What Is a Senior Checking Account?

What Is a Senior Citizen Checking Account?

A senior checking account usually comes with unique perks designed to provide support to senior citizens. As we get older our needs change, including our financial needs. That’s why some financial institutions offer these accounts, known as senior checking accounts.

So what exactly is a senior checking account? What perks does it offer and what are the possible downsides? And is it worth it vs. a regular checking account . We’ll fill you in on all of that, plus how to find a senior citizen checking account if you think it’s right for you.

How Does a Senior Checking Account Work?

A checking account, often simply referred to as a bank account, is a type of deposit account that gives consumers a place to safely store their money while still being able to easily access it and spend it. With a checking account, it’s possible to make purchases or payments with a debit card or a check.

So, what is a senior checking account then? A senior checking account functions the same as a normal checking account, but is designed for consumers of a certain age (usually in retirement).

What Is the Difference Between a Senior Checking Account and a Normal Checking Account?

Overall, senior checking accounts serve the same purpose as a normal checking account. However, a senior checking account may have certain age requirements and can come with unique benefits and senior discounts designed to provide support to senior citizens. Some of these benefits may include:

•   Free checks

•   No minimum balance requirement

•   No monthly service charges

•   No transaction fees

•   No statement processing fees

•   Waived CD penalties

These types of perks make it easier for senior citizens to manage their financial life.

Pros of a Senior Checking Account

A senior checking account enjoys the same advantages as a normal checking account, as well as additional perks.

•   Unique perks. Eligible account holders can enjoy special perks like free checks, and no minimum balance requirement, monthly service charges, or transaction fees.

•   Earn interest. It’s not guaranteed everywhere, but some senior checking accounts allow account holders to earn interest.

•   Secure. Thanks to FDIC insurance, funds stored in a checking account (up to a certain amount) are safe and secure.

•   Accessible. It’s super easy to access money stored in a checking account. Account holders can make as many withdrawals as they like in a variety of different ways including by visiting a bank, using a debit card at an ATM, writing a check, and making an online bank transfer.

•   Debit card. Typically, checking accounts come with debit cards which make it easy to pay for purchases without having cash on hand.

•   Direct deposits. Instead of waiting for paper checks in the mail, account holders can set up convenient direct deposits.

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Cons of a Senior Checking Account

Of course, there are also disadvantages associated with senior checking accounts. Here are some to mull over:

•   Age requirements. Senior checking accounts often have age requirements, such as age 55 and over. Some banks require age 62 and up. It can be challenging to find one if below a certain age.

•   No interest. As briefly mentioned above, it is possible to earn interest with a checking account, but it’s fairly rare. Keeping money in a savings account can make it easier to earn interest.

•   Fees. While senior checking accounts tend to charge fewer or lower fees, they can come with account management fees, overdraft fees, and other fees.

•   Minimum balance. Again, some senior checking accounts don’t require a minimum balance, but some may.

How Can I Apply for a Senior Citizen Checking Account?

The process of opening a checking account for senior citizens looks the same as opening a normal checking account, but the applicant may be required to prove they are a certain age to be eligible.

While all banks and credit unions will have their own unique process for opening an account, consumers can generally expect to take the following steps to open a senior citizen checking account.

•   Complete the application. During the application process it is typical to provide identity and contact information during this stage.

•   Designate beneficiaries. Once their application is approved, they will need to choose a beneficiary for their account in the event they pass away.

•   Deposit funds. As briefly noted, some senior citizen checking accounts will require a minimum account balance, so the applicant may need to deposit that amount to open their account.

Is a Senior Checking Account Worth It Over a Normal Checking Account?

If someone is old enough to qualify for a senior checking account, it is likely worth it for them to choose this type of deposit account over a normal checking account. Both senior checking accounts and normal checking accounts share the same disadvantages, but senior checking accounts come with unique perks that regular checking accounts often don’t include, such as free checks and minimal fees.

Things to Consider When Looking for a Senior Citizen Checking Account

Before opening a senior checking account, here are a few helpful things to keep in mind.

•   Convenience. Scope out the bank’s features to make sure it’s super simple to use. Is it also possible to have a savings account at the bank or credit union offering a senior citizen checking account? Having both a checking account and savings account in one place is usually easier. Do they have a bank location nearby? Is their website a breeze to use? Keep convenience in mind when choosing where to open a new senior citizen checking account.

•   Bank type. Everyone has their preferences when it comes to banking. Take some time to consider if a traditional bank, credit union, or online bank is the best fit.

•   Features. Compare a few different senior citizen checking account options. What perks do they offer? Do they have a mobile app? What other financial products and tools do they offer?

•   Fees. Senior citizen checking accounts tend to have fewer fees than typical checking accounts. Still, it’s worth comparing the different fees each account charges.

The Takeaway

If you or a loved one is 55 or older, a senior bank account can offer unique advantages compared to typical checking accounts. Fees can be lower, you might earn a bit of interest, and checks may be free. All in all, if someone is old enough to qualify, they can likely enjoy a lot more perks with a senior citizen checking account.

