Investing Archives

Dec

2025

Strike Price, Explained: Definition and Examples

Strike Price: What It Means for Options Trading

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

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

Table of Contents

What Is a Strike Price?
Examples of Strike Price in Options Trading
Moneyness
How Is Strike Price Determined?
How Do You Choose a Strike Price?
What Happens When an Option Hits the Strike Price?
FAQ

In options trading, a strike price represents the price at which an option purchaser can buy or sell an option’s underlying asset. An option strike price can also be referred to as an exercise price or a grant price, as it comes into play when a trader is exercising the option contract they’ve purchased.

A strike price can determine how much or how little an investor stands to gain by exercising an option contract, and can also inform the value of the option. Trading options can potentially generate higher rewards, though it can entail taking more risk than investing in individual stocks. Understanding strike prices is key to developing a successful options trading strategy.

Key Points

• Strike price is the price at which an option holder can buy or sell the underlying asset through the option.

• The strike price helps determine the value of an option and the potential gain for the trader.

• Strike prices are set when options contracts are written and can vary for different contracts.

• There are different types of options, including calls and puts, each of which will have a set strike price.

• Understanding strike price is crucial for developing a successful options trading strategy.

What Is a Strike Price?

An option is a contract that gives the owner or buyer of the option the right, though not the obligation, to buy or sell a particular security on or before a specific date, at a predetermined price. In options trading terminology, this price is called the strike price or the exercise price.

Strike prices are commonly used in derivatives trading. A derivative draws its value from an underlying investment. In the case of options contracts, this can be a stock, bond, commodity, or other type of security or index.

Further, options contracts can trade European-style or American-style. With European-style options, investors can only exercise them on their expiration date. American-style options can be exercised any time up to and upon the expiration date. This in itself doesn’t affect strike price for options contracts.

In options trading, there are two basic types of options: calls and puts. With either type of option, the strike price is set at the time the options contract is written. This strike price determines the price at which the underlying asset would be bought or sold if the option is exercised.

Calls

A call option conveys the right (though not the obligation) to a purchaser to buy shares of an underlying stock or other security at a set strike price. Call option writers are obligated to sell the shares if the option is exercised.

Puts

A put option conveys the right (though not the obligation) to a purchaser to sell shares of an underlying stock or other security at a set strike price. This is one way that investors can short a stock. Put option writers are obligated to buy the shares if the option is exercised.

Examples of Strike Price in Options Trading

Having an example to follow can make it easier to understand the concept of strike prices and how they may affect the value of an option contract. When trading options, traders must select the strike price and length of time they’ll have before exercising an option.

The following examples illustrate how strike price works when trading call or put options.

Buying a Call

Call options, again, give a purchaser the right, but not the obligation, to purchase a security at a specific price. At the same time, the seller of the call option must sell shares to the investor exercising the option at the strike price.

Let’s say you hold a call option to purchase 100 shares of XYZ stock at $50 per share (the strike price). You believe the stock’s price, currently trading at $45, will increase over time. This belief eventually pans out as the stock rises to $70 per share thanks to a promising quarterly earnings call. At this point, you could exercise your option to buy shares of the stock at the $50 strike price. The call option seller would have to sell those shares to you at that price.

The upside here is that you’re purchasing the stock at a discount, relative to its actual market price. You could then turn around and sell the shares you purchased for $50 each at the new higher price point of $70 each. This allows you to collect a $20 per share profit, less the premium you paid to purchase the call contract and any trading fees owed to your brokerage (or online brokerage).

Keep in mind, however, that if the price of the underlying stock remains below the strike price, the option will expire worthless, and you will lose the premium you paid for the option.

Buying a Put

Put options give purchasers the right, but not the obligation, to sell a security at a specific strike price. The seller of a put option has an obligation to buy shares from a trader who exercises the option.

So, assume that you hold a put option to sell 100 shares of XYZ stock at $50 per share (the strike price). You believe that the stock’s price, currently at $55, is going to decline in the next few months. The stock’s price drops to $40 per share so you decide to exercise the option. This allows you to make a profit of $10 per share (minus the premium paid per share and any fees), since you’re selling the shares at the $50 strike price, rather than their current lower market price.

But again, if the price of the stock remains above the strike price the option will expire with no value and you would lose the premium you paid upfront.

Writing a Covered Call

A covered call is an options trading strategy that can be useful when an investor believes the price of stock they own may remain neutral or rise slightly. This strategy involves doing two things:

• Writing a call option for a security

• Owning an equivalent number of shares of that same security

Writing (or selling) covered calls is a way to potentially generate income from the premiums traders pay to purchase the call option. Premiums paid by a call option buyer are nonrefundable, even if they choose not to exercise the option later.

The premium from a covered call may also offer a degree of downside protection if the stock price falls slightly (though losses would still be substantial if the price dropped significantly)..

So, say you own 100 shares of XYZ stock, currently trading at $25 per share. You write a call option for 100 shares of that same stock with a strike price of $30. You then collect the premium from the investor who buys the option.

One of two things can happen at this point: If the stock’s price rises slightly, but remains below the $30 stock price, then the option will expire worthless. You still keep the premium for writing it and you still own your shares of stock.

On the other hand, assume the stock’s price shoots up to $35. The purchaser exercises the option, meaning you must sell them those 100 shares. You still collect the premium, but your profit from selling those shares is capped at $5 per share, given the $30 strike price.

Investors should always consider the potential tradeoffs of writing covered calls, since they could cap upside potential. Covered calls are generally suitable for investors who would be comfortable selling their shares, if needed.

