its new market value.

Mark to Market Losses During Crises

Mark to market losses can be amplified during a financial crisis when it’s difficult to accurately determine the fair market value of an asset or security. When the stock market crashed, for instance, in 1929, banks were moved to devalue assets based on mark to market accounting rules. This helped turn what could have been a temporary recession into the Great Depression, one of the most significant economic events in stock market history.

Mark to Market Losses in 2008

During the 2008 financial crisis, mark to market accounting practices were a target of criticism as the housing market crashed. The market for mortgage-backed securities vanished, meaning the value of those securities took a nosedive.

Banks couldn’t sell those assets, and under mark to market accounting rules they had to be revalued. As a result banks collectively reported around $2 trillion in total mark to market losses.

The Takeaway

Mark to market is, as discussed, an accounting method that’s used to calculate the current or real value of a company’s assets. Mark to market is a helpful principle to understand, especially if you’re interested in futures trading.

When trading futures or trading on margin, it’s important to understand how mark to market calculations could affect your returns and your potential to be subject to a margin call. As always, if you feel like you’re in the weeds, it can be beneficial to speak with a financial professional for guidance.

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FAQ

Is mark to market accounting legal?

Mark to market account is a legal accounting practice, and is overseen by the FASB. Though it has been used in the past to cover financial losses, it remains a legal and viable method.

Is mark to market accounting still used?

Yes, mark to market accounting is still used both by businesses and individuals for investments and personal finance needs. In some sectors of the economy, it may even remain as one of the primary accounting methods.

What are mark to market losses?

Mark to market losses are losses that are generated as a result of an accounting entry, as opposed to a loss generated by the sale of an asset. The loss is incurred, under mark to market accounting, when the value of an asset declines, not when it is sold for less than it was purchased.

Photo credit: iStock/Drazen_

Sep

2023

When Can You Withdraw From Your 401(k)?

By LeeMarie Kennedy | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

If you’re diligently contributing to a 401(k) fund, receiving matching contributions from your employer, and watching your savings start to accumulate, you might find yourself wondering “When can I withdraw from my 401(k) account?”

The answer depends on a number of factors including your age, whether you’re still working or already retired, if you qualify for a hardship withdrawal, whether it makes sense to take out a 401(k) loan, or rollover your 401(k) into another account.

Here’s what you need to know.

What Are The Rules For Withdrawing From a 401(k)?

Because 401(k) accounts are retirement savings vehicles, there are restrictions on exactly when investors can withdraw 401(k) funds. Typically, account holders can withdraw money from their 401(k) without penalties when they reach the age of 59½. If they decide to take out funds before that age, they may face penalty fees for early withdrawal.

That said, there are some circumstances in which people can reach into their 401(k) account before 59 ½. Each plan should have a description that clearly states if and when it allows for disbursements, hardship distributions, 401(k) loans, or the option to cash out the 401(k).

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

What Age Can You Withdraw From 401(k) Without Penalty?

The rules about the penalties for 401(k) withdrawals depend on age, with younger workers generally facing higher penalties for withdrawals, especially if they’re not yet retired.

The IRS provision known as the “Rule of 55” allows account holders to withdraw from their 401(k) or 403(b) without any penalties if they’re 55 or older and leaving their job in the same calendar year.

In the case of public safety employees like firefighters and police officers, the age to withdraw penalty-free under the same provision is 50.

Under the Age of 55

When 401(k) account holders are under the age of 55 and still employed at the company that sponsors their plan, they have two options for withdrawing from their 401(k) without penalties:

1. Taking out a 401(k) loan.

2. Taking out a 401(k) hardship withdrawal.

If they’re no longer employed at the company, account holders can roll their funds into a new employer’s 401(k) plan or possibly an IRA.

Between Ages 55–59 1/2

The Rule of 55, as previously mentioned, means that most 401(k) plans allow for penalty-free retirements starting at age 55, with the exception of public service officials who are eligible as early as 50. Still, there are a few guidelines to consider around this particular IRS provision:

1. Account holders who retire the year before they turn 55 are subject to a 10% early withdrawal penalty tax.

2. If account holders roll their 401(k) plans over into an IRA account, the provision no longer applies. A traditional IRA account holder cannot withdraw funds penalty-free until they are 59 ½.

3. Once a 401(k) account holder reaches 59 ½, access to their funds depends on whether they are retired or still employed.

After Age 73

In addition to penalties for withdrawing funds too soon, you can also face penalties if you take money out of a retirement plan too late. When you turn 73, you must withdraw a certain amount, known as a “required minimum distribution (RMD),” every year, or face a penalty of up to 50% of that distribution.

💡 Quick Tip: Did you know that a traditional Individual Retirement Account, or IRA, is a tax-deferred account? That means you don’t pay taxes on the money you put in it (up to an annual limit) or the gains you earn, until you retire and start making withdrawals.

Withdrawing 401(k) Funds When Already Retired

If a 401(k) plan holder is retired and still has funds in their 401(k) account, they can withdraw them penalty-free at age 59 ½. The same age rules apply to retirees who rolled their 401(k) funds into an IRA.

Withdrawing 401(k) Funds While Still Employed

If a 401(k) plan holder is still employed, they can access the funds from a 401(k) account with a previous employer once they turn 59 ½. However, they may not have access to their 401(k) funds at the company where they currently work.

401(k) Hardship Withdrawals

Under certain circumstances, 401(k) plans allow for hardship withdrawals or early distributions. If a plan allows for this, the criteria for eligibility should appear in plan documents.

Hardship distributions are typically only offered penalty-free in the case of an “immediate and heavy financial need,” and the amount disbursed is not more than what’s necessary to meet that need. The IRS has designated certain situations that can qualify for hardship distributions, including:

• Certain medical expenses

• Purchasing a principal residence

• Tuition and educational expenses

• Preventing eviction or foreclosure on a primary residence

• Funeral costs

• Repair expenses for damage to a principal place of residence

The terms of the plan govern the specific amounts eligible for hardship distributions. In some cases, account holders who take hardship distributions may not be able to contribute to their 401(k) account for six months.

As far as penalties go, hardship distributions may be included in the account holder’s gross income at tax time, which could affect their tax bill. And if they’re not yet 59 ½, their distribution may be subject to an additional 10% tax penalty for early withdrawal.

Taking Out a 401(k) Loan

Some retirement plans allow participants to take loans directly from their 401(k) account. If the borrower fulfills the terms of the loan and pays the money back in the agreed upon timeframe (usually within five years), they do not have to pay additional taxes on it.

That said, the IRS caps the amount someone can borrow from an eligible plan at either $50,000, or half of the amount they have saved in their 401(k)—whichever is less. Also, borrowers will likely pay an interest rate that’s one or two points higher than the prime.

Coronavirus-related 401(k) Loans and Withdrawals

While the Coronavirus Aid, Relief, and Economic Security (CARES) Act offered special withdrawal allowances for 401(k) plan holders in 2020, most of the early withdrawal penalties returned in 2021, and those penalties are now in effect.

Cashing Out a 401(k)

Cashing out an old 401(k) occurs when a participant liquidates their account. While it might sound appealing, particularly if a plan holder needs money right now, cashing out a 401(k) can have some drawbacks. If the plan holder is younger than 59 ½, the withdrawn funds will be subject to ordinary income taxes and an additional 10% penalty tax. That means that a significant portion of their 401(k) would go directly to the IRS.

Rolling Over a 401(k)

Instead of cashing out an old 401(k), account holders may choose to roll over their 401(k) into a different retirement account, like an IRA. In many cases, this strategy allows participants to continue saving for retirement, avoid unnecessary penalty fees, and reduce their total number of retirement accounts.

The Takeaway

Certain factors like age, employment status and hardship eligibility determine whether you can make a withdrawal from your 401(k). In cases where plan participants do not meet age requirements for withdrawing 401(k) funds penalty-free, they can still take out a 401(k) loan, cash out a pre-existing 401(k) plan, or rollover their 401(k) into a different retirement account.

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The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
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).
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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 prequalification for any loan product offered by SoFi Bank, N.A.

Third-Party Brand Mentions: No brands, products, or companies 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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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.

SOIN0723005

Sep

2023

DINK: Living the Dual Income No Kids Lifestyle

By Ashley Kilroy | Budgeting & Goals, Growing Wealth, invest, Investing | Comments Off

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 Brookings Institution, an economic think tank, it will cost a middle-income couple an estimated $310,605 to raise a child from birth to age 17, which assumes a 4% inflation rate during that time period.

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.

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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 may 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 responsible 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.

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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.

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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.

• $487,300: 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 saving some of their extra cash early and take advantage of compound interest over time.

If they 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. Couples who are planning to never have children or to wait to have them, often have more disposable income to put toward their financial goals, including investing.

Invest with as little as $5 with a SoFi Active Investing account.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
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 prequalification for any loan product offered by SoFi Bank, N.A.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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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SOIN0723003

Sep

2023

Introduction to Fixed Income Securities

By Matthew Zeitlin | Growing Wealth, invest, Investing | Comments Off

Fixed income securities are a vital pool of investments that are an important part of investors’ strategies, whether they’re institution or individual investors. And while the public is more likely to hear about the ups and downs of the stock market on the news, the fixed income security market is worth trillions, and of vital importance to the overall financial system.

Understanding fixed income securities, and how they fit into an investing strategy, can be critical for investors of all stripes.

What are Fixed Income Securities?

To understand fixed income securities and investing in fixed income securities, it’s important to understand what “fixed income” means, and how that designation sets these financial securities apart from other investments that can be bought and sold.

“Fixed income” refers to the structure of the security itself: fixed income securities like bonds return a preset payment that legally can not change, known as the interest, and also the principal, which is returned at a set time in the future, known as “maturity.”

And like other types of securities, they have their upsides and downsides, and potentially, a place in an investor’s portfolio. With that in mind, too, it can be a good idea for investors to know how to buy bonds.

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Pros and Cons of Fixed Income Securities

Here’s a quick rundown of the advantages and disadvantages of fixed income securities for investors.

Pros of Fixed Income Securities

Perhaps the biggest advantage of fixed income securities is that they are relatively low-risk, and experience less price volatility compared to equities. They can also offer more or less guaranteed returns through regular interest payments (stocks, by comparison, offer no such guarantees other than perhaps dividends), and some of them may offer tax benefits or advantages, too.

Cons of Fixed Income Securities

Fixed income securities can have their downsides, too. For most investors, there are lower potential returns to be derived from fixed income securities (lower risk and lower returns). Given that they tend to be less volatile, too, there can be fewer opportunities to sell them for a sizable return. They can also be subject to things like interest rate risks, which may not apply to other types of securities.

How Fixed Income Securities Differ from Other Securities

The payments (dividends, potentially) from a fixed-income security, like a bond, are likely known in advance. Investors know what they’re getting, in other words, and can more or less depend on a fixed income stream. The trade-off, though, is that many of those same securities do not typically have the same potential for price appreciation as stocks, as discussed.

It’s worth noting, too, that some bonds are “callable” (versus non-callable). Callable bonds can be riskier for some investors as the issuer can “call” it, requiring an investor to perhaps reinvest their money at a different rate. So, in that sense, callable bonds may not be quite as “fixed” as they seem.

Utilizing Bonds as a Fixed Income Security

Bonds are the heavy hitters of the fixed income world. Bonds are, in effect, investments in the debt of a government or a corporation, or sometimes consumer debts like mortgages or auto loans.

Think of bonds vs. stocks like this: Because of their predictable yield, bonds are generally more low-risk than stocks, which have a value that can fluctuate minute to minute.

There are a few different types of bonds, each of which have their own unique attributes. It’s also worth noting that some bonds can be “callable” — meaning, the issuer can choose to repay investors the face value of the bond before the maturity date arrives. In those cases, interest is not always guaranteed.

Corporate bonds

There are trillions of dollars worth of corporate bonds outstanding that run the gamut from very safe, low-yield bonds issued by huge companies to the riskier, higher-yield bonds, issued by companies whose prospects for future earnings are more uncertain.

High-yield bonds used to be called “junk bonds.” These are bonds issued to fund companies that often don’t have long track records of steady profits or have fallen on tough times recently and thus have to pay more for the privilege of borrowing money.

While these bonds are considerably more risky than bonds in the so-called “blue chip” market, they also provide more opportunities for profits, both because their value tends to sway and that they have higher coupon payments.

Typically the easiest way for an individual or retail investor to invest in corporate bonds is to use an investment product like an exchange-traded fund, what’s known as a “fixed income” or bond ETF, specifically for bonds.

Know, too, that there are a multitude of investment funds on the market, many of which may include or use bond investments.

Government bonds

While the corporate bond market is almost unfathomably big, it’s actually a smaller portion of the world of bonds. Government bonds are issued by governments or public agencies that issue debt to fund their activities, and pay it off with either tax payments or a stream of fees that governments have special access to.

Whenever you hear about the “national debt” of a country, you’re hearing about a set of outstanding bonds that a country uses to cover the gap between taxes and spending. This concerns the federal government in the U.S. There’s also debt issued by states and local governments, some of which offers tax advantages for investors, and debt issued by government-affiliated agencies, like Fannie Mae and Freddie Mac, the two housing finance corporations.

Debt issued by the federal government tends to have the lowest possible yield of any debt for its duration (meaning the time during which an investor gets the coupon payments), because it’s assumed by the market to be risk-free. (Think government savings bonds.) This is why corporations or institutional investors with a large amount of cash will sometimes buy government debt in order to earn something back but not risk their overall investment, compared to keeping it in cash.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Similar Investments to Fixed Income Securities

While bonds do most of the heavy lifting in the fixed income securities world, they’re not the only types of investments that behave in roughly the same way, or which can be used by investors to provide the same type of service in a portfolio. Here are some examples.

Dividend-paying or Preferred stocks

Preferred stocks may have fixed payouts like a bond and are given a “preference” over common stock, meaning that before dividends are paid to common stockholders, they need to be paid to preferred stockholders. Preferred stockholders are also prioritized when a company liquidates or goes out of business — the “senior debt,” aka bondholders, get paid out first, then the preferred stockholders, and finally the common stockholders get paid last.

Money market funds

Money market mutual funds are invested in short-term instruments, and investors can use them as a sort of buoy to try and maintain portfolio stability. These accounts typically invest in short-term debt investments that provide low yield but are low-risk as well. One way to think of a money market mutual fund is as a fixed income investment product that you can always sell out of and into at a stable price.

They can be used in a similar way to checking accounts but do not have the type of Federal Deposit Insurance Corporation (FDIC) insurance that bank products will have.

Certificates of Deposit (CDs)

One of the most well-known types of fixed income security, Certificates of deposit (CDs) may not seem like a “security” at all and are typically purchased through a bank, not a broker.

Unlike a bank account, however, CDs cannot be accessed for a set amount of time, which makes them more similar to traditional fixed income investments. Likewise, with a CD an investor gets a contractually obligated stream of payments that is predetermined when they purchase the security. It may be worth reading up the differences in bonds vs. CDs.

One unusual aspect of CDs is that they’re insured by the FDIC for up to $250,000, which can be attractive to some investors. They’re generally low-risk investments, too — but that lower risk tends to come with correspondingly low interest rates, making CDs a savings product more than an investment one.

Investing with SoFi

Fixed income securities like bonds, preferred stocks, money market accounts, and CDs offer steady payments and little to no income fluctuation. But with that low level of risk comes a generally low level of payoff. For investors who like knowing exactly what they’re getting, fixed income securities can be an asset to a portfolio.

The potential downside of investing in fixed income securities is lower potential returns, which may turn many investors off of them. However, depending on your investment strategy, they may play a huge role in your portfolio, too.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Are fixed income securities debt or equity?

Fixed income securities are typically debt securities, which includes assets like bonds. Though they can sometimes be equities, like preferred stocks.

What are the risks of investing in fixed income securities?

The primary risks of investing in fixed income securities are increased chances for lower returns compared to other asset types, and risks associated with interest rate changes.

What is the difference between a bond and fixed income securities?

A bond is a type of fixed income security, so there isn’t really a difference – one is an umbrella term over the other.