Dec
16
2022
Guide to Building a Well-Balanced Crypto Portfolio
There may be growth opportunities in the cryptocurrency market. What you might want to know to build a diverse cryptocurrency portfolio.
Read more
SoFi
Student Loan Consolidation and Refinancing
Dec
15
2022
Guide to Leverage in Options Trading
Options leverage is a core concept of options trading. For a given capital outlay, investing in options will increase your potential returns compared with investing in the underlying stock. However, options leverage works both ways by also increasing the potential losses.
Options leverage is inherent to options trading and allows you to use call or put options to earn the returns on a specific amount of stock (usually 100 shares per contract) with less money than purchasing the stock outright.
What Is Leverage?
Leverage applies to a variety of different financial products. The leverage example most familiar to people is the purchase of a home.
If you’re looking to buy a new home valued at $400,000, one approach would be to pay $400,000 upfront in cash. A more common approach would be to put 20% down ($80,000) and get a mortgage for the $320,000 balance.
Continuing with our house example, let’s say your house appreciates in value to $500,000. If you paid all cash, you get a return of $100,000 or 25% of your initial investment of $400,000. But through the use of a mortgage, you get the same return of $100,000 but on a lower initial investment of $80,000, a return of 125%.
Using a mortgage leverages your cash to potentially get higher returns.
How Leverage Works in Options Trading
Using options leverage works much the same way. No matter which strategies for trading options you use, you may increase the leverage of your investment by using options.
💡 Recommended: How to Trade Options
Example of Leverage in Options
For example; an investor wants to invest in stock ABC currently trading at $50 per share. There is also an at-the-money option with a strike price of $50 trading at $5. They can choose to buy 100 shares at $50 each for a capital outlay of $5,000. Or, using options leverage, they can purchase an options contract at $500 ($5 times 100 shares per option contract).
Some time later the ABC stock trades at $60 per share. If you purchased 100 shares, your shares would now be worth $6,000, an increase of $1,000 and a 20% return on your initial outlay of $5,000.
An investor in the options strategy could see their options triple in price to $15. The options contract would now be worth $1,500, also an increase of $1,000 but on the much smaller initial outlay of $500 for a return of 200%.
In addition, the options investor would still have the opportunity to invest the $4,500 from the original capital as they saw fit. That includes investing the additional capital in ABC stock, buying more ABC options, or pursuing other investments entirely.
Pros and Cons of Leverage in Options
Here are a few of the pros and cons of using leverage in options trading:
| Pros | Cons |
|---|---|
| Potentially higher percentage of return | Risk of losing your entire investment |
| Options can allow you to hedge an existing position against unfavorable movement | You can lose money if you are wrong on any one of the direction, timing or magnitude of the stock’s move, even if you are right on the other two |
| Flexibility to make money with a variety of different strategies | Options typically have less liquidity than stocks |
Calculating Leverage
The options leverage example above presents the options price movement from $5 to $15 without explaining what drove the price change. Generally, the price of an option is driven by asset volatility, time to expiration, and asset price. Those factors drive the delta Greek of an option which tells an investor how much the option price will change relative to a change in the underlying stock price.
One way to calculate the amount of leverage that you get with a particular option is to take the option’s delta value, multiply it by the stock’s price and divide it by the price of the option. This calculation is usually represented by the Greek letter lambda.
The Takeaway
Options can be a way to increase your returns, but with those higher potential returns comes higher potential risk. Before trading options, make sure you understand the risks and rewards of your position, and set up an exit plan.
If you’re ready to try your hand at options trading, SoFi can help. You can trade options from the SoFi mobile app or through the web platform. And if you have any questions come up along the way, SoFi offers educational resources about options to learn more.
FAQ
How much leverage can you get with options?
In theory you can have nearly unlimited leverage with options, if you buy an option with a very low cost. However, the cheaper the option contract that you purchase, the higher the risk that it will expire worthless.
How is option leverage calculated?
To calculate the amount of leverage that you will get with a particular option contract, first determine the option’s delta value. Then multiply that by the stock’s price and divide it by the price of the option to get the leverage or lambda of the option.
Do call options use leverage?
Yes, using call options is one way to use leverage to invest in the stock market. When you buy a call option, you can control 100 shares of stock for a much lower price than purchasing those 100 shares outright.
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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.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.
New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.
*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
SOIN0221025
Dec
15
2022
Green Bonds, Explained
Green bonds are debt instruments used to raise money for new and existing environmental and sustainability projects while providing investors with steady returns, similar to ordinary bonds. Green bonds may help fund climate change mitigation and adaptation, renewable energy, conservation, waste management, transportation, and more.
To qualify as actual green bonds, these investments have to be certified by a third party, like the Climate Bonds Standard and Certification Scheme. Green bonds may offer investors certain tax benefits versus other kinds of bonds.
What Is a Green Bond?
A green bond is a type of fixed-income security that pension funds or institutional investors can buy. Individual investors can add green bonds to their portfolio by purchasing ETFs or mutual funds that include green bonds. They are issued by corporations, governments, and financial institutions to raise money for specific sustainability and environmental projects. The World Bank is one of the largest green bond issuers.
A green bond is similar to other types of bonds, but the money borrowed through their sale goes towards vetted projects that fit into pre-determined frameworks to meet sustainability standards.
Most green bonds are asset-linked bonds or “use of proceeds” bonds, where the money raised from the sale of the bonds is earmarked for green projects and backed by the issuer’s balance sheet. For example, “use of proceeds” revenue bonds use the issuer’s revenue as collateral; green project bonds rely on the assets and balance sheet of the particular project as collateral; and green securitized bonds where a group of projects are collateral.
Green Bonds vs Climate Bonds vs Blue Bonds
Green bonds can be structured in different ways and generally fall into the category of impact investing.
• For example, the term green bond can cover a broad spectrum of projects, from renewable energy to waste management to climate change.
• There are also climate bonds that put money specifically towards climate change projects such as reducing emissions or adapting infrastructure to changing climate conditions.
• Blue bonds specifically fund water-related projects, such as cleaning up plastic from the oceans, marine ecosystem restoration and conservation, sustainable fisheries, and wastewater treatment projects.
How Do Green Bonds Work?
Green bonds work much the same as other types of bonds. They’re issued by an entity and pay a certain interest rate, with the main difference being that institutional investors are usually buying the bonds, not retail investors.
Who Issues Green Bonds?
When a company, government, or financial institution wants to raise money for a sustainability project, they might choose to issue green bonds, which can be purchased by individual or institutional investors. Generally green bond issuers are large municipalities or public corporations, because a strong credit rating provides the issuer with a better borrowing rate.
The difference between investing in a green bond and buying a traditional bond is the issuer publicly discloses their plans for how the money will be spent. Uses of the money must be considered ‘green’ for it to be marketed as a green bond. The issuer generally releases a pre-issuance report describing the projects the funds will be used for and their expected impact.
Certifying Green Bonds
Issuers don’t have to follow specific requirements to call their bond green, but many follow voluntary frameworks such as the Climate Bonds Standard (CBS) or the Green Bond Principals (BGPs). By following those frameworks the bond will have a higher rating and investors will be more likely to buy it.
The guidelines outline the types of projects funds are recommended to be used for, how to select green projects, and how to report on the use of funds and results of the bond issuance.
Third-party firms work with the issuer as underwriters, certifiers, and auditors to ensure the money is going towards quality projects and used in the ways the borrower claimed it would be.
The Importance of Pre-Issuance Reports
Many issuers also work with third parties to prepare pre-issuance reports. Those parties help validate the quality of the bond to the extent the issuer chooses. There are four levels of validation a third-party can provide:
1. An external opinion about the quality of the bond
2. Verification that the bond aligns with certain environmental and business goals and criteria
3. Certification with a particular standard such as CBS or BGPs
4. A bond rating or score
If an issuer plans to issue multiple bonds, they might develop their own green bond framework to outline their particular criteria, goals, and impact. Issuers can either sell directly to investors or go through an exchange that works with green bonds, like the Luxembourg Stock Exchange (LuxSE).
Since the process of creating and tracking a green bond is costly and time consuming, they tend to be issued for large-scale projects.
Once the bond is issued and money raised, the issuer puts the money towards the projects stated in the pre-issuance report. The project could either be directly funded and internally run, or the money could go towards a service company like an energy provider.
The green bond issuer then puts out regular public post-issuance reports to investors, usually on an annual basis. The reports describe the way money has been used, progress, and results of the projects.
Green Bond Principles
In 2014, a group of investment banks established four “Green Bond Principles” to help investors understand green bonds. The principles are:
1. Use of Proceeds: How money is spent and what types of projects are included
2. Process for Project Evaluation and Selection: How projects are chosen and vetted
3. Management of Proceeds: How the money raised by the bond is managed
4. Reporting: How project progress and impact is shared
Issuers
Issuers of green bonds can include federal, state or city governments, financial institutions, or corporations.
Some reasons a company, government, or financial institution might issue a green bond include:
• The desire to promote one’s sustainability efforts and image
• Attracting new investors looking specifically for ESG investment products
• There can be tax benefits and incentives for issuing green bonds
• Issuing green bonds can be a good way to raise low-cost capital
• The issuer is looking to raise millions of dollars or more for particular sustainability projects
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Examples of Green Bonds
One example of a green bond is the World Bank Green Bond, which was developed in collaboration with Skandinaviska Enskilda Banken (SEB) and launched in 2008. SEB and the World Bank saw that there was a demand for a triple-A-rated fixed income product that supports climate change projects, so they developed the World Bank Green Bond in response.
Sale of the bonds raises money from investors looking for a fixed-income asset, and the money goes towards projects vetted by the World Bank that focus on mitigating and adapting to climate change.
Around $18 billion in World Bank Green Bonds have been issued since 2008. There have been 200 different bonds available in 25 currencies. Investors who buy the bonds can both earn a fixed amount and know that their money is going towards climate change mitigation and adaptation projects.
Other green bonds that have been issued by corporations include:
• Goldman Sachs Renewable Power issued a 24-year, $500 million bond, certified by Sustainalytics, to use for solar energy projects
• PNC Financial Services Group issued a 5-year, $650 million bond, using an internal green bond framework, to use for energy projects
• Verizon Communications Inc. issued a 10-year, $1 billion bond to use for energy generation and storage, buildings, and land use projects
When Did Green Bonds Start?
In 2008, the first green bond was issued by the World Bank and European Investment Bank (EIB). The bond was rated AAA. After that it took a few years for green bonds to take off, but since 2014 the market has grown significantly each year.
In 2013, the first USD 1 billion green bond issued by IFC sold out within just one hour after issuance. The first green bond issued by a corporation was issued in 2013 by Vasakronan.
Also in 2013, the first green muni bond was issued by Massachusetts, the first Green City bond was issued by Gothenburg, and the first solar asset-backed securities (ABS) were issued by SolarCity (now Tesla).
The Growth of the Green Bond Market
Over $1 trillion in green bond issuance has been put on the market since the first green bonds were issued in 2007.
Over the past 15 years, the green bond market has grown exponentially. In 2019, $51.3 billion in green bonds was issued in the U.S., and $257.7 billion in bonds was issued worldwide.
The largest green bond issuer is government-backed mortgage firm Fannie Mae in the United States. They issue 9% of the world’s green bonds. Green bonds have been issued by city governments and large corporations including Verizon, Pepsi, and Apple.
Although the U.S. currently has the biggest green bond market, it is projected to be overtaken by the EU in coming years. Between European companies and governments, about $300 billion has been allocated to green bond issuances over the next five years.
Investing In Green Bonds
Interest in sustainability, ESG, renewable energy, and climate change has increased significantly in recent years and is projected to keep growing. As investor interest grows, more and more green bonds are being made available with better disclosure and transparency to give investors peace of mind about the quality of the asset.
Investing in green bonds can be a good way for investors to put their money where their values are. Like other kinds of sustainable investing, ESG investing, or impact investing, green bonds are a way to both make money and make a positive difference in the world
While individuals can’t usually purchase green bonds directly, they can add them to their portfolio by purchasing certain ETFs and mutual funds.
Are Green Bonds a Good Investment?
Like other types of bonds, green bonds can be a relatively safe investment that provides fixed income without a high risk of loss. Bonds don’t tend to pay out high interest rates, but are less risky than other types of investments.
One risk of investing in green bonds is the phenomenon of greenwashing, where an issuer markets a bond as green but it doesn’t actually result in as much positive impact as advertised. A few questions an investor can explore to choose the best green bonds are:
• Why is the bond being marketed as green?
• What is the definition of green being used?
• Is the issuer using a standard such as CBS and working with a third-party certifier?
• Does the bond have an independent rating?
• How will the use of funds and impacts be disclosed to investors?
• Has the issuer issued green bonds in the past and what were the results and reporting standards?
Benefits Of Green Bonds
The main benefit of green bonds is they are designed help support sustainability projects (companies, new technologies) that support people and ecosystems around the world. Market demand is growing for green bonds, and they can be a good way to earn stable, low-risk interest.
Another benefit of green bonds is they can come with tax exemptions and tax credits, so investors might not have to pay income tax on the interest earned from the bond.
The Takeaway
Green bonds are an increasingly popular type of investment product that aim to help make the world a more sustainable place. When a company, government, or financial institution wants to raise money for a sustainability project, they might choose to issue green bonds.
Though green bonds work similar to other types of bonds, in that they’re a form of debt issued by an entity and pay a certain interest rate, the main difference is that institutional investors typically purchase the bonds, not retail investors.
Generally green bond issuers are large municipalities or public corporations, because a strong credit rating provides the issuer with a better borrowing rate.
Investors interested in adding green bonds to their portfolio can purchase ETFs and mutual funds that include green bonds. If you are interested in investing in green bonds through the purchase of fund shares, consider using SoFi Invest®. You can set up an Active Invest account seamlessly and security. The online investing platform lets you research and buy ETFs, stocks, and other assets right from your phone. All you need is a few dollars to get started with sustainable investing.
Photo credit: iStock/PeopleImages
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.
SOIN0922029
Dec
15
2022
Can You Retire at 62? Should You Retire at 62?
Planning to retire at 62 is worth considering, but whether it’s a realistic goal depends on how much you’ve saved, your anticipated living expenses, and an educated estimate of your likely longevity.
If you choose to retire at 62, which is on the early side these days, it’s important to have a solid retirement strategy in place so that you don’t run out of money.
Should You Retire at 62?
Your answer will depend on your overall financial situation and how much preparation you’ve put into planning for early retirement. Retiring at 62 could make sense if:
• You have little to no debt
• Your overall living expenses are low
• You’ll have multiple streams of income to draw on for retirement (e.g. Social Security as well as an IRA, 401(k), or pension)
• Don’t anticipate any situations that could hinder your ability to meet your retirement expenses (e.g. medical expenses, dependent family members)
On the other hand, retiring at 62 could backfire if you have limited savings, extensive debt, or you think you might need long-term care later in life, which could substantially drain your nest egg.
Beyond financial considerations, it’s also important to think about how you’ll spend your time in retirement.
You might retire at 62 and find yourself with too much time on your hands, which could lead to boredom or dissatisfaction. While studies have shown that retirement, and in particular early retirement, can improve mental health for some individuals, it may worsen mental health for others.
💡 Recommended: Retirement Planning Guide for Beginners
Retiring at 62 With a Little Bit of Money
There is no single dollar amount that’s recommended for retirees, though financial experts might say that $1 million to $2 million is an optimal goal to aim for. If you haven’t saved close to those amounts, you might be wondering how to retire at 62 with little money.
Defining for you can help you decide if retiring at 62 is realistic. Asking these questions can help you clarify your retirement vision:
• Will you continue to work in some capacity?
• How much do you have saved and invested for retirement?
• Will you take Social Security benefits right away or wait?
• What does your monthly retirement budget look like?
• What kind of lifestyle are you hoping to enjoy?
• How much do you anticipate paying in taxes?
Retiring at 62 with little money could be workable if you plan to relocate to an area with a lower cost-of-living, and cut your expenses. It also helps if you have additional money from Social Security, a pension, or an annuity that you can count on.
Investing for Retirement at 62
The longer you have until retirement, the more time you have to invest and grow your money through the power of compounding interest. If you’re planning to retire at 62, adjusting your strategy to be aggressive might be necessary since you:
• Have less time save
• Need the money that you do save to last longer
Save and Invest More Aggressively
Instead of saving 15% of your income for retirement, for instance, you might need to set aside 30% or more to cover your living expenses. And rather than stick with a conservative asset allocation, you may want to lean toward a higher percentage of equities to add growth.
For example, if you plan to stop working completely, you’ll need to weigh the cost of health care until you become eligible for Medicare. You can’t apply for Medicare until the year you turn 65. If you have a health condition that requires regular care, you may need to increase your savings cushion to cover those expenses until you become eligible.
Where to Save Your Money
It’s also important to think about where to keep the money you’re investing for retirement at 62. There are different retirement plans that you can use to invest, starting with a 401(k).
A 401(k) plan is generally a workplace plan that allows for tax-advantaged investing. Contributions are deducted from your taxable income and grow tax-deferred. Once you retire, withdrawals are taxed at your ordinary income tax rate.
You can begin making withdrawals penalty-free at age 59 ½, or potentially earlier if you meet Rule of 55 guidelines. This IRS rule enables you to avoid early withdrawal penalties if you leave your job and withdraw from your 401(k) the year you turn 55.
A 457 plan is another option for saving in the workplace. These plans are offered by state and local governments as well as certain non-profits, and they work similarly to 401(k) plans. Whether you have a 401(k) or 457 retirement account, investing consistently matters if you’re planning to retire at age 62.
The good news is that you can fund a 401(k) or 457 plan automatically through salary deferrals. You can adjust the amount you save each year as you get raises to help you get closer to your goals. And if your employer matches contributions, that’s free money you can use to plan for early retirement.
Boost your retirement contributions with a 1% match.
SoFi IRAs now get a 1% match on every dollar you deposit, up to the annual contribution limits. Open an account today and get started.
Only offers made via ACH are eligible for the match. ACATs, wires, and rollovers are not included.
Benefits of Investing for Retirement at 62
The chief benefit of investing for retirement at 62 is that you can grow your money faster than you would by saving it.
When you put your money into the market, you can potentially earn higher returns than you would by keeping it in a savings account or a certificate of deposit (CD). The trade-off, of course, is that you’re also taking more risk by investing versus saving.
It’s important to choose a retirement plan that fits your investment goals. With a workplace plan, you’re typically offered a range of mutual funds and exchange-traded funds (ETFs). The investments you choose should reflect both your risk tolerance and your risk capacity, meaning how much risk you need to take to reach your financial goals. Take too much risk and you could lose money; take too little risk and your money won’t grow enough to fund an early retirement.
It’s also important to consider the fees you’re paying for those investments. Mutual funds and ETFs have expense ratios, which determine how much it will cost you to own them on a yearly basis. The higher the fees, the more they can eat into your returns.
Considerations for Retirement at 62
So, can you retire at 62? It can be a difficult question to answer if you’re not considering all the factors that affect your decision. If you have early retirement in your sights, then there are several things to weigh.
Health Care
Medicare eligibility doesn’t begin until the year you turn 65. So, you’ll need to consider how you’ll pay for medical care in the interim. You could purchase private insurance or continue COBRA coverage through your former employer, but either option could be expensive.
Long-term care is another consideration. The monthly median cost of long-term care ranges from $1,690 for adult day care to $9,034 for a private room in a nursing facility, according to Genworth. Long-term care insurance can help with some of those costs but if you don’t have this kind of coverage, and you or your spouse requires this type of care, it could eat into your savings.
Household Expenses
Some household expenses in retirement could be lower. For example, if you move to a smaller home, you might have a lower mortgage payment. Utility bills may also decrease with a smaller home. Or you might have no mortgage payment at all if you’re able to pay off your home loan when you retire.
On the other hand, your household expenses could increase if you move to a more expensive area. Buying a retirement home in southern Florida, for example, could easily be more expensive compared to living in the Midwest. And your expenses could also climb if your adult child or grandchild unexpectedly moves in with you.
Lack of Income
Retirement generally means that your regular paychecks go away. Instead, you live on savings, investments, Social Security, pensions, or some combination of those things.
If you want to retire at 62, you’ll have to think about how much of an impact a lack of steady income might have financially. You may not miss those regular paychecks if you’re able to draw enough from savings, investments, and other income sources in retirement.
But if you’re in a pinch, you may need to consider ways to make up for a shortfall, such as getting a part-time job or starting a business or side hustle.
Retirement Withdrawals
It’s also important to consider your savings withdrawal rate. This is the rate at which you draw down your savings and investments monthly and annually to fund your retirement lifestyle. The 4% rule is an often-used rule of thumb for determining retirement withdrawals.
For example, say that you’ve saved $500,000 for retirement by age 62. Following the 4% rule, you can withdraw 4% of your savings to live on each year. If you stick to that rule and your portfolio continues to generate a 3% annual rate of return, then $500,000 would be enough to last you until age 97.
That assumes a 3% inflation rate. If inflation is higher at 8%, your money would run out by age 82. So, inflation is another important consideration to factor in when deciding if you can retire at 62.
Social Security Benefits
Determining a day to retire matters if you’re planning to take Social Security benefits at 62. If you’ll be relying heavily on those benefits for income, it’s important to apply in a timely manner so they kick in when needed — but you get the maximum amount possible under the circumstances.
When deciding when to retire, remember that taking Social Security at 62, or any other time before your full retirement age, will reduce your benefit amount. Working part-time can also reduce your benefits if you’re earning income above certain thresholds. Meanwhile, you could increase your benefit amount by delaying benefits up to age 70. Think about how important Social Security is for completing your retirement income picture and when you’ll need to take it.
Investing for Retirement With SoFi
Whether you’re planning to retire at 62 (or any age), having a plan can work in your favor. Estimating your expenses, setting a target savings goal, and investing in your workplace retirement plan can all help you to get on the right track.
You can open a retirement account online and start building a diversified portfolio. And if you’re assessing your retirement savings, you may want to roll over your old 401(k) accounts to an IRA, so you can manage your money in one place.
SoFi makes the rollover process seamless. You don’t have to watch the mail for your 401(k) check because the transfer is handled automatically, and there are no rollover fees.
Help grow your nest egg with a SoFi IRA.
FAQ
Is it a good idea to retire at 62?
Retiring at 62 could be a good idea if you can afford it and you’ve planned for any what-if scenarios that could affect your ability to cover your expenses. If you have significant amounts of debt and minimal savings, however, retiring at 62 may do more harm than good.
How can you retire at 62 with little money?
Retiring at 62 with little money requires careful planning to understand what your expenses will be, how much money you’ve saved, and how long that money will last. Supplementing savings with Social Security benefits or a pension can help, though you may need to plan to live much leaner in order to stretch your dollars.
What are the benefits of retiring after 62?
The longer you wait to retire, the more time you have to invest and build wealth. Delaying retirement after 62 can also increase the amount of benefits you’re eligible to receive from Social Security.
Photo credit: iStock/kate_sept2004
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.
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.
SOIN0722012
Dec
15
2022
What Is a Carbon Tax?
In countries where there is a carbon tax, businesses must pay a levy based on the amount of carbon emissions produced by their business operations. A carbon tax is designed to reduce the amount of carbon — also known as CO2 emissions.
There are two types of carbon taxes: a tax on quantities of greenhouse gases emitted, and a tax on carbon-intensive goods and services such as gasoline production.
In the United States, several carbon tax proposals have been introduced in Congress, but none have yet been implemented.
How Does a Carbon Tax Work?
When a government implements a carbon tax, a price per ton of greenhouse gas emissions is chosen, and a company gets taxed that amount for every ton they emit or are responsible for.
In some cases, the price per ton increases the more an entity emits, thereby incentivizing companies to reduce and prevent emissions.
What Type of Carbon Is Taxed?
Although it is called a carbon tax, usually the price is actually per ton of CO2 gas emitted. That’s because every fossil fuel has a particular amount of carbon content in it, and when burned each carbon molecule combines with two oxygen molecules and becomes CO2 gas which goes into the atmosphere.
So the amount of emissions associated with the fuel can be taxed at the point of extraction, refinement, import, or use.
As many ESG investors know, burning coal emits the highest amount of CO2, followed by diesel, gasoline, propane, and natural gas. Therefore, coal gets taxed higher than other fossil fuels. Once CO2 is emitted into the atmosphere, it remains there for a hundred years or more, creating a greenhouse effect which heats up the planet and leads to climate change.
Only products associated with the burning of fossil fuels get taxed. So products such as plastic that contain petroleum but don’t directly result in CO2 emissions don’t get taxed.
What Is the Economic Impact of Carbon Taxation?
Since a carbon tax increases costs across the entire supply chain, everyone from extractors to consumers are incentivized to reduce fossil fuel consumption — at least in theory.
Those being taxed can raise the prices of their goods and services, but only as much as the market is willing to pay while allowing them to remain competitive.
What Is the Social Impact of Carbon Emissions?
The theory around carbon pricing is that each ton of CO2 should have a price equal to the social cost of carbon. The social cost of carbon is the current amount of estimated damages over time that each ton of CO2 emitted causes today.
In addition to causing global warming, emissions and pollution typically lead to negative effects on human health and natural ecosystems. Thus investing in companies with lower carbon emissions can be considered a type of socially responsible investing.
Over time, the social cost of carbon increases, because each ton of emissions is more damaging as climate change worsens. Therefore, the price of carbon and the tax would increase over time.
Those producing emissions know that the tax will increase over time, and so investments into decarbonization are worth it to them today. For instance, a company can invest in solar energy and wind power, and while that might have a high upfront cost for them, over time it could be worth it could help them avoid a rising carbon tax.
Examples of Carbon Taxes
Understanding carbon taxes is an important facet of sustainable investing. Carbon taxes have been put into place in many countries around the world so far, and their popularity is rising. As of 2021, 35 countries had a form of carbon tax or energy tax.
• Finland was the first country to implement a carbon tax in 1990, soon followed by Norway and Sweden in 1991. In 2021 Finland’s price per ton was $73.02. Norway is known to have one of the strictest carbon taxes.
• The Canadian province of British Columbia implemented a carbon tax in 2008. In 2019, South Africa became the first African country to install a carbon tax.
• Although there is not yet a federal carbon tax in the U.S., there are more than 50 regional ones. For instance, the city of Boulder, CO, implemented a carbon tax in 2006 after it passed a local vote. However, the average price per ton across these programs is very low: generally about $2.
Support for a U.S. federal carbon tax has been growing over time, but one of the things holding it back is debate about how the revenue from the tax would be used. A few ideas include: paying back consumers through a carbon dividend; using the money to fund infrastructure upgrades or low-emissions technologies, or reducing other taxes.
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The Importance of Carbon Tax
Reducing global emissions is essential to stop the buildup of CO2 in the Earth’s atmosphere. The more CO2 gets emitted, the more the planet warms and the worse climate change becomes — including the frequency of climate-related disasters.
Global temperatures have already increased 1°C over pre-industrial levels, and if emissions are not reduced temperatures are projected to rise 4°C by the end of this century. The more temperatures rise the more the effects become irreversible and catastrophic.
A carbon tax is a powerful tool to discourage the use of fossil fuels and incentivize a shift to low- and zero-emission energy sources. This is why many people invest in green stocks.
Pros and Cons of Carbon Tax
There are several pros and cons to a carbon tax.
Some of the pros of a carbon tax include:
• The carbon tax is a way to regulate emissions without having to actually mandate production and consumption limits directly.
• Carbon taxes incentivize companies and individuals to reduce and avoid emissions.
• Carbon taxes are easy to administer.
• A carbon tax may help reduce the buildup of greenhouse gasses, which in turn may help reduce pollution, improve air and water quality, and more.
• The revenue raised through a tax can be used to fund decarbonization efforts, environmental restoration, and other projects.
• Other programs, such as an incentive using renewable energy, haven’t been as successful in reducing fossil-fuel use.
A few cons of a carbon tax include:
• It can be challenging to figure out how the revenues should be spent.
• A carbon tax can be put on any point of a supply chain and it’s hard to decide which is best.
• It’s hard to predict how much emissions will be reduced as a result of the carbon tax.
• If a carbon tax increases energy costs, this can have a big impact on lower-income households which tend to spend a higher percentage of their income on energy than higher-income households.
• If one country implements a carbon tax and others don’t, then that puts local industries at a competitive disadvantage. If they have to raise prices, customers may start buying from the countries that don’t have the tax, resulting in the same or more emissions. For this reason carbon tax plans build in ways to prevent emissions leakage and issues with competition. Some of these include rebates, exemptions for particular industries, and taxation based on past emissions.
• Companies can purchase carbon offsets or carbon credits to lower the amount they pay in taxes. They can also use those offsets to claim that they are carbon neutral or carbon negative. This isn’t exactly true, since they are still emitting carbon. The ability to purchase offsets reduces their incentive to decarbonize.
Who Regulates Carbon Taxes?
Carbon tax programs are regulated by federal, state, or local governments. Regulation involves setting the price per ton of carbon, deciding which entities get taxed, collecting the tax, and deciding how the revenues are spent.
There is an ongoing discussion about the international coordination of carbon pricing. If a minimum price per ton is set, this would eliminate issues around competition and guarantee a certain amount of effort towards emission reduction. Canada has already implemented national price coordination. The minimum price per ton in Canadian provinces and territories is CAD $50.
Which Countries Have the Highest Carbon Tax?
Below are a few of the countries that have the highest carbon tax rates. The rates are in USD price per ton:
• Uruguay: $137
• Sweden: $129.89
• Switzerland: $129.86
• Liechtenstein: $129.86
• Norway: $87.61
The Takeaway
A carbon tax can be a powerful tool for reining in carbon emissions, and potentially helping reduce the amount of greenhouse gasses in the atmosphere. Essentially, these taxes penalize companies by making them pay a fee for CO2 emissions relating to their products or operations.
While the U.S. doesn’t have a federally mandated carbon tax, there are state and local levies. Given concerns about climate change, it’s likely that more countries will continue to adopt and adjust carbon taxes.
If you’re interested in investing in sustainably focused businesses, you can explore your options using SoFi Invest, and start trading from your Active Invest account with as little as $5.
Photo credit: iStock/Delmaine Donson
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