Moneyness

Moneyness describes an option’s strike price relative to its market price. There are three ways to measure the moneyness of an option:

In the Money

Options are in the money when they have intrinsic value. A call option is in the money when the market price of the underlying security is above the strike price. A put option is in the money when the market price of the underlying security is below the strike price.

At the Money

An option is at the money when its market price and strike price are the same (or nearly the same).

Out of the Money

An out-of-the-money option has no intrinsic value. A call option is out of the money if the market price of the underlying security is below the strike price. A put option is out of the money when the market price of the underlying security is above the strike price.

Understanding moneyness is important for deciding when to exercise options and when they may be at risk of expiring worthless.

How Is Strike Price Determined?

The strike price of an option contract is set when the contract is written. Strike prices may be determined by the exchange they’re traded on (like the Chicago Board Options Exchange, or CBOE). For listed options, strike prices are set by the exchange at standardized intervals based on the underlying asset’s market price.

A writer may issue multiple strike prices for the same underlying security so traders can choose the level they want. For example, you might see five option contracts for the same stock with strike prices of $90, $92.50, $95, $97.50 and $100. This allows investors an opportunity to select varying strike prices when purchasing calls or put options for the same stock.

Note, however, that writing calls that aren’t covered entails significant risk and can result in substantial losses. Both individual and institutional investors can write options, but there is significant risk involved — particularly when the calls they write aren’t covered.

How Do You Choose a Strike Price?

When deciding which options contracts to buy, strike price is an important consideration. Stock volatility and the passage of time can affect an option’s moneyness and your potential losses or profits should you exercise the option.

As you compare strike prices for call or put options, consider:

• Your personal risk tolerance

• Where the underlying asset is trading, relative to the option’s strike price

• How long you have to exercise the option

You may also consider using various options trading strategies to manage risk. That may include using covered calls as well as long calls, long puts, short puts, married puts, and others. Learning more about how to trade options can help you apply these strategies to pursue potential profits while potentially managing risk exposure, given the high risk of options trading.

What Happens When an Option Hits the Strike Price?

When the price of an option’s underlying asset is equal to or near the strike price it’s considered at the money. This means it has no intrinsic value as the strike price and market price are the same. There’s typically no incentive for an investor to exercise an option that’s at the money at expiration as there’s nothing to be gained from either a call or put option. In this scenario, the option may expire worthless.

If you’re the purchaser of an option that expires worthless, you would lose the money you paid for the premium to buy the contract. If you’re the writer of the option, you would profit from the premium charged to the contract buyer.

The Takeaway

Strike price is a critical concept for investors to know, especially if they’re trading or otherwise dealing with options as a part of their investing strategy. In an options contract, the strike price simply refers to the set price at which the purchaser can buy or sell the underlying security. Again, options can be high risk and fairly high-level, and may not be appropriate for all investors.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Explore SoFi’s user-friendly options trading platform.

FAQ

What is a strike price in options trading?

The strike price, also known as the exercise price or grant price, is the predetermined price at which an investor can buy or sell the underlying asset of an option contract. This price is set when the options contract is written. It’s a critical factor that helps determine the value of the option and an investor’s potential gain or loss upon exercising the contract.

How does the strike price work for call and put options?

For call options, the strike price is the price at which the purchaser has the right, but not the obligation, to buy the underlying security if the market price moves in their favor. For put options, the strike price is the price at which the purchaser has the right, but not the obligation, to sell the underlying security if the market price moves favorably.

Note that writers of options contracts are obligated to buy or sell the underlying security at the strike price if a purchaser chooses to buy or sell the underlying security.

What are the three measures of an option’s “moneyness”?

Moneyness describes an option’s strike price relative to its market price. An option that is in the money (ITM) has intrinsic value. A call is ITM if its market price is above the strike price; a put is ITM if its market price is below the strike price.

An option that is out of the money (OTM) has no intrinsic value. A call is OTM if the market price is below the strike price; a put is OTM if the market price is above the strike price.

An option is at the money (ATM) if the market price and strike price are the same.

Photo credit: iStock/Paul Bradbury

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

SOIN-Q325-033

Dec

2025

A pink question mark is shown to illustrate questions people have about what 401(k) benchmarking is and how it works.

What Is 401(k) Plan Benchmarking?

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

Table of Contents

How 401(k) Benchmarking Works
The Importance of 401(k) Plan Benchmarking
How to Benchmark Your 401(k) Plan: 3 Steps
FAQ

Benchmarking a 401(k) retirement plan refers to how a company assesses their plan’s design, fees, and services to ensure they meet industry and ERISA (Employee Retirement Income Security Act) standards.

Benchmarking 401(k) plans is important for a few reasons. First, the company offering the plan needs to be confident that they are acting in the best interests of employees who participate in the 401(k) plan. And because acting in the best interests of plan participants is part of an employer’s fiduciary duty, benchmarking can help reduce an employer’s liability if fiduciary standards aren’t met.

If a company’s plan isn’t meeting industry benchmarks, it may be wise for an employer to change plan providers. Learn more about how benchmarking works and why it’s important.

Key Points

• Benchmarking evaluates 401(k) plan design, fees, and services to meet ERISA standards.

• Annual benchmarking can ensure compliance and help reduce employer liability.

• Administrative, investment, and transaction fees must be evaluated to make sure they are reasonable.

• Service quality of the plan, including customer support and investment guidance, is assessed.

• Optimizing 401(k) plan features may enhance employee retention and satisfaction.

How 401(k) Benchmarking Works

While a 401(k) plan is a convenient and popular way for participants to invest for retirement, the company offering the plan has many responsibilities to make sure that its plan is competitive. That is where 401(k) benchmarking comes into play.

An annual checkup is typically performed whereby a company assesses its plan’s design, evaluates fees, and reviews all the services offered by the plan provider. The 401(k) plan benchmarking process helps ensure that the retirement plan reduces the risk of violating ERISA rules. For the firm, a yearly review can help reduce an employer’s liability and it can save the firm money.

ERISA, the Employee Retirement Income Security Act, requires that the plan sponsor verifies that the 401(k) plan has reasonable fees. ERISA is a federal law that mandates minimum standards that retirement plans must meet. It helps protect plan participants and beneficiaries.

The Importance of 401(k) Plan Benchmarking

It is important that an employer keep its 401(k) plan up to today’s standards. Making sure the plan is optimal compared to industry averages is a key piece of retirement benchmarking. It’s also important that your employees have a quality plan to help them save and invest for retirement. Most retirement plan sponsors conduct some form of benchmarking planning, and making that a regular event — such as annually — is important so that the employer continuously complies with ERISA guidelines.

Employers have a fiduciary responsibility to ensure that fees are reasonable for services provided. ERISA also states that the primary responsibility of the plan fiduciaries is to act in the best interest of their plan participants. 401(k) benchmarking facilitates the due diligence process and reduces a firm’s liability.

How to Benchmark Your 401(k) Plan: 3 Steps

So, as an employer, how exactly do you go about benchmarking 401(k) plans? There are three key steps that plan sponsors should take so that their liability is reduced, and the employees get the best service for their money. Moreover, 401(k) benchmarking can help improve your service provider to make your plan better.

1. Assess Your 401(k) Plan Design

It’s hard to know if your retirement plan’s design is optimal. Two gauges used to figure its quality are plan asset growth and the average account balance. If workers are continuously contributing and investments are performing adequately compared to market indexes, then those are signs that the plan is well designed.

Benchmarking can also help assess if a Roth 401(k) feature should be added. Another plan feature might be to adjust the company matching contribution or vesting schedule. Optimizing these pieces of the plan can help retain workers while meeting ERISA requirements.

2. Evaluate Your 401(k) Plan Fees

A 401(k) plan has investment, administrative, and transaction fees. Benchmarking 401(k) plan fees helps ensure total costs are reasonable. It can be useful to take an “all-in” approach when assessing plan fees. That method can better compare service providers since different providers might have different terms for various fees.

But simply selecting the cheapest plan does not account for the quality and depth of services a plan renders. Additional benchmarking is needed to gauge a retirement plan’s quality. Here are the three primary types of 401(k) plan fees to assess:

• Administrative: Fees related to customer service, recordkeeping, and any legal services.

• Investment: Amounts charged to plan participants and expenses related to investment funds.

• Transaction: Fees involved with money movements such as loans, 401(k) withdrawals, and advisory costs.

3. Evaluate Your 401(k) Provider’s Services

There are many variables to analyze when it comes to 401(k) benchmarking of services. A lot can depend on what your employees prefer. Reviewing the sponsor’s service model, technology, and execution of duties is important.

Also, think about it from the point of view of the plan participants: Is there good customer service available? What about the quality of investment guidance? Evaluating services is a key piece of 401(k) plan benchmarking. A solid service offering helps employees make the most out of investing in a 401(k) account.

The Takeaway

Investing for retirement is more important than ever as individuals live longer and pension plans are becoming a relic of the past. With today’s technology, and clear rules outlined by ERISA, it may be easier for workers to take advantage of high-quality 401(k) plans to help them save and invest for the long term.

For the company offering the plan, establishing a retirement benchmarking process is crucial to keeping pace with the best 401(k) plans. Reviewing a plan’s design, costs, and services helps workers have confidence that their employer is working in their best interests. Benchmarking can also protect employers.

If your company already has a 401(k) plan that you contribute to as an employee, you might also consider other individual retirement accounts to open. You can learn more about various options available, such as IRAs. There are different types of IRAs, including traditional and Roth IRAs. You may want to explore them as an option to help reach your retirement savings goals.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help build your nest egg with a SoFi IRA.

🛈 While SoFi does not offer 401(k) plans at this time, we do offer a range of individual retirement accounts (IRAs).

FAQ

How often should a 401(k) be benchmarked?

It’s considered a best practice to benchmark a 401(k) annually to make sure the plan complies with ERISA (Employee Retirement Income Security Act) guidelines. Making sure that the plan’s fees are reasonable and acting in the best interests of plan participants is part of an employer’s fiduciary duty. Benchmarking facilitates the due diligence process and reduces an employer’s liability if fiduciary standards aren’t met.

How do I benchmark my 401(k) fees?

To benchmark your 401(k) fees, take an “all-in” approach by calculating the service provider fees plus the investment expenses for the plan. This helps you compare your plan’s fees to fees charged by other service providers. In addition, assess the plan’s quality by looking at administrative fees (fees related to customer service and recordkeeping, for instance), investment fees (expenses related to investment funds and amounts charged to participants in the plan), and transaction fees (fees related to moving money, such as withdrawals or loans).

Why is 401(k) benchmarking important?

The process of 401(k) benchmarking is important for making sure a 401(k) plan is a quality plan and that it is in compliance with ERISA rules. An employer has a fiduciary duty to act in the best interest of their employees, and ensuring that a 401(k) plan has reasonable fees is part of that due diligence. Benchmarking can also help protect an employer and reduce their liability.

Photo credit: iStock/MicroStockHub

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

SOIN-Q425-026

Dec

2025

A man sits at a table outside, smiling, looking at his investments on a tablet.

Capital Markets Explained

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Are Capital Markets?
What Is the Main Purpose of Capital Markets?
What Are the Types of Capital Markets?
Capital Markets vs. Financial Markets vs. Money Markets
Real-world Examples of Capital Markets
The Takeaway
FAQ

A capital market is an exchange or platform where individuals, institutions, governments, and other entities come together to buy and sell securities. Well-known capital markets typically include the stock, bond, and commodities markets.

Capital markets generally facilitate the trading of longer-term securities vs. money markets, where investors can buy short-term debt. Capital markets today may or may not have specific geographical locations, as most capital markets conduct business electronically.

Key Points

• Capital markets refers to platforms that enable entities to sell securities to raise funds for various purposes, and where investors can buy those instruments.

• Examples of well-known capital markets include the stock market, bond market, commodities market, forex market, and more.

• Capital markets can have physical locations in financial capitals such as Tokyo, London, or New York, but most securities trading is done electronically.

• Capital markets are a critical part of the global economy, as they make it possible for money to change hands with relative ease.

• Primary markets are where securities are issued for the first time, and secondary markets are where they’re traded subsequently.

What Are Capital Markets?

Capital markets perform a key economic role. They bring together those who need to sell securities and those who wish to buy them, thereby facilitating the movement of capital around the world. Capital markets include a wide range of securities markets where funds can be traded between companies, governments, institutions, and individuals for myriad reasons (like investing online).

Established capital markets include stock and bond markets, and commodities. Capital markets and money markets are distinct, though: money markets are where short-term debt is traded. Most capital markets are located in the world’s financial centers, such as London, New York, Singapore, and Hong Kong.

What Is the Main Purpose of Capital Markets?

As noted, the main purpose of capital markets is to bring buyers and sellers together, specifically, for those who want to transact in securities markets. This means that they’re a meeting place for organizations or entities (governments, companies, etc.) that need money to get it from those who are willing to lend it or buy equity (investors).

Capital markets are important to the functioning of the broader economy.

What Are the Types of Capital Markets?

There are different types of capital markets, including broad markets: primary and secondary markets.

Primary vs Secondary Market

Capital markets are commonly divided into primary and secondary markets. The primary markets are where issuers sell “new” securities, and where investors buy them.

The other side of the capital markets are the secondary markets. This is where investors buy and sell the securities that have already been issued, often through a self-directed investing account.

Stock Market vs Bond Market

Stock markets are probably the most well-known of the capital markets. They are where companies go to acquire the capital they need to grow, and where investors go to buy stocks, and find opportunities for their capital to grow.

Bond markets operate differently. For one thing, the bond market doesn’t have a central exchange. Instead, they sell over the counter (OTC). And most of the people who trade in this OTC market are professional traders, such as pension funds, investment banks, hedge funds, and asset managers.

A bond is similar to an IOU, in that investors agree to lend capital to a government, company, or other bond issuer in exchange for regular interest payments over time, and a guarantee their principal will be repaid when the bond matures.

Stock and bond markets are one way to divide up the capital markets. But there are other securities such as convertible bonds, convertible preference shares and other alternative securities that companies sell to raise capital.

Capital Markets vs. Financial Markets vs. Money Markets

Financial markets are a broader category that include both capital markets and money markets. People sometimes use all three terms interchangeably, but there are some distinctions.

Financial Markets

Financial markets, generally, are any venue in which individuals and institutions trade any financial asset, including stocks, bonds, currencies, derivatives, commodities, and alternative investments.

Capital Markets

Capital markets specifically refer to the places where companies and other entities go to raise capital. Some distinguish capital markets as the segment where investors can invest in longer-term securities, versus the short-term instruments available through money markets.

Money Markets

Capital markets are also distinct from money markets in that the money market is where investors trade short-term debt, generally less than one year. Money markets support entities that need the return from short-term debt instruments.

The key distinction between money markets and capital markets are the types of securities traded, their risk level, and duration.

Money market instruments are generally fixed-income securities, and as such can be considered lower risk than other securities traded in the capital markets.

Real-world Examples of Capital Markets

Here are a few examples of capital markets at work in the real world.

Example 1: A Company Goes Public (IPO)

Many companies will choose to conduct an initial public offering, or IPO, in an effort to raise capital in quantities that simply aren’t available through private investors. The public capital market creates the opportunity for millions of investors to buy stakes in the company.

A company will usually consider an IPO when it has grown in size and matured as an organization. From a size perspective, one common time to consider an IPO is when a unicorn company has reached a valuation of $1 billion, though many companies go public before this point.

For many companies, the day of its IPO represents the beginning of a new stage of growth. In addition to the funds raised in an IPO, the credibility and transparency of being a publicly traded company can make it easier and less expensive to borrow money in the future.

Example 2: A City Issues Bonds for a New School

To access public funding through a bond issue, a company or another entity will start by discussing its need for capital with an investment bank or banks, which will act as the underwriter. In some cases, an entity may issue bonds directly, without using an underwriter.

If the bond issuer doesn’t have a rating from a bond-rating agency, the bank will help the borrower get in touch with the right rating agencies.

Once the terms of the bond are agreed upon, and the rating assigned to it, the bank sets up meetings with institutional investors. If they respond positively, then the bonds go to the investors who agreed to buy it over the course of the meetings leading up to the issuance date.

Example 3: Capital Markets in Real Estate

There are several ways that capital markets can serve or operate within the real estate sector. For instance, if a real estate developer needed to raise capital to fund a project, they could securitize it and sell shares, such shares of a real estate investment trust (REIT). Or, if a city needed to fund a project, they could sell shares of municipal bonds to raise the money to do it.

Further, there are financial instruments that are backed by real estate, such as mortgage-backed securities.

The Takeaway

The term capital markets encompasses the in-person and electronic exchanges where companies, governments, institutions, and other entities go to obtain capital from investors.

While the term financial markets is often used to indicate the means by which all types of securities and investment are traded, capital markets tends to refer to the platforms that facilitate the trading of equities and longer-term debt instruments.

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FAQ

What are capital markets in simple terms?

Capital markets bring together companies and other entities that need capital for various purposes, and investors who are willing to buy the securities they offer.

What is the capital market vs the stock market?

The stock market is an important subset of capital markets. It’s where companies that issue shares of their stock can find willing investors.

What is a primary market vs a secondary market?

A primary market is where securities or certain assets are issued for public sale for the first time, and a secondary market is where those securities or assets are subsequently traded or transacted.

Who are the main participants in capital markets?

Broadly, the main participants in capital markets are issuers, or those looking to sell equity or debt for funding, and investors, who are those looking to spend or lend capital in exchange for equity. Intermediaries could also be included, and those include market makers who connect issuers and investors.

Is the foreign exchange (forex) market a capital market?

Yes, the forex market could be considered a type of capital market.

Photo credit: iStock/Ivan Pantic

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SOIN-Q425-047

Dec

2025

How Much Do I Need to Retire?

By Dan Miller | invest, Investing, Preparing for Retirement | Comments Off

Table of Contents

How Much Money Do You Need to Retire?
Are You Currently Saving Enough?
Factors That Impact How Much Retirement Savings You’ll Need
Closing the Gap Between Current Savings and Your Goal
FAQ

While there are formulas and calculators that can help you determine a basic amount that you need to save for retirement, these are just ballpark numbers. In some cases it can be useful to game out a couple of different scenarios — using different assumptions about where you might live, whether you’ll work part time or travel, and so on.

Doing this can help you, and your spouse or partner, decide on the retirement path that suits you. It can also help you make the best estimate of how much you need to retire.

Key Points

• Determining the amount needed for retirement is a personalized calculation influenced by lifestyle, savings, Social Security, and various other factors.

• Guidelines suggest saving 15% to 20% of income for retirement, with targets based on age, such as 10 times salary by age 67.

• The 80% rule recommends replacing 80% of pre-retirement income, while the 4% rule provides a method for estimating required savings based on annual expenses.

• Factors like retirement age, pre-retirement income, desired lifestyle, and future expenses significantly impact the amount needed for a comfortable retirement.

• Starting retirement planning early and regularly assessing savings can help close the gap between current funds and future needs, especially considering inflation and healthcare costs.

This article is part of SoFi’s Retirement Planning Guide, our coverage of retirement readiness and all the steps you need to create a successful retirement plan.

How Much Money Do You Need to Retire?

There isn’t a single number you need to retire that will work for everyone. As mentioned, every person’s situation is unique and comes with its own complications and assumptions for what retirement might mean.

Many Americans aren’t sure where to begin when it comes to figuring out the exact amount they’ll need. In a 2024 SoFi Retirement Survey, 75% of adults don’t know how much they will need to retire. Just 1 in 4 have done the calculations to determine the amount, while 41% have a general sense, and 34% have no idea how much they’ll need for retirement.

do you know how much you need to retire - sofi retirement survey results
Source: SoFi’s 2024 Retirement Survey

Fortunately, there are some rules of thumb to consider to help determine retirement savings.

1. Retirement Savings Targets by Age

If you’re just starting out in life, you might think that with retirement decades away that you don’t have to worry about it. But the sooner you start saving for retirement, the better off you’ll be. Here are a few rough targets for how much you should have saved at certain ages:

By Age…	You should target saving this much
30	1X your salary
40	3X your salary
50	6X your salary
60	8X your salary
67	10X your salary

Source: Fidelity, “When Can I Retire”

These should only be considered as very rough guidelines — for more detailed retirement targets, consider working with a financial advisor.

retirement savings target by age

2. The 80% Rule

One basic guideline is known as the 80% rule, which says you should aim to replace 80% of your pre-retirement income. So, if you earn $100,000, you’ll need about $80,000 per year when you retire.

This is only meant as a guideline, but it has been called into question by some experts as being too high. As the thinking goes, your expenses decline in retirement, largely because you’re no longer saving for retirement, nor are you commuting.

Others have said workers should aim to replace 100% of their pre-retirement income, owing to inflation.

3. The 4% Rule

Another popular rule of thumb is the 4% rule, which says that you can take your projected annual retirement expenses and divide them by 4% (0.04) to know how much money you’ll need before you can safely retire.

If you project annual expenses of $50,000, you’ll need $1,250,000 (which is $50,000 divided by 0.04). Then each year you could withdraw 4% (indexed for inflation), which would come mostly if not completely from the appreciation of the portfolio.

Since the 4% rule was introduced in 1994, other advisors have said that it is not conservative enough, due partly to increased longevity, and have suggested 3.33% or even 3.7% might be more appropriate.

example of the 4 percent rule

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Are You Currently Saving Enough?

First, take a good long look at how much you’re putting away for retirement. Have you reached —or come close to — the goal of saving 15% to 20% of your income? Unfortunately, many people have not.

In the SoFi Retirement Survey, just 17% of respondents say they’re putting 15% or more of their income toward retirement. The majority are contributing much less. Here’s how the numbers break down:

Retirement Contributions

• 49% contribute less than 10% of their income

• 23% contribute less than 5% of their income

• 17% contribute 15% or more of their income

Of those who are contributing 15% or more of their income to retirement savings, 50% have a household income of $100,000 or more. The older they get, the more likely survey respondents are to contribute. While 32% of those aged 25 to 34 put at least 15% of their income toward retirement savings, the number jumps to 60% for those aged 25 to 44.

Factors That Impact How Much Retirement Savings You’ll Need

factors to consider when saving for retirement

When considering how much you’ll need to retire, here are a few things that you will want to keep in mind:

Age You Plan to Retire

In simple terms, your retirement age is the age when you decide to retire. For example, you might set your target retirement date as 62 or 65 or 66 — all of which are related to Social Security benefits in some way.

Social Security has largely shaped how we view retirement age in the U.S. because that monthly payout is what enables the majority of people to leave work. Ninety-seven percent of adults ages 60 or older receive Social Security, according to a 2024 estimate by the Social Security Administration. And most people ages 65 and older say Social Security is the majority of their income, according to an analysis by the Center on Budget and Policy Priorities, a nonpartisan research and policy institute.

While retiring at 62 is the earliest age when you can claim Social Security, that’s not your “full retirement age” – 67 is generally considered the full retirement age for those born in 1960 or later.

Pre-Retirement Income

Some financial planners suggest that you base your retirement projections on your pre-retirement income. You might use 70%, 75%, or 80% of your current income as a basis for estimating how much money you’ll need in retirement.

For a more detailed look, go through your budget and see how each type of expense will change in retirement. You may need more or less income than you think.

Retirement Lifestyle Goals

Another thing to think about is how your lifestyle overall might change in retirement. Consider whether you plan to move or make other big lifestyle changes that can impact both expenses and taxes. While some costs may go down (such as if you pay off the mortgage on your home), others might go up as you change your lifestyle.

As one example, if you want to explore the world or visit grandchildren, your travel budget may drastically increase from pre-retirement levels.

Social Security

Social Security benefits can provide a vital supplement to your retirement income and help you get closer to financial security. However, it’s critical to understand that the amount of your benefit will vary depending on your age.

The earliest you can start receiving Social Security Benefits is age 62, but your benefits will be reduced by as much as 30% if you take them that early — and they will not increase as you age.

If you wait until your full retirement age (FRA) you can begin receiving full benefits. Your full retirement age is based on the year you were born. For example, if you were born in 1960 or later, your full retirement age is 67. You can find a detailed chart of retirement ages on the Social Security website.

But here is the real Social Security bonus: If you can put off claiming your Social Security benefits until age 70, perhaps by working longer or working part time, the size of your benefits will increase considerably. Typically, for each additional year you wait to claim your benefits up to age 70, your benefits will grow by 8%.

Future Retirement Expenses

Creating an estimated budget can help you get a sense of what your retirement expenses might be. For example, you may know how much you’ll pay for things like housing, utilities, and food. But it’s also important to consider any future expenses that could require you to spend more each month in retirement.

Most people aren’t sure how much money they need to retire, according to SoFi’s retirement survey. Just one quarter of respondents say they know the amount they need.

• 41% have a rough estimate of how much they’ll need to retire comfortably

• 25% know how much they’ll need to retire comfortably

• 25% don’t know how much they’ll need to retire comfortably

Of those who don’t know how much they’ll need for retirement, about 40% are aged 45 or older.

That’s why it’s so important to start thinking now about the expenses you might face in retirement. The sooner you start planning and saving for these costs, the more time — and ideally, the more money — you may be able to stash away.

For instance, healthcare can be a major cost in retirement, especially if you retire early. At age 65, you will qualify for Medicare, but if you retire before then, you’ll need to make sure that you have a plan for covering healthcare costs in retirement. Even after qualifying for Medicare, you may still have significant health-related costs, depending on your specific medical situation. While Medicare can pay for many health-related issues, it doesn’t pay for all of them. Long-term nursing care is a big exclusion.

Purchasing long-term care insurance or a long-term care annuity could provide you with the necessary funds to cover those expenses, should you need nursing care. But if you don’t have either of those options in place, you’ll need to consider how you’ll fit long-term care costs into your retirement budget.

Inflation

Inflation eats away at the value of each individual dollar, including savings and investments, so it’s important to keep in mind the inflation rate for retirement planning. There are several strategies you can use when investing during inflation.

The cost of living in the future will be higher than it is today. For example, if rent costs $1,000 today, but next year inflation rises by 2.5%, that cost could rise to $1,025. Over a decade or more, that price could double or triple.

Closing the Gap Between Current Savings and Your Goal

If you realize that you have a gap between your current savings and where you think you need to be when you retire, it’s important to make a plan to address the gap. If you choose to do nothing, the gap will only grow wider.

You have three main ways to close the gap — either start saving more of your money or find a way to increase the returns your investments are earning. You can also consider making different choices about the sort of retirement you want.

Retirement Savings Accounts

You have many different ways that you can invest and save for retirement. Many employers have 401(k) accounts that give tax advantages for saving for retirement. On top of that, some employers offer matching funds when you contribute to a 401(k) account.

Another option can be to open an IRA, which you can set up on your own.

There are two main types: a traditional IRA and a Roth IRA. While both types let you contribute up to $7,000 yearly for 2025, with an additional catch-up contribution of $1,000 for those age 50 and older, and up to $7,500 for 2026, with an additional catch-up contribution of $1,100 for those 50 and older, one key difference is the way the two accounts are taxed: Traditional IRAs let you deduct your contributions up front and pay taxes on distributions when you retire, whereas Roth IRA contributions are not tax deductible, but you can withdraw money tax-free in retirement.

The Takeaway

It would be nice if there was a simple way to calculate the exact amount you need to retire on. Instead, think of your retirement amount as an ongoing series of calculations that you’ll refine as you get older, and as your thinking gets clearer.

There are some things you can predict, but many that you can’t — including the state of your health (or your spouse’s), the turns the market might take, or a change in priorities. All you can do is start early and save steadily for the retirement you hope to have one day.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help build your nest egg with a SoFi IRA.

FAQ

How much money do you need to retire with a $100,000 salary?

In order to determine how much money you need to retire with a certain amount of salary, you’ll need to make a few assumptions. For example, you can estimate that you’ll need 75% of your pre-retirement income after you retire and follow the 4% rule. That would mean you’ll need $1,875,000 to be able to retire.

If you change your assumptions, it will also change your numbers. If you follow the 80% rule, for instance, you would aim to replace 80% of your $100,000 pre-retirement income — or $80,000 per year.

How can I catch up on retirement savings if I’m behind?

There are two main ways to catch up on retirement savings if you’re not meeting the targets for where you want to be. The first is to increase the amount of money you’re saving each month. Upping your contributions can help close your retirement savings gap. The other would be to try to increase the investment returns that you are earning, though that may also come with increased risk or volatility.

Should I factor in Social Security when determining how much retirement income I’ll need?

It may not be prudent to count on Social Security as a major contributor to your retirement amount, especially if it’s still decades until your retirement date. Current projections indicate that the government may not be able to fully fund Social Security payments at some point fairly soon — a June 2025 report by the Social Security Board of Trustees indicates that this might happen by 2034. Social Security recipients are still likely to receive benefits, though those benefits may be reduced by around 23%, the report said.

It’s conceivable that Congress could take action to address the shortfall, but that’s impossible to know.

Can you comfortably retire with $1.5 million?

Deciding whether $1.5 million is enough for you to comfortably retire depends a lot on your standard of living and annual retirement expenses. Using the 4% rule says that a nest egg of $1.5 million would give an annual amount of $60,000. Depending on the cost of living in your area and your own standard of living, that may be enough to retire comfortably.

Am I on track to retire comfortably?

To gauge if you are on track with your retirement savings, you can use a couple of general guidelines. The 80% rule says you will need 80% of your pre-retirement income per year when you retire. Another guideline recommends having 10 times your annual salary saved by the time you’re 67.

But you also need to factor in your personal financial situation, as well as your retirement goals to determine if you can retire comfortably. Depending on your circumstances, you may need to save more or less than the guidelines recommend.

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Dec

2025

Can You Name a Trust as a Beneficiary of an IRA?

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

Individual retirement accounts (IRAs) offer a tax-advantaged way to invest for retirement. When opening an IRA, one question you’ll need to answer is who should be the beneficiary. You could name your spouse or another relative, but it’s also possible to list a trust as beneficiary of IRA assets.

A trust is a legal arrangement used in estate planning that allows an individual called a
trustee to manage assets for one or more beneficiaries, according to the specific wishes of the person who creates the trust.

There are advantages and disadvantages to naming a trust as the beneficiary of an IRA. It’s helpful to understand the implications of this process when developing your estate plan.

Key Points

• Naming a trust as an IRA beneficiary allows the account holder to control when and how IRA assets are distributed after they’re gone.

• IRA assets can be left to a trust in order to provide financially for those dependent on care, such as minors or special needs individuals.

• When an IRA is left to a trust instead of a spouse, that spouse will not be able to claim or roll those assets into their own IRA, as they would if they were the beneficiary.

• IRA assets held in a trust must be distributed within five years if the IRA owner died before starting to take required minimum distributions (RMDs).

• A trust that qualifies as a see-through trust, which passes assets to beneficiaries through the trust, may be able to bypass certain distribution requirements.

How an IRA Is Inherited

The way IRAs work is that the account holder makes contributions to the IRA to help save for retirement. Those under age 50 may contribute up to $7,000 annually in 2025, while those up 50 and up may contribute up to $8,000 annually. In 2026, those under age 50 may contribute up to $7,500 annually, while those 50 and up can contribute up to $8,600 a year.

The account holder names one or more beneficiaries to inherit the IRA. After the account holder’s death, IRA beneficiaries must take distributions from the account — known as required minimum distributions (RMDs) — and pay any required taxes due on those distributions, in accordance with Internal Revenue Service (IRS) rules.

You can select one or more beneficiaries when you open an IRA and then update your beneficiaries at any time. For example, you could make a change to your beneficiary designation if you get married or divorced and wish to name or remove your spouse.

Types of Designated IRA Beneficiaries

A designated IRA beneficiary, similar to a 401(k) beneficiary, is the individual who will inherit the IRA account, as chosen by the account owner. A designated IRA beneficiary must be a person.

There are two primary categories of designated beneficiaries: Spouse and non-spouse. Non-spouse designated beneficiaries to an IRA can include:

• Children

• Parents or other family members

The IRS recognizes a separate category of designated beneficiaries, referred to as eligible designated beneficiaries (EDBs). This term is used to describe beneficiaries who benefit from special treatment regarding inherited IRA distributions under the SECURE Act, which went into effect in 2020. The following individuals qualify for EDB status:

• Spouses and minor children of the deceased IRA owner

• Disabled or chronically ill individuals

• Individuals who are not more than 10 years younger than the IRA owner

Eligible designated beneficiaries can space out required minimum distributions from an inherited IRA over their lifetime. Ordinarily, non-spouse beneficiaries who inherit an IRA are required to withdraw all of the assets from the account within 10 years, under the rules of the SECURE ACT.

Non-Designated Beneficiaries

Non-designated beneficiaries are entities that inherit an IRA or another retirement account. Examples of non-designated beneficiaries include:

• Estates

• Charities

• Trusts

Non-designated beneficiaries must withdraw IRA assets within five years of the account owner’s death if the owner died before they were required to start taking RMDs at age 72 before 2023, and at age 73 beginning in 2023.

However, if the account owner died after they started taking out RMDs, the payout rule applies. According to this rule, the beneficiary (in this case, the trust) must take out the assets over what would have been the account owner’s life expectancy if they had not died.

Benefits to Naming a Trust as an IRA Beneficiary

So, can a trust be the beneficiary of an IRA? Yes. But should a trust be the beneficiary of an IRA? That answer is largely determined by the specifics of your situation. Here are some of the advantages of naming a trust as beneficiary to an IRA.

Control

Assets held in a trust are managed by a trustee who is bound by a fiduciary duty, meaning that they must act in the best interest of their client. During your lifetime you may act as your own trustee, with someone else succeeding you at your death. Any trustee you name is required to adhere to your wishes, as specified in the trust document.

That means you can have a say in what happens to IRA assets after you’re gone. That’s one of the chief benefits to a trust. If you were to name an individual as IRA beneficiary, on the other hand, they could do whatever they like with the money.

Special Situations

Trusts can be used to manage assets on behalf of minor children or special needs children/adults. You may set up a trust for the purpose of providing financially for a family member or another individual who is dependent on you for their care.

Setting up an IRA financial trust ensures that their needs will continue to be met after you’re gone. You can leave specific instructions for your trustee and any successor trustees you name on how the trust assets should be used to fund the care for these individuals.

Disadvantages to a Trust IRA Beneficiary

Naming a trust as the beneficiary of an IRA doesn’t always make sense, however. You may lose more than you benefit by choosing a trust as beneficiary vs. an individual. Here are some of the drawbacks to carefully consider.

Distribution Rules

Non-person IRA beneficiaries, including trusts, must fully distribute assets within five years of the account owner’s death if the owner had not yet begun taking required minimum distributions, or if the account is a Roth IRA. If the account owner died after they started taking out RMDs, however, the beneficiary must take out the assets over what would have been the account owner’s life expectancy if they had not died.

The only exception to these rules is if a trust qualifies as a see-through trust (learn more about that below).

By comparison, designated non-spouse beneficiaries generally have a 10-year window in which to withdraw IRA assets. Spousal beneficiaries can treat the IRA as their own and roll it over to their retirement account, which may minimize their tax liability.

Loss of Spousal Benefits

Naming a trust as IRA beneficiary when you have a living spouse takes away some of the tax benefits that are typically afforded to spouses when inheriting retirement accounts.

Most importantly, they don’t have the option to treat the IRA as their own. That could increase their tax obligation when receiving trust assets, leaving them with less inherited wealth to fund their retirement.

Rules for Trusts Inheriting IRAs

The SECURE Act introduced rules for trusts that inherit IRAs, including the five-year requirement for distributions. The rules says that non-designated beneficiaries must withdraw IRA assets within five years of the account owner’s death if the owner died before they were required to start taking out RMDs at age 72 before 2023, and at age 73 beginning in 2023.

If the account owner died after they started taking out RMDs, the beneficiary must take out the assets over what would have been the account owner’s life expectancy if they had not died.

Trusts may be able to bypass these requirements if they qualify as see-through entities, meaning they pass retirement assets to beneficiaries. With see-through trusts, the RMDs that must be taken are calculated based on the age of the beneficiary.

Here are the rules for see-through trusts.

• Trusts must be valid according to the laws of the state in which they’re created.

• The trust must become irrevocable, meaning it can’t be changed, when the account owner passes away.

• Trust beneficiaries must be readily identifiable.

• A copy of the trust must be provided to the custodian by October 31 in the year following the account owner’s death.5

These are the most current rules as of 2024. New legislation or updates to existing legislation can change inherited IRA rules.

Process for Updating IRA Beneficiary

The process for updating IRA beneficiaries is usually determined by the brokerage or bank that holds your IRA. If you need to make an update, you’ll need to contact your IRA custodian for the next steps.

Typically, you’ll fill out a beneficiary change form and share some information about the new beneficiary. If you’re updating your IRA beneficiary to a trust you’ll likely need to share the trust’s tax identification number as well as the trustee’s name and contact information.

Keep in mind that if you have an irrevocable trust you may not be able to make the change. Talking to an estate planning attorney or financial advisor can help you better understand what changes you can or cannot make.

The Takeaway

If you’re considering a trust as part of your estate plan and you also have an IRA, think about your specific situation and objectives. Putting an IRA in a trust could make sense if you have a special family situation or you want some say in how the assets are to be used after your death. On the other hand, it’s important to weigh the tax consequences your heirs might face.

If you don’t yet have an IRA but you’d like to set one up and begin making IRA contributions, it’s easy to open a retirement account online.

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

FAQs

Who pays the taxes if a trust is the beneficiary of an IRA?

When a trust retains income from an inherited IRA, the trust pays tax on that income. If IRA assets are passed on to the trust beneficiaries, then the beneficiaries pay the tax.

Can a trust be the beneficiary of Roth IRAs and traditional IRAs?

A trust can be the beneficiary of a traditional or Roth IRA. It’s possible for someone to have both types of IRAs and name a trust as beneficiary to one or both of them.

Do IRAs with beneficiaries go through probate?

Probate is a legal process in which a deceased person’s assets are inventoried, outstanding debts are paid, and remaining assets are then passed on to their heirs. Generally speaking, retirement accounts with designated beneficiaries are not subject to probate.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Photo credit: iStock/miniseries

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