When Can You Withdraw From Your 401(k)?

If you’re the kind of take-charge retirement planner who’s diligently contributing to a 401(k) fund, receiving matching contributions from your employer, and watching your savings start to stack, you might find yourself wondering “When can I withdraw from my 401(k) account?”

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

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

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

That being said, there are some circumstances in which people can reach into their 401(k) account before 59½. Each plan should have a description that clearly states if and when it allows for disbursements, hardship distributions, 401(k) loans, or the option to cash out the 401(k).

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

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

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

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

Under the Age of 55

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

1.   Taking out a 401(k) loan.

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

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

Between Age 55–59 1/2

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

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

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

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

After Age 72

In addition to penalties for withdrawing funds too soon, you can also face penalties if you take money out of a retirement plan too late. After age 72, you must withdraw a certain amount, known as a “required minimum distribution (RMD),” every year, or face a penalty of up to 50% of that distribution.

Withdrawing 401(k) Funds When Already Retired

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

Withdrawing 401(k) Funds While Still Employed

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

401(k) Hardship Withdrawals

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

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

•  Certain medical expenses

•  Purchasing a principal residence

•  Tuition and educational expenses

•  Preventing eviction or foreclosure on a primary residence

•  Funeral costs

•  Repair expenses for damage to a principal place of residence

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

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

Taking Out a 401(k) Loan

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

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

Coronavirus-related 401(k) Loans and Withdrawals

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

However, the CARES Act has expanded a relief provision into 2021 that allows 401(k) plan holders who meet qualified disaster requirements to borrow up to $100,000 from their 401(k) account (up from $50,000 in 2019) in a 401(k) loan and defer those loan payments for a year. In 2020, a third of Americans with retirement savings dipped into them during the crisis.

Additionally, the COVID-Related Tax Relief Act , passed in December 2020, allows 401(k) account holders to make relief withdrawals if they are taxpayers in a qualified disaster area and have suffered a financial loss due to that disaster.

Cashing Out a 401(k)

Cashing out an old 401(k) occurs when a participant liquidates their account. While it might sound appealing, particularly if a plan holder needs money right now, cashing out a 401(k) can have some drawbacks. If the plan holder is younger than 59½, the withdrawn funds will be subject to ordinary income taxes and an additional 10% penalty tax. That means that a significant portion of their 401(k) would go directly to the IRS.

Rolling Over a 401(k)

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

The Takeaway

Certain factors like age, employment status and hardship eligibility determine whether you can make a withdrawal from your 401(k). The CARES Act and other legislation provides some early 401(k) withdrawal relief and a little wiggle room for taxpayers in qualifying disaster areas.

In cases where plan participants do not meet age requirements for withdrawing 401(k) funds penalty-free, they can still take out a 401(k) loan, cash out a pre-existing 401(k) plan, or rollover their 401(k) into a different retirement account.

SoFi Invest® is a simple way to rollover your 401(k) into an IRA. You can take control of your retirement savings with SoFi’s active or automated Traditional, Roth, and SEP IRAs, plus you can access real human advisors who’ll help you every step of the way.

Ready to roll over that 401(k)? Learn more about retirement investing with SoFi.



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

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

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

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

What Does DINK mean?

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

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

The Significance of Dual Income, No Kids

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

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

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

•  Their two incomes are not very high

•  They live in an expensive area

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

Why are More Couples Choosing the DINK Life?

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

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

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

Structuring a DINK Household

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

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

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

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

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

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

Money Management Tips for Couples

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

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

Paying Off Debts

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

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

Creating Sustainable Spending Habits

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

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

Traveling Smart

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

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

Planning Ahead and Investing Early

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

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

Consolidating Stuff

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

Acquiring New Skills

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

Getting Wise About Taxes

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

The Pros and Cons of a DINK Lifestyle

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

Pros of Becoming a DINK Couple

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

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

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

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

•  Opportunity to save and invest extra income.

Cons to Remaining a DINK Couple

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

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

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

Planning for a Life Without Children

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

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

Couples will need to figure out:

•  How they’ll spend their retirement years,

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

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

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

Key Financial Baselines to Keep in Mind

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

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

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

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

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

Planning for the Ultimate DINK Lifestyle

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

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

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


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

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Comparing SPAC Units With Different Warrant Compositions

Comparing SPAC Units With Different Warrant Compositions

Special purpose acquisition companies (SPACs) have emerged as a popular way for private companies to go public on the stock market. But before a company can evaluate whether or not it makes sense to go public via SPAC, the SPAC itself must “go public” and list on an exchange.

Generally, a group of individuals form a shell company and nominate a board of directors, with the hopes that investors have enough faith in their ability to source an attractive deal. They can then sell shares in this new “blank check” company.

As an additional incentive for being an early investor when the SPAC debuts on an exchange, the shares, or “units”, may be comprised not only of common stock in the company, but also a warrant (whole or partial) to go along with each unit.

This benefit is only offered to early investors who buy the SPAC generally within its first 52 trading days. After the first 52 days1, units will usually split into the common shares and the warrants, with the two trading separately under different tickers.

How to Evaluate SPACs

When evaluating whether or not to invest in a SPAC IPO, potential investors often look at the qualitative aspects previously mentioned: who is the sponsor? Have they launched other SPACs before? Have those SPACs found targets and completed a successful company merger? Do the board members have the experience and track records that you would expect to evaluate investment opportunities?

However, it’s just as important for investors to understand the quantitative terms, or “structure,” of a SPAC deal. All SPACs are typically priced at $10 per unit, but the makeup of the units can be vastly different.

Read on for a closer look at warrants and how their inclusion, or absense, in a SPAC unit can affect investor profits. We will break down the mechanics of a SPAC unit with the following compositions:

•  one share + one full warrant

•  one share + no warrant

•  one share + partial warrant

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SPAC Warrants 101

Stock warrants are financial contracts that give holders the right to buy shares at a later date. Compared with stocks, warrants can be a relatively inexpensive way for investors to wager on an underlying asset, usually a stock, because they offer leverage–putting up a small investment for a potentially bigger payout.

Just like in options trading, warrants have an expiration date, so investors will need to pay attention if they want to exercise them. Another nuance worth noting is that when warrants get exercised, the action can be dilutive to shareholders since a flood of new shares can enter the market.

But warrants have the potential to be incredibly lucrative for these early SPAC investors because as explained before, essentially they’re buying for $10 one share plus the right to buy additional shares at a set level–what’s known as the strike or exercise price. Also importantly, even if an early investor decides to redeem their shares in the SPAC before a merger is completed, they get to keep the warrants that were a part of the SPAC units.

If the company doesn’t want to issue additional shares, they may not include warrants in their SPAC units. Market conditions may also dictate whether warrants are unnecessary. Remember: warrants are meant to entice investors to put in their money early. If demand for the SPAC is strong enough, the company may not feel the need to issue units with warrants.

Examples of SPAC Investments With Different Warrant Compositions

It’s important for investors to examine the deal structure of each SPAC closely, and they can do this by reading the IPO prospectus. The information around the composition of the shares or units being offered is usually on one of the first few pages, but reading the entire prospectus is essential for investors to make the right investment decision for them.

In general, here are some other pertinent pieces of information relating to warrants that potential investors should be looking for when reading through the prospectus:

•  the strike price

•  exercise window

•  expiration date

•  whether there are any specific conditions that can trigger an early redemption.

Investors should also inspect the exact composition of a SPAC unit. Does it offer one whole warrant, no warrant, one-quarter, one-third, or one-half?

The strike price or exercise price of SPAC warrants is often $11.50 a share. Investors sometimes have until five years after the merger before the warrant expires. However, the terms of different SPAC deals can vary vastly. It’s possible that the deal terms call for an early redemption period, and if investors miss exercising their contracts in that period, the warrants could expire worthless.

SPAC Unit With Whole Warrant

Let’s say an investor buys 1,000 units of a SPAC. In this case, each SPAC unit is composed of one whole share plus one whole warrant. That means the investor now owns 1,000 shares of the merged company stock plus 1,000 warrants to buy shares at $11.50 each.

If the SPAC completes its merger and the shares jump to $20, our investor can buy additional shares for just $11.50 each. So that’d be at a significant discount to where the existing shares are trading.

Here’s a hypothetical step-by-step example of how an investor could profit from exercising their whole warrants.

1.   Investor buys 1,000 units at $10 each, spending a total of $10,000.

2.   SPAC shares jump to $20 each.

3.   Investor exercises warrants, purchasing 1,000 shares for $11.50 each and spending an additional total

  of $11,500.

4.   Investor sells all 2,000 shares immediately for the market price of $20 each, so for $40,000 total.

5.   Our investor pockets the difference, so $40,000 minus $21,500 = $18,500.

SPAC Unit With No Warrant

Now, imagine that same investor bought into a SPAC where the units had no warrants. That means, while the investor’s 1,000 shares doubled in value, they didn’t have the right to buy an additional 1,000 shares.

1.   Investor buys 1,000 units at $10 each, spending a total of $10,000.

2.   SPAC shares jump to $20 each.

3.   Investor sells the 1,000 shares immediately for the market price of $20 each, so for $20,000 total.

4.   Our investor pockets the difference, so $20,000 minus $10,000 = $10,000

SPAC Unit With Partial Warrant

Let’s say our hypothetical SPAC has units with partial warrants. So in each unit, there’s one share attached to one-half warrant.

1.   Investor buys 1,000 units at $10 each, spending a total of $10,000.

2.   SPAC shares jump to $20 each.

3.   Investor exercises warrants. Every two warrants converts to one share, so the investor buys 500 shares for $11.50 each, spending an additional total of $5,750.

4.   Investor sells all 1,500 shares immediately on the market for $20 each, so for $30,000.

5.   Our investor pockets the difference, so $30,000 minus $15,750 = $14,250.

Here’s a hypothetical table that lays out different profit scenarios depending on the warrant composition, assuming once again that an investor has bought 1,000 units, that the exercise price of the warrants is $11.50, and the underlying shares hit $20 each.

Warrants Attached to Each SPAC Unit 1 Whole Warrant ½ Warrant ⅓ Warrant ¼ Warrant No Warrant
Units Purchased 1,000 1,000 1,000 1,000 1,000
Number of Shares That Can Be Bought With Warrants in SPAC Unit 1,000 500 333 250 0
Cost of Exercising Warrants at $11.50 Strike Price $11,500 $5,750 $3,829.50 $2,875 $0
Proceeds From Selling Shares Acquired Through Warrant Exercise $20,000 $10,000 $6,660 $5,000 $0
Net Proceeds from Selling Shares Exercised From Warrants $8,500 $4,250 $2,830.50 $2,125 $0
Net Proceeds From Selling All Shares $18,500 $14,250 $12,830.50 $12,125 $10,000

The Takeaway

With SPAC investments, whether units come with full warrants, no warrants, or partial warrants is a quantitative consideration. All else being equal, SPACs that provide full or partial warrants offer more potential profit than SPACs that offer no warrants.

SoFi IPO Investing

SoFi Invest allows eligible investors to buy into companies before they begin trading on a stock exchange through the IPO Investing service. Investors need to first set up an Active Investing account, which allows them to access IPO deals, company stocks, ETFs, fractional shares and cryptocurrencies–all in one app.

Get started on SoFi’s IPO Investing Center today.

Photo credit: iStock/FatCamera


1Investors should read all documents related to an offering as the terms of each SPAC can differ vastly.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
IPOs: Investing early in IPO stock involves substantial risk of loss. The decision to invest should always be made as part of a comprehensive financial plan taking individual circumstances and risk appetites into account.
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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How the 4% Retirement Rule Works

After decades of saving for retirement, many new retirees often find themselves facing a new challenge: Determining how much money they can take out of their retirement account each year, without running the risk of depleting their nest egg too quickly.

One rule of thumb used by some professionals is “the 4% rule.”

What Is the 4% Retirement Rule?

This “rule” suggests that retirees start by withdrawing 4% from their overall nest egg, and adjust that dollar amount each year based on inflation.

Because the withdrawals would at least partly consist of dividends and interest that continue to accrue, the entire amount withdrawn each year would not totally come out of the principal balance.

This post will explore this rule in more depth, including how it originated, misconceptions some people have about the rule, the potential risks associated with it, and whether it’s still a viable strategy today.

Origination of the 4% Rule

Many people think that the 4% rule ensures that a retiree won’t run out of money in their retirement, but Bengen came up with the 4% in rule in 1994, based on an analysis of investment data going back to 1926. Bengen used this historical data to determine the maximum safe withdrawal amount that a retiree could sustainably take out for each rolling 30-year time frame.

Because this withdrawal percentage reflects what has happened in the past, this may or may not accurately predict what will happen now and in the future.

Also, in 2005, Bergen revisited his calculations and expanded his sample portfolio to include small cap stocks. He found that with this additional asset class, he could increase the annual withdrawal amount, so it is now also referred to as the 4.5% rule.

Common 4% Rule Misconceptions

Many mistakenly believe that Bengen’s rule will ensure that a nest egg last all the way through retirement, but Bengen’s calculations, he was not determining a percentage that would help to ensure that someone’s retirement savings would last a lifetime. Instead, he was calculating what withdrawal level would result in retirement funds lasting a minimum of 30 years.

Another common misconception focuses on how to calculate the 4%, with some people believing that the percentage should be calculated each year at the current principal balance. In Bengen’s formula, it should only be calculated once, based on the principal balance of the retirement funds when the person first retires.

So, if the balance was $500,000 at the point of retirement, then the maximum annual withdrawals would be $20,000. If the starting balance was $1 million, then it would be $40,000, and so forth.

Here are two more things to consider: Bengen used sample portfolios that contained 50% stocks and 50% bonds.

Portfolios with different investments of varying percentages would likely have different results, depending on that portfolio’s risk level.

And, because success in this theory is defined as having money left over after 30 years—meaning, any money whatsoever—Bengen’s definition of success may not align with that of a typical retiree. For example, if, after 30 years, a retiree had $10 left in a retirement fund, then the 4% (or 4.5%) rule would be considered a success. Would a retiree who might live five years longer (or more!), without any more money to withdraw, consider this a successful management of funds?

Risks of the 4% Rule

One challenge associated with this rule, as noted above, is that it only addresses 30 years’ worth of time. So, if someone’s life expectancy goes beyond 30 years post-retirement they could find themselves out of money.

Other challenges can exist for retirees who have chosen investments that have higher risks than average ones. In that case, they may need to take a more conservative withdrawal approach, particularly in the years immediately following their retirement because a market downturn could have a bigger impact on the value of those portfolios.

If retirees take a larger withdrawal, especially early on, this lowers the principal in a way that will affect compound interest throughout retirement years. If this happens, then the retiree can’t simply pick up with the 4% rule from that point on. On the other hand, if a retiree spends much less in a given year, the rule doesn’t adjust for that either.

Is the 4% Rule Too Conservative?

Some financial professionals believe that the 4% rule is too conservative, assuming that the United States doesn’t experience a significant economic depression. Because of that, retirees may be too frugal with their retirement funds and not necessarily live life as fully as they could.

Others say, this rule doesn’t take into account any other sources of income retirees may have, such as Social Security, company pensions, or an inheritance.

So, what’s the right withdrawal strategy to take? It depends. The most appropriate withdrawal strategy for any individual will depend on their unique goals and financial picture.

Starting to Invest for Retirement

It’s never too early to start investing for retirement. This can be challenging for young professionals with other financial goals, including things like paying down student loans or saving up for a house downpayment.

Recommended: How Much Should I Have Saved by 30?

But, starting sooner rather than later can make a huge difference in accumulating savings, perhaps hundreds of thousands of dollars of a difference. And whether you follow the 4% rule or not, the more you have saved for retirement, the more you’ll be able to spend in those years.

To get yourself on track for retirement, consider putting your retirement savings in these accounts:

401(k) or other forms of workplace retirement plans

With a workplace plan, employees typically contribute part of a paycheck, using pre-tax dollars, up to $19,500 per year into their retirement account. Those age 50 and older can contribute an additional $6,500. Companies sometimes offer a “match,” which means that the employee’s contribution gets matched up to a certain percent by the employer. This account is tax deferred, meaning no taxes are paid on the funds until they are withdrawn. However, withdrawing these funds early—generally before age 59 ½,—could trigger an additional 10% early distribution tax.

SEP IRA, SIMPLE IRA or Solo 401(k)

These are retirement plan options for people who are self-employed.

Traditional IRA (individual retirement account)

This is a tax-deferred retirement account, one that’s not tied to the workplace. So, this is also an option used by freelancers and other self-employed people, as well as people who don’t have 401(k) accounts at work. Contribution limits for an IRA for people under age 50 are capped at $6,000 annually; those who are 50 or older can contribute up to $7,000 each year. This account also has a 10% tax penalty for early withdrawal.

Roth IRA

This is another form of retirement account that’s not connected to the workplace, and contribution limits are $6,000 annually. The taxation system for a Roth IRA, however, is different, with income taxes paid in advance on contributed money. But, when retirees withdraw funds, the money is not taxed. Not everyone qualifies for a Roth IRA (there are income limits) but it can be an option for those who are employed by a company as well as those who are self-employed.

Ways to Save for Retirement

If it seems challenging to save for retirement, given your other expenses, a good first step is to create a budget that works for your income and expenses, and includes contributions to a retirement account.

This should be a reasonable budget—meaning that it’s realistic, one that can be adhered to. It makes sense to review this budget regularly, perhaps every few months, and adjust as needed.

In situations where employers offer a 401(k) plan with a contribution match, then it can be a wise move to participate in this program. Matches, remember, are essentially free cash.

Also, consider which expenses you can cut back to make room for higher contributions. Are there online subscriptions or fee-based apps you can cancel? Can you get a better deal on your cell phone plan? Insurance policies?

Can you consolidate your credit cards into a lower-rate personal loan? Once you’ve paid off your credit card balance or personal loan, consider putting the money from those bills into the retirement account?

What about getting a side gig? You can use special skills, such as photography, copyediting, or cooking, to earn extra money that can go toward additional retirement contributions.

The Takeaway

At its core, the 4% rule represents a percentage that retirees are able to withdraw from their savings annually and have them last a minimum of 30 years. For example, someone following this rule could withdraw $20,000 a year from a $500,000 retirement account balance.

However, different people have different dreams for retirement. Some want to travel the world, while others want to spend time with family at home. Some may have other financial responsibilities, like helping a grandchild pay for college. What matters most is that each person plans for the retirement they want to experience.

Given those variations, 4% makes more sense as a guideline than as a hard-and-fast rule for retirees. Having as much flexibility as possible in planning for withdrawals, means saving as much as possible first. A starting place for many people is their workplace 401(k), but that’s not the only place you can save for retirement. Those who don’t have access to a workplace retirement account can save in an IRA or a plan for the self-employed.

You can start an IRA–or a taxable account–by opening an account on the SoFi Invest® brokerage platform. Use it to build a portfolio including stocks, exchange-traded funds, and even cryptocurrency. You can take a hands-on approach with Active Investing, or a hands-off one with Automated Investing. Plus, fractional shares allow you to start fractional share investing. You can select your favorite companies and invest in them, without needing to commit to buying a whole share.

Interested in investing in your retirement? SoFi offers many options, all with no trading fees.


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

Swing trading is a type of stock market trading that attempts to capitalize on short-term price momentum in the market. The swings can be to the upside or to the downside and typically from a couple days to roughly two weeks.

The difference between swing trading and day trading is time. Whereas day traders typically stay invested for minutes or hours, swing traders invest for several days or weeks. Meanwhile, swing trading is more short-term than investors who buy and hold onto stock for many months or years.

Here’s a closer look at swing trading as an investment strategy.

What Is Swing Trading?

Generally, a swing trader uses a mix of fundamental and technical analysis to identify short- and mid-term trends in the market. They can go both long and short in market positions, and use stocks, exchange-traded funds, and other market instruments that exhibit pricing volatility.

It is possible for a swing trader to hold a position for longer than a few weeks, though a position held for a month or more may actually be classified as trend trading.

A swing trading strategy is somewhere in between a day trading strategy and trend trading strategy. They have some methods in common but may also differ in some ways—so it’s important to know exactly which you plan to utilize.

Day Trading vs. Swing Trading

Like day traders, swing traders are highly interested in the volatility of the market.

Along with day traders and trend traders, swing traders are likely to analyze volatility charts and price trends to predict what a stock’s price is most likely to do next. This is using technical analysis to research stocks–a process that can seem complicated but is essentially trying to see if price charts can give clues on future direction.

The goal, then, is to identify patterns with meaning and accurately extrapolate this information to the future.

The strategy of a day trader and a swing trader may start to diverge in the attention they pay to a stock’s underlying fundamentals—the overall health of the company behind the stock.

Day traders aren’t particularly interested in whether a company stock is a “good” or “bad” investment—they are simply looking for short-term price volatility. But because swing traders spend more time in the market, they may also consider the general trajectory of a company’s growth.

Pros and Cons of Swing Trading

Pros of Swing Trading

To understand the benefits of swing trading, it helps to understand the benefits of long-term investing—which may actually be the more suitable strategy for some investors.

The idea behind set-it-and-forget-it, buy-and-hold strategies is quite simply that stock markets tend to move up over long periods of time. Also, unlike trading, it is not zero-sum, meaning that all participants can potentially profit by simply remaining invested for the maximum amount of time possible.

Further, long-term investing may require less time and effort. Dips in the market can provide opportunity to buy in, but methodical and regular investing is generally regarded higher than any version of attempting to short-term time the market.

Swing trading exists on the other end of the time-and-effort continuum, although it generally requires much less effort and attention than day trading. (Whereas day traders must keep a minute by minute watch on the market throughout the trading days, swing trading does not require that eyes be glued to the screen.)

Income

Compared to long-term investing, swing trading may create more opportunity for an investor to actively generate income.

Most long-term investors intend to keep their money invested—including profits—for as long as possible. Swing traders are using the short-term swings in the market to generate profit that could be used as income.

Greater Profits

Next, there is the potential to generate returns beyond a passive market strategy. If an investor’s only goal is to simply return the stock market’s average, this is easy to accomplish with a passive index strategy.

Investors who are interested in generating additional profit, or want to do so on an expedited timeline, may be interested in finding additional ways to increase risk in order to generate returns. (Whether an investor is successfully able to do this is another question altogether.)

Avoidance of Dips

Last, it may be possible for swing traders to avoid some downside.

Long-term investors remain invested through all market scenarios, which includes downturns. Because swing traders are participating in the market only when they see opportunity, it may be possible to avoid the biggest dips.

Cons of Swing Trading

Though there is certainly the potential to earn a pretty penny via swing trading, there’s also a substantial risk of losing money—and even going into debt.

As with any investment strategy, risk and reward are intrinsically related. For as much potential as there is to earn a rate of return, there is potential to lose money. Therefore it is smart to be completely aware—and comfortable—with the risks, no matter which investing strategy you decide to use.

Expense

Don’t trade (or invest) money that you can’t afford to lose.

Additionally, it can be quite expensive to swing trade. Although brokerage commissions won’t be quite as high as they would be for day traders, they can be substantial.

In order to profit, traders will need to out-earn what they are spending to engage in swing trading strategies. That requires being right more often than not and doing so at a margin that outpaces any losses.

Time

Swing trading might not be as time-consuming or as stressful as day trading, but it can certainly be both. Many swing traders are researching and trading every day, if not many times a day.

What can start as a hobby can easily morph into another job, so be honest if that’s the life that you want.

Efficacy

Within the investing community, there is significant debate as to whether the stock market can be timed on any sort of regular or consistent basis.

In the short term, stock prices do not necessarily move on fundamental factors that can be researched.

Predicting future price moves is nothing more than just that: trying to predict the future. Short of having a crystal ball, this is supremely difficult to do.

Swing Trading Strategies

Each investor will want to research their own preferred swing trading strategy, as there is not one single method. It might help to designate a specific set of rules. Not every trade will work in your favor, but that does not mean the strategy is broken.

Channel Trading

One such popular strategy is channel trading. Channel traders assume that each stock is going to trade within a certain range of volatility, called a channel.

In addition to accounting for the ups and downs of short-term volatility, channels tend to move in a general trajectory. Channels can trend in flat, ascending, or descending directions, or a combination of these directions.

When picking stocks for a swing trading strategy using channels, you might buy a stock at the lower range of its price channel, called the support level. This is considered an opportune time to buy.

When a stock is trading at higher prices within the channel, called the resistance level, swing traders tend to believe that it is a good time to sell or short a stock.

MACD

Another method used by swing traders is moving average convergence/divergence.

The MACD indicator looks to identify momentum by subtracting a 26-period exponential moving average from the 12-period EMA.

Traders are seeking a shift in acceleration that may indicate that it is time to make a move.

Other Strategies

This is not a complete list of the types of technical analysis that traders may integrate into their strategies.
Additionally, traders may look at fundamental indicators such as SEC filings and special announcements, or watch industry trends, regulation, etc., that may affect the price of a stock.

Similarly, they may watch the news or reap information from online sources to get a sense of general investor sentiment.

Traders can use multiple swing trading methods simultaneously or independent from one another.

The Takeaway

Swing traders, who invest for days or weeks, use different strategies to try to reap rewards greater or faster than they might with long-term investing. There is no one surefire method, but it might be best to find a strategy and stick with it.

SoFi Invest® offers educational content as well as access to financial planners. The Active Investing platform lets investors choose from an array of stocks, ETFs or fractional shares. For a limited time, opening an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is sign up, play the claw game, and find out how much you won.

Ready to place a trade? Get started with SoFi Invest.



SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Claw Promotion: For the full terms and conditions of SoFi’s Claw Promotion, click here. Probability of a customer receiving $1,000 is 0.028%.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.

Stock Bits
Stock Bits is a brand name of the fractional trading program offered by SoFi Securities LLC. When making a fractional trade, you are granting SoFi Securities discretion to determine the time and price of the trade. Fractional trades will be executed in our next trading window, which may be several hours or days after placing an order. The execution price may be higher or lower than it was at the time the order was placed.

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.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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