Looking for a new bank with a lot of perks? Check out SoFi. If you open an online bank account with direct deposit, you’ll earn a terrific 1.25% APY, pay no account fees, and get a debit card that can deliver up to 15% cash back at local establishments when you use it to pay.

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FAQ

What is senior banking?

Senior bank accounts function the same way normal banking does. The only difference between banking products and services designed for senior citizens is that they offer unique perks suited for their life stage — such as not requiring a minimum account balance.

Which banks have the best checking accounts?

Getting the best checking account depends on the features that matter most to you. That said, online banks tend to have the same benefits since they don’t need to pay for bricks and mortar locations and pass the savings along to their customers with fewer fees and better APYs. Similarly, because credit unions are not-for-profit organizations owned by their members, they tend to pass their profits off to customers in the forms of lower fees and higher interest rates.

What is the age restriction for senior checking accounts?

The age restrictions for senior bank accounts depend on each bank and credit union that offers this type of account. They often range from a minimum age requirement of 55 to 62.


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Target Date Funds: What Are They and How to Choose One

A target date fund is a type of mutual fund designed to be an all-inclusive portfolio for long-term goals like retirement. While target date funds could be used for shorter-term purposes, the specified date of each fund — e.g. 2040, 2050, 2065, etc. — is typically years in the future, and indicates the approximate point at which the investor would begin withdrawing funds for their retirement needs (or another goal, like saving for college).

Unlike a regular mutual fund, which might include a relatively static mix of stocks and bonds, the underlying portfolio of a target date fund shifts its allocation over time, following what is known as a glide path. The glide path is basically a formula or algorithm that adjusts the fund’s asset allocation to become more conservative as the target date approaches, thus protecting investors’ money from potential volatility as they age.

If you’re wondering whether a target date fund might be the right choice for you, here are some things to consider.

What Is a Target Date Fund?

A target date fund (TDF) is a type of mutual fund where the underlying portfolio of the fund adjusts over time to become gradually more conservative until the fund reaches the “target date.” By starting out with a more aggressive allocation and slowly dialing back as years pass, the fund’s underlying portfolio may be able to deliver growth while minimizing risk.

This ready-made type of fund can be appealing to those who have a big goal (like retirement or saving for college), and who don’t want the uncertainty or potential risk of managing their money on their own.

While many college savings plans offer a target date option, target date funds are primarily used for retirement planning. The date of most target funds is typically specified by year, e.g. 2035, 2040, and so on. This enables investors to choose a fund that more or less matches their own target retirement date. For example, a 30-year-old today might plan to retire in 38 years at age 68, or in 2060. In that case, they might select a 2060 target date fund.

Investors typically choose target date funds for retirement because these funds are structured as long-term investment portfolios that include a ready-made asset allocation, or mix of stocks, bonds, and/or other securities. In a traditional portfolio, the investor chooses the securities — not so with a target fund. The investments within the fund, as well as the asset allocation, and the glide path (which adjusts the allocation over time), are predetermined by the fund provider.

Sometimes target date funds are invested directly in securities, but more commonly TDFs are considered “funds of funds,” and are invested in other mutual funds.

Target date funds don’t provide guaranteed income, like pensions, and they can gain or lose money, like any other investment.

Whereas an investor might have to rebalance their own portfolio over time to maintain their desired asset allocation, adjusting the mix of equities vs. fixed income to their changing needs or risk tolerance, target date funds do the rebalancing for the investor. This is what’s known as the glide path.

How Do Target Date Funds Work?

Now that we know what a target date fund is, we can move on to a detailed consideration of how these funds work. To understand the value of target date funds and why they’ve become so popular, it helps to know a bit about the history of retirement planning.

Brief Overview of Retirement Funding

In the last century or so, with technological and medical advances prolonging life, it has become important to help people save additional money for their later years. To that end, the United States introduced Social Security in 1935 as a type of public pension that would provide additional income for people as they aged. Social Security was meant to supplement people’s personal savings, family resources, and/or the pension supplied by their employer (if they had one).

💡 Recommended: When Will Social Security Run Out?

By the late 1970s, though, the notion of steady income from an employer-provided pension was on the wane. So in 1978 a new retirement vehicle was introduced to help workers save and invest: the 401(k) plan.

While 401k accounts were provided by employers, they were and are chiefly funded by employee savings (and sometimes supplemental employer matching funds as well). But after these accounts were introduced, it quickly became clear that while some people were able to save a portion of their income, most didn’t know how to invest or manage these accounts.

The Need for Target Date Funds

To address this hurdle and help investors plan for the future, the notion of lifecycle or target date funds emerged. The idea was to provide people with a pre-set portfolio that included a mix of assets that would rebalance over time to protect investors from risk.

In theory, by the time the investor was approaching retirement, the fund’s asset allocation would be more conservative, thus potentially protecting them from losses. (Note: There has been some criticism of TDFs about their equity allocation after the target date has been reached. More on that below.)

Target date funds became increasingly popular after the Pension Protection Act of 2006 sanctioned the use of auto-enrollment features in 401k plans. Automatically enrolling employees into an organization’s retirement plan seemed smart — but raised the question of where to put employees’ money. This spurred the need for safe-harbor investments like target date funds, which are considered Qualified Default Investment Alternatives (QDIA) — and many 401k plans adopted the use of target date funds as their default investment.

Today nearly all employer-sponsored plans offer at least one target date fund option; some use target funds as their default investment choice (for those who don’t choose their own investments). Approximately $1.8 trillion dollars are invested in target funds, according to Morningstar.

What a Target Date Fund Is and Is Not

Target date funds have been subject to some misconceptions over time. Here are some key points to know about TDFs:

•   As noted above, target date funds don’t provide guaranteed income; i.e. they are not pensions. The amount you withdraw for income depends on how much is in the fund, and an array of other factors, e.g. your Social Security benefit and other investments.

•   Target date funds don’t “stop” at the retirement date. This misconception can be especially problematic for investors who believe, incorrectly, that they must withdraw their money at the target date, or who believe the fund’s allocation becomes static at this point. To clarify:

◦   The withdrawal of funds from a target date fund is determined by the type of account it’s in. Withdrawals from a TDF held in a 401k plan or IRA, for example, would be subject to taxes and required minimum distribution (RMD) rules.

◦   The TDF’s asset allocation may continue to shift, even after the target date — a factor that has also come under criticism.

•   Generally speaking, most investors don’t need more than one target date fund. Nothing is stopping you from owning one or two or several TDFs, but there is typically no need for multiple TDFs, as the holdings in one could overlap with the holdings in another — especially if they all have the same target date.

Example of a Target Date Fund

Most investment companies offer target date funds, from Black Rock to Vanguard to Charles Schwab, Fidelity, Wells Fargo, and so on. And though each company may have a different name for these funds (a lifecycle fund vs. a retirement fund, etc.), most include the target date. So a Retirement Fund 2050 would be similar to a Lifecycle Fund 2050.

How do you tell target date funds apart? Is one fund better than another? One way to decide which fund might suit you is to look at the glide path of the target date funds you’re considering. Basically, the glide path shows you what the asset allocation of the fund will be at different points in time. Since, again, you can’t change the allocation of the target fund — that’s governed by the managers or the algorithm that runs the fund — it’s important to feel comfortable with the fund’s asset allocation strategy.

How a Glide Path Might Work

Consider a target date fund for the year 2060. Someone who is about 30 today might purchase a 2060 target fund, as they will be 68 at the target date.

Hypothetically speaking, the portfolio allocation of a 2060 fund today — 38 years from the target date — might be 80% equities and 20% fixed income or cash/cash equivalents. This provides investors with potential for growth. And while there is also some risk exposure with an 80% investment in stocks, there is still time for the portfolio to recover from any losses, before money is withdrawn for retirement.

When five or 10 years have passed, the fund’s allocation might adjust to 70% equities and 30% fixed income securities. After another 10 years, say, the allocation might be closer to 50-50. The allocation at the target date, in the actual year 2060, might then be 30% equities, and 70% fixed income. (These percentages are hypothetical.)

As noted above, the glide path might continue to adjust the fund’s allocation for a few years after the target date, so it’s important to examine the final stages of the glide path. You may want to move your assets from the target fund at the point where the predetermined allocation no longer suits your goals or preferences.

Pros and Cons of Target Date Funds

Like any other type of investment, target date funds have their advantages and disadvantages.

Pros

•   Simplicity. Target funds are designed to be the “one-stop-shopping” option in the investment world. That’s not to say these funds are perfect, but like a good prix fixe menu, they are designed to include the basic staples you want in a retirement portfolio.

•   Diversification. Related to the above, most target funds offer a well-diversified mix of securities.

•   Low maintenance. Since the glide path adjusts the investment mix in these funds automatically, there’s no need to rebalance, buy, sell, or do anything except sit back and keep an eye on things. But they are not “set it and forget it” funds, as some might say. It’s important for investors to decide whether the investment mix and/or related fees remain a good fit over time.

•   Affordability. Generally speaking, target date funds may be less expensive than the combined expenses of a DIY portfolio (although that depends; see below).

Cons

•   Lack of control. Similar to an ordinary mutual fund or exchange-traded fund (ETF), investors cannot choose different securities than the ones available in the fund, and they cannot adjust the mix of securities in a TDF or the asset allocation. This could be frustrating or limiting to investors who would like more control over their portfolio.

•   Costs can vary. Some target date funds are invested in index funds, which are passively managed and typically very low cost. Others may be invested in actively managed funds, which typically charge higher expense ratios. Be sure to check, as investment costs add up over time and can significantly impact returns.

What Are Target Date Funds Good For?

If you’re looking for an uncomplicated long-term investment option, a low-cost target date fund could be a great choice for you. But they may not be right for every investor.

Good For…

Target date funds tend to be a good fit for those who want a hands-off, low-maintenance retirement or long-term investment option.

A target date fund might also be good for someone who has a fairly simple long-term strategy, and just needs a stable portfolio option to fit into their plan.

In a similar vein, target funds can be right for investors who are less experienced in managing their own investment portfolios and prefer a ready-made product.

Not Good For…

Target date funds are likely not a good fit for experienced investors who enjoy being hands on, and who are confident in their ability to manage their investments for the long term.

Target date funds are also not right for investors who are skilled at making short-term trades, and who are interested in sophisticated investment options like day-trading, derivatives, cryptocurrencies, and more.

Investors who like having control over their portfolios and having the ability to make choices based on market opportunities might find target funds too limited.

The Takeaway

Target date funds can be an excellent option for investors who aren’t geared toward day-to-day portfolio management, but who need a solid long-term investment portfolio for retirement — or another long-term goal like saving for college. Target funds offer a predetermined mix of investments, and this portfolio doesn’t require rebalancing because that’s done automatically by the glide path function of the fund itself.

The glide path is basically an asset allocation and rebalancing feature that can be algorithmic, or can be monitored by an investment team — either way it frees up investors who don’t want to make those decisions. Instead, the fund chugs along over the years, maintaining a diversified portfolio of assets until the investor retires and is ready to withdraw the funds.

Target funds are offered by most investment companies, and although they often go by different names, you can generally tell a target date fund because it includes the target date, e.g. 2040, 2050, 2065, etc.

If you’re ready to start investing for your future, you might consider opening a brokerage account with SoFi Invest® in order to set up your own portfolio and learn the basics of buying and selling stocks, bonds, exchange-traded funds (ETFs), crypto and more. Note that SoFi members have access to complimentary financial advice from professionals.


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.
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Typical Retirement Expenses to Prepare for

Many people dream about how their retirement years will play out. Some want to spend their golden years spoiling the grandkids, while others envision traveling the world. As long as retirees have saved enough during their working years to fund the expenses, these goals are attainable.

Unfortunately, not all Americans know what to expect regarding living expenses during their retirement years. They may not know how to budget for ordinary costs in retirement, like housing and transportation, or make the most out of retirement income. Here’s a look at typical retirement expenses so individuals can get a handle on how much they’re likely to spend and how much they need to budget for retirement.

Average Retirement Expenses by Category

According to the Bureau of Labor Statistics, an American household headed by someone aged 65 and older spent an average of $48,791 per year, or $4,065.95 per month, between 2016 and 2020. More specifically, households headed by someone between the ages of 65 and 74 spent $53,916 annually during these five years, while spending dropped to $41,637 annually for people aged 75 and older.

The typical budget for retirees needs to cover that amount every year for a retirement that could stretch over two or three decades.

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Retirees usually spent less than the American average, which was $60,593 per year, or $5,049.42 per month. Retirees also less than people nearing retirement, those aged 55 to 64, who spent $65,392 annually between 2016 and 2020.

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

Housing

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

average housing expenses during retirement

From 2016 through 2020, Americans aged 65 and older spent an average of $16,880 annually, or $1,406.68 per month, on housing-related costs.

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

Transportation

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

average transportation expenses during retirement

Americans spent an average of $11,910 per year getting from point A to point B between 2016 and 2020, but retirees spent a little less. Those over age 65 spent an average of $7,062 annually on transportation, or $588.50 per month. People aged 65 to 74 spent $8,497 per year, and people 75 and older spent $5,073 per year. These numbers cover everything from buying a car to filling up the gas tank and could be significantly higher for those who spend a lot of time traveling.

Retirees who don’t own a car may still need to factor the cost of public transportation into their annual retirement costs. Buses, subways, and other public transportation sources cost older generations $526.80 per year.

Healthcare

Americans’ healthcare costs — including health insurance, medical services, medical supplies, and prescription drugs — increase as they grow older. With age comes aching joints, injuries from falling, and sometimes chronic diseases like arthritis, diabetes, or Alzheimer’s. Americans spent an average of $4,976 on healthcare annually between 2016 and 2020, but this is one area where retirees spend more than their younger peers.

average healthcare expenses during retirement

People over age 65 spent an average of $6,583 per year, or $548.62 per month, on healthcare from 2016 through 2020. Costs vary from person to person depending on their genetics, injuries, and lifestyle choices. For example, if heart disease runs in the family or you are a smoker, you may want to save extra for retirement healthcare costs.

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

Food

Households run by someone age 65 or older spent $6,207 annually, or $517.23 monthly, buying food from 2016 through 2020. Those aged 65 to 74 spent $6,864 per year, and those over 75 spent $5,274. These food expenses include groceries, alcohol expenditures, and meals eaten at restaurants.

average food expenses during retirement

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

Entertainment

Having fun isn’t just for the young. From 2016 through 2020, people over 65 spent an average of $2,527 annually on entertainment, or $210.55 monthly, on fees and admissions to places like museums, theater performances, and movies. Entertainment expenses also include hobbies and pet costs.

average entertainment expenses during retirement

People aged 65 to 74 spent $3,080 per year on entertainment during the past five years. However, once they hit age 75, spending on entertainment dropped to $1,749 annually, perhaps as mobility decreased.

5 Steps to Set Up a Retirement Budget

Once you have an idea of potential retirement expenses, you can start to save and comprehensively budget for them. Since every retirement looks different, there is no average retirement budget. Nonetheless, these are the steps to create a budget that may work for you.

Step 1. Contribute to a Retirement Account

You may already have retirement savings in your company-sponsored 401(k) or a similar retirement plan. But those who don’t have access to a 401k or want to increase their savings can also save in an individual retirement account like a Traditional IRA or Roth IRA. These accounts can provide tax-advantaged ways to start retirement with adequate savings to build a budget.

💡 Recommended: 5 Steps to Investing in Your 401k Savings Account

Step 2: Make a List of Expected Monthly Expenses

Most expenses can fit into one of three categories: fixed, variable, and one-time.

Fixed expenses are payments that occur regularly and stay the same from month to month, like mortgage/rent payments, property taxes, and car payments.

Variable expenses change from month to month, depending on personal usage and price fluctuations. Standard variable costs include utility bills and groceries. Likewise, any entertainment expenses, medical expenses, pet care, and personal care expenses may be variable.

💡 Recommended: Fixed Expense vs Variable Expense

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

To get an idea of your various expenses, gather payment information from bank statements, credit card statements, receipts, and bills. Take a look at what you spend now, then deduct expenses you won’t have at retirement (perhaps you’ll eliminate a car payment or pay off your mortgage). Then you can tally what’s left to get an estimate of your projected expenses and build a line-item budget.

Step 3: Estimate Retirement Income

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

Step 4: Compare Expected Expenses to Expected Income

In an ideal world, your expected income will be a larger number than your expected Ideally, your expected income will be larger than your projected expenses. If this is not the case, you can remedy this issue by reducing costs or increasing income.

To reduce expenses, you may consider downsizing your home or going from owning two cars to one. You may also consider streamlining entertainment expenses as a better way to cut costs.

To increase income, you may consider taking on a part-time job when you retire or look to passive income sources to boost the money that you have to spend during retirement.

Step 5: Figure Out When You Can Retire

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

Is your retirement piggy bank feeling light?

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The Takeaway

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

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

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


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.
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How Much Should I Contribute to My 401(k)?

Once you set up your retirement plan at work, the next natural question is: How much should I put in my 401(k)? While there’s no ironclad answer for how much to save in your employer-sponsored plan, there are some important guidelines that can help you set aside the amount that’s right for you: e.g. the tax implications, your employer match (if there is one), your own retirement goals, and more.

Here’s what you need to think about when deciding how much to contribute to your 401k.

How Much Can You Contribute to a 401(k)?

There are several factors to consider when weighing how much to contribute to a 401k account, which are detailed in the sections below. The main thing to consider off the bat, however, are the IRS contribution limits themselves.

The IRS may change the retirement contribution limits and other parameters of various retirement accounts from time to time, so it’s always a good idea to double check before you decide how much you want to contribute.

2022 vs 2021 401(k) Contribution Limits

Like most tax-advantaged retirement plans — e.g. 403bs, 457 plans, different types of IRAs — 401k plans come with caps on how much you can contribute. The IRS puts restrictions on the amount that you, the employee, can save in your 401k; plus there is a cap on total employee-plus-employer contributions.

For 2021 the contribution limit is $19,500, with an additional $6,500 catch-up provision for those 50 and older, for a total of $26,000. The combined employer-plus-employee contribution limit for 2021 is $58,000 ($64,500 with the catch-up amount).

For 2022, you can save up to $20,500 in your 401k — a $1,000 increase. The catch-up amount is unchanged at $6,500, for a total of $27,000 if you’re 50 and up. The employer-employee max is $61,000 for 2022; it’s $67,500 with the catch-up amount.

401(k) Contribution Limits 2021 vs 2022

2021

2022

Basic contribution $19,500 $20,500
Catch-up contribution $6,500 $6,500
Total + catch-up $26,000 $27,000
Employer + Employee maximum contribution $58,000 $61,000
Employer + employee max + catch-up $64,500 $67,500

How Much Should You Put Toward a 401(k)?

Next you may be wondering, Ok, those are the limits, but how much should I put in my 401k?

One rule-of-thumb is to save at least 10% of your annual income for retirement. So if you earn $100,000, you’d aim to set aside at least $10,000. But 10% is only a general guideline. In some cases, depending on your income and other factors, 10% may not be enough to get you on track for a secure retirement, and many experts suggest aiming for 15% or even 20% — to make sure your savings will last given the cost of living longer.

In addition, you may want to consider the following:

•   Are you the sole or primary household earner?

•   Are you saving for your retirement alone, or for your spouse’s/partner’s retirement as well?

•   When do you and your spouse/partner want to retire?

If you are the primary earner, and the amount you’re saving is meant to cover retirement for two, that’s a different equation than if you were covering just your own retirement. In this case, you might want to save more than 10%.

However, if you’re not the primary earner and/or your spouse also has a retirement account, setting aside 10% might be adequate. For example, if the two of you are each saving 10%, for a combined 20% of your gross income, that may be sufficient for your retirement needs.

All of this should be considered in light of when you hope to retire, as that deadline would also impact how much you might save as well as how much you might need to spend.

Here are some other factors that should be weighed carefully as you decide how much to save in a 401k.

Factors That May Impact Your Decision

Before you decide to go with the general rule-of-thumb above, it’s wise to think about taxes, your employer contribution, your own goals, and more.

1. The Tax Effect

The key fact to remember about 401k plans is that they are tax-deferred accounts, and they are considered qualified retirement plans under ERISA (Employment Retirement Income Security Act) rules.

That means: The money you set aside is typically deducted from your paycheck pre-tax, and it grows in the account tax free — but you pay taxes on any money you withdraw. (In most cases, you’ll withdraw the money for retirement expenses, but there are some cases where you might have to take an early 401(k) withdrawal. In either case, you’ll owe taxes on those distributions, as they’re called.)

The tax implications are important here because the money you contribute effectively reduces your taxable income for that year, and potentially lowers your tax bill.

Let’s imagine that you’re earning $100,000 per year, and you’re able to save the full $20,500 allowed by the IRS for 2022. Your taxable income would be reduced from $100,000 to $79,500, thus putting you in a lower tax bracket.

2. The Employer Match

Some employers offer a matching contribution, where they “match” part of the amount you’re saving and add that to your 401k account. A common employer match might be 50% up to the first 6% you save.

In that scenario, let’s say you save 10% of your $100,000 salary, or $10,000 per year. But your employer might match 50% of the first 6% ($6,000), which comes to $3,000. So the total would be $13,000.

If your employer does offer a match, you likely want to save at least up to the matching amount, so you get the full employer contribution. It’s free money, as they say.

3. Your Retirement Goals

What sort of retirement do you envision for yourself? Even if you’re years away from retirement, it’s a good idea to sit down and imagine what your later years might look like. These retirement dreams and goals can inform the amount you want to save.

Goals may include thoughts of travel, moving to another country, starting your own small business, offering financial help to your family, leaving a legacy, and more.

You may also want to consider health factors, as health costs and the need for long-term care can be a big expense as you age.

4. Do You Have Debt?

It can be hard to prioritize saving if you have debt. You may want to pay off your debt as quickly as possible, then turn your attention toward saving for the future.

The reality is, though, that debt and savings are both priorities and need to be balanced. It’s not ideal to put one above the other, but rather to find ways to keep saving even small amounts as you work to get out of debt.

Then, as you pay down the money you owe — whether from credit cards or student loans or another source — you can take the cash that frees up and add that to your savings.

Consider 401(k) Alternatives Like an IRA

You don’t have to limit your savings to your 401k. You may also be able to save in other retirement vehicles, like a traditional IRA or Roth IRA.

Can you contribute to 401k and IRA plans simultaneously? For example, if you’re already contributing to a 401k plan at work, you may be wondering if you can also save money in an IRA.

Or maybe you opened an IRA in college, but now you’re starting your career and have access to a 401k. Does it make sense to keep making contributions if you’ll soon be enrolled in your employer’s retirement plan?

Contributing to a Traditional IRA and a 401(k)

The short answer is yes, according to the IRS you can contribute to a 401k at work and a traditional IRA. But there are limits on the amount of IRA contributions you can deduct in this scenario. You can deduct the full amount of your IRA contributions if:

•   You file single or head of household and your modified adjusted gross income (MAGI) is $68,000 or less.

•   You’re married filing jointly, or a qualifying widow(er), with a MAGI of $109,000 or less.

For incomes over these limits, the amount you can deduct phases out gradually.

Contributing to a Roth IRA and a 401(k)

Can you have a Roth IRA and a 401k? You fund a Roth IRA with after-tax dollars, meaning you don’t get the benefit of deducting the amount you contribute from your current year’s taxes. The upside of Roth accounts, though, is that qualified withdrawals in retirement are tax free.

But there’s a catch: Your ability to contribute to a Roth IRA is based on your income. So how much you earn — not necessarily whether you have a 401k at work — could be a deciding factor in answering the question, can you have a Roth IRA and 401k at the same time.

The rules for combining a 401k account with an IRA can be complicated. It’s best to consult a professional.

The Takeaway

Many people wonder: How much should I contribute to my 401k? There are a number of factors that will influence your decision. First, there are the contribution limits imposed by the IRS. In 2022, the maximum contribution you can make to your 401k is $20,500, plus an additional $6,500 catch-up contribution if you’re 50 and up.

While few people can start their 401k journey by saving quite that much, it’s also possible to follow the common guideline and save 10% of your income. From there, you can work up to saving the max. In fact, many plans offer an automatic savings increase that bumps up your savings rate by a small amount, like 1% per year.

In addition, you’ll want to consider whether your employer offers a matching contribution — and at least save that amount, to get the additional funds from your company.

Of course, the main determination of the amount you need to save is what your goals are for the future. This is where you should focus, because saving is never easy. But by contemplating what you want to spend money on now, and the quality of life you’d like when you’re older, you can make trade-offs.

If you’re ready to open an IRA or start investing for retirement on your own, it’s easy when you open a SoFi Invest® account. You can trade stocks, exchange-traded funds (ETFs), fractional shares, even cryptocurrency. And SoFi members are entitled to complimentary financial advice from professionals who can help answer your questions.


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.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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What Is a Salary Reduction Contribution Plan?

What Is a Salary Reduction Contribution Plan?

A salary reduction contribution plan allows employees to reduce their taxable income by investing for retirement. So an employee’s salary isn’t really reduced; rather the employer deducts a percentage of their salary and deposits the funds in a retirement savings plan so the money can grow tax deferred.

Common employer-sponsored retirement plans include 401(k)s, 403(b)s, and SIMPLE IRAs. Employee contributions — also called elective deferral contributions — are typically made with pre-tax money, effectively reducing the participant’s taxable income and often lowering their tax bill. Some plans feature an after-tax Roth contribution option, too.

You may already be contributing to a salary reduction plan, although your company may not call it that. These plans can be a valuable way to boost your retirement savings, and offer you a tax break. Here’s what you need to know.

Salary Reduction Contribution Plans Explained

A salary reduction plan helps workers save and invest for retirement through their employer via several types of retirement accounts. Money is typically deposited in a retirement account such as a 401k, 403b, or SIMPLE IRA on a pre-tax basis through recurring deferrals (a.k.a. contributions) on behalf of the employee.

Employees typically select the percentage they wish to deposit, e.g. 3%, 10%, or more. That percentage is deducted from an employee’s paycheck automatically, and deposited in their retirement account. Sometimes a specific dollar amount is established as the salary reduction contribution amount.

The upshot for the worker is that they can delay paying taxes on the amount of the salary reduction for many years, until they withdraw money from the account during retirement. Like a traditional 401k or 403b, these accounts can be tax deferred; Roth options are considered after tax (because you deposit after-tax funds, but pay no tax on withdrawals). Retirement contributions can offer decades of compounded investment growth without taxation. Essentially, retirement contributions through an employer’s plan means saving money from your salary.

There are also SIMPLE IRA salary reduction agreements sometimes offered by small businesses with 100 or fewer employees: “SIMPLE” is short for “Savings Incentive Match Plan for Employees.”

A Salary Reduction Simplified Employee Pension Plan (SARSEP), on the other hand, is a simplified employee pension plan established before 1997.

How Salary Reduction Contribution Plans Work

Salary reduction contribution plans are established between a worker and their employer. The two parties agree to have a set percentage or a dollar amount taken from the employee’s salary and deposited into a tax-advantaged retirement plan. That money can then be invested in stock or bond mutual funds, or other investments offered by the plan.

With pre-tax contributions, the employee has a reduced paycheck but captures current-year tax savings. With after-tax contributions, as in a Roth account, taxes are paid today while the account can potentially grow tax-free through retirement; withdrawals from a Roth account are tax free.

Example of a Salary Reduction Contribution Plan

Here’s an example of how a salary reduction plan contribution agreement might work:

Let’s say an employee at a university has a $100,000 salary and wishes to save 10% of their pay in a pre-tax retirement account. The school has a 403b plan in place. The worker contacts their Human Resources department to ask about submitting a salary reduction agreement form. On the form, the worker chooses an amount of their salary to defer into the 403b plan (10%).

Typically they also select investments from a lineup of mutual funds or exchange-traded funds (ETFs).

Recommended: ETFs vs. Mutual Funds: Learning the Difference

Come payday, the employee’s paycheck will look different. If the usual biweekly gross earnings amount is $3,846 ($100,000 salary divided by 26 pay periods, per year), then $384.60, or 10% of earnings, is deducted from the employee’s paycheck and deposited into the 403b and invested, assuming the employee has selected their desired investment options.

Depending on other deductions, the employee’s new taxable income might be $3,461.40. The contribution effectively reduced the worker’s salary, potentially lowering their tax bill at the end of the year.

If the worker is in the 22% marginal income tax bracket, the $10,000 annual deferral amounts to an annual federal income tax savings of $2,200 per year.

Bear in mind that withdrawals from the 403b plan are taxable with pre-tax salary reductions. We’ll look at salary reduction plan withdrawal rules later.

Pros & Cons of Salary Reduction Contribution Plans

Although your employer may offer a salary reduction contribution plan like a 401k or SIMPLE IRA salary reduction agreement for retirement, it’s not required to participate. Before deciding whether you want to join your organization’s plan, here are some advantages and disadvantages to consider.

Pros

A salary reduction contribution offers employees the chance to reduce their current-year taxable income. A lower salary defers taxation on the money you save, until retirement. For young workers, that could mean decades of compound investment growth without having to pay taxes along the way.

For those who have the option of choosing a Roth account, taxes are paid in the current year, but withdrawals are tax free (as long as certain criteria are met). Also, contributions to a Roth 401k or Roth 403b plan can grow tax-free through retirement.

What’s more, the employer might offer their own contribution such as a matching feature. Typically, an employer might match employees’ contributions up to a certain amount: e.g. they’ll match 50 cents for every dollar an employee saves, up to 6% of their salary.

Another upside is that lowering one’s salary through automated savings can help an individual live on less money and avoid spending beyond their means — which can help establish long-term savings habits. Thus, contributing to a salary reduction plan can be a step toward creating a financial plan.

Cons

Like many aspects of personal finance, salary reduction contributions can be a balancing act between meeting your obligations today and providing for your future self.

Saving for the future can mean forgoing some pleasure in the present, similar to the concept of delayed gratification. Maybe you decide to postpone a vacation or buying a new car in exchange for a more robust retirement account balance.

Employees should also weigh the likelihood of needing money in the event of an emergency. Taking early withdrawals or borrowing from your 401(k) account can be costly, or may come with penalties, versus having extra cash in a checking or savings account. In most cases if you take out a loan from an employer-sponsored plan, you would have to repay the loan in full if you left your job.

Salary Reduction Contribution Limits

Annual salary reduction contribution limits can change each year. The Internal Revenue Service (IRS) determines the yearly maximum contribution amount. For 2022, the most a worker can contribute to a 401k or 403b is $20,500. For those age 50 and older, an additional $6,500 contribution is permitted.

A SIMPLE IRA salary reduction agreement has different limits. For 2022, a SIMPLE IRA’s annual maximum contribution is $14,000 with a catch-up contribution of up to $3,000 for those age 50 and older.

Salary Reduction Contribution Plan Withdrawal Rules

There are many rules regarding salary reduction contribution plan withdrawals.

At a high level, when an employee withdraws money from a tax-deferred retirement account, they will owe income tax on the money. If you withdraw money before age 59 ½, a 10% early-withdrawal tax might be applied.

There can be some exceptions to these rules, but it’s best to consult with a professional.

Should you withdraw money when you leave your employer? While taking a lump sum is possible under those circumstances, it may not be your best choice: You’d owe taxes on the full amount, and you’d risk spending money that’s meant to support you when you’re older.

The standard rule of thumb is that individuals who are leaving one employer should consider rolling over their retirement account to an IRA, or their new employer’s plan; in that case there are no penalties or taxes owed, and the money is once again secured for the future.

The Takeaway

Salary reduction contribution plans can help workers save money for retirement on a pre-tax or after-tax basis. Steadily putting money to work for your future is a major step toward building a solid long-term financial plan. And in many cases you will reap a tax advantage in the present — or in the future.

That said, there are important pros and cons to weigh when deciding whether you should contribute via a salary reduction plan. You may have another strategy. But if you don’t, you might want to consider opting into your employer’s plan for the benefits it can provide.

An important point to know: Even when you join a salary reduction plan, you can still open up an IRA to boost your savings. It’s easy when you open an online brokerage account with SoFi Invest®. SoFi can help you consider risk and return objectives when planning ahead. And as a SoFi member, you have access to complimentary financial planners who can help guide you along your financial journey.

FAQ

Does a 401k reduce salary?

Not really. Contributions toward a traditional 401k retirement plan are a tax-deductible form of savings, that effectively reduce an individual’s taxable income. In that regard, making retirement contributions on a pre-tax basis can reduce someone’s salary (but you still have the money in your retirement account).

Also, some plans allow for after-tax contributions which also reduce the size of your paycheck, but are not tax deductible.

What does employee salary reduction mean?

Employee salary reduction means that money is automatically deducted from an employee’s paycheck and contributed to a retirement plan. Money moves into a plan such as a 401k, 403b, or a SIMPLE IRA. And the account is in your name, and you decide how to invest the funds.

What is the difference between SEP and SARSEP?

A SEP is known as a Simplified Employee Pension Plan. A SEP plan allows employers to contribute to traditional IRAs (called SEP-IRAs) for their employees. The IRS states that a business of any size, even self-employed, can establish a SEP. These plans are common in the small business world.

A SARSEP, on the other hand, is a simplified employee pension plan established before 1997. A SARSEP includes a salary reduction arrangement. The employee can choose to have the employer contribute a portion of their salary to an IRA or annuity. Per the IRS, a SARSEP may not be established after 1996.


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.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.


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