Jun
06
2023
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Actively Managed Funds vs Index Funds: Differences and Similarities

By | Growing Wealth, invest, Investing | Comments Off on Actively Managed Funds vs Index Funds: Differences and Similarities

Actively managed funds and index funds are similar in that they’re both a type of pooled investment fund, and they both come in a variety of styles (e.g. large cap, small cap, green bonds, and so on). The main difference between them is that actively managed funds rely on a team of live portfolio managers vs. index funds, which simply track or mirror a relevant index using an algorithm.

The difference in management style between active and so-called “passive” index funds leads to a series of other differences, including cost and transparency around securities in the fund.

The debate concerning the merits of actively managed funds vs. index funds is a longstanding one. Both types of funds have the potential to yield advantages to investors. But they each have drawbacks that should be weighed in the balance.

What Are Index Funds?

Index funds are a type of mutual fund or exchange-traded fund (ETF) that mirror the performance of a specific stock market index.

A stock market index measures a particular sector of the market. In the case of the S&P 500 Index, for example, what’s being measured is the performance of the 500 largest U.S. companies.

While it’s not possible to invest in an index directly, index funds and ETFs offer a work-around because when you invest in an index fund, you’re purchasing a fund that holds securities which are representative of its representative index.

If you’re buying a fund that tracks the Nasdaq-100 Composite Index, for example, the fund would include stocks from the 100 largest and most actively-traded non-financial domestic and international securities listed on the Nasdaq. The securities are not hand-picked by a portfolio manager, and an index fund doesn’t seek to outperform the benchmark — but rather to match it.

Index funds can be cap-weighted, meaning they track an index that relies on market capitalization to decide which securities to include. Market capitalization is a company’s value as determined by its share price multiplied by the number of shares outstanding.

For example, some index funds only track large-cap companies that have a market capitalization of more than $10 billion. Others focus on small-cap companies that have a market capitalization of $250 million to $2 billion.

Index funds and index investing follow a passive investment strategy. That means that the fund tracks the performance of a particular benchmark, rather than trying to beat the market by using the skills of a live portfolio manager.


💡 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.

What Are Actively Managed Funds?

Actively managed ETFs and mutual funds also represent a collection or basket of securities. The difference between these types of funds and index funds is that instead of being passively managed and tracking a specific index, a fund manager plays a hands-on role in determining which securities to include, in an attempt to beat the market.

Because of that, fund turnover — the movement of assets in and out of the fund — may be more frequent compared to an index fund. This has certain tax and cost implications for investors.

Index Funds vs Actively Managed Funds

Index funds do have some similarities to actively managed funds, but the chief difference between them — i.e. the use of passive management vs. active management — yields some important other differences.

Index Funds

 Active Funds
Types of securities All securities (stocks, bonds, etc.) All securities (stocks, bonds, etc.)
Investment objective To mirror its benchmark To outperform its benchmark
Management style Passive (securities in the fund match the index) Active (fund managers select securities in the fund on the basis of performance)
Cost Average expense ratio is about 0.03 to 0.05% Average expense ratio is about 0.50% to 0.75%
Tax efficiency Less turnover, more tax efficient Higher turnover, less tax efficient

Similarities

As noted above, both types of funds are pooled investment funds. You might have passively or actively managed mutual funds as well as exchange-traded funds.

Both types of funds can be invested in a wide range of different equities, bonds, and other securities. For example, you might have a small-cap ETF that’s passively managed (perhaps it tracks the Russell 2000 small-cap index) or an ETF that’s actively managed and also invested in small-cap companies.

Differences

The chief differences between actively managed funds show up in terms of cost and tax implications, and performance.

Actively managed funds are generally more expensive than index funds, because the fund employs a team of active managers who hand-pick securities and trade them.

Active funds also have a different investment objective: to beat the market. Index funds merely seek to mirror the performance of its benchmark index.

So a large-cap actively managed fund might seek to outperform the S&P 500, whereas a large-cap index fund that tracks the S&P 500 would aim to deliver the same results as the index itself.


💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Pros and Cons of Index Funds

There’s a lot to like about index funds but with any investment, it’s important to consider the potential downsides. Reading through an index fund’s prospectus can offer more insight into how the particular fund works, in terms of what it invests in, its risk profile, and the costs you’ll pay to own it. This can help you better gauge whether a particular index fund aligns with your investment strategy.

When weighing index funds as a whole, here are some important points to keep in mind.

Index Fund Pros

•   Simplified diversification. Diversification may help manage risk inside a portfolio. Index funds can make diversifying easier through exposure to multiple securities that represent a specific index.

•   Cost. Because they are passively managed, index funds typically charge fewer fees and carry expense ratios that are well below the industry average of 0.57%. Fewer fees allow you to keep more of your investment returns.

•   Tax efficient. Index funds tend to turn over assets less frequently than actively managed funds, which means fewer capital gains tax events — another way index funds can save investors money.

•   Consistent returns. The idea behind an index fund is that it will closely track its benchmark to mirror performance. Index funds can offer stable returns over time when they perform in tandem with their respective indices.

Index Fund Cons

•   Underperformance. Index fund returns can differ from one fund to the next and factors such as fees, expense ratios, and market conditions can affect how well a fund performs. It’s possible that rather than matching its benchmark, an index fund may deliver returns below expectations.

•   Cost. Between index funds vs. managed funds, index funds tend to have lower costs — but that’s not always the case. It’s possible to invest in index funds that prove more expensive than actively managed funds.

•   Tracking error. Tracking error occurs when an index fund’s performance doesn’t match the performance of its benchmark. This can happen if the fund’s makeup doesn’t accurately reflect the makeup of securities tracked by the index.

•   Limit on returns. Index funds aren’t designed to beat the market. Investing in these funds, without considering active investing strategies, could limit your return potential over time and cause you to miss out on bigger investment gains.

Why Invest in Index Funds?

Index funds and index investing may work better for a buy-and-hold investor who’s focused on investing for the long-term. Buy-and hold-strategies often go hand in hand with value investing strategies, in which the emphasis lies on finding companies that are undervalued by the market.

Utilizing index funds could simplify investing over the long term, and it may suit people who want to minimize risk-taking in their portfolios. But it’s important to consider the trade-offs involved with choosing index funds vs. actively managed funds.

Pros and Cons of Actively Managed Funds

With active funds, fund managers use their knowledge and expertise to determine which securities to buy or sell inside the fund in order to reach the fund’s investment goals.

As with index investing, using actively managed funds to invest can have its high and low points. Here are some key things to know about investing with actively managed funds.

Actively Managed Funds Pros

•   Professional expertise. Actively managed funds allow investors to benefit from a fund manager’s know-how and experience in the market. This may be reassuring to an investor who’s still learning the ropes of how trading works, or who has faith in a particular fund manager.

•   Higher returns. Actively managed funds seek to outperform the market. If the fund realizes its objectives, returns could possibly exceed those offered by index funds. Historically, though, the majority of active funds don’t outperform the market.

Actively Managed Funds Cons

•   Underperformance. As with index funds, it’s possible that an actively managed fund’s returns won’t meet investor expectations. This can happen if the fund manager makes a miscalculation when choosing securities or unforeseen events, such as a major economic downturn, deliver a blow to the market.

•   High management fees. The costs associated with having a fund manager make decisions are typically higher than with passively managed index funds.

•   Risk. Active trading can be riskier than index investing, since performance relies on the fund manager to make buying and sellings decisions.

•   Taxes. Since asset turnover is higher for actively managed funds, more capital gains tax events are likely. Even though an actively managed fund may generate higher returns, those have to be weighed against the possibility of increased tax liability.

Why Invest in Actively Managed Funds

Actively managed funds may offer more downside than upside to investors. Unlike index funds, actively managed funds may not be suited for a long-term, buy-and-hold strategy. But for investors who have the time or inclination to take their chances for a greater potential yield, they might be an attractive part of a portfolio.

Are Index Funds Better than Managed Funds?

Both actively managed funds and index funds aim to help investors achieve their goals, but in different ways and with potentially different results. Whether index funds or managed funds are better hinges largely on the individual investor and what they need or expect their investments to do for them.

When considering index funds and actively managed funds, ask yourself what’s more important: Steady returns or a chance to beat the market? While actively managed funds can outperform market indices, results aren’t guaranteed and in some cases, active funds can lag behind their benchmarks.

Index funds, on the other hand, may offer a greater sense of stability over time and potentially more insulation against market volatility. While all investments carry the risk of loss, over time there may be a smaller chance of losing money in an index fund. But there are no guarantees.

Lower investment costs can also be attractive when estimating net returns, but again it’s important to compare fund costs against fund performance individually, to ensure that you’re comfortable with the number.

The Takeaway

Whether you prefer index funds vs. managed funds might depend on your age, time horizon for investing, risk tolerance, and goals. If you lean toward a hands-off, goals-based investing approach that carries lower costs, index investing could suit you well.

On the other hand, if you’re more interested in beating the market, and if you believe active management is more likely to deliver outperformance, then you may consider the benefits of active investing.

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.

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.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Jun
06
2023
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What Is Net Worth and Why Should You Know Yours?

By | Debt Payoff, Financial Independence, Growing Wealth, invest, Terminology | No Comments

A person’s net worth describes their total financial value, and is calculated by subtracting their liabilities from their assets. Though we generally discuss net worth in relation to very wealthy individuals, it can be important for people who aren’t billionaires to know their net worth as well.

A person’s net worth can be an important reference point in understanding one’s financial position. Net worth can be negative, especially early on in one’s careers. But net worth can help an individual figure out how much they need to save, how much spending they need to cut back on, or how much they’ve saved for retirement.

How to Calculate Net Worth

If you’re wondering how to calculate net worth, it’s actually a simple formula:

Assets – Liabilities = Net Worth

The hard part is usually determining a person’s assets and liabilities. And a person’s assets can go beyond what they have in their checking account. In fact, a person’s assets can include a whole host of things.

Assets

Assets basically boil down to how much money you have, as well as the value of things you own. In order to know one’s net worth, estimate the value of each asset below:

•   Money in savings accounts

•   Money in checking accounts

•   Money in investing or retirement accounts. Brokerage accounts or 401(k)s are in this bucket.

•   Physical cash

•   Value from insurance policies

•   Value from business ownership or stakes

•   Value of cars

•   Valuable personal goods, like jewelry or art

•   Value of real estate, including home

Calculating the value of a home can be a task in itself. It’s important to research the value of the homes around you, the size of your home, any deferred maintenance on the home, additional benefits like parking spots, backyard space, room count, etc. There are a number of home value calculators online, too.

Recommended: Understanding Property Valuations

There are other ways to think about assets:

•   Liquid Assets: Items like stocks, bonds, mutual funds, or ETFs that are easy to sell quickly and whose sale will not greatly affect their price.

•   Fixed Assets: These are items that would take a longer time to convert to cash. These assets are often deposited for extended periods of time in exchange for high interest accrual and thus cannot be cashed before their agreed-upon time frame is up.

•   Equity Assets: Equity assets include your shares in a company, either private or public.

Intangible Assets, such as brand recognition for a company or any other intellectual property like patents, trademarks or even goodwill, are trickier to factor into your net worth due to the complexity of measuring their value.

Liabilities

Liabilities are debts. The following categories are what most often make up liabilities:

•   Auto loans

•   Student loans

•   Personal loans

•   Business loans (personally guaranteed)

•   Credit card balances

•   Mortgages

While liabilities are on the negative side of the net worth equation, it doesn’t necessarily have to symbolize something negative about your finances. For example, student loans or mortgage loans are typically seen as necessary loans that individuals take on as they reach milestones in life, like going to college, graduate school or buying a home.

Meanwhile, knowing one’s total liabilities can help with figuring out a plan to start paying off debt that has higher interest rates, like from credit card balances.


💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

Median and Average Net Worth in US

An individual or household’s net worth isn’t set in stone, and it ebbs and flows all the time. For that reason, it can be difficult to nail down median or average net worth figures for both individuals and households in the U.S. You can find some numbers if you search for them, but they’re often several years old, and may not be accurate given the time lapse.

For instance, the Federal Reserve tracks median and average net worth data in the U.S., but generally, they do so using survey data that it publishes once every few years. So, while data from a few years ago may be fine, large-scale world events–such as a pandemic, natural disaster, recession, or similar–may have led to large changes in those numbers.

This is all something to keep in mind if you seek out average net worth numbers. It’s not that they’re inaccurate, it’s simply that the data may be hard to capture and synthesize in a reasonable amount of time.

Remember, too, that it’s important to keep abreast of your net worth because this number may fluctuate depending on factors such as stock values, interest rates, real estate trends, and other tides of the financial world. It’s important to have an idea of overall trends so you can generally understand your financial health and have an idea of your true wealth.


💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

The Takeaway

True wealth can be an important factor in knowing when you might expect to retire. It’s a good idea to focus on your gains year over year, rather than the number you get at the end of the equation. If you’re concerned about your net worth or are hoping to increase it, especially for future retirement goals, then it might be helpful to consider investing.

There are a multitude of things that can have an effect on your net worth. And focusing strictly on your net worth probably shouldn’t be your focus. If you’re concerned about it, though, it may be worthwhile to talk to 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.

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.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Jun
05
2023
What Do Investment Bankers Do?

What Do Investment Bankers Do?

By | Growing Wealth, invest, Investing | Comments Off on What Do Investment Bankers Do?

Investment banking is a specialized area of the financial services industry that focuses on aiding governments, corporations and other entities to raise capital and complete mergers and acquisitions. The term “investment banker” refers to an individual who works for an investment bank that offers these services.

Investment banking is typically considered to be a prestigious career, and becoming an investment banker can be lucrative for those willing to complete the necessary education and training.

What Is an Investment Banker?

Investment bankers work for investment banks, which are effectively middlemen between entities that need capital and entities that provide it. In simpler terms, investment bankers help their clients to expand and grow their businesses or operations.

Another way to think of an investment banker is as a financial advisor to governments, corporations, and other businesses. As part of their professional duties, they may guide clients in making financial decisions that directly or indirectly affect their bottom line.

Investment bankers are most often associated with Wall Street, though they work in cities throughout the world. Some of the largest investment banks in the United States include Goldman Sachs & Co., Morgan Stanley, J.P. Morgan, Bank of America Merrill Lynch, and Blackstone.


💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

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What Do Investment Bankers Do?

Investment bankers play an important role in helping companies achieve their financial goals. When a corporation is planning an upcoming expansion project, for instance, its board may turn to an investment bank for help. An investment banker can analyze the company’s financial situation to determine the best way to meet its needs.

In terms of the specific tasks an investment banker may carry out, that depends largely on the type of clients they work with.

Assisting With Initial Public Offerings

Investment bankers can play a critical role in helping clients secure capital. Depending on the client, this can be done through a variety of means, including the launch of an initial public offering (IPO).

An initial public offering, or IPO, allows private companies to offer shares of its stock to the public for the first time. The investment banker assists by creating a prospectus explaining the details of the IPO, marketing it to potential investors, and navigating Securities and Exchange Commission (SEC) compliance rules.

Investment bankers are key to whether the company’s IPO is a success. They help determine the initial price of the offering, which is critical. Pricing too high could scare off investors, while going too low could undercut their client’s profits.

Bond Issuance

Government agencies and corporations often use bonds as a fundraising tool. For example, if a city government needs money to improve local roads they might issue a municipal bond to fund the project. Investors purchase the bonds on the bond market, giving the government the capital it needs to complete the road updates. Investors can hold onto the bond and earn interest on it, or they can sell it to another investor.

As with an IPO, an investment banker’s role in issuing bonds may include preparing the bond issuance documents, setting a price, submitting it to the SEC for approval, and marketing the bond to investors to raise capital.

Recommended: Federal Reserve Interest Rates, Explained

Equity and Debt Financing

Equity and debt financing are two other ways that companies can tap into funding. With equity financing, companies raise capital by selling an ownership share in the business. Venture capital and private equity are common examples of equity financing.

Debt financing involves taking out loans or lines of credit, without giving up ownership stakes. An investment banker can help companies assess which type of financing makes more sense for their business model, and help them work through the process of securing the funding.

For example, investment bankers may work with startups to pitch angel investors, while they might help more established companies compare and select loan options.

Mergers and Acquisitions

Another common task that investment bankers assist companies with is mergers and acquisitions. In a merger, two companies enter into an agreement to become a single business entity. Each company is treated as an equal in the transaction. An acquisition, on the other hand, involves one company purchasing another.

In either type of arrangement, companies may use investment bankers to oversee the process. This could involve negotiating the terms of a merger or acquisition and reporting the details of the transaction to the SEC to ensure compliance. When a company considers an acquisition, investment bankers can also help identify and vet potential targets.

Recommended: What Happens to a Stock During a Merger?

Investing and Asset Management

While investment bankers’ duties primarily revolve around raising capital for their clients, there are other services they may perform. This can include things like:

•   Investment research and analysis

•   Buying and selling securities

•   Offering advisory services

•   Asset management

These services are similar to what a personal financial advisor might offer their clients.


💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

How to Become an Investment Banker

If you’re interested in a career in investment banking, there are a few things to know. In terms of education, a bachelor’s degree is typically a minimum requirement for most investment banker jobs. Though some investment banks may look for candidates that have earned a higher degree of education, such as an MBA or a graduate-level degree in finance.

Aside from education, there are certain skills that may help you be successful as an investment banker. Those include:

•   Ability to perform under pressure

•   Good communication skills

•   Solid marketing skills

•   Firm grasp of financial markets and modeling

•   Strong attention to detail

Depending on your responsibilities, you may also need a securities license. That may include completing one of more of the following licensing exams:

•   Series 7 General Securities Representative Qualification Examination (GS)

•   Series 79 Investment Banking Representatives Exam

•   Series 63 Uniform Securities Agent State Law Exam

Before you can take these exams, you first have to be employed and sponsored by a FINRA-member firm or other self-regulatory organization member.

Taking and passing the Securities Industries Essentials (SIE) Exam could help improve your chances of being hired as an intern or junior employee. That process begins early, with many banks hiring summer interns more than a year ahead of the start of the program.

How Much Do Investment Bankers Make?

Investment bankers generally earn above-average salaries. Even at the entry level, it’s possible to make $100,000 or more, and salaries for top Wall Street bankers can easily range into the millions or tens of millions. But investment banking is one of the hardest jobs on Wall Street. So, if you’re not prepared to routinely work 100-hour weeks or constantly be on-call for your clients, it may not be the job for you.

The Takeaway

Investment bankers work primarily with institutional investors, governments and corporations rather than individual investors. But you can still benefit from the work investment bankers do behind the scenes indirectly.

Investment bankers may work in a variety of roles, such as helping facilitate IPOs, or mergers and acquisitions. It can be a lucrative career path, too, but generally requires a graduate-level education, and additional licensing.

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.

Photo credit: iStock/fizkes

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.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Jun
05
2023
How to Make Talking About Finances Fun, Not a Fight

How to Make Talking About Finances Fun, Not a Fight

By | Family Finances, invest, Life & Career | No Comments

Ask couples what they fight about most, and money is sure to be at the top of the list. Decades of research have shown that common clashes are sparked by different spending habits, different financial values (which influence spending habits), and how to raise financially smart kids.

While dealing with money isn’t always easy, it doesn’t have to drive a wedge in your relationship. These strategies will ensure your financial discussions with your partner are productive and — dare we suggest — maybe even something to look forward to.

Meet Regularly — but Don’t Discuss Money

When couples fight about money, the classic mistake is to think that having a regular “money talk” will help solve things. Unlikely.

That’s because the source of most financial disagreements is that one person’s values don’t line up with the other’s. In order to truly ease money stress, you have to start by understanding the bigger wants and needs and priorities of your partner.

Make time to meet regularly and focus on things you both want out of life. It doesn’t have to be a long conversation — maybe 30 minutes, or an hour.

Come Prepared

Consider bringing a list of topics to each meeting, but don’t expect to cover them all. There will be other meetings, and it’s more important to leave each conversation with a sense that you understand each other better. You might raise some common questions:

Do you want kids? Do you want pets? Do you want to live a certain lifestyle? Start a business? Retire early? Send the kids to private school vs. public?

How important is it to have a vacation each year, or is it more important to have a beautiful home — or both?

Do you both believe in working hard and playing hard? Working to live or living to work? These may sound like cliches, but dig into each topic to get at each person’s core feelings.

Create a Safe Space

A key aspect of these non-money talks has to be a spirit of openness, not criticism or judgment. You’re trying to get to know one another in a slightly different way. Ask questions, take time to listen to each other’s answers.

While these sessions may seem uncomfortable at first, having these non-financial conversations may actually prevent important issues from causing conflicts.

Again, keep these conversations fairly short. The idea is to find common ground, and that may not happen right away. So don’t expect to agree, expect to learn something new about your partner.

Look for Shared Goals and Points of Agreement

Even couples that fight about money, also agree on plenty of financial issues. Be sure to pay attention as you discover these points in common, and celebrate the fact that you have them.

Knowing that you have financial goals and priorities in common, not just pain points, can build your confidence and momentum and lead to the good part of all this: Having more fun because you’re not stressed about money squabbles!

Address Financial Topics as Organically as You Can

Rather than set up more meetings (who has time?), you can use your newfound empathy and sense of shared values to tackle topics as they come up naturally in your day-to-day lives.

Now you can talk about spending when you get the credit card bill, or when you have to make a tough choice between two competing priorities. In some ways it’s less stressful to discuss whether to refinance the house or set up a Roth IRA when that question comes up organically, rather than trying to anticipate bigger issues.

Be sure to take the opportunity to make sure you’re including something fun in your financial plan. Money is for the future, and it’s also for the present, so make sure you enjoy it.

Let Go of Resentment

Financial inequity between partners — say, if one person has a lot of debt or there’s a large disparity between incomes — can be a common source of tension.

If you feel like one person’s debt is holding you both back, remember that it doesn’t have to last forever. There are many strategies for paying off debt — talking it through will help you find the right path for you both. You might also decide to meet with a financial advisor who can help you prioritize, budget, and sometimes even refinance to break even faster.

In cases of income disparity, it may help to reframe each partner’s contribution to the household. Yes, one person may bring in more (or all) of the household income, but be clear on the non-monetary intangibles that the other person is contributing. Cooking, cleaning, watching the kids, caring for aging relatives — these duties all add up and represent what each of you is bringing to the household.

Reward Yourselves

Create incentives to stick with your financial meeting schedule. Maybe that means taking your laptops to your favorite coffee shop, or treating yourselves to a movie night afterward.

Another idea is to reward yourselves as a couple after you hit a predetermined financial goal or milestone. For example, every month you successfully increase your emergency fund by a target amount, you might choose to enjoy a nice restaurant meal.

Even a free indulgence — like a walk around your favorite lake after the discussion — can be effective. Just make it something that you both enjoy (bonus points if it’s something that you don’t do all the time so it feels extra special). That way, you’ll look forward to it.

The Takeaway

The best way to take the sting out of discussing finances with your partner is to start by getting in sync as people, understanding each other’s values and perspectives. Scheduling time to talk monthly (or whatever cadence works for you) allows you to also savor the ways you are on the same page already, and what some of those shared goals are.

Don’t try to meet about big hairy financial goals that aren’t on the table yet. You do have to plan ahead, but it’s also important (and less stressful) to address money matters as they arise naturally. Then, get back to the fun of living your lives together the rest of the time.

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

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.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Jun
05
2023

Understanding Divorce and Retirement Accounts

By | Family Finances, invest, Investing, Preparing for Retirement | Comments Off on Understanding Divorce and Retirement Accounts

Getting divorced can cause both emotional and financial upheaval for everyone involved. One of the most important questions you and your soon-to-be former spouse may have to decide centers on how to divide retirement assets.

Understanding the key issues around divorce and retirement can make it easier to untangle them as you bring your marriage to a close.

Taking Note of Your Retirement Accounts

The average cost of divorce can range from several hundred to several thousand dollars, so it’s important to know what’s at stake financially. Managing retirement accounts in divorce starts with understanding what assets you have.

There are several possibilities for saving money toward retirement, and different rules apply when dividing each. Here’s a look at what types of retirement accounts you may hold and thus will need to consider in your divorce.

401(k)

A 401(k) plan is a defined contribution plan that allows you to save money for retirement on a tax-advantaged basis. Your employer may also make matching contributions to the plan on your behalf. According to the Census Bureau, 34.6% of Americans have a 401(k) or a similar workplace plan, such as a 403(b) or Thrift Savings Plan.

IRA

Individual retirement accounts, or IRAs, also allow you to set aside money for retirement while enjoying some tax benefits. The difference is that these accounts are not offered by employers. There are several IRA options, including:

•   Traditional IRAs, which allow for tax-deductible contributions.

•   Roth IRAs, which allow for tax-free withdrawals in retirement.

•   SEP IRAs, which follow traditional IRA tax rules and are designed for self-employed individuals.

•   SIMPLE IRAs, which also follow traditional IRA tax rules and are designed for small business owners.

Each type of IRA has different rules regarding who can contribute, how much you can contribute annually, and the tax treatment of contributions and withdrawals.

💡 For more info, check out our guide on individual retirement accounts (IRAs).

Pension Plan

A pension plan is a type of defined benefit plan. The amount you can withdraw in retirement is determined largely by the number of years you worked for your employer and your highest earnings. That’s different from a 401(k), since the amount you can withdraw depends on how much you (and your employer) contribute during your working years.

How Are Retirement Accounts Split in a Divorce?

How retirement accounts are split in divorce can depend on several factors, including what type of accounts are up for division, how those assets are classified, and divorce laws regarding property division in your state. There are two key issues that must be determined first:

•   Whether the retirement accounts are marital property or separate property

•   Whether community property or equitable distribution rules apply

Legal Requirements for Dividing Assets

Marital property is property that’s owned by both spouses. An example of a tangible marital property asset is a home the two of you lived in together. Separate property is property that belongs to just one spouse.

In community property states, spouses have an equal share in assets accrued during the marriage. Equitable distribution states allow for an equitable — though not necessarily equal — split of assets in divorce.

You don’t have to follow state guidelines if you and your spouse can come to an agreement yourselves about how divorce assets should be divided. However, if you can’t agree, then you’ll be subject to the property division laws for your state.

If retirement assets are to be divided in divorce, there are certain steps that have to be taken to ensure the division is legal. With a workplace plan, you’ll need to obtain a Qualified Domestic Relations Order (QDRO). This is a court order that specifies how much each spouse should receive when dividing a 401(k) or similar workplace plan in divorce.

IRAs do not require a QDRO. You would, however, still need to put in writing who gets what when dividing IRAs in divorce. That information is typically included in the final divorce settlement agreement, which a judge must sign off on.

Protecting Your 401(k) in a Divorce

The simplest option for how to protect your 401(k) in a divorce may be to offer your spouse assets of equivalent value. For example, if you’ve saved $500,000 in your 401(k) and you jointly own a home that’s worth $250,000, you might agree to let them keep the home as part of the divorce settlement.

If they’re not open to the idea of a trade-off, you may have to split the assets through a QDRO. That could make a temporary dent in your savings, but you might be able to make it up over time if you continue to make new contributions.

You could skip the QDRO and withdraw money from your 401(k) to fulfill your obligations to your spouse under the terms of the divorce settlement. However, doing so could trigger a 10% early withdrawal penalty if you’re under age 59 ½, along with ordinary income tax on the distribution.

Protecting Your IRA in a Divorce

Traditional and Roth IRAs are subject to property division rules like other retirement accounts in divorce. Depending on where you live and what laws apply, you might have to split your IRA 50/50 with your spouse.

Again, you might be able to protect your IRA by asking them to accept other assets instead. Whether they’re willing to agree to that might depend on the nature of those assets, their value, and their own retirement savings.

If you’re splitting an IRA with a spouse, the good news is that you can avoid tax consequences if the transaction is processed as a transfer incident to divorce. Essentially, that would allow you to transfer money out of the IRA to your spouse, who would then be able to deposit it into their own IRA.

Divorce and Pensions

Pension plans are less common than 401(k) plans, but there are employers that continue to offer them. Generally, pension plan assets are treated as marital property for divorce purposes. That means your spouse would likely be entitled to receive some of your benefits even though the marriage has ended. State laws will determine how much your spouse is eligible to collect from your pension plan.

Protecting Your Pension in a Divorce

The best method for protecting a pension in divorce may be understanding how your pension works. The type of payout option you elect, for instance, can determine what benefits your spouse is eligible to receive from the plan. It’s also important to consider whether it makes sense to choose a lump-sum or annuity payment when withdrawing those assets.

If your spouse is receptive, you might suggest a swap of other assets for your pension benefits. When in doubt about how your pension works or how to protect pensions in a divorce, it may be best to talk to a divorce attorney or financial advisor.

Opening a New Retirement Account

Splitting retirement accounts in a divorce can be stressful. It’s important to know what your rights and obligations are going into the process. If you’re leaving a marriage with less money in retirement, it’s a good idea to know what options you have for getting back on track. That can include opening a new retirement account.

SoFi offers individual retirement accounts for people who want to invest with minimal hassle. You can open a traditional or Roth IRA online and choose between active or automated investing to fit your needs and goals.

Easily manage your retirement savings with a SoFi IRA.

FAQ

How long do you have to be married to get part of your spouse’s retirement?

If you’re interested in getting spousal retirement benefits from Social Security, you have to be married for at least one continuous year prior to applying. The one-year rule does not apply if you are the parent of your spouse’s child. Divorced spouses must have been married at least 10 years to claim spousal benefits.

Is it better to divorce before or after retirement?

Neither situation is ideal, but divorcing before retirement may be easier if there are fewer assets to divide. Getting a divorce after retirement can raise questions over how to divide retirement and non-retirement assets. It may also lead to financial insecurity on the part of one or both spouses if the distribution of assets is unequal.

Who pays taxes on a 401(k) in a divorce?

If you’re dividing up your 401(k) prior to divorcing then you would be responsible for paying any taxes or penalties owed. Waiting until after the divorce is finalized to split your 401(k) with your former spouse could reduce the amount of taxes and penalties you owe.

Photo credit: iStock/FG Trade Latin

This article is not intended to be legal advice. Please consult an attorney for advice.

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.

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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