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How Much Retirement Money Should I Have at 40?

At some point or another, you’ve probably wondered if you have enough money for the future and asked yourself, “how much retirement should I have at 40?”

It’s an important question. Hopefully, you’re already saving some money for retirement. However, you might not be saving enough to retire when you want.

There are different ways to save money for retirement. The sooner, the better—so that it can start adding up. Here’s how to maximize your retirement savings at age 40 and beyond.

Understanding Your Retirement Savings at 40

Now, to answer the question: How much money should I have saved by 40? A general rule of thumb recommended by many financial advisors is to have about three times your annual salary saved in retirement money by the time you’re 40.

Knowing this general benchmark is helpful for your retirement planning.

What Does the Average 40-Year-Old Have Saved?

According to a recent study from Northwestern Mutual, people in their forties say they currently have $77,400 saved for retirement. However, that’s a long way from the amount they expect to need for retirement, which is $1.28 million.

How Your Retirement Savings Compare to National Averages

Compared to the guideline of having three times your annual salary saved by the time you’re 40, if you only have the amount reported by the respondents in the Northwestern study — $77,400 — you’ve got some work to do. The good news is, you’ve probably got around 20 years or more to help get where you need to be by the time you’re ready to retire.

Factors Influencing Your Retirement Savings So Far

As you reach your 40s, it’s likely that your income is increasing, but so are the obligations that are tied to your money.

You might be saving money for your kids’ college; you probably have mortgage payments and existing debt, including your own student loans; you may even be taking care of aging parents. It’s a lot of financial multitasking and you have to prioritize.

In addition to all that, inflation over the past couple of years has made many prices higher, which could increase your cost of living. Overall, prices are 13% higher than they were two years ago, according to Consumer Price Index data. You might also be dealing with unemployment or a job layoff. All these factors can make saving for retirement more challenging.

The Right Retirement Savings Path for You

To map out a savings plan that makes sense, you can start by estimating how much money you’ll need for retirement. It’s also a good idea to look at your goals. That includes figuring out when you might want to retire, what kind of lifestyle you want in retirement, and how much money you might have coming in during your golden years. That will help you determine how much you need to save.

Projecting Your Retirement Needs

Start by thinking about the kind of lifestyle you’d like to have in retirement. Will you move to a smaller home? If so, you may save money on housing costs. On the other hand, if you’d like to travel frequently, your expenses may increase.

Also, estimate what your budget as a retiree might be. Include housing, utilities, insurance, food, transportation, clothes, and so on. And don’t forget entertainment expenses like movies, concerts, and meals out.

Next, factor in healthcare expenses. Health-related costs can be significant in retirement, depending on your medical situation.

Retirement Savings Rate: How Much of Your Income to Save

While each person’s situation and needs are unique, there are some general guidelines that can help project your financial needs during retirement.

For instance, according to Fidelity, you should try to save 15% of your pre-tax income each year if you plan to retire at age 67.

Another rule, known as the 80% rule, says you should have enough money by the time you retire to cover 80% of your pre-retirement income.

Milestones for Retirement Savings By Decade

As discussed, when you plan to retire and what kind of lifestyle you’d like to have in retirement are two of the main factors that affect how much money you’ll need to save. The milestones below are general, but they will give you an idea about how much to save at various ages.

Retirement Savings By:

•  Age 30: 1x your annual income

•  Age 40: 3x your annual income

•  Age 50: 6x your annual income

•  Age 60: 8x your annual income

•  Age 67: 10x your annual income

Maximizing Your Retirement Savings in Your 40s

If you haven’t saved 3 times your annual income by your 40s, or even if you have, here are some ways to make the most of your retirement funds in this decade.

Benefits of a Roth 401(k) and When to Consider It

Some 401(k) plans give you the opportunity of choosing a Roth 401(k) to save for retirement. If your employer offers such a plan you may want to consider it.

The difference between a Roth 401(k) and a traditional 401(k) is that with a Roth 401(k), contributions are made using after-tax funds. That means they aren’t tax deductible, but the withdrawals you make in retirement are tax-free. In addition, you don’t pay taxes on your annual investment earnings in a Roth 401(k). With a traditional 401(k), the contributions you make are tax deductible, however, you will pay taxes on your retirement withdrawals. So a Roth 401(k) can be beneficial if you expect to be in a higher tax bracket by the time you retire.

The good news is, you can contribute to both a Roth 401(k) and a traditional 401(k) as long as your plan allows it. Just know that there are yearly limits on your contributions. Across both plans, individuals under age 50 can contribute $22,500 annually in 2023.

If you have a traditional 401(k), there are a number of strategies to max out your 401(k) that are worth looking into. For example, it makes sense to contribute at least enough to qualify for any employer matching that your company offers. Why lose out on the “free” money your employer is willing to contribute to your retirement savings?

Catch-Up Contributions: Leveraging Them When the Time Comes

Once you reach age 50, you can make catch-up contributions to your 401(k) plan, as long as your plan allows them, which could help you save even more for retirement. In 2023, the catch-up contribution is an additional $7,500. That means, in total, individuals 50 and older could contribute up to $30,000 to their 401(k) in 2023.

Knowing about catch-up contributions when you’re in your forties could help you plan and prepare for them when you reach 50. Catch-up contributions can help you make the most of your retirement plan.

Investment Strategies for Mid-Career Savers

There are many other ways to save for retirement, even beyond the employer-sponsored 401(k) and Roth 401(k).

Some people choose to put their retirement savings in more than one type of account. This is useful if you want to set aside more than the yearly contribution limits on 401(k) plans. In that case, it might make sense to open an IRA savings account to save beyond the 401(k) limits, as long as you meet the necessary criteria.

Recommended: A Look at Traditional IRAs vs Roth IRAs

The Role of Expenses in Retirement Planning

Figuring out how much your retirement living expenses will be is important for calculating how money you’ll need to save. These are some of the things you may want to consider and budget for.

Emergency Savings vs. Retirement Savings

Your retirement savings are extremely important. However, if you don’t have an emergency fund that can cover three to six months’ worth of living expenses, consider putting that at the top of your priority list.

Why? While retirement is still likely to be years away if you’re 40 now, an emergency could happen at any time. For instance, you may be faced with an unexpected medical procedure that you’ll need to pay for if insurance doesn’t cover it all. Or your heater might break in the middle of winter and need to be replaced. If you don’t have the emergency funds to cover these things, you risk taking on debt. And that could in turn limit your retirement savings as you work to pay off that debt.

Of course, if you can afford to contribute to both an emergency fund and your retirement savings, by all means, do so.

Planning for Healthcare Expenses in Retirement

As people grow older, their healthcare needs and costs typically increase. For many, healthcare can be one of the biggest retirement expenses.

Fidelity estimates that the average person may need $157,500 to cover healthcare costs in retirement. If you have a high-deductible health insurance plan, you might want to look into a Health Savings Account (HSA), which could potentially help you save money to cover some healthcare costs.

Incorporating Home Costs Into Retirement Savings

Housing costs are another major retirement expense. You may have mortgage payments, homeowner’s insurance, and home maintenance and repairs to pay for. If you rent, you’ll have to cover your monthly rental fee plus renters’ insurance.

Additionally, where you live — the city and state — can impact how much you pay for housing. In general, living on the coasts can be more expensive. You may want to take the cost of living into consideration when you’re thinking about where you want to live in retirement.

Family and Retirement: Balancing the Present and Future

Of course, along with saving for retirement, you have present-day expenses and events to pay for as well. This includes important family milestones, such as college and a child’s wedding. Fortunately, with proper budgeting and planning, it is possible to help cover these expenses and save for retirement at the same time.

Budgeting for College Savings While Prioritizing Retirement

To keep building a retirement nest egg while saving for college for your kids, consider some college-savings plans. One good option to consider: a 529 plan that you fund with after-tax dollars. You can contribute to the plan on a regular basis, or whenever you have extra money, and family members and friends can contribute as well. For instance, instead of birthday gifts, ask loved ones to contribute to your child’s 529 instead.

Virtually every state offers a 529 plan and you can shop around to find one that has the best tax benefits and lowest costs. Open the plan as early as you can when your child is young so that the money invested has more time to grow.

Weddings and Other Major Family Expenses

If you’d like to help pay for your child’s wedding, you could put some money in a savings or investment account so that it can grow over time. If the wedding is coming up relatively soon, you could put your money into a high-yield savings account, for instance, to get a higher interest rate than you’d get from a regular savings account. If the wedding is farther in the future, you might want to invest in mutual funds or a stock index fund, which could deliver more growth.

Expert Strategies to Increase Retirement Savings

There are a number of smart ways to maximize your savings and be on track for retirement. Here are a few strategies experts advise.

Salary Negotiations and Their Long-Term Impact on Savings

If it’s been a while since you’ve received a raise, this may be a good time to ask for one. By age 40, you’ve probably developed skills that make you valuable to your employer.

If you need some incentive for negotiating for a higher salary, consider this: Even an extra $100 a week invested for the next 20 years with a 10% annual return could give you approximately $300,000 more in retirement savings.

Building a Solid Financial Foundation with a Six-Month Emergency Fund

As we discussed earlier, having an emergency fund is critical for any unexpected expenses that arise. Ideally, it’s wise to have six months’ worth of expenses saved up. That can help tide you over in case of job loss or some other significant event that affects your income.

You can open a high-yield savings account for your emergency fund to help it grow. Consider automating your savings to make sure you’re contributing to your emergency fund regularly.

Then, once you’ve reached six month’s worth, you can allocate the money you had been contributing to the emergency fund to your retirement savings.

Why Prioritizing Roth Retirement Accounts Can Pay Off

Investing in a Roth IRA can be helpful if you want to withdraw money in retirement without paying taxes on it. After-tax accounts can be appealing to individuals who plan to achieve financial independence at a younger age and retire early. Unlike qualified plans, which place penalties on withdrawing funds before a certain age, an after-tax account is a pool of money that you can withdraw from without having to worry about penalties if you access the account before age 59 ½.

Even if you wait until age 67 to retire, if you expect to be in a higher tax bracket at retirement, a Roth IRA can make sense since you won’t have to pay taxes on retirement withdrawals.

For 2023, you can contribute up to $6,500 annually in a Roth IRA. Individuals 50 and older can contribute $7,500. That said, there are income limits on Roth IRAs. The amount you can contribute starts to phase out if you earn more than $138,000 as a single tax filer, or $218,000 for married couples who file jointly.

The Takeaway

While there are conventional rules of thumb as to how much money you should have saved by 40, the truth is everyone’s path to a comfortable retirement looks different. One piece of advice is universal, however: The sooner you start saving for retirement, the better your chances of being in a financially desirable position later in life.

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


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



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

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.

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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The Best Cities for Retirees in 2023: Your Guide to Affordable Retirement

The Best Cities for Retirees in 2024: Your Guide to Affordable Retirement

The challenge of identifying a great city to retire in is that retirees have lots of different needs. Proximity to kids and grandkids, if you have them, is a key factor for many retirees. One retiree might want a beach while another wants ski slopes; one wants a small town vibe, another big city culture.

But there are some concerns that many retirees share: For example, is it affordable? The average retirement check for those collecting Social Security at age 65 in 2022 was $1,676, according to figures from the Social Security administration. How far that goes in retirement is dependent on a lot of factors, not the least of which is location, location, location.

But there are other considerations besides cost of living. Are there adequate medical facilities and personnel? Is the state’s tax structure advantageous for retirees? How is the crime rate? How well is the area expected to fare in climate change?

Rather than listing a select few of the more than 100,000 cities and towns in the U.S., what follows highlights some of the best cities to retire to in various categories. Depending on what’s most important to you, you can assign a value to each factor to help you pick the best options. Knowing where you want to retire and how much you will need to live on can help you decide when is a good time to retire. Now, some answers to the question, What are the best cities to retire in?

States with Favorable Tax Environments

If you have planned for your retirement years by opening an individual retirement account and funding it, you may not want to pay out a chunk of that in taxes. So, looking at the tax structure of various states can have a big impact on where you decide to retire.

So when considering the best cities to retire in the U.S., you may want to think about how a state’s sales tax, property tax, estate tax, and income tax stack up. Also think about whether a state you’d retire in will or won’t tax your pension. It has another list of states that won’t tax your pension. Hawaii, Alabama, and Tennessee all score well on these lists, but so do a lot of others that may better fit your lifestyle.

Cities Predicted to Do Well in Climate Change

Climate change threatens to trigger rising sea levels, rising temperatures, drought, wildfires, and more. If you plan to buy a home in your retirement haven, you may find that housing values, mortgage loans, and future mortgage refinancing may be affected by the expected impacts of climate change.

Some places are predicted to fare better than others because of their location, elevation, access to water, and other factors. Among these are Portland, Oregon; Charlotte, North Carolina; and Minnesota’s Twin Cities of Minneapolis and St. Paul. Research shows large coastal cities have generally invested more in resiliency measures to protect against climate change impacts than those in the Midwest.

Moreover, some cities are actively planning climate justice — or racial and social equity — into their climate mitigation plans. Oakland, California; Cleveland, Ohio; San Antonio, Texas; and Baltimore, Maryland all make that list.

Cities with Great Medical Resources

Since retirees may encounter healthcare issues as they age, having the right medical resources available is important. Moving to a quaint town or remote area might seem perfect, until you need a physical therapist or a doctor who specializes in gerontology.

In one ranked list of cities by health resources, Vermont towns do exceptionally well according to this list, but so do Missoula, Montana, and Pittsburgh, Pennsylvania. In addition to seeing where good health facilities are, you should evaluate the cost of those facilities. Healthcare is one of several crucial factors in calculating typical retirement expenses.

Cities with The Lowest Cost of Living

The average retirement age changes depending on where you live and the average Social Security check is about $1,668 per month. Before retiring, it’s important to know your budget and choose a retirement location where money won’t be a stressor.

One way to save is to live in a small town or city where the cost of living is below the national average. Many cities and towns in Alabama check a lot of boxes for retirees including having the lowest cost of living and a favorable tax environment.

Other cities that have a lower cost of living than the U.S. average include Lake Charles, Louisiana at about 14.5% lower than the national average; Topeka, Kansas at 14.7% lower; and Amarillo, Texas, at nearly 20% lower than the national average. Keep in mind, the earlier you retire, the lower your Social Security check will be, so where you want to live could impact when you retire.

Most Diverse Cities

For many people, diversity is a key factor to being able to comfortably settle in a town or city. This might include racial diversity, ethnic diversity, linguistic diversity, cultural diversity and more.

Oakland, California; New York, New York; and Chicago, Illinois often top lists for diversity, but can also be pricey places to live. Luckily there are other cities that are also very diverse including Jersey City, New Jersey; Gaithersburg and Germantown Maryland; Spring Valley, Nevada; and Kent, Washington.

Cities with Lowest Crime Rates

Generally speaking, the smaller the place, the less crime there is. That said, there are also some decent-sized cities that are recognized as being very safe. Columbia, Maryland gets high marks for being a very safe city. Others in that category are Nashua, New Hampshire; Portland, Maine; Gilbert, Arizona; and Raleigh, North Carolina. Least safe cities include St. Louis, Missouri; Memphis, Tennessee; and Oakland, California. That’s what makes the choosing tricky, Oakland fares very well in some categories, but not well at all on crime.

Most Accessible for People with Disabilities

Through the eyes of a person with disabilities, cities can look quite different. There’s the question of affordability, but also questions like whether restaurants, supermarkets, and parks are wheelchair accessible; whether the city is walkable; and the share of accessible homes.

If this is a consideration as you contemplate retirement, know this: Interestingly, Minneapolis, Minnesota — even with its annual snowfall of around 50 inches — tops the list. Other cities that score well on the accessibility scale include Pittsburgh, Pennsylvania; Scottsdale, Arizona; and Overland Park, Kansas.

Cities with Cool Stuff to Do

Another facet of what makes cities great for retirees is the availability of cultural opportunities from outdoor activities to volunteering, theater, and restaurants. One list of such opportunities took into account climate change; but didn’t weigh heavily on cost of living. It scored Austin, Texas high on all counts, though anyone who has lived there can attest to whole chunks of summer spent indoors trying to escape temperatures of 100 or more. Other cities that ranked high included Ashland, Oregon; Boston, Massachusetts; and Hilton Head, South Carolina.

Cities with Over 55 Communities

Some people prefer to live in communities that have young professionals and families, while others prefer to live predominantly around other seniors. Many of these planned communities have clubhouses for fitness and activities, theaters, walking trails and more. The least expensive houses generally start at around $100,000 or $200,000, depending on where they are, and rise up to $1 million. In these communities people own their own homes and function much as they would in a normal neighborhood but most of their neighbors are at roughly the same stage of life they are. Some of the leading over 55 communities include The Villages in central Florida; Sun City — which has many locations including Hilton Head, South Carolina and Huntley, Illinois; and Del Webb Sweetgrass in Richmond, Texas.

Recommended: What’s a Good Monthly Retirement Income for a Couple?

Places with Intentional Co-Housing

Co-housing is different from retirement communities in that people are expected to contribute to the community in the form of gardening, cooking, and generally looking out for one another. Co-housing that is designed for seniors might have medical facilities nearby, shuttles for shopping or the library, community gardens and so forth. Some have special facilities for people who suffer from dementia or other conditions. Retiring near a place where you could receive extra care and support down the road if you need it could be a good long-term option. Co-housing.org offers a list of these communities in states across America.

The Takeaway

Retirement isn’t just a cessation of work; it’s an opportunity to create a new and improved life. Before retiring, you need to understand what will constitute a good retirement income for your needs, as well as the environment you desire, surrounded by activities that really enhance your life. You are the only one who can really define what that environment and activities should be.

Whatever form of retirement beckons, SoFi wants to help you find a way to afford and enjoy it through all the special features of our Checking and Savings account. When you open an online bank account with SoFi, you’ll spend and save in one convenient place, earn a competitive APY, and pay no account fees.

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


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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

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

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

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

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

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


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When Can You Withdraw From Your 401(k)?

If you have a 401(k), odds are, you can withdraw money from it–but there are rules, penalties, and taxes to take into account, depending on several factors. Even so, if you’ve diligently contributed to a 401(k) fund, and watched your balance grow,, you may have found yourself wondering “When can I withdraw from my 401(k) account?”

It’s a common question, and some key things to consider include 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 said, there are some circumstances in which people can take an early withdrawal from their 401(k) account before 59 ½. Each plan should have a description that clearly states if and when it allows for disbursements, hardship distributions, 401(k) loans, or the option to cash out the 401(k).


💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

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

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

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

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

Under the Age of 55

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

1.   Taking out a 401(k) loan.

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

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

Between Ages 55–59 1/2

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

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

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

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

After Age 73

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

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.

IRA Rollover Bridge Loan

The IRS allows for short-term tax and penalty-free rollover loans, assuming you follow a 60-day rule. In short, the 60-day rollover rule requires that all funds withdrawn from a retirement account be deposited into a new retirement account within 60 days of their distribution, so, within that 60-day window, you can use the money as a bridge loan.

401(k) Withdrawals vs Loans

While most financial professionals would likely tell you that it’s wise to keep your retirement funds where they are for as long as possible, withdrawals and loans are possible. If you do find yourself looking at either withdrawing or borrowing money from your retirement accounts, it may be best to use the loan option as you won’t get dinged on taxes–and assuming that you can pay the money back within the given time frame.

But again, this is likely a decision that should be made with the help of a financial professional.

Cashing Out a 401(k)

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

Rolling Over a 401(k)

Instead of cashing out an old 401(k), account holders may choose to roll over their 401(k) into 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

While it may be possible to withdraw money from a 401(k) at almost any time, there are things to consider, such as taxes and penalties. Certain factors like age, employment status and hardship eligibility determine whether you can make a withdrawal from your 401(k).

In cases where plan participants do not meet age requirements for withdrawing 401(k) funds penalty-free, they can still take out a 401(k) loan, cash out a pre-existing 401(k) plan, or rollover their 401(k) into a different retirement account. As always, though, it may be best to discuss your options with a financial professional.

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


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

FAQ

Can you take out 401(k) funds if you only need the money short term?

It’s possible, and one way that some people “borrow” from their 401(k)s for short periods of time is by utilizing the 60-day rollover window. While you’d need to open a new retirement account, this rollover period can allow you to borrow retirement funds tax and penalty-free for a short period of time.

How long does it take to cash out a 401(k) after leaving a job?

The period of time between when you leave a job and when you can withdraw money from your 401(k) will depend on your employer and the company that administers your account, but probably won’t take longer than two weeks.

What are other alternatives to taking an early 401(k) withdrawal?

Perhaps the most obvious alternative to taking an early 401(k) withdrawal is to take out a loan from your retirement account instead, which allows savers to repay the money over time without penalty.



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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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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Are Mutual Funds Good for Retirement?

Are Mutual Funds Good for Retirement?

Mutual funds are one option investors may consider when building a retirement portfolio. A mutual fund represents a pooled investment that can hold a variety of different securities, including stocks and bonds. There are different types of mutual funds investors may choose from, including index funds, target date funds, and exchange-traded funds (ETFs).

But how do mutual funds work? Are mutual funds good for retirement or are there drawbacks to investing in them? What should be considered when choosing mutual funds for retirement planning?

Those are all important questions to ask when determining the best ways to build wealth for the long term.

Understanding Mutual Funds

A mutual fund pools money from multiple investors, then uses those funds to invest in a number of various securities. Mutual funds can hold stocks, bonds, short-term debt, and other types of securities.

How a mutual fund is classified or categorized can depend largely on what the fund invests in and what type of investment strategy it follows. For example, index funds follow a passive investment strategy, as these funds attempt to mimic the performance of a stock market benchmark. So a fund that tracks the S&P 500 index would attempt to replicate the returns of the companies included in that index.

Target-date funds utilize a different strategy. These funds automatically adjust their asset allocation based on a target retirement date. So a 2050 target-date fund, for example, may shift more of its asset allocation toward bonds or fixed-income and away from stocks as the year 2050 approaches.

Exchange-traded funds or ETFs trade on an exchange just like stocks. This is a departure from the way mutual funds are typically traded, with the price being set at the end of the trading day.

How Mutual Funds Work

Mutual funds work by allowing investors to purchase shares in the fund. Buying shares makes them part-owner of the fund and its underlying assets. As such, investors have the right to share in the profits of the fund. So if a mutual fund owns dividend-paying stocks, for example, any dividends received would be passed along to the fund’s investors.

Depending on how the fund is structured or what the brokerage selling the fund offers, investors may be able to receive any dividends or interest as cash payments or they may be able to reinvest them. With a dividend reinvestment plan or DRIP, investors can use dividends to purchase additional shares of stock, often bypassing brokerage commission fees in the process.

Investors pay an expense ratio to invest in mutual funds. This reflects the annual cost of owning the fund, expressed as a percentage. Passively managed mutual funds, including index funds and target date funds, tend to have lower expense ratios. Actively managed funds, on the other hand, tend to be more expensive, but the idea is that higher fees may seem justified if the fund produces above-average returns.

Investors can learn more about how a particular mutual fund works, what it invests in, and the fees involved by reading the fund’s prospectus.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Mutual Funds for Retirement Planning

Mutual funds are arguably one of the most popular investment options for retirement planning. According to the Investment Company Institute, 52.3% of U.S. households totaling approximately 115.3 million individual investors owned mutual funds in 2022. Older generations such as Baby Boomers and Gen Xers—those who may be planning for retirement—are more likely to have mutual funds, the research found.

So are mutual funds good for retirement? Here are some of the pros and cons to consider.

Pros of Using Mutual Funds for Retirement

Investing in mutual funds for retirement planning could be attractive for investors who want:

•   Convenience

•   Simplified diversification

•   Professional management

•   Reinvestment of dividends

Investing in a mutual fund can offer exposure to a wide range of securities, which can help with diversifying a portfolio. And it may be easier and less costly to purchase a single fund that holds 10 or 20 stocks than to purchase individual shares of each of those companies.

Mutual funds are professionally managed, so investors can rely on the fund manager’s expertise and knowledge. You don’t need to be as hands-on as you would need to be if you were day trading individual stocks. And if the fund includes dividend reinvestment, you can increase your holdings automatically which can make it easier to grow wealth.

Cons of Using Mutual Funds for Retirement

While there are some advantages to using mutual funds for retirement planning, there are also some possible disadvantages, including:

•   Potential for high fees

•   Overweighting risk

•   Under-performance

•   Tax inefficiency

As mentioned, mutual funds and ETFs carry expense ratios. While some index funds may charge as little as 0.15% in fees, there are some actively managed funds with expense ratios well above 1%. If those higher fees are not being offset by higher than expected returns (which is never a guarantee), the fund may not be worth it. Likewise, buying and selling mutual fund shares could get expensive if your brokerage charges steep trading fees.

While mutual funds make it easier to diversify, there’s the risk of overweighting one’s portfolio — owning the same holdings across different funds. For example, if you’re invested in five mutual funds that hold the same stock and the stock tanks, that could drag down your portfolio.

Something else to keep in mind is that a mutual fund is typically only as good as the fund manager behind it. Even the best fund managers don’t always get it right. So it’s possible that a fund’s returns may not live up to your expectations.

On the other hand, you may also have to contend with unexpected tax liability at the end of the year if the fund sells securities at a gain. Just like other investments, mutual funds and ETFs are subject to capital gains tax. Whether you pay short- or long-term capital gains tax rates depends on how long you held a fund before selling it.

Pros

Cons

•   Mutual funds offer convenience for investors

•   It may be easier and more cost-effective to diversify using mutual funds vs. individual securities

•   Investors benefit from the fund manager’s experience and knowledge

•   Dividend reinvestment can make it easier to grow wealth

•   Some mutual funds may carry higher expense ratios than others

•   Overweighting can occur if investors own multiple funds with the same underlying assets

•   Fund performance may not always live up to the investor or fund manager’s expectations

•   Income distributions can result in unexpected tax liability for investors

Investing in Mutual Funds for Retirement Planning

The steps to invest in mutual funds for retirement are simple and straightforward.

1.    Start with an online brokerage account, individual retirement account (IRA) or 401(k). You can also buy a mutual fund directly from the company that created it, but a brokerage account or retirement account is usually the easier way to go.

2.    Set your budget. Decide how much money you can afford to invest in mutual funds. Keep in mind that the minimum investment for a particular fund can vary. One fund may allow you to invest with as little as $100 while another might require $1,000 to $3,000 to get started.

3.    Choose funds. If you already have a brokerage account, this may simply mean logging in, navigating to the section designated for buying funds, selecting the fund or funds and entering in the amount you want to invest.

4.    Submit your order. You may be asked to consent to electronic delivery of the fund’s prospectus when you place your order. If your brokerage charges a fee to purchase mutual funds, that amount will likely be added to the order total. Once you submit your order to purchase mutual funds, it can take a few business days to process.

Determining If Mutual Funds Are Right for You

Whether it makes sense to invest in mutual funds for retirement can depend on your time horizon, risk tolerance, and overall investment goals. If you’re leaning toward mutual funds for retirement planning, here are a few things to consider.

Investment Strategy

When comparing mutual funds, it’s important to understand the overall strategy the fund follows. Whether a fund is actively or passively managed may influence the level of returns generated. The fund’s investment strategy may also determine what level of risk investors are exposed to.

For example, index funds are designed to meet the market. Growth funds, on the other hand, typically have a goal of beating the market. Between the two, growth funds may produce higher returns — but they may also entail more risk for the investor and carry higher expense ratios.

Choosing funds that align with your preferred strategy, risk tolerance, and goals matters. Otherwise, you may be disappointed by your returns or be exposed to more risk than you’re comfortable with.

Cost

Cost is an important consideration when choosing mutual funds for one reason: Higher expense ratios can drain away more of your returns.

When comparing mutual fund expense ratios, it’s important to look at the amount you’ll pay to own the fund each year. But it’s also important to consider what kind of returns the fund has produced historically. A low-fee fund may look like a bargain but if it generates low returns then the cost savings may not be worth much.

It’s possible, however, to find plenty of low-cost index funds that produce solid returns year over year. Likewise, you shouldn’t assume that a fund with a higher expense ratio is guaranteed to outperform a less expensive one.

Fund Holdings

It’s critical to look under the hood, so to speak, to understand what a particular mutual fund owns and how often those assets turn over. This can help you to avoid overweighting your portfolio toward any one stock or sector.

Reading through the prospectus or looking up a stock’s profile online can help you to understand:

•   What individual securities a mutual fund owns

•   Asset allocation for each security in the fund

•   How often securities are bought and sold

If you’re interested in tech stocks, for example, you may want to avoid buying two funds that each have 10% of assets tied up in the same company. Or you may want to choose a fund that has a lower turnover rate to minimize your capital gains tax liability for the year.

💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

Other Types of Funds for Retirement

Mutual funds, and target date funds in particular, are one of the ways to save for retirement. But there are other options you might consider. Here’s a brief rundown of other types of funds that can be used for retirement planning.

Real Estate Investment Trusts (REITs)

A real estate investment trust isn’t a mutual fund, per se. But it is a pooled investment that allows multiple investors to own a share in real estate. REITs pay out 90% of their income to investors as dividends. You may consider a REIT if you’d like to reap the benefits of real estate investing (i.e. diversification, inflationary hedge, etc.) without actually owning property.

Exchange-Traded Funds (ETFs)

Exchange-traded funds are another retirement savings option. Investing in ETFs can offer more flexibility compared to mutual funds. They may carry lower expense ratios than traditional funds and be more tax-efficient if they follow a passive investment strategy.

Income Funds

An income fund is a specific type of mutual fund that focuses on generating income for investors. This income can take the form of interest or dividend payments. Income funds can be an attractive option for retirement planning if you’re interested in creating multiple income streams or reinvesting dividends until you’re ready to retire.

Bond Funds

Bond funds focus exclusively on bond holdings. The type of bonds the fund holds can depend on its objective or strategy. For example, you may find bond funds or bond ETFs that only hold corporate bonds or municipal bonds while others offer a mix of different bond types. Bond funds are generally considered fairly safe, and they may help round out the fixed-income portion of your retirement portfolio.

IPO ETFs

An initial public offering or IPO represents the first time a company makes its shares available for trade on a public exchange. Investors can invest in individual IPOs or multiple IPOs through an ETF. IPO ETFs invest in companies that have recently gone public so they offer an opportunity to get in on the ground floor. IPO ETFs are generally considered safer than IPOs, but still, they are relatively risky.

The Takeaway

Mutual funds can be part of a diversified retirement planning strategy. Regardless of whether you choose to invest in mutual funds, ETFs or something else, the key is getting started sooner rather than later. Time can be one of your most valuable resources when investing for retirement.

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


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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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2022 Best States To Retire in for Tax Purposes

2024 Best States to Retire in for Tax Purposes

Many people consider relocating when they retire to reduce their cost of living and make their savings last longer. When weighing the pros and cons of moving to another state, it’s important to consider the total tax burden there, including state and local taxes on retirement income, property tax, even sales tax. Some areas with a lower tax burden have a higher overall cost of living, which can cancel out any savings.

Below we look at the best states to retire in for taxes and how to tell if moving will be worth it.

Key Points

•   Writing a check to yourself is a way to transfer money between your own accounts.

•   Start by writing your name as the payee and the amount you want to transfer.

•   Sign the check on the signature line as the payer and write “For Deposit Only” on the back.

•   Deposit the check into your other account through a mobile banking app or at a bank branch.

•   Keep a record of the transaction for your own records and to reconcile your accounts.

Most Tax-Friendly States for Retirement

A number of states exempt Social Security income from state taxes. A smaller number offer a tax break on other retirement income, such as IRAs and 401(k) plans, private pensions, interest, dividends, and capital gains.

These are the 10 tax-friendly states for retirees, according to Kiplinger:

1.    Mississippi

2.    Tennessee

3.    Wyoming

4.    Nevada

5.    Florida

6.    South Dakota

7.    Iowa

8.    Pennsylvania

9.    Alaska

10.    Texas

But before you complete that change of address card, you’ll want to look at the bigger picture.


💡 Quick Tip: How much your home is worth impacts your property taxes, homeowners insurance, and net worth. Online tools can help you easily estimate home value whenever you need it.

Factors to Consider When Choosing the Best State to Retire In

When choosing where to retire, it’s wise to first consider issues like safety, access to healthcare, distance to friends and family, or living near other people of retirement age.

Make a list of features that are important to you in a retirement locale, and consider whether any of them could indirectly impact your cost of living, such as being close to friends and family.

Then look at the total cost of living in an area: housing, food, transportation, cultural activities, and other expenses. These retirement expenses generally have a bigger impact on one’s lifestyle than taxes.

Finally, to determine whether a state is tax-friendly for retirees, look at the following:

Does the State Tax Social Security?

Generally, Social Security income is subject to federal tax. But some states also tax Social Security above a certain income threshold, while other states offer tax exemptions for individuals in lower tax brackets.

The states that tax some or all Social Security benefits are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.

Does the State Tax Pensions?

Many states tax income from pensions, but 14 states do not. These states are: Alabama, Alaska, Florida, Hawaii, Illinois, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington and Wyoming.

And these 13 states do not tax income from 401(k) plans: Alaska, Florida, Illinois, Iowa, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no state income tax.

Recommended: Tax-Friendly States That Don’t Tax Pensions or Social Security Income

Other Taxes That Affect Retirees

When choosing the best state for you to retire in, it’s a good idea to look into sales tax and property taxes too. States that don’t charge sales tax are Alaska, Delaware, Montana, New Hampshire, and Oregon. On the other hand, New Hampshire has very high property taxes, reducing the benefit of no sales tax.

Recommended: When to Start Saving for Retirement

States to Avoid When Retiring

Choosing the best state to retire in sometimes means making compromises. If safety and healthcare access are top priorities, for instance, you may not get your ideal weather. But for many retirees, a high cost of living is a deal-breaker.

Here are the 10 states with the highest annual cost of living, according to a 2023 analysis conducted by GOBankingRates:

1.    Hawaii: $124,486

2.    Massachusetts: $100,325

3.    California: $92,829

4.    New York: $90,821

5.    Alaska: $83,995

6.    Maryland: $83,058

7.    Oregon: $81,786

8.    Vermont: $77,904

9.    Connecticut: $77,235

10.    New Hampshire: $76,766

Recommended: Avoid These 12 Retirement Mistakes

The Best States to Retire in 2024

As noted above, the best state to retire in will depend on an individual or couple’s budget, lifestyle, and values. But recent trends may help point you in the right direction.

These are the top 10 states that retirees are moving to, according to United Van Lines’ annual National Movers Study:

1.    Wyoming

2.    Delaware

3.    South Carolina

4.    Florida

5.    Maine

6.    Arizona

7.    New Mexico

8.    South Dakota

9.    West Virginia

10.    Alabama

If cost of living is your sole concern, the following are the 10 least expensive states, according to Bankrate:

1.    West Virginia

2.    Mississippi

3.    Iowa

4.    Alabama

5.    Missouri

6.    Oklahoma

7.    Indiana

8.    Kansas

9.    Wyoming

10.    Arkansas

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States with the Lowest Tax Burden

An area’s total tax burden is the sum of all property taxes, sales taxes, excise taxes (which affect the price of goods), and individual income taxes. Below are the states with the lowest total tax burden for retirees.

Rank

State

Total Tax Burden

1 Alaska 5.06%
2 Delaware 6.12%
3 New Hampshire 6.14%
4 Tennessee 6.22%
5 Florida 6.33%
6 Wyoming 6.42%
7 South Dakota 6.69%
8 Montana 6.93%
9 Missouri 7.11%
10 Oklahoma 7.12%

States With the Most Millionaires

One way to measure the overall desirability of an area is the number of millionaires who live there. After all, millionaires can afford to live in states that have high-quality healthcare, nice weather, and diverse cultural offerings. These are not the cheapest states in terms of cost of living or taxes, but their popularity may help non-millionaires reevaluate their must-haves vs. nice-to-haves.

Rank

State

% of Millionaire Households

1 New Jersey 9.76%
2 Maryland 9.72%
3 Connecticut 9.44%
4 Massachusetts 9.38%
5 Hawaii 9.20%
6 District of Columbia 9.12%
7 California 8.51%
8 New Hampshire 8.47%
9 Virginia 8.31%
10 Washington 8.18%
Source: Statista

Does It Make Financial Sense to Relocate in Retirement?

For workers who already live in a state with moderate taxes, near family, and have a lifestyle they enjoy and can afford, there may not be any compelling reason to move. But for those looking to make a change or lower their retirement expenses, it may make financial sense to relocate.

Just remember that housing, food, transportation, and other expenses usually have a bigger impact on one’s retirement lifestyle than taxes.

Pros and Cons of Relocating for Tax Benefits

Lower taxes alone may not be enough to motivate someone to pick up and move house. Other factors should also support the decision.

Pros of Relocating for Tax Benefits

•   Potentially lower cost of living

•   Discovering a community of like-minded retirees

•   Possibly ticking off other boxes on your list

Cons of Relocating for Tax Benefits

•   Other living costs may cancel out the tax benefits

•   Moving costs are high, and the stress can be tough

•   Need to find another home in a seller’s market


💡 Quick Tip: We love a good spreadsheet, but not everyone feels the same. An online budget planner can give you the same insight into your budgeting and spending at a glance, without the extra effort.

The Takeaway

The best state to retire in for tax purposes depends on an individual’s budget, lifestyle, and values. Some states with lower taxes for retirees can have higher housing and transportation costs, canceling out any tax benefit. A financial advisor can help you decide if saving on taxes is worth the expense and trouble of relocating.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

With SoFi, you can keep tabs on how your money comes and goes.

FAQ

What are the 3 states that don’t tax retirement income?

Nine states don’t tax retirement plan income because they have no state income taxes at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Illinois, Iowa, Mississippi and Pennsylvania don’t tax distributions from 401(k) plans, IRAs, or pensions. Alabama and Hawaii don’t tax pensions, but do tax distributions from 401(k) plans and IRAs.

Which state is the best state to live in for tax purposes?

Alaska has the lowest overall tax rates.

Which states do not tax your 401k when you retire?

Alaska, Florida, Illinois, Iowa, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming do not tax 401(k) plans when you retire.


Photo credit: iStock/Jeremy Poland

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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