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Putting Goals-Based Investing Into Practice

Are your investments on track to help you achieve your goals? Are you putting your money in the right assets for what you want to spend it on down the road? Does your portfolio correspond with your future plans?

It’s hard to answer these questions. Making investment decisions can feel pretty personal, because it involves thinking about what you want to do with your money in the future. It also means considering where you want to put your money, which could mean pinpointing companies and stocks you like, and avoiding stocks that don’t align with your worldview.

And of course, it’s frustrating that no one actually knows what’s going to happen in the stock market. There are predictions galore, but no return is guaranteed, and no stock is a sure bet. That doesn’t mean you should let confusion keep you from investing, though. Investing earlier can give your money more time to benefit from compound returns (which is when your investment returns make their own returns).

If you’re just getting started investing, use our beginner’s guide to investing and make sure you understand how goals-based investing works.

What Is Goals-Based Investing?

Goals-based investing, also known as goals-driven investing, is exactly what it sounds like; it’s an investment approach focused on your goals, rather than on market benchmarks.

Traditionally, investment strategy focuses on portfolio returns and measuring risk tolerance—i.e., how much risk you want in your investments. Those factors would then determine your investment strategy and portfolio makeup. Investments can make money in a number of different ways, including yielding interest or dividends which translate to earnings for the investor.

What you choose to invest in, and how much, is known as your asset allocation. And your asset allocation is determined by what you want out of your investment returns and your investment timeline.

For example, your investment strategy might be different if you’re going to retire in five years compared to someone who plans to retire in 25 years.

Goals-based investing, by contrast, measures your portfolio against your goals. That allows you to plan for different goals with different investment strategies.

The Benefits of Goals-Based Investing

The benefit of goals-based investing is that you can adapt your investment strategy to meet your actual needs. Many households have far more goals than just retiring—and have not, historically, had a way to plan for them.
The other benefit of goals-based investing is a bit more psychological.

A number of recent studies and research also suggest goals-based investing can have a behavioral impact on how you act—including, how invested you are in your investments and how emotionally you react to market fluctuations. Having a goal helps you focus your efforts.

For example, if you know you’re saving money for a down payment on a house, then you’re less likely to spend it on a new jacket or a fancy dinner. You’re also less likely to overreact to a dip in the market and sell off your assets when the price is low if you know you’re aiming at a certain goal down the road.

Goals-based investing also gives you more buy-in as an investor, and more of a say in the process. However, the danger of goals-based investing is you might not fully know what your goals are—or, more likely, what your goals will be down the road. Studies have found that we often fail to predict how much we will change in the next decade, and in turn, that can have a distorting effect on our goals and how we plan for them.

For example, right now, you might think you want a low-key retirement in a rural woodsy cabin, but what happens if you only invest enough to purchase a small cheap plot of land and then you change your mind in 20 years and need more money? That’s also why you want to re-evaluate your goals regularly and change your investing strategy as appropriate.

How to Put Goals-Based Investing Into Practice

The key to goals-based investing is figuring out short-term and long-term goals. In the short term, goals could include saving for a vacation or a wedding; something like a down payment on a house might be a medium-term goal; and setting aside money for retirement—whatever kind of retirement you envision—is perhaps the longest-term goal.

Some common financial goals include: saving up an emergency fund; accumulating enough for a large purchase, like a car or a trip; paying for your kids’ colleges; putting a down payment on a house; caring for elderly parents and other loved ones; and planning for retirement. These all require different strategies and different timelines.

The first step is to determine your goals and then take a realistic look at your current financial situation.

Talking to a financial planner can help you refine and clarify your financial objectives. Then, create targets and separate accounts for your various goals.

The last step is actually figuring out the investment strategy for each of your investment accounts. For example, you might have a different investment strategy for savings you’re going to use in five years, versus your retirement savings that you’re going to use in 20 years.

Talk to a Professional About Goals-Based Investing

SoFi Invest® uses a goals-based approach to make sure you’re getting what you want out of your money. After talking to you about your investment goals, SoFi financial advisors can help you find strategies that might work for your goals, age, income, and assets, among other factors. While portfolios are diversified over many asset classes, SoFi primarily uses ETFs in our automated investment platform.

Although you can implement goals-based investing on your own, many people also find it helpful to talk to a professional to help hone in on the right strategy—especially if you have multiple goals over different time frames.

If you’re ready to talk about your financial goals and figure out a plan to make them reality, talk to a SoFi financial advisor at no cost.


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The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
The information provided is not meant to provide investment, tax or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Advisory and automated services offered through SoFi Wealth LLC. An SEC registered investment advisor. SoFi Securities LLC, member FINRA / SIPC .

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Stock Market Terms Every Trader Should Know

If you are new to trading stocks, the insider lingo of stock market terms can be off-putting. But learning some basic stock trading terminology is a great place to begin before investing any money. For any new investor just getting into trading, these are the top basic stock terms to know before you start.

Stock

Buying stock, also known as shares or equity, is like owning a piece of a company. You purchase stock in a company, and receive a proportional part of that corporation’s assets and earnings. The price of stock is different for each company and fluctuates over time.

This is why you hear the phrase, “Buy low, sell high” because if you invest in an organization when their stocks are priced lower, and then the company grows and makes money, you may be able to make a profit if you sell that stock at a higher price later on. (To be clear, that’s not advice we’re giving—it’s just an investment adage you might hear around town.)

Trade

To trade in the stock market means the buying and selling of a stock. For every seller, there is a buyer on the other side. This transfer, shares of stock in exchange for money, requires an agreement on price. People who trade can be small individual investors, or larger entities like banks and insurance companies, whose buy or sell orders might be executed for them by a stock exchange trader.

Stock Symbol

Also known as a ticker symbol, this short abbreviation helps traders identify stocks from various companies. The limit is usually one to five characters, made up of letters and numbers, and is often tied closely to the company’s own name—AAPL for Apple, for instance, or V for Visa.

Bid and Ask

Any potential buyer bids a certain price for stock, and the seller asks for a specific price for the same stock. Buying or selling at the market means you will accept any current bid or ask price, resulting in a market order.

When the bid and ask prices match, a sale takes place, on a first-come basis if there is more than one buyer. The bid-ask spread is the difference between the highest price a buyer is willing to bid, and the lowest price a seller is willing to ask.

Broker

Short for stockbroker, this is a professional who executes buy and sell orders on behalf of clients, typically for a fee or commission. Brokers usually work for a brokerage firm. This person can also serve as a financial advisor, understanding the markets and making investment decisions that will ideally lead to profit for their clients.

Dividend

The payment made from a company to its shareholders, often drawn from earnings. Usually, these are made in cash, but sometimes they are paid out as additional stock shares. They are typically paid on an annual or quarterly basis, and typically only come from more established companies, not startups.

Yield

A stock yield is the ratio of annual dividends divided by the share price. For example, if a stock is set to pay $1 in dividends over the next year, and is currently trading for $50, the yield would be 2%. Dividends and yield are both an important reflection of a company’s value, but only a piece of the puzzle.

Portfolio

Collectively, all of the financial assets, such as stocks, that an investor currently owns. Building up a diversified portfolio means investing in many different assets that perform differently so that if one asset falls in value, other assets will hopefully pick up the slack.

Exchange

A stock exchange can be a physical in-person location, like the NYSE, where transactions take place on a trading floor. Here, traders shout their bid and offer prices, known as open outcry. Other stock exchanges such as the NASDAQ are electronic only, where everyone uses computers to manage trades.

Market Cap

Market capitalization is the total dollar market value of a company’s outstanding shares—which is the stock currently held by all shareholders. The market cap is calculated by multiplying the number of outstanding shares by the share price.

Since it refers to the organization’s total value of all shares of stock, it is an important number to consider relative to future growth expectations or when comparing companies in the same sector.

Orders

Besides buying at face value, aka a market order, there are also limit orders, good til canceled orders, and day orders. More advanced traders, or with the help of a broker, can negotiate stock prices. A limit order will only allow someone to buy or sell stock at a specific price or better.

A day order is exactly what it sounds like—an order to buy or sell that automatically expires if it is not executed that same day. Good til canceled (GTC) orders can be good for investors who do not wish to consistently watch stock prices and can place buy or sell orders at specific price points, and keep them for many weeks. If the market price hits the price of the GTC before it expires, the trade will execute.

Volatility

Volatility really comes down to the range a stock price changes over time. If the price stays stable, then the stock has low volatility. If the price jumps from high to low and then back to high often, it would be considered more of a high-volatility stock.

Liquidity

Market liquidity is essentially how easily shares of stock can be converted to cash. The market for a stock is “liquid” if its shares can be sold quickly, and the act of selling only minimally impacts the stock price.

Trading Volume

For a stock trading on a stock exchange, the stock volume is typically reported as the number of shares that changed hands during any given day. It’s important to note that even with an increasing price, if it’s paired with a decreasing volume, that can mean a lack of interest in a stock.

A price increase or drop on a larger volume day (i.e., a bigger trading day) is a potential signal that the stock has changed dramatically.

Averaging Down

If an investor already owns some stock but then purchases additional stock after the price has dropped, this is known as averaging down. It results in a decrease in the overall average price for which you purchased the company stock. Investors can profit if the company’s price subsequently recovers.

IPO

The Initial Public Offering is the process by which a company first sells stocks to the public. A company’s goal is to sell a predetermined number of shares to the public at the best possible price. Not all large companies are public; IKEA and Mars Candy are still privately held, meaning they have a small number of shareholders and individuals aren’t able to invest in them. But going public offers the company a lot of money for it to grow, by raising a lot of money quickly with a new group of large investors.

Blue Chips

Sadly, not a fun stock market-themed snack. These are largely considered to be top-notch stocks you can invest in long term. These stalwarts of the stock market are well-established, large, and financially sound companies like Disney, Intel, and Coca-Cola.

Bull and Bear Markets

When someone refers to a bull market, it means broadly that the market is “up.” A bear market on the other hand, means the market is “down.” A bull market typically describes an economy that is growing and optimistic, while a bear market indicates the opposite, with loss on investments and general pessimism about the economy.

This can be as simple as the difference between rising and falling stock prices, but also takes into account things like job creation or loss, and unemployment rates.

No matter when you start investing, it’s always important to have a great team supporting you as you navigate the stock market. If you are looking for a smart, painless way to begin, SoFi offers wealth management using automated investing, with access to our human financial advisors.

SoFi Invest offers goal planning, working with individuals to achieve goals, and making a plan for your investments. We also focus on diversification, and we can help you choose from thousands of assets available for investing.

As a SoFi Invest member, you can start online investing with as little as $1 today.


Choose how you want to invest.

Ready to
do-it-yourself?

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hands-off role?

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The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
The information provided is not meant to provide investment, tax or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Advisory and automated services offered through SoFi Wealth LLC. An SEC registered investment advisor. SoFi Securities LLC, member FINRA / SIPC .

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12 Tips for First-Time Homebuyers

If you’re getting ready to buy your first home, there are probably thousands of questions running through your mind. Questions about location, real estate services, expenses, and more—it’s a huge financial commitment and you probably want to make sure you have the best chance at getting exactly what you want.

While it can be a difficult process to navigate, there is help for first-time home buyers, from resources and advice to first-time homebuyer programs to help you finance a home.

If you’re worried you won’t ever be able to purchase a home, take a deep breath and a good look at your finances. You can start by reviewing your options and begin by starting to save for a down payment. (There are investment accounts and savings options that can help you reach your goal of buying a home, too.) Here are 12 helpful tips for first-time home buyers.

1. Knowing Your Credit Score

Your credit score is typically very influential in determining what kind of interest rate you can get on a mortgage. You can get one free credit report from each of the three major credit bureaus (TransUnion, Equifax, and Experian) once every 12 months. You can review your credit report to spotlight any errors that may be affecting what lenders are willing to offer you.

If you find any errors, you can report them and have them removed. This process can sometimes take a while, even if the mistakes are obvious, so consider starting a credit report review early on in your home-buying process.

2. Calculating What You Can Afford

Do you know how to figure out how much house you can afford? While the size of your mortgage is generally determined by an evaluation of your personal finances and debt, there are a few rules of thumb that may be relevant.

One general guideline is that an eventual mortgage should, ideally, be no more than 28% of gross monthly income.

If you are paying off student loans, credit card debt, or a car payment, you may want to adjust your budget accordingly. Some people try to keep their debt to 43% (this is just another rule of thumb and everyone’s financial goals are different) of their gross monthly income, so that they can still prioritize financial goals like saving for retirement.

And having less debt may make you more appealing to mortgage lenders. Understanding how much money you feel comfortable spending on a house can, in turn, impact the properties you consider. As you build your budget, you can also check out SoFi’s mortgage calculator.

3. Looking into First-Time Homebuyers’ Programs

While you are evaluating your options and creating your budget, it could be worth looking into some first-time homebuyers’ programs. Some programs offer down payment and closing cost assistance, or loans with reduced interest rates.

There are a variety of options available for first-time homebuyers looking for assistance. For example, the Federal Housing Administration offers a mortgage insured by the FHA. These loans often come with competitive interest rates and allow for smaller down payments.

The USDA also helps first-time home buyers with a program focused in rural areas. And the VA provides assistance to active duty military members, veterans, and surviving spouses. There are even more first-time homebuyer programs available offered by various states as well .

4. Understanding the Expenses

There are plenty of other expenses that come with purchasing a home beyond your down payment and closing costs. For example, when you’re renting property, you don’t have to worry about property tax or general maintenance. When you own property, you do.

In addition to property tax, you’ll likely also need insurance to protect your new home. And you’ll be responsible for maintaining the property, of course, which can include painting, replacing windows, updating the roof, replacing appliances, and more regular maintenance and upkeep.

You may also need to factor in additional purchases like a lawn mower or professional landscaping if the property you are looking has a yard. Will you need to buy a snowblower to clear the driveway during long winters? These are all factors that can come into consideration when figuring out the cost of your new home.

Check out our Home Affordability
Calculator to estimate how much house
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5. Remember that Location Matters

Location is, obviously, important to many buyers. In some cases, you may have to decide if being in the neighborhood you want is more important than having extra square footage or other, similar trade-offs.

If you have kids or are planning to, you will likely be considering the school district each potential property falls in. Even if you aren’t planning to have kids, it could be worth considering the school district since it can have an impact on the value of your property and could make it easier to sell the house down the line.

6. Planning for the Future

Zoning laws and development plans are another factor to consider when house-hunting. If there is undeveloped land nearby, it can’t hurt to do some digging and see if there are any plans for development.

It may also be worth looking into the property value of other homes in the area. Have they been declining in recent years? If so, this could impact the future value of a home you’re considering.

7. Using Your Imagination

When shopping around for houses, you can take the opportunity to look at a property’s potential, as well as its current value. It’s easy to be distracted by the current owner’s décor, paint, carpet, or other factors that are easy to change or adjust. You can easily repaint or update the appliances, but you won’t be able to adjust the location, floorplan, or add on to the home as easily.

8. Reserving Cash for Home Improvements

When you’re getting ready to put a down payment on a house, it may be tempting to clean out your savings account. And while that’s completely understandable, keeping your emergency fund close at hand may be a good idea when becoming a homeowner.

After closing costs have been sorted out and you’ve moved into your new home, you might find that unexpected repairs pop up. Having a reserve stash of cash can be helpful if the roof in your new home starts leaking, or you need to replace an appliance.

9. Getting a Real Estate Agent

With all of the housing apps and free resources available on the internet, it may seem like a real estate agent is unnecessary. But in reality, navigating the housing market can be tricky and hiring a buyer’s agent up front can save you time and help make your home-buying experience easier.

While you could spend your time going to open houses and scouring real estate listings, an agent can tailor the home search so that you spend less time looking at houses that don’t meet your criteria. They also can have access to new listings that aren’t yet on the market and may be willing to “preview” homes for you. A real estate agent can also help you navigate the intricacies of contract negotiations and paperwork.

10. Knowing What to Expect from a Home Inspection

Having a home inspection completed is a critical step in buying a home. Inspection procedures vary from state to state, so it can be important to understand what is included in the home inspection in your state, since this is a great chance to truly examine the property and uncover any issues—before they become your issues.

Inspectors should have access to every part of the house including the roof and crawl spaces, and you should be able to attend the inspection yourself.

Don’t be afraid to ask the inspector questions; the more information you have, the better prepared you can be to decide if this is the right house for you.

11. Negotiating the Offer

You’ll have an opportunity to negotiate when you’re making an offer on a house. A lot of factors can influence an offer and negotiating terms in your favor could result in serious savings, especially if you are in a buyer’s market .

If you are working with a real estate agent, they can help give you a good idea of what is considered a reasonable purchase bid by providing comparable sales.

A “comparable sale” is a similar home in the same condition as the one you’re considering that has sold in the last three months. An agent can help give you an estimated price range and manage your expectations.

12. Finding the Right Mortgage

Before committing to a mortgage, it’s smart to shop around and see what various lenders are willing to offer you. A few things to consider include the interest rates, loan terms, application process (Is it lengthy? Online only?), and any hidden fees included in applying for or repaying the mortgage.

At SoFi, we offer a variety of unique mortgage options so you can make the most of your money. And you can have your financing completed quickly—most applications close within 30 days.

If you’re ready to buy your first home, a mortgage with SoFi can help open the doors. Get a quote in two minutes.


The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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 Mortgages are not available in all states. Products and terms may vary from those advertised on this site. See SoFi.com/eligibility-criteria#eligibility-mortgage for details.

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How the UltraFICO Credit Score Works

For a long time, people with low credit or no credit haven’t had a lot of options to improve their credit score, except to make debt payments on time—debt that they may or may not be able to obtain.

Really, improving a credit score can be a tough proposition for anyone who is trying to start from the beginning or start over, especially after suffering financial distress.

Folks in this position may soon have another option to raise their credit scores. Under a new scoring system, a person’s bank account balances and banking history could give their scores an additional boost.

The Fair Isaac Company, the creator of the most widely used credit scores, the FICO® Scores, designed a new scoring system. UltraFICOTM is rolling out in 2019 and according to FICO, the aim is to provide a more comprehensive understanding of a consumer’s financial profile.

They claim they will be able to do this by expanding their criteria for what makes someone “creditworthy” by taking into account their history of overdraft and checking, savings, and money market account balances.

With a new FICO score comes new FICO score rules. Below, we’ll cover the new FICO score changes as well as discuss who the new FICO score intends to benefit (and who it doesn’t).

How Does UltraFICO Work?

To know how UltraFICO will work, it helps to first understand the calculation method behind the current version of the FICO Score.

Although FICO keeps the exact calculation methodology a secret, a score between the range of 300 and 850 is awarded based on the following criteria:

•   35%: Debt payment history; so, whether a person is making debt payments on time
•   30%: Credit utilization, which is how much of your available revolving credit you’re using. Utilizing less of the available credit at any one given time is better than using more
•   15%: Length of credit history; a longer history is better
•   10%: New credit; New sources of credit can temporarily lower a credit score
•   10%: Types of credit; Managing a variety of types of credit successfully is rewarded

As you can see, FICO has a pretty specific formula based on the previous handling of debt. This score is used to determine who can access new credit, or credit at the best rates. And that’s exactly what’s at stake here.

A credit score can make or break someone’s ability to access a home loan or refinance their student loans. A credit score also determines the interest rate on many types of credit, which could result in the difference of thousands of dollars on a sizeable loan.

Sometimes, credit scores are even used for non-credit related reasons, such as renting an apartment. FICO—in partnership with Experian and fintech company Fincity—wanted to create another option for people who are financially responsible, but whose credit scores may not necessarily reflect that.

Say that a prospective borrower is sitting at a bank, trying to get approved for a mortgage loan. Depending on their credit score, they may or may not get approved. If they don’t qualify, they can try and work on improving their score or find a different bank.

Are you working on improving your credit
score? Track your progress in the SoFi app!


With the new UltraFICO Score, the borrower may have another option. If their base FICO Score doesn’t yield the result they are looking for, or if they don’t yet have a FICO Score, a participating lender could offer to pull their UltraFICO score. (The UltraFICO score won’t be pulled without permission from the borrower.)

The UltraFICO Score will pull information from a person’s checking, savings, and money market accounts—you get to choose the data you share—to supplement the information that is already considered for your credit score.

If you already have a credit score, it will be updated with the new information. If you do not have a credit score, a new one will be generated. Similar to other FICO Scores, you will receive a score between 300 and 850.

When bank account information is pulled, two primary factors are being looked at: average account balance and history of overdrawn accounts. If you have more than $400 in your account, and there is no history of a negative balance in the previous three months, your score could improve.

The new FICO score rules will also consider whether a person has more deposits than outflows, the account’s length of history, and if the accounts are regularly used to pay bills, such as utilities.

Experian, one of the three primary credit bureaus, will gather a person’s bank account information using Finicity, which is a financial technology company and data aggregator. Upon request, they will send this information to the requesting bank, along with summaries of the bank accounts an individual willingly includes.

Who Will UltraFICO Benefit?

According to FICO’s website , the score will “attract the underbanked—the self-employed, millennials, immigrant entrepreneