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Q: When will social security run out?

According to a 2020 projection from the Social Security Administration (SSA), workers who reach retirement age after 2034 are projected to receive 76% of scheduled benefits.

Jun

2024

When Will Social Security Run Out?

By Rebecca Lake | Investing, Preparing for Retirement | Comments Off

While it’s unlikely that Social Security will ever run out completely, it is possible, and current predictions are that Social Security will be able to pay out 100% of scheduled benefits until 2033. After that, benefits could be reduced.

Why Social Security is vulnerable to “running out” requires a bit of background into how Social Security works. It’s a good idea to have an idea as to what could happen if Social Security were to run out, too.

How Social Security Works

To get a sense of how Social Security works, it may be helpful to think of the Social Security system as a bucket of water. Current workers pay Social Security tax that’s added to the bucket, while retired workers withdraw their benefits from the resources in the bucket. Throughout Social Security’s history, there was always a surplus of funds – meaning that more people were paying into the system than were withdrawing from it.

Over time, for various reasons — including a smaller pool of younger workers and a longer-living pool of retirees — those excess resources have been slowly depleted. Given the demands on the system, it’s unclear how to keep Social Security functioning unless benefit payouts are reduced, or the government takes some kind of action to remedy the situation.

Social Security can often be described as a “pay-as-you-go” system, meaning that the contributions made by workers now (through the Social Security payroll tax) are actually used to pay the benefits of today’s retirees. Currently some 182 million workers pay into the system, which provides Social Security and Disability benefits for tens of millions people.

When today’s workers retire, the idea is that they will receive benefits based on what the next generation contributes. Any money that’s left over goes into one of two Social Security trust funds.

According to the Social Security Trustees report published in 2024, total costs of the OASI and DI Trust Funds (Old Age and Survivors Insurance, and Disability Insurance) the system began to outstrip total income in 2021, and the reserves of the OASI and DI Trust Funds started declining after that.

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Understanding Social Security Tax

The amount each individual worker contributes to Social Security depends on their income. Employees who work for a traditional employer split the Social Security tax payment with their employer at 6.2% each up to $168,600 in annual salary, and self-employed workers are responsible for the entire 12.4%.

As employees contribute to the tax, they earn Social Security “credits” — with a max of four per year.

Those employees become eligible for benefits when they reach 40 credits, which equals roughly 10 working years, or they reach full retirement age. For Americans born in 1960 or later, that’s 67 years old.

At What Age Are You Eligible for Social Security?

Getting the most out of Social Security benefits becomes a numbers game as workers get close to retirement age, because workers are technically eligible at age 62. But for each month previous to full retirement age that someone starts drawing benefits, they’re reduced by one-half of one percent.

The benefits stop increasing at age 70, which is generally when workers would be able to get the biggest return on their contributions into the system. But individual decisions should be made on a number of factors, including employment outlook and health.

Recommended: When Can I Retire?

Social Security Trust Funds

After all the contributions have been paid in and benefits paid out, any remaining funds are divided up between two trust funds, divided up between the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund, where they earn interest in government-guaranteed Treasury bonds.

The larger of the two funds, the OASI, pays benefits to retired workers, their surviving spouses and eligible children, and covers administrative and other expenses. It’s the largest fund that takes care of retirees who don’t face special circumstances, and deposits are made daily. It’s been around since 1940.

The smaller DI Trust Fund handles monthly benefit payments to disabled workers and their spouses and children until they’re eligible for full benefits through the OASI.

Even though both funds are a part of the overall federal budget, they’re handled separately and the SSA isn’t allowed to pay out more than what’s in the trust fund.

The Risk of Social Security Running Out

Media headlines in recent years have highlighted concerns over a potential Social Security funding shortfall. But it’s important to separate fact from fiction when understanding how Social Security works.

Myth 1: There Won’t be any Money to Pay Benefits

As mentioned, the odds of Social Security running out of money completely are low. Remember, Social Security is pay as you go with today’s workers paying in funds that are used to provide retirement benefits for today’s retirees.

When you retire, your benefits would be paid by those still working. So unless the system itself is abolished, Social Security benefits would continue to exist and be funded by workers.

Reality: Social Security Surplus Funds May be Exhausted

While workers pay into Social Security, the program also has a surplus of trust funds that it can use to pay benefits, as described earlier. The program has begun using those funds to pay some benefits as of 2021, with payroll taxes continuing to pay the majority of benefits to retirees.

While Social Security itself is unlikely to end, the trust funds may eventually be spent down to $0, which presents the possibility of a reduction in future benefits.

Myth 2: People Who Aren’t Eligible for Social Security can Receive It

Another concern about the possibility of Social Security running out stems from the mistaken belief that undocumented individuals can illegally claim Social Security benefits.

The idea is that some people might unfairly claim benefits they’re not entitled to, putting a burden on the system and reducing benefits for eligible workers.

Reality: Documentation is Required to Obtain Benefits

A Social Security number or Individual Taxpayer Identification Number is required for the Social Security Administration to create a benefits record for a citizen or non-citizen who’s authorized to work in the U.S. Someone who has either could legally obtain benefits through Social Security since they’ve technically paid into the system.

Myth 3: The Current System Can’t Support an Aging Population

As life expectancies increase and the birth rate declines, it’s natural to assume that living longer may affect Social Security’s ability to continue paying out benefits. Someone who’s 25 now, for example, may be wondering what year will Social Security run out, and how will it time up with my retirement?

Reality: Social Security Can Adapt

While there’s little the government can do to change the demographic makeup of the population, lawmakers can be proactive in proposing changes to Social Security. That includes measures that can help to preserve benefits for as many workers as possible while minimizing the odds of running out of funding.

Problems With Social Security

Because benefit payouts are tied to the SSA’s reserve balance, it begs a question for many working Americans — what happens when that balance hits zero? The SSA itself acknowledges that benefits will likely only be available in full until 2033.

Reasons for the depletion of fund reserves are attributed to a number of challenges, including a rise in program costs. Cost-of-living adjustments, or COLA, have been steadily increasing. Life expectancy for Americans has grown longer, while the number of workers hasn’t kept pace with the number of retirees.

How to Avoid Social Security Running Out

Lawmakers, financial experts, and retirement advocates are starting to float ideas for how to save the program. To date, the two ideas that have been floated include raising the Social Security tax or reducing the benefit — two options that are likely to be unpopular with both workers and retirees.

In effect, it would mean that workers either pay more in, or get less out – or some combination of the two.

Another proposed fix that was proposed in 2023, called the Social Security 2100 Act, would make a number of changes to the current system, such as changing the formula for COLA to use a Consumer Price Index for the Elderly (versus its current price index for wage earners).

It would also involve setting the new minimum benefit at 25% above the poverty line. Advocates say the result would be like getting a 2% raise of the average benefit.

But given that any big changes to the system are likely to be politically unpopular and difficult to pass into law, there are few practical, concrete options on the table as of 2024.

History of Early Social Security

The need to secure a financial future for ourselves and our loved ones isn’t new — or uniquely American. Across the pond, the English passed a series of “Poor Laws” around 1600 intended to ensure that the state provided for the welfare of its poorest citizens.

Americans were quick to embrace the idea that the country should take care of its people, but at first it wasn’t society at large. In 1862, for example, a post Civil War-era program offered pensions to disabled Civil War soldiers, and widows and children of the deceased.

Around the late 1800s, some private companies were starting to offer pension plans too. The first company to offer a real pension plan was the Alfred Dolge Company, which made pianos and organs. They took 1% of an employee’s salary and put it into a pension plan, and then added 6% interest per year.

In 1935, President Franklin D. Roosevelt signed into law the Social Security Act. The government then started collecting Social Security taxes two years later. Then on January 31, 1940, the first monthly retirement check of $22.54 was issued to Ida May Fuller in Ludlow, Vermont.

This Isn’t the First Social Security Shortfall

The mass retirement of the Baby Boomer generation and parallel decline in birth rate is taking the blame for Social Security’s current problems. But this isn’t the first time the fund has been in trouble.

When the program first began phasing in, for example, workers were contributing but no one was retiring yet, so the fund grew a nice little surplus. Congress, seeing those nice big numbers, were generous with increasing benefits every time they had the chance.

When the 1970s rolled around, however, and those workers reached retirement age, that upward momentum came to a screeching halt. On top of that, a flaw in the program’s COLA formula caused benefits to double-index, or increase at twice the rate of inflation rather than matching it.

It became such a mess that task forces were created, the error got its own name “The Notch Issue,” and instead of making changes to Social Security during even years, because increases and expansions were good for election campaigns, Congress made changes on odd-numbered years.

Social Security Amendments of 1983

Amendments in 1983 addressed the financing problems to the Social Security system. These changes were the last major ones to the program and were based on recommendations from a commission chaired by Alan Greenspan.

The Greenspan Commission adjusted benefits and taxes. The resulting reforms have generated surpluses and the buildup of a trust fund. However, many experts project that the retirement of the baby boomers, along with other demographic factors, will exhaust the trust.

What Can I Do About Social Security?

The SSA allows contributors to keep track of their Social Security accounts online, work with retirement and benefits estimation tools, and even apply for retirement benefits online.

Perhaps the two most important tools in the journey toward retirement are education and planning — knowing where you are, where you want to be, and what you need. Understanding the ins and outs of the ideal retirement age, whether that’s through Social Security or private retirement savings plans, and how to avoid penalties can help form a solid plan.

Aside from government benefits, one of the easiest steps for traditionally employed workers is to take full advantage of their employer’s 401(k) matching plans. These are programs in which the employer can match what you contribute to the 401(k).

If your employer doesn’t offer a 401(k) or matching plan, consider setting up an IRA or Roth IRA. Regular IRAs are tax-deductible like 401(k)s, meaning you’re not taxed until your withdrawal in retirement. Meanwhile, contributions to Roth IRAs are not tax-deductible, but you can withdraw money tax-free in retirement.

The Takeaway

Without fixes, the cash reserves of the SSA will become depleted and workers who reach full retirement age after 2033 will likely receive a reduced benefit amount. But again, that assumes that the government does not step in to make any changes – and as of 2024, there are no popular, concrete ideas for doing so, though many proposals are floating around.

It can be a scary proposition for some, but knowing that the deadline is approaching is a huge advantage for members of the workforce who have time to take measures to counter the expected shortfall by saving more and adjusting their financial plans.

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Jun

2024

What Are the Average Retirement Savings By State?

By Kaitlyn Farley | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

For many Americans, not having enough saved up for retirement is a real fear. Which state you live in can have a major effect on how much you may need. Research from Personal Capital, a digital wealth manager, shows just how much your state really impacts that savings number: The state with the highest retirement savings has an average of $545,754, while the lowest had $315,160.

And that number can vary even more when you consider factors like age. Currently, the average retirement age in the U.S. is 65 for men and 63 for women, but you may find yourself retiring much later or earlier depending on which state you live in and when you start saving for retirement.

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The Average Retirement Savings by State

Looking at the retirement savings average 401(k) balance by state can help you get a better idea of how much money you need to retire in your state. To find that information, Personal Capital, a financial services company, looked at the retirement accounts of its users and took the average balances by state as of September 29, 2021. This is the most recent data available. You can find out more about Personal Capital’s methodology here.

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Alaska

• Average Retirement Balance: $503,822

• Rank (as of 9/29/21): 4 out of 51

Alabama

• Average Retirement Balance: $395,563

• Rank (as of 9/29/21): 36 out of 51

Arkansas

• Average Retirement Balance: $364,395

• Rank (as of 9/29/21): 46 out of 51

Arizona

• Average Retirement Balance: $427,418

• Rank (as of 9/29/21): 31 out of 51

California

• Average Retirement Balance: $452,135

• Rank (as of 9/29/21): 17 out of 51

Colorado

• Average Retirement Balance: $449,719

• Rank (as of 9/29/21): 19 out of 51

Connecticut

• Average Retirement Balance: $545,754

• Rank (as of 9/29/21): 1 out of 51 (BEST)

D.C., Washington

• Average Retirement Balance: $347,582

• Rank (as of 9/29/21): 49 out of 51

Delaware

• Average Retirement Balance: $454,679

• Rank (as of 9/29/21): 14 out of 51

Florida

• Average Retirement Balance: $428,997

• Rank (as of 9/29/21): 28 out of 51

Georgia

• Average Retirement Balance: $435,254

• Rank (as of 9/29/21): 26 out of 51

Hawaii

• Average Retirement Balance: $366,776

• Rank (as of 9/29/21): 45 out of 51

Iowa

• Average Retirement Balance: $465,127

• Rank (as of 9/29/21): 11 out of 51

Idaho

• Average Retirement Balance: $437,396

• Rank (as of 9/29/21): 25 out of 51

Illinois

• Average Retirement Balance: $449,983

• Rank (as of 9/29/21): 18 out of 51

Indiana

• Average Retirement Balance: $405,732

• Rank (as of 9/29/21): 33 out of 51

Kansas

• Average Retirement Balance: $452,703

• Rank (as of 9/29/21): 15 out of 51

Kentucky

• Average Retirement Balance: $441,757

• Rank (as of 9/29/21): 23 out of 51

Louisiana

• Average Retirement Balance: $386,908

• Rank (as of 9/29/21): 39 out of 51

Massachusetts

• Average Retirement Balance: $478,947

• Rank (as of 9/29/21): 8 out of 51

Maryland

• Average Retirement Balance: $485,501

• Rank (as of 9/29/21): 7 out of 51

Maine

• Average Retirement Balance: $403,751

• Rank (as of 9/29/21): 35 out of 51

Michigan

• Average Retirement Balance: $439,568

• Rank (as of 9/29/21): 24 out of 51

Minnesota

• Average Retirement Balance: $470,549

• Rank (as of 9/29/21): 9 out of 51

Missouri

• Average Retirement Balance: $410,656

• Rank (as of 9/29/21): 32 out of 51

Mississippi

• Average Retirement Balance: $347,884

• Rank (as of 9/29/21): 48 out of 51

Montana

• Average Retirement Balance: $390,768

• Rank (as of 9/29/21): 38 out of 51

North Carolina

• Average Retirement Balance: $464,104

• Rank (as of 9/29/21): 12 out of 51

North Dakota

• Average Retirement Balance: $319,609

• Rank (as of 9/29/21): 50 out of 51

Nebraska

• Average Retirement Balance: $404,650

• Rank (as of 9/29/21): 34 out of 51

New Hampshire

• Average Retirement Balance: $512,781

• Rank (as of 9/29/21): 3 out of 51

New Jersey

• Average Retirement Balance: $514,245

• Rank (as of 9/29/21): 2 out of 51

New Mexico

• Average Retirement Balance: $428,041

• Rank (as of 9/29/21): 29 out of 51

Nevada

• Average Retirement Balance: $379,728

• Rank (as of 9/29/21): 42 out of 51

New York

• Average Retirement Balance: $382,027

• Rank (as of 9/29/21): 40 out of 51

Ohio

• Average Retirement Balance: $427,462

• Rank (as of 9/29/21): 30 out of 51

Oklahoma

• Average Retirement Balance: $361,366

• Rank (as of 9/29/21): 47 out of 51

Oregon

• Average Retirement Balance: $452,558

• Rank (as of 9/29/21): 16 out of 51

Pennsylvania

• Average Retirement Balance: $462,075

• Rank (as of 9/29/21): 13 out of 51

Rhode Island

• Average Retirement Balance: $392,622

• Rank (as of 9/29/21): 37 out of 51

South Carolina

• Average Retirement Balance: $449,486

• Rank (as of 9/29/21): 21 out of 51

South Dakota

• Average Retirement Balance: $449,628

• Rank (as of 9/29/21): 20 out of 51

Tennessee

• Average Retirement Balance: $376,476

• Rank (as of 9/29/21): 43 out of 51

Texas

• Average Retirement Balance: $434,328

• Rank (as of 9/29/21): 27 out of 51

Utah

• Average Retirement Balance: $315,160

• Rank (as of 9/29/21): 51 out of 51 (WORST)

Virginia

• Average Retirement Balance: $492,965

• Rank (as of 9/29/21): 6 out of 51

Vermont

• Average Retirement Balance: $494,569

• Rank (as of 9/29/21): 5 out of 51

Washington

• Average Retirement Balance: $469,987

• Rank (as of 9/29/21): 10 out of 51

Wisconsin

• Average Retirement Balance: $448,975

• Rank (as of 9/29/21): 22 out of 51

West Virginia

• Average Retirement Balance: $370,532

• Rank (as of 9/29/21): 44 out of 51

Wyoming

• Average Retirement Balance: $381,133

• Rank (as of 9/29/21): 41 out of 51

Why Some States Rank Higher

Many factors are involved when determining why some states have higher rankings than others. For the sake of simplifying the data, different tax burdens and cost of living metrics weren’t considered in the analysis, which can make the difference between the highest and lowest ranking state retirement accounts look far wider than they may actually be.

Likewise, not considering the average cost of living by state could explain why states like Hawaii, D.C. and New York aren’t in the top five states for retirement. These states have some of the highest costs of living.

So, when planning your retirement and determining where your retirement savings may stretch the furthest, you may also want to consider tax burdens and cost of living metrics by state instead of just considering the average retirement savings by state.

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How Much Do You Need to Retire Comfortably in Each State?

How much you need to retire comfortably is largely determined by a state’s cost of living, but it will vary even more based on your own personal financial situation, the retirement lifestyle you’re aiming to pursue, and anticipated retirement expenses.

As such, you may want to use a retirement calculator or even talk with a financial advisor to help you determine just how much you should be saving for retirement based on your lifestyle, what you expect to spend in retirement, where you want to live, your current and projected financial situation, and a slew of other factors.

Recommended: How to Choose a Financial Advisor

By Generation Breakdown

Unsurprisingly, the amount Americans have saved for retirement varies a lot by generation. Personal Capital’s report reveals that generally, younger generations have less saved up for retirement than older ones.

Gen Z

• Total Surveyed: 121,489

• Average Retirement Balance: $38,633

• Median Retirement Balance: $12,016

Millennials

• Total Surveyed: 742,108

• Average Retirement Balance: $178,741

• Median Retirement Balance: $75,745

Gen X

• Total Surveyed: 375,718

• Average Retirement Balance: $605,526

• Median Retirement Balance: $303,663

Baby Boomers

• Total Surveyed: 191,648

• Average Retirement Balance: $1,076,208

• Median Retirement Balance: $587,943

Recommended: Average Retirement Savings by Age

The Takeaway

The average 401(k) balance by state varies quite a bit, and myriad factors can affect how much you’ll personally need to retire comfortably. Your state’s costs of living, the age you start saving for retirement, and your state’s tax burdens will all play a role.

As you’re taking a look at your retirement savings, you may want to explore additional options beyond a 401(k), such as opening an IRA or setting up a brokerage account. Taking the time now to see what options might be right for you could be time well spent when it comes to reaching your financial goals.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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FAQ

Have more questions about retirement? Check out these common concerns about retirement and retirement savings.

How much do Americans have saved up for retirement?

How much the average American has saved for retirement varies greatly by state and age. Connecticut has the highest average retirement savings, $545,754, and Utah has the lowest, $315,160. In general, younger generations have far less saved up than older generations, with Gen Zers averaging $38,633 and Boomers averaging $1,076,208.

What’s the average retirement age in the US?

The average retirement age in the U.S. is 65 for men and 63 for women. Alaska and West Virginia have the lowest average retirement age, 61, and D.C. has the highest, 67.

What can I do now to help build my retirement savings?

To help build your retirement savings you could take such actions as participating in your workplace 401(k) and taking advantage of the employer 401(k) match if there is one. You might also want to consider opening an IRA or investing in the market. Weigh your options carefully and consider the possible risk involved to help determine what savings and investment strategy is best for you.

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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.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
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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.

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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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Jun

2024

Guide to Short- vs Long-Term Certificates of Deposit (CDs)

By Dan Miller | Growing Wealth, Investing, money | Comments Off

A certificate of deposit (CD) is a type of savings account that holds your funds for a set period of time, or term. In exchange, the bank pays you a fixed annual percentage yield (APY), which tends to be higher than what you could earn in a traditional savings account.

When you open a CD, you can typically choose between a short-term CD (one year or less), mid-term CD (two to three years), or long-term CD (four years or longer). Generally, the longer the term of the CD, the higher the interest rate will be. However, these days, that’s not always the case. Nonetheless, APY is one of several factors to consider when deciding which type of CD is right for you.

How Do CDs Work?

A certificate of deposit is a type of deposit account offered by a variety of financial institutions, including brick-and-mortar banks, online banks, and credit unions. When you open a CD, you make a lump sum deposit then agree to leave the money untouched until the end of the CD’s term.

Unlike a regular savings account, you typically can’t add money to a CD after your initial deposit. And if you withdraw money before the end of the CD’s term, you will likely get hit with an early withdrawal penalty.

There are some no-penalty CDs on the market that don’t charge a fee for pulling your money out early, but be sure you understand the terms and potential tradeoffs with regard to lower rates or fees.

Are CDs Insured?

Yes, CDs are typically insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000, which makes them a relatively safe investment. Any money you deposit, up to $250,000, would be covered in the event of fraud or a bank collapse.

If the CD is issued by a credit union, it would be insured for the same amount, by the National Credit Union Administration (NCUA).

What Is a Short-Term CD?

Short-term CDs are CDs with terms of one year or less. Different banks offer CDs with different terms, but 3-month, 6-month, and one-year CDs are common.

A short-term CD gives you greater flexibility than a longer-term CD, since you’ll have access to your money sooner. But a short-term CD will also typically offer a lower annual percentage yield (APY) than a CD with a longer maturity date.

Advantages and Disadvantages of Short-Term CDs

Short-term CDs come with both pros and cons. Here are some to consider.

Advantages of Short-Term CDs

• They typically pay a higher interest rate than traditional savings accounts.

• They offer a safe place to park savings for a big purchase, while earning a steady rate.

• If rates change or your needs shift, you won’t have to wait long to access your money.

Disadvantages of Short-Term CDs

• They may offer lower interest rates than long-term CDs.

• You may be able to find higher rates with other financial products, such as a high-yield savings account.

• If you need the money before the CD matures, you’ll have to pay an early withdrawal penalty.

What Is a Long-Term CD?

Generally speaking, a long-term certificate of deposit is a CD that has a term of four years or more. Long-term CDs typically offer the highest rates of any type of CD, but the returns you’ll earn even with a long-term CD tend to be lower than historical stock market averages. That said, the beauty of CDs is that they offer a predictable rate of return, in a vehicle that’s relatively low risk.

The tradeoff to the higher interest rates that come with long-term CDs is that you won’t have access to your money for several years without paying a penalty.

Advantages and Disadvantages of Long-Term CDs

As with short-term CDs, long-term CDs come with both benefits and drawbacks. Here are some to keep in mind.

Advantages of Long-Term CDs

• They typically offer the highest interest rates of any type of CD.

• The predictable rate of return can help balance more volatile investments in your portfolio.

• Knowing that you’ll incur penalties for early withdrawal can deter you from dipping into your savings prematurely.

Disadvantages of Long-Term CDs

• If you end up needing to take money out before the term is over, you will likely get hit with early withdrawal penalty fees.

• Some long-term CDs require a minimum opening deposit of $1,000 or more.

• There’s a risk that inflation or interest rates will go up while your money is tied up in the CD.

Main Differences Between Short-Term and Long-Term CDs

Here’s a look at how short- and long-term CDs compare side-by-side.

	Short-Term CD	Long-Term CD
Term length	3 months to 1 year	4 years or more
Early withdrawal penalty?	Yes	Yes
Safety	FDIC or NCUA Insured	FDIC or NCUA Insured
APY	Typically lower	Typically higher
Found at:	Traditional banks, online banks, and credit unions.	Traditional banks, online banks, and credit unions.

When Should I Consider a Short-Term or Long-Term CD Over the Other?

Whether you should go with a short-term or long-term CD will depend on your financial goals, the amount of money you can afford to lock away, and your need for flexibility.

Consider a short-term CD if:

• You may need access to your funds in the near future.

• You want to take advantage of potentially higher interest rates compared to traditional savings accounts.

• You are uncertain about future interest rate changes and want to reassess your options sooner.

Consider a long-term CD if:

• You have money you want to set aside for a specific purpose that won’t happen for several years.

• You want to maximize your earnings with potentially higher long-term CD interest rates.

• You are confident you won’t need access to the funds before the CD matures.

It’s also important to consider your overall financial situation, including emergency savings, other investments, and financial goals, before deciding between short-term or long-term CDs.

The Takeaway

Opening a CD can be a smart way to earn a higher interest rate than you’d get from a traditional savings account. The tradeoff is that most CDs will charge an early withdrawal penalty if you remove your money before the end of the CD’s term, so you have to be willing to lock up your funds for the specific term of the CD you choose.

Generally, CDs with longer terms offer higher interest rates than shorter-term CDs, but this isn’t always the case so it’s a good idea to shop around and compare rates before opening a CD. You may also be able to find competitive rates with other types of accounts, like high-yield savings accounts.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQ

Is a long-term or short-term CD better?

It depends on your financial goals and circumstances. If you have funds you can comfortably lock away for a longer period and want to earn a potentially higher interest rate, a long-term certificate of deposit (CD) might be better. If you need more flexibility or anticipate needing the funds in the near future, a short-term CD might be a better fit.

How are rates different between short-term and long-term CDs?

Certificate of deposit (CD) rates can vary widely, but generally the longer the CD term, the higher the interest rate. Short-term CDs (usually up to one year) tend to offer lower interest rates compared to long-term CDs (four years or more).

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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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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.

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Jun

2024

Guide to IRA Accounts With Limited Margin

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

An IRA account with limited margin is a retirement account that allows investors to trade securities with unsettled cash. It’s a more lenient structure versus a cash account, where you must wait for trades to settle before using the money for further trading. But an IRA account with limited margin isn’t a true margin account in that you can’t use leverage.

Nonetheless, an IRA account with limited margin offers a few advantages, including the ability to defer or avoid short-term capital gains tax, and you’re protected against good faith violations. That said, there are still restrictions, so before setting one up, it may be beneficial to learn more about how these accounts work.

What Is an IRA Account With Limited Margin?

An IRA account that may have limited margin — often called simply a limited margin IRA — presents a more flexible option to invest for retirement than a traditional IRA. These types of IRAs may allow you to trade with unsettled funds, meaning that if you close a position you don’t have to wait the standard two days after you trade, you can use those funds right away.

There may also be tax benefits. In a traditional IRA margin account, capital gains taxes are deferred until funds are withdrawn. This is similar to a regular IRA, where you don’t pay taxes on contributions or gains until you withdraw your money.

You may also be able to use limited margin in a Roth IRA, and there may be even more tax benefits when using limited margin in a Roth IRA. You don’t pay any capital gains because Roth accounts are tax-free, since Roth contributions are made with after-tax money.

As noted, an IRA account with limited margin may allow investors to trade with unsettled cash. However, a limited margin IRA is just that — limited. It is not a true margin account, and does not allow you to short stocks or use leverage by borrowing money to trade with margin debits. In that sense, it is different from margin trading in a taxable brokerage account.

You may be able to use limited margin in several IRA types. In addition to having margin IRAs with traditional and Roth accounts, rollover IRAs, SEP IRAs, and even small business SIMPLE IRAs are eligible for the margin feature. While mutual funds are often owned inside an IRA, you cannot buy mutual funds on margin.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

How Does Limited Margin Work?

Limited margin works by allowing investors to trade securities without having to wait for funds to settle. You can think of it like an advance payment from positions recently sold.

The first step is to open an IRA account and request that the IRA margin feature be added. Once approved, you might have to request that your broker move positions from cash to margin within the IRA. This operational task will also set future trades to the margin type.

IRAs with limited margin will state your intraday buying power — you should use this balance when day trading stocks and options in the IRA.

An advantage to trading in limited margin IRAs is that you can avoid or defer capital gains tax. Assuming you earn profits from trading, that can be a major annual savings versus day trading in a taxable brokerage account. If you trade within a pre-tax account, such as a traditional or rollover IRA, then you simply pay income tax upon the withdrawal of funds. When using Roth IRA margin, your account can grow tax-free forever in some cases.

The drawback with an IRA with limited margin versus day trading in a taxable account is you are unable to borrow money from your broker to create margin debits. You are also unable to sell securities short with an IRA with limited margin account. So while it is a margin account, you do not have all the bells and whistles of a full margin account that is not an IRA.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 12%* and start margin trading.

*For full margin details, see terms.

Who Is Eligible for an IRA With Limited Margin?

Some brokerage firms have strict eligibility requirements such as a minimum equity threshold (similar to the minimum balances required in full margin accounts). When signing up, you might also be required to indicate that your investment objective is the “most aggressive.” That gives the broker a clue that you will use the account for active trading purposes.

Another restriction is that you might not be able to choose an FDIC-insured cash position. That’s not a major issue for most investors since you can elect a safe money market fund instead.

IRA Margin Calls

An advantage to having margin in an IRA is that you can more easily avoid margin calls by not having to wait for cash from the proceeds of a sale to settle, but margin calls can still happen. If the IRA margin equity amount drops below a certain amount (often $25,000, but it can vary by broker), then a day trade minimum equity call is issued. Until you meet the call, you are limited to closing positions only.

To meet the IRA margin call, you just have to deposit more cash or marginable securities. Since it is an IRA, there are annual contribution limits that you cannot exceed, so adding funds might be tricky.

💡 Quick Tip: One of the advantages of using a margin account, if you qualify, is that a margin loan gives you the ability to buy more securities. Be sure to understand the terms of the margin account, though, as buying on margin includes the risk of bigger losses.

Avoiding Good Faith Violations

A good faith violation happens when you purchase a security in a cash account then sell before paying for the purchase with settled cash. You must wait for the funds to settle — the standard is trade date plus two days (T+2 settlement) for equity securities. Only cash and funds from sale proceeds are considered “settled funds.” Cash accounts and margin accounts have different rules to know about.

A good faith violation can happen in an IRA account without margin. For example, if you buy a stock in the morning, sell it in the afternoon, then use those proceeds to do another round-trip trade before the funds settle, that second sale can trigger a good faith violation. Having margin in an IRA prevents good faith violations in that instance since an IRA with limited margin allows you to trade with unsettled funds.

Pros and Cons of Limited Margin Trading in an IRA

Can IRA accounts have margin? Yes. Can you use margin in a Roth IRA? Yes. Should your IRA have the limited margin feature added? It depends on your preferences. Below are the pros and cons to consider with IRAs with limited margin.

Pros	Cons
You are permitted to trade with unsettled cash.	You cannot trade using actual margin (i.e. leverage).
You can avoid good faith violations.	You cannot engage in short selling or have naked options positions.
	You take on more risk with your retirement money.

The Takeaway

An IRA account with limited margin allows people investing in individual retirement accounts to trade securities a bit more freely versus a cash account. The main benefit to having an IRA with limited margin is that you can buy and sell stocks and options without waiting for lengthy settlement periods associated with a non-margin account.

But remember: Unlike a normal margin account, this type doesn’t allow you to use leverage. That means a margin-equipped IRA doesn’t permit margin trading that creates margin debit balances. You are also not allowed to have naked options positions or engage in selling shares short.

Get one of the most competitive margin loan rates with SoFi, 12%*

FAQ

Is an IRA a cash or a margin account?

An IRA can either be a cash account or a limited margin account. While a cash account only lets you buy and sell securities with a traditional settlement period, a limited margin IRA might offer same-day settlement of trades. You are not allowed to borrow funds or short sell, however.

Is day trading possible in an IRA?

Yes. You can day trade in your IRA, and it can actually be a tax-savvy practice. Short-term capital gains can add up when you day trade in a taxable brokerage account. That tax liability can eat into your profits. With a limited margin IRA that offers same-day settlement, however, you can buy and sell stocks and options without the many tax consequences of a non-IRA. The downside is that, in the case of losses, you cannot take advantage of the $3,000 capital loss tax deduction because an IRA is a tax-sheltered account. Another feature that is limited when day trading an IRA is that you cannot borrow funds to control more capital. A final drawback is that you are limited to going long shares, not short.

Can a 401(k) be a margin account?

Most 401(k) plans do not allow participants to have the margin feature. An emerging type of small business 401(k) plan — the solo brokerage 401(k) — allows participants to have a margin feature. Not all providers allow it, though. Also, just because the account has the margin feature, it does not mean you can borrow money from the broker to buy securities.

Photo credit: iStock/Drazen_

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

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.

*Borrow at 12%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Jun

2024

What Is a Hostile Takeover?

By Michael Flannelly | Growing Wealth, invest, Investing | Comments Off

A hostile takeover is when one entity or investor tries to take control of a company without the permission of that company’s management or board of directors. That’s why the unwelcome acquisition bid is considered ‘hostile.’

There are various ways a hostile takeover can occur. The hostile company or investor may make a tender offer to buy the other company’s shares directly from shareholders. Or they may attempt a proxy fight, where the hostile company tries to replace the other company’s board of directors.

The implications of a hostile takeover can affect investors of all stripes. If you own shares of the companies involved, the outcome of a takeover can be important for short- and long-term stock price movements.

How Hostile Takeovers Work

A hostile takeover is a type of legal acquisition in which a bidder — either another company or an investor — seeks to acquire a majority stake in the target company without the approval of the target’s board of directors. Hostile takeovers are often characterized by aggressive tactics such as proxy fights, tender offers, and open letters to company shareholders.

This aggressive action contrasts with typical acquisitions, where two companies work together to agree on a deal, and the board of directors of the target company approves of the purchase. Investors who own stock in a company that’s involved in any kind of merger or takeover need to pay attention to the motives, proposed terms, and possible outcomes.

Reasons for a Hostile Takeover

There are many reasons why a company or investor may try to take over another company. Hostile takeovers happen when a target company’s management refuses initial takeover offers, but the bidding company is persistent in its efforts to acquire the company.

Sometimes it’s because the stock market undervalues the target company’s shares, and the bidder believes that they can increase the company’s value. Other times, it may be because the bidder wants the target company’s assets, brand recognition, or market share.

If the company making the hostile takeover successfully acquires a majority of the shares, then it can gain control of the target company. Once in power, the acquiring company can make changes to the target company’s management, strategy, and operations.

In some cases, the company making the hostile takeover may take steps to increase the value of the company, such as selling off non-core assets, cutting costs, or increasing investment in research and development.

Recommended: How to Buy Stocks: A Step-by-Step Guide

Hostile Takeover Strategies

There are a few ways a company may pursue a hostile takeover. Sometimes a bidder may try to buy a significant percentage of shares of the target company on the open market, hoping to gain enough voting power to persuade the board of directors to accept a takeover offer. If that doesn’t work, the bidder uses its voting power to change management.

The bidder may also take aggressive measures, such as making open letters to shareholders or launching a public relations campaign to pressure the target company’s management to accept the offer. The most common hostile takeover tactics include:

• Tender offers: A tender offer is when the bidding company reaches out directly to the target company’s shareholders, offering to purchase shares — usually at a premium to the current market value. The bidder pursues a tender offer to bypass a company’s leadership and get enough shares to have a controlling stake in the company. Each shareholder can then decide if they want to sell the stake in the company.

• Proxy fights: A proxy fight is a battle between competing groups of shareholders to gain control of a company. In a hostile takeover, a bidder, which usually owns a portion of the target company’s stock, tries to persuade other shareholders to vote out the target company’s management. This may allow the bidder to replace the board of directors and seize control of the company.

Examples of Hostile Takeovers and Takeover Attempts

A hostile takeover usually starts when the acquiring company makes an unsolicited bid to purchase the target company. If the board of directors of the target company doesn’t approve of the proposal, they may reject the offer. The acquiring company then will pursue a hostile takeover bid by going directly to the shareholders or trying to replace the board of directors.

However, hostile takeovers don’t usually reach this conclusion. The target companies may defend themselves, causing the bidding company to drop the takeover attempt. Or the target company’s board of directors will relent and eventually agree to terms on an acquisition.

In some cases, antitrust laws or shareholder resistance can thwart a hostile takeover in its tracks.

Choice Hotels’ Attempted Takeover of Wyndham Hotels & Resorts

When Choice Hotels International, Inc. (CHH) made a hostile bid for Wyndham (WH) early in 2023, concerns arose over the potential for a monopoly, given that each company controlled multiple hotel brands and close to half a million hotel rooms.

Choice made multiple attempts to acquire Wyndham, starting in April 2023, but by December their strategy had evolved into an outright takeover. The $7.8 billion attempt did not go through, however, and Choice backed out in March of 2024, citing a lack of shareholder support.

JetBlue’s Strategy to Acquire Spirit Airlines

In March of 2024, JetBlue (JBLU) scuttled its attempted $3.8 billion acquisition of Spirit Airlines (SAVE). This marked the end of JetBlue’s protracted pursuit of the smaller budget airline, which began as a merger proposal in 2022. After Spirit rebuffed JetBlue’s advance, the situation devolved into a hostile takeover — with a twist. JetBlue hoped to prevent Spirit from joining forces with Frontier. Unfortunately, the Justice Department ruled against the takeover, and a similar fate befell the Spirit + Frontier merger as well.

Elon Musk Takes Over Twitter

In one of the more well-known hostile bids in recent years, Tesla (TSLA) CEO Elon Musk moved to take over Twitter in 2023, in a months-long process that was closely followed — and widely debated — by business and media alike.

Despite speculation that the hostile takeover would not succeed, The final $44 billion deal resulted in a complete rebranding of Twitter as X.

Sanofi’s Acquisition of Genzyme

The French healthcare company Sanofi (SNY) attempted a hostile takeover of the American pharmaceutical firm Genzyme in 2010. Before the hostile bid, Sanofi’s management made several friendly offers to buy Genzyme, but the American company’s management declined.

As a result, Sanofi courted shareholders to gather support for a deal and made a tender offer. This put pressure on Genzyme management to finally accept a deal, which they did. Sanofi bought Genzyme for $20.1 billion in 2011.

Kraft Foods’ Takeover of Cadbury

Kraft Foods (KHC), an American food company, launched a hostile bid for Cadbury, a UK-based chocolate company, in 2009. The hostile takeover was motivated by Kraft’s desire to increase its market share in the global confectionery market and acquire Cadbury’s valuable portfolio of brands. Cadbury’s management opposed the takeover and put together a hostile takeover defense team. Also, Cadbury shareholders and the UK government opposed the deal. However, Kraft was ultimately successful in acquiring Cadbury, and the takeover was completed in 2010 for $19.6 billion.

How Can Companies Defend Against Hostile Takeovers?

Companies can deploy various strategies to defend against a potential or imminent hostile takeover. These defensive plans are intended to make the hostile takeover more difficult, expensive, or less attractive to the bidder.

Poison Pill

Companies may adopt a shareholder rights plan, more commonly known as a poison pill, to protect themselves from a hostile bidder. With a poison pill, the target company’s shareholders have the right to purchase additional shares at a discount if a hostile takeover attempt is made, diluting the ownership of the existing shareholders. This makes it more expensive for the acquirer to buy a controlling stake in the company and often deters hostile takeover attempts altogether.

Golden Parachute

A golden parachute is a hostile takeover defense where the target company offers its top executives large severance packages if another firm takes over the company and the executives are terminated due to the acquisition. This makes the purchase more expensive and unattractive for a potential buyer.

Pac-Man Defense

A Pac-Man defense is an offensive strategy employed by a target company in a hostile takeover attempt. A Pac-Man defense refers to a target company that fights back against a hostile bidder by launching its own takeover bid for the bidder.

How Hostile Takeovers Affect Investors

A hostile takeover can significantly affect investors who own shares of either the target or bidding company, causing uncertainty in short- and long-term stock market prospects.

In the short term, investors who own shares of the competing companies may see share prices rise or fall, depending on whether the markets view the proposal as a good or bad deal.

Recommended: Understanding Market Sentiment

The target company’s management may also make the company less attractive to a bidder, such as by adopting poison pill provisions or increasing debt levels. These tactics may increase costs and debt burdens, which may negatively impact the long-term outlook for the company.

However, the target company’s share price may be positively affected as the hostile company tries to buy the target company’s shares at a premium.

If the hostile takeover is successful, the investors in the target company may see a change in the management of the company, as well as a potential change in the company’s strategy. This may change the long-term outlook for the company, which may be bullish or bearish for investors.

On a macro level, a hostile takeover can also affect the industries in which the target company and bidder operate. If the hostile takeover is successful, the industry may see a consolidation of companies, affecting market competition and share prices of related firms.

The Takeaway

Investors may hear about hostile takeover bids in the press, causing them to wonder how the situation may affect them and their portfolios. In some situations, the stock of the companies involved may go up, and the stock may go down in other situations. In the end, it’s essential to monitor the news of the deal carefully and pay attention to price fluctuations.

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

Photo credit: iStock/gorodenkoff

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE