Nov
19
2025
Pros & Cons of Working After Retirement
Many retirees continue working or take on a new job, but working after retirement can have downsides.
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Nov
11
2025
4% Rule for Withdrawals in Retirement
Table of Contents
After decades of saving for retirement, many new retirees often find themselves facing a new challenge: Determining how much money they can take out of their retirement account each year without running the risk of depleting their nest egg too quickly.
One popular rule of thumb is “the 4% rule.” Read on to learn more about the rule and how it works.
Key Points
• The 4% rule suggests withdrawing 4% of retirement savings in the first year, and then adjusting for inflation annually.
• The rule assumes a 30-year retirement period and a balanced 50% stock, 50% bond portfolio.
• Flexibility is important to adapt to lifestyle changes and fluctuating expenses in retirement.
• Additional income sources, such as Social Security or pensions, should be considered when it comes to how much to withdraw in retirement.
• For those who hope to retire early, the 4% rule likely won’t provide a sustainable income for all their years of retirement.
What Is the 4% Rule for Retirement Withdrawals?
The 4% rule suggests that retirees withdraw 4% from their retirement savings the year they retire, and adjust that dollar amount each year going forward for inflation. Based on historical data, the idea is that the 4% rule should allow retirees to cover their expenses for 30 years.
The rule is intended to give retirees some planning guidance about retirement withdrawals. The 4% rule may also help provide them with a sense of how much money they need for retirement.
How to Calculate the 4% Rule
To calculate the 4% rule, add up all of your retirement investments and savings and then withdraw 4% of the total in your first year of retirement. Each year after that, you increase or decrease the amount, based on inflation.
For example, if you have $1 million in retirement savings in an online investment account, you would withdraw 4% of that, or $40,000, in your first year of retirement. If inflation rises 3% the next year, you would increase the amount you withdraw by 3% to $41,200.
Drawbacks of the 4% Rule
While the 4% rule is simple to understand and calculate, it’s also a rigid plan that doesn’t fit every investor’s individual situation. Here are some of the disadvantages of the 4% rule to consider.
It doesn’t allow for flexibility
The 4% rule assumes you will spend the same amount in each year of retirement. It doesn’t make allowances for lifestyle changes or retirement expenses that may be higher or lower from year to year, such as medical bills.
The 4% rule assumes that your retirement will be 30 years
In reality, an individual’s retirement may be shorter or longer than 30 years, depending on what age they retire, their health, and so on. If someone’s life expectancy goes beyond 30 years post-retirement they could find themselves running out of money.
It’s based on a specific portfolio composition
The 4% rule applies to a portfolio of 50% stocks and 50% bonds. Portfolios with different investments of varying percentages would likely have different results, depending on that portfolio’s risk level.
It assumes that your retirement savings will last for 30 years
Again, depending on the assets in your portfolio, and how aggressive or conservative your investments have been, your portfolio may not last a full 30 years. Or it could last longer than 30 years. The 4% rule doesn’t adjust for this.
4% may be too conservative
Some financial professionals believe that the 4% rule is too conservative, as long as the U.S. doesn’t experience a significant economic depression. Because of that, retirees may be too frugal with their retirement funds and not necessarily live life as fully as they could.
Others say the rule doesn’t take into account any other sources of income retirees may have, such as Social Security, company pensions, or an inheritance.
How Can I Tailor the 4% Rule to Fit My Needs?
You don’t have to strictly follow the 4% rule. Instead you might choose to use it as as a starting point and then customize your savings from there based on:
• When you plan to retire: At what age do you expect to stop working and enter retirement? That information will give you an idea about how many years worth of savings you might need. For instance, if you plan to retire early, you may very well need more than 30 years’ worth of retirement savings.
• The amount you have saved for retirement: How much money you have in your retirement plans will help you determine how much you can withdraw to live on each year and how long those savings might last. Also be sure to factor in your Social Security benefits and any pensions you might have.
• The kinds of investments you have: Do you have a mix of stocks, bonds, mutual funds, and cash, for instance? The assets you have, how aggressive or conservative they are, and how they are allocated plays an important role in the balance of your portfolio. An investor might want assets that have a higher potential for growth but also a higher risk tolerance when they are younger, and then switch to a more conservative investment strategy as they get closer to retirement.
• How much you think you’ll spend each year in retirement: To figure out what your expenses might be each year that you’re retired, factor in such costs as your mortgage or rent, healthcare expenses, transportation (including gas and car maintenance), travel, entertainment, and food. Add everything up to see how much you may need from your retirement savings. That will give you a sense if 4% is too much or not enough, and you can adjust accordingly.
Should You Use the 4% Rule?
The 4% rule can be used as a starting point to determine how much money you might need for retirement. But consider this: You may have certain goals for retirement. You might want to travel. You may want to work part-time. Maybe you want to move into a smaller or bigger house. What matters most is that you plan for the retirement you want to experience.
Given those variations, the 4% rule may make more sense as a guideline than as a hard-and-fast rule.
Having flexibility in planning for withdrawals in retirement means saving as much as possible first. A starting place for many people is their workplace 401(k), but that’s not the only way you can save for retirement. For instance, those who don’t have access to a workplace retirement account might want to open an IRA or a retirement savings plan for the self-employed to invest for their future.
Recommended: How Much Retirement Money Should I Have at 40?
The Takeaway
The 4% rule represents a percentage that retirees can withdraw from their retirement savings annually (increasing or decreasing the amount each year, based on inflation) and theoretically have their savings last a minimum of 30 years. For example, in the first year in retirement, someone following this rule could withdraw $20,000 from a $500,000 retirement account balance.
However, the 4% rule has limitations. It’s a rigid strategy that doesn’t take factors like lifestyle changes into consideration. It assumes that your retirement will last 30 years, and it’s based on a specific portfolio allocation. A more flexible plan may be better suited to your needs.
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FAQ
How long will money last using the 4% rule?
The intention of the 4% rule is to make retirement savings last for approximately 30 years. But exactly how long your money may last will depend on your specific financial and lifestyle situation.
Does the 4% rule work for early retirement?
The 4% rule is based on a retirement age of 65. If you retire early, you may have more years to spend in retirement and your financial needs will likely be different. In this instance, the 4% rule may not give you enough income to sustain you through all the years of retirement.
Does the 4% rule preserve capital?
With the 4% rule, the idea is to withdraw 4% of your total funds and allow the remaining money in the account to keep growing. Because the withdrawals would at least partly consist of dividends and interest on savings, the amount withdrawn each year would not come totally out of the principal balance.
Is the 4% rule too conservative?
Some financial professionals say the 4% rule is too conservative, and that by using it, retirees may be too frugal with their retirement funds and not live as comfortable a life as they could. Others say withdrawing 4% of retirement funds could be too much because the rule doesn’t take into account any other sources of income retirees may have, such as Social Security.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
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Read moreSep
23
2025
Can You Have Multiple IRAs?
In theory, there’s no limit to how many individual retirement accounts (IRAs) one person can have. A retirement saver could potentially maintain more than one traditional IRA, Roth IRA, rollover IRA, or simplified employee pension (SEP) IRA in order to gain certain tax advantages now, and potentially down the road.
That said, the rules governing these different IRA accounts vary considerably, and combining many IRAs — without running afoul of contribution limits or creating tax issues — can be difficult.
How Many Roth and Traditional IRAs Can You Have?
As mentioned above, you may open any number of individual retirement accounts (IRAs). The Internal Revenue Service (IRS) does not limit the number of IRAs you can have and will not penalize you for having multiple IRAs in your name, as long as you follow the rules and contribution limits for each account.
One or more IRAs could work in tandem with a 401(k) workplace retirement plan. For instance, you might put part of each paycheck into a 401(k) plan at work while also maxing out your traditional IRA contributions every year. There might be restrictions, though, about the amount you can deduct.
An individual’s annual contribution limit — for traditional and Roth IRAs combined — is $7,000 ($8,000 for savers ages 50 or older) for the 2025 tax year. For tax year 2026, the limit is $7,500 ($8,600 for those ages 50 or older).
Recommended: What is an IRA?
Types of IRA
The two main account types are the traditional IRA and the Roth IRA. Again, your traditional IRA withdrawals are taxed at your ordinary income tax rate in retirement while Roth IRA money can be withdrawn tax-free.
With a traditional IRA, contributions can provide tax deductions when the money is deposited. Qualified distributions are taxed as ordinary income in retirement. Funds distributed before the account holder reaches age 59 ½ are usually subject to an added 10% tax.
Roth IRA contributions do not qualify for a deduction when deposited. However, when the account holder reaches age 59 ½, the money may be withdrawn tax-free. As with traditional IRAs, you can have multiple Roth IRAs.
There is a third type of IRA, the SEP IRA. These IRAs have higher contribution limits: up to $70,000 for tax year 2025 and $72,000 for tax year 2026, or 25% of compensation, whichever is less. But because these are employer-funded plans, they follow a different set of rules.
If you are self-employed and contributing to a SEP IRA on your own behalf, or if you work for a company with a SEP plan, you may or may not have the option of making traditional IRA contributions — but you could likely contribute to a Roth in addition to the SEP.
You may want to consult with a professional so you don’t over-contribute — or contribute less than you could have — or miss out on any of the potential tax benefits.
Advantages and Disadvantages of Multiple IRAs
Whether it makes sense for you to have multiple IRAs can depend on many factors, including your investment goals, financial situation, marital status, and career plans.
Advantages
Here are some of the chief advantages of maintaining more than one IRA:
• Tax management. Traditional IRAs and Roth IRAs are taxed differently, as mentioned above. Also, traditional IRAs are subject to required minimum distributions (RMDs), which can increase your taxable income in retirement, while Roth IRAs are not. Having money in both types of IRA could make your retirement investing more tax-efficient.
• Diversification. Diversification can help manage investment risk. Holding money in multiple IRAs, each with a different investment strategy, could help you create a diversified portfolio.
Diversification may also benefit you from a tax perspective if you keep less tax-efficient investments in a traditional IRA and more tax-efficient ones in a Roth IRA.
• Access. Traditional IRAs do not permit early withdrawals before age 59 ½ without triggering a tax penalty. You can, however, withdraw your original contributions from a Roth IRA at any time without owing income tax or penalties on those distributions. Having one IRA of each type could make it less expensive for you to withdraw money early if needed. This is possible whether investing online or not.
• Avoiding RMDs. Traditional IRAs are subject to RMD rules, which dictate that you must begin taking minimum IRA distributions at age 72. If you don’t, the IRS can levy a steep tax penalty. Roth IRAs aren’t subject to RMD rules, so they could help you hang on to more assets as you age.
Disadvantages
Opening and funding multiple IRAs isn’t always an optimal strategy. Here are some disadvantages that may make you reconsider having several IRAs:
• Contribution limits. The IRS caps the amount you can contribute in a given year. For 2024, your total contributions to all your IRAs cannot exceed $7,000 (or $8,000 if you’re 50 or older). For 2025, your total contributions to all your IRAs cannot exceed $7,000 (or $8,000 if you’re 50 or older). For 2026, your total contributions to all your IRAs cannot exceed $7,500 (or $8,600 if you’re 50 or older). So having multiple IRAs doesn’t give you an edge in saving up for retirement.
• Overweighting. When a significant share of your asset allocation is dedicated to a single stock, security, or sector, your portfolio is overweight. This overexposure can heighten your risk profile, such that a downturn in that investment could drag down your entire portfolio. Having multiple IRAs may put you at risk of being overweight if you’re not careful about reviewing the holdings in each account.
• Fees. Brokerages often charge various fees to maintain IRAs. Plus, within each IRA, you may have to pay additional fees for specific investments. For example, a mutual fund has an annual ownership cost signified by its expense ratio. If you’re not paying attention to each IRA’s fees, it’s possible that you could overpay and shrink your investment returns.
• Organization. Having multiple IRAs could present an organizational burden in the form of additional paperwork or, if you manage your IRAs online, logging in to multiple brokerages or robo-advisor platforms. You may also worry about increased risk for cybercrime.
Reasons You Might Want More Than One IRA
Evaluating your investment goals can help you decide if having more than one IRA makes sense for you. But you may need extra accounts if you’re:
• Rolling over a 401(k). When separating from your employer, you could leave your 401(k) money where it is or roll it into a traditional IRA instead. If you open a rollover IRA and already have a Roth account too, you may end up with multiple IRAs.
• Planning a backdoor Roth. Roth IRAs offer tax-free distributions but there’s a catch: To fund one, you have to meet eligibility requirements pertaining to your income and filing status. People who are over the income limit sometimes work around it by setting up a traditional IRA and later transferring some of that money to a Roth IRA. Taxes are levied on the transferred amount. This arrangement is known as a Roth conversion or backdoor Roth.
• Married and the sole income-earner. The IRS allows married couples who file a joint tax return to each contribute to IRAs, even when one spouse does not have taxable compensation. So if you’re the breadwinner in your relationship, you could set up an IRA for yourself and open a spousal IRA to make contributions on behalf of your spouse.
• Self-employed or plan to be. People who are self-employed can use traditional, Roth, or SEP IRAs to save for retirement. You might end up with multiple IRAs if you were an employee who had a traditional or Roth IRA, then later went out on your own as an entrepreneur. You could then open a SEP IRA, which allows for tax-deductible contributions and a higher annual contribution limit ($70,000 in 2025, and $72,000 in 2026).
Reasons You Might Want Your IRAs With Different Companies
Whether you’re planning to open your first IRA or your fifth, it’s important to choose the right place to keep your retirement savings. You can open an IRA with a traditional broker, an online brokerage, or sometimes at your bank or credit union.
So why would you want to have your IRAs in different places? Two big reasons for that center on investment options and insurance.
Setting up IRAs at different brokerages could offer you greater exposure to a wider variety of investments. Every brokerage has its own policies on IRA assets. One brokerage might lean almost exclusively toward investing in exchange-traded funds (ETFs) or index funds, for example, while another might allow you to purchase individual stocks or bonds through your IRA.
You can also benefit from increased insurance coverage. The Securities Investor Protection Corporation (SIPC) insures Roth IRAs and other eligible investment accounts up to $500,000 per person. Under those rules, you could have a traditional IRA at one brokerage and a Roth IRA at another and they’d both be covered up to $500,000.
Note: SIPC coverage only protects you against the possibility of your brokerage failing, not against any financial losses associated with changes in the value of your investments.
How to Transfer an IRA to Another Investment Company
It’s fairly straightforward to move an IRA from one brokerage to another. First you need to set up an IRA at the new brokerage. Then you’d contact your current brokerage to initiate the transfer of some or all of your IRA funds.
You can request a trustee-to-trustee transfer, which allows your current IRA company to move the money to the new IRA on your behalf. No taxes are withheld on the transfer amount and you also avoid the risk of triggering a tax penalty.
The IRS also allows 60-day rollovers, in which you get a distribution from your existing IRA then redeposit it into your new retirement account. Taxes are withheld, so you’ll have to make that amount up when you deposit the money to your new IRA. If you fail to complete the rollover within 60 days, the IRS treats the deal as a taxable distribution.
The Takeaway
Investing in multiple IRAs is perfectly legal and, in theory, you can have an unlimited number of them. The IRS’s annual limits on contributions apply across all your accounts, however. Traditional and Roth IRAs have different tax rules and can sometimes be useful to offset each other. SEP IRAs offer the potential to save more, thanks to their higher contribution limits. Wage earners can often contribute to separate accounts for their non-working spouses, potentially doubling the amount of allowable contributions.
If you have yet to set up an IRA, getting started is easier than you might think. With SoFi Invest, you can open a traditional or Roth IRA. And you may want to consider doing a rollover IRA, where you roll over old 401(k) funds so that you can better manage all your retirement money.
SoFi makes the rollover process seamless and simple, so you don’t have to worry about transferring funds yourself, or potentially incurring a penalty. There are no rollover fees, and you can complete your 401(k) rollover without a lot of time or hassle.
FAQ
Does it make sense to have multiple IRAs?
Having more than one IRA could make sense for some people, depending on their investment strategies. When maintaining multiple IRAs, the most important thing to keep in mind are the limits on annual contributions. It’s also helpful to weigh the investment options offered and the fees you might pay to own multiple IRAs.
Can I have both a traditional and a Roth IRA?
Yes, you can have both a traditional IRA and a Roth IRA. However, your total contribution to all your IRAs cannot exceed the annual limits allowed by the IRS.
How many Roth IRAs can I have?
A person can have any number of Roth IRAs. The IRS does, however, set guidelines on who can contribute to a Roth IRA and the maximum amount you can contribute each year.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/Prostock-Studio
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
SOIN0322050
CN-Q425-3236452-01
Sep
22
2025
How to Rebalance Your 401(k)
Table of Contents
Rebalancing is the process of buying and selling assets in a portfolio to bring your allocations back into line with your investment goals. If you’re new to rebalancing 401(k) savings, it helps to know how it works and how often you might want to do it.
Making 401(k) contributions can help you build retirement wealth while enjoying some tax advantages. Periodic 401(k) rebalancing can help ensure that your asset allocation aligns with your risk tolerance and financial goals.
Key Points
• Determine the current asset allocation in your 401(k) to understand the distribution of investments.
• Establish a target allocation that aligns with personal financial goals, age, and risk tolerance.
• Sell assets that exceed the target allocation to reduce overconcentration in certain investments.
• Purchase assets that are below the target allocation to achieve a balanced portfolio.
• Automatic rebalancing or target date funds could simplify the process and maintain the desired asset mix.
This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.
What Is Rebalancing Your 401(k)?
A 401(k) rebalance refers to buying or selling investments in your workplace retirement plan to bring them back into alignment with the original percentages you started with.
Example
If you started with 50% in equities (stocks) and 50% in bonds, over time that portfolio balance will change as the value of those securities rises or falls. You can then rebalance your portfolio to restore the original 50-50 ratio. (Or you can adjust your allocation according to a new ratio that reflects what you’re comfortable with today.)
Rebalancing isn’t the same as changing your 401(k) contributions. That usually refers to increasing — or decreasing — the amount of your salary you contribute to your plan. If you’re wondering if you change your 401(k) contribution at any time, you typically can, though it might depend on your plan administrator’s rules.
When you rebalance 401(k) assets, you’re changing how the money in your account is allocated. How you determine your retirement goals and your risk tolerance can shape your ideal asset allocation.
When to Rebalance Your 401(k)
There’s not one specific answer for how often to balance your 401(k). Every investor’s needs and goals are different. As a general rule of thumb, you might revisit your 401(k) allocation at least once a year. But rebalancing 401(k) savings could make sense at any time when your allocation no longer matches up with your investment goals or risk tolerance.
Life changes might also affect your decision of how often to rebalance 401(k) assets. For example, you might need to take a second look at your assets if you get married, have a child, or get divorced. Any of those situations can influence the way you approach investing, including how much risk you’re comfortable taking and how much you might need your 401(k) to grow to hit your retirement target.
Age is also a consideration for deciding when to rebalance a portfolio. When you’re younger with years ahead of you to ride out periodic ups and downs in the market, you might not be as concerned with rebalancing your 401(k) assets. You can generally afford to take greater risks at this stage to earn greater rewards with your investments.
As you get older, however, and closer to retirement, you might naturally begin to gravitate toward more conservative investments. If you find yourself growing less tolerant of risk, that’s a sign that it might be time for some 401(k) rebalancing.
Recommended: Average Retirement Savings by Age
Example of Rebalancing a 401(k)
Rebalancing 401(k) assets is a fairly straightforward process. First, you need to decide what you want your target asset allocation to look like. From there, you’d either buy or sell assets until your portfolio achieves the right balance.
Let’s say that you’re 35 years old and your target 401(k) portfolio allocation is 85% stocks and 15% bonds. Upon checking your latest statement, realize that your asset makeup has become 75% stocks and 25% bonds. You could rebalance 401(k) investments by selling 10% of your bond holdings, then reinvesting the proceeds into stocks.
You can do that without tax consequences as long as you’re not withdrawing money from your plan. Should you decide later that it makes more sense to move back to a 75%/25% split, you could sell off some of your stocks and purchase bonds instead.
Benefits of Rebalancing Your 401(k)
What is rebalancing meant to do for you? A few things, actually, and there are good reasons to consider regular 401(k) rebalancing.
Here are some of the main advantages of paying attention to your 401(k) allocation.
• Manage risk. Rebalancing your retirement savings can help ensure that you’re not taking more risk with your investments than you’re comfortable with. At the same time, it allows you to see if you’re taking enough risk in order to reach your goals.
In the example above, rebalancing the portfolio so it has a higher percentage invested in stocks will increase the portfolio’s risk/reward ratio. Stocks tend to be higher-risk investments, with a higher risk of loss and a higher potential for rewards.
• Maximize returns. If your 401(k) allocation becomes too conservative, you could miss out on potential opportunities to earn greater returns. Rebalancing can prevent that from happening so that you have a better chance of achieving the level of returns you’re looking for.
• Keep pace with changing goals. As mentioned, life changes and age can influence your asset allocation preferences. Should your goals or needs change, rebalancing can help you adjust your financial plan both for the short- and long-term.
Is there a downside to 401(k) rebalancing? There can be if the investments you’re buying underperform and don’t deliver the level of returns you’re expecting. Another unintended consequence centers on cost. If you’re swapping out lower-cost investments in your 401(k) for ones with higher fees, that could potentially offset benefits you might realize in the form of better returns.
Steps for Rebalancing Your 401(k)
Ready to rebalance your 401(k)? The process itself isn’t difficult, though you may want to spend some time researching the different investment options offered through your plan.
Calculate Current Asset Allocations
The first step in 401(k) rebalancing is figuring out what kind of asset split you currently have. In other words, what percentage of your account is dedicated to stocks, bonds, or other assets.
You may be able to do that by logging in to your 401(k) plan and checking your asset allocation. Many plan administrators offer online investment portfolio tracking so you can see at a glance how much you have invested in stocks, bonds, or other securities.
If your plan doesn’t automatically calculate your allocation, you can figure it out yourself by identifying the amount of money assigned to each investment, dividing it by the total value of your account, then multiplying by 100.
For example, say that you have $120,000 in your 401(k) and $72,000 of that is in stocks. If you divide $72,000 by $120,000, then multiply by 100, you get 60%. That means 60% of your 401(k) portfolio is stocks. You can perform the same calculation for each type of investment in your plan.
Compare to Target Asset Allocations
Once you know how your 401(k) assets break down, you can compare those percentages to your target percentages. For example, if you’ve got 60% of your 401(k) in stocks and your goal is 80% stocks, then you know you’ve got a 20% gap to close.
How you set your target allocations is entirely up to you and, again, it can depend on things like:
• Your age
• Risk tolerance
• Investment goals
• Timeframe for investing
You might try using a basic rule of thumb like the rule of 100 or rule of 120 to find a starting point for allocating assets. These rules suggest subtracting your age from 100 or 120, then using that number as a guide for allocating your portfolio to stocks.
For example, if you’re 35, then based on the rule of 120, stocks should account for 85% of your portfolio. You could also look at how much you have saved versus what you need to save. This kind of retirement gap analysis can tell you how close or how far away you are to your goals and where you might need to adjust your savings strategy.
Sell Overweight Assets
Now that you know what your target allocation should be, you can take the next step and sell off overweight assets. These are the ones that are causing your asset allocation to skew away from your ideal alignment.
If you need more stocks, for example, then you’d sell off bonds. And if you want a more conservative allocation, you’d sell some of your stocks so you can use the money to buy more bonds.
Buy Underweight Assets
The last step is to buy underweight assets in order to bring your 401(k) portfolio back in line with where you want it to be. There are a couple of ways you can do this.
First, you could make a large, one-time purchase using the proceeds from the overweight assets that you sold. That might be easiest if you don’t want to make any changes to future allocations of your 401(k) contributions.
The other option is to change your allocations to direct future 401(k) contributions to underweight assets. What you have to keep in mind here is that once you reach your target allocation, you may need to change your future allocation preferences again so that you don’t accidentally end up overweight in one asset class.
One more possibility when considering how to manage 401(k) asset allocation is to check with your plan administrator to see if automatic rebalancing is an option. An automatic rebalance 401(k) feature could make keeping your allocation easier so you don’t have to spend as much time worrying about your assets.
Consider a Target Date Fund
If you want to skip rebalancing altogether, you might consider investing in a target date fund in your 401(k). Target date funds have an asset allocation that shifts automatically over time as you get closer to retirement.
You choose a target date fund based on your expected retirement date and the fund does the rest. Target date funds offer convenience since you don’t have to actively rebalance, but they might not be right for everyone. If the fund’s allocation doesn’t adjust in a way that’s consistent with your goals, you might be overexposed or underexposed to risk.
The Takeaway
If you’re contributing to a 401(k) for your retirement, it helps to know how to make the most of it. Rebalancing your 401(k) can help you stick to an asset allocation that makes the most sense for you. You also have the option of changing your allocation if your risk tolerance changes or your goals shift.
Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.
🛈 While SoFi does not offer 401(k) plans at this time, we do offer a range of Individual Retirement Accounts (IRAs).
FAQ
Is it good to rebalance your 401(k)?
It’s a good idea to rebalance your 401(k) if you’re concerned about taking too much risk — or not enough — with your investments. Rebalancing 401(k) assets is usually recommended when you experience life changes that affect your retirement goals and as you get older.
Should I rebalance my 401(k) before a recession?
Whether it makes sense to rebalance a 401(k) before a recession can depend on your specific financial situation, investment timeline, and current asset allocation. If you’re heavily invested in securities that are typically recession-proof or tend to fare well in economic downturns, then rebalancing might not be necessary. On the other hand, you might want to consider the idea of making some shifts in your 401(k) assets if you think a recession could expose you to more risk than you’re comfortable with. You may also want to consult with a financial professional.
Does it cost money to rebalance 401(k)?
In general, it shouldn’t cost money to rebalance a 401(k), since you’re buying and selling assets in the same plan. However, you may want to ask your plan administrator whether any transaction fees will apply before you move ahead with 401(k) rebalancing. Keep in mind that taking money out of your plan to buy investments could cost you, since early withdrawals are subject to tax penalties.
Should I rebalance my 401(k) in a bear market?
Whether you should rebalance your 401(k) in a bear market can depend on the type of assets you’re holding, your investment timeline, and how much risk you’re willing to take. Bear markets can be opportunities for investors who are comfortable taking more risk, as they might be able to find investments at bargain prices when the market is down. Once the market recovers, those discounted investments might experience gains as prices rise again. But then again, they might not, since there is no guarantee. Carefully consider the pros and cons.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/miniseries
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Read moreSep
18
2025
Building a Nest Egg in 5 Steps
Table of Contents
A nest egg can help you save for future goals, such as buying a home or for your retirement. Building a nest egg is an important part of a financial strategy, as it can help you cover any emergency costs that might crop up and allow you to become financially secure.
A financial nest egg requires some planning and commitment. In general, the sooner you start building a nest egg, the better.
Key Points
• A financial nest egg is important for securing long-term goals and handling unforeseen expenses.
• Setting SMART financial goals means they are specific, measurable, achievable, relevant, and time-bound.
• Managing finances through a budget helps in allocating resources towards building a nest egg.
• Automating savings allows for consistent contributions to a nest egg, which could help with achieving financial goals.
• Putting money in savings vehicles with compound interest potentially accelerates growth, supporting both long-term and short-term needs.
What Is a Nest Egg?
A financial nest egg is a large amount of money that an individual saves to meet financial goals. Usually, a nest egg focuses on longer-term goals such as saving for retirement, paying for a child’s college education, or buying a home.
A nest egg could also help you handle emergency costs, such as unexpected medical bills, pricey home fixes, or car repairs. There is no one specific thing a nest egg is for, as it depends on each person’s unique aims and circumstances.
Understanding How a Nest Egg Works
To successfully build a nest egg, there are a few factors to keep in mind.
• You have to have a plan. Unlike saving for short-term goals, building a nest egg takes time and you need a strategy to make it happen. A common technique is to save a certain amount of money each month or each week.
• You need a place to stash your savings. This may sound obvious, but in order to save money every week or month, you have to put it in a savings account of some sort, such as a high-yield savings account. If you “save” the money in your checking account, you may end up spending it instead.
• Make it untouchable. In order for your nest egg to grow so that you can reach your savings goals by a certain age, you have to protect it. Consider it hands-off.
How Much Money Should Be in Your Nest Egg?
There is no one correct amount a nest egg should be. The amount is different for each person, depending on their needs and what they are saving for. If you’re using your nest egg for a down payment on a house, for instance, you’ll likely need less money than if you are planning to use your nest egg for retirement.
If your nest egg is for retirement, one common rule of thumb is to save 80% of your annual income. However, the exact amount is different for each person, depending on the type of lifestyle they want to have in retirement. For instance, someone who plans to travel a lot may want to save 90% or more of their annual income.
What Are Nest Eggs Used for?
Nest eggs are typically used for future financial goals, such as retirement, a child’s education, or buying a house.
A nest egg can also be used to cover emergency costs, such as expensive home repairs, medical bills, or car repairs.
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5 Steps to Building a Nest Egg
1. Set a SMART Financial Goal
The SMART goal technique is a popular method for setting goals, including financial ones. The SMART method calls for goals to be (S)pecific, (M)easurable, (A)chievable, (R)elevant, and (T)ime bound.
With this approach, it’s not enough to say, “I want to learn how to build a nest egg for emergencies.” The SMART goal technique requires you to walk through each step:
• Be Specific: For example, if you’re saving for emergencies, target an amount to save in an emergency fund. One rule of thumb is to save at least three to six months’ worth of living expenses, in case of a crisis like an illness or a job layoff.
• Make it Measurable and Achievable: Once you decide on the amount that’s your target goal, your next task is to figure out how to reach that goal. If you want to save money from your salary to reach a total of, say, $3,000 for your emergency fund, you could put $200 a month into a high-yield savings account until you reach your goal. Be sure to create a plan that’s measurable and doable for your situation.
• Keep it Relevant and Time-bound: The last actions in the SMART method are to keep your goal a priority, and to adhere to a set timeframe for achieving it. For example, if you commit to saving $200 per month for 15 months in order to have an emergency fund of $3,000, that means you can’t suddenly earmark that monthly $200 for something else.
2. Create a Budget
Saving money takes time and focus. Making a budget is a way to help you save the amount you need steadily over time. There are numerous budgeting methods, so find one that works for you as you build up your nest egg.
You could try the 50-30-20 plan, for instance, in which you allocate 50% of your money to musts like rent, utility payment, groceries, and so on; 30% to wants, such as eating out or going to the movies; and 20% to savings. You could also explore zero-based budgeting. Try out your selected method to ensure that you can live with it.
3. Pay Off Debt
Debt can be a major obstacle to building a nest egg, especially if it’s high-interest debt like credit card debt. If you’re struggling to pay down debt, making it a priority to repay what you owe can help save you money on interest and also reduce financial stress.
Adding debt payments into your monthly budget is one way to help keep your debt repayment plan on track. In addition, there are specific methods you can use to repay debt.
Debt Repayment Strategies
These are two popular debt repayment strategies you might want to explore — the avalanche method and the snowball method.
The avalanche method focuses on paying off the debt with the highest interest rate as fast as possible. You continue to pay the minimum monthly amount on all your other debt, but you direct any extra money you have the highest-interest debt. This method can generally save you the most money in the long run.
The other option is the snowball method, which focuses on paying off the smallest debt first while making minimum payments on all other debts. When one debt is paid off, you take the payment that went toward that debt and add it to the next-smallest one, “snowballing” as you go.
This method can be more psychologically motivating, as it’s easier and faster to eliminate smaller debts first, but it can cost more in interest over time, especially if the larger debts have higher interest rates.
Finally if you’re having trouble paying down a certain debt, like a credit card or medical bill, it might be worth calling the lender. In some cases, lenders may work with individuals to create a manageable debt repayment plan. Call the lender before the debt gets out of control.
4. Make Saving Automatic
Automating your savings simplifies the act of saving with automatic transfers of money from your paycheck directly into your savings account. It can be a steady way to build your savings over time, since you don’t even have to think about it or remember to do it.
Not only that, because the money isn’t hitting your checking account, you won’t be tempted to spend it.
Set up automatic transfers to your online bank account every week, or every month. While you’re at it, set up automatic payments for the bills you owe. Don’t assume you can make progress with good intentions alone. Technology can be your friend, so use it!
5. Start Investing in Your Nest Egg
In addition to a savings account, you might also want to explore options like putting some of your money in a money market account or certificate of deposit (CD). Both types of accounts tend to earn higher interest rates than traditional savings accounts.
CDs come with a fixed term length and a fixed maturity date, which can range from months to years. You generally need to leave the money in a CD untouched for the length of the term, or you’ll owe an early withdrawal fee. With a money market account, you can access your money at any time, though there may be some restrictions.
To help build retirement savings over time, consider participating in your employer’s 401(k). Some employers offer matching funds — if you can, contribute enough to your to get the employer match, since it is essentially free money.
The Power of Compounding Interest
When saving money to build a nest egg in certain savings vehicles such as a high-yield savings account or a money market account, the power of compound interest can work to your advantage.
Here’s how it works: Compound interest is earned on the initial principal in a savings vehicle and the interest that accrues on that principal. So, for instance, if you have $500 in a savings account and you earn $5 in interest, the $5 is added to the principal and you then earn interest on the new, bigger amount. Compound interest can help your savings grow. Use a compound interest calculator to see this in action.
Why Having a Nest Egg Is Important
A financial nest egg can help you save for retirement and/or achieve certain financial goals, such as buying a home or paying for your child’s education. By building a nest egg as early as you can, ideally starting in your 20s or 30s, and contributing to it regularly, the more time your money will potentially have to grow.
The Takeaway
Building a nest egg starts with setting financial goals and then creating a specific plan of action to reach them. Using a method like the SMART goal technique, it’s possible to build a nest egg for an emergency fund, a down payment on a house, or retirement. You can use a budgeting system to help stay on track, and automate your savings to make saving simpler.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
What is a financial nest egg?
A financial nest egg is a sum of money you save or invest to meet a certain financial goal. A nest egg typically focuses on future milestones, such as retirement, paying for a child’s college education, or buying a home.
How much money is a nest egg?
There is no one specific amount of money a nest egg should be. The amount is different for each person, depending on their needs and what they’re using the nest egg for. For instance, if a nest egg is for retirement, some financial professionals suggest saving at least 80% percent of your annual income.
Why is it important to have a nest egg?
A nest egg allows you to save a substantial amount of money for a financial goal, such as retirement or your child’s education, for instance. By starting to build a nest egg as early as you can, the more time your money has to grow.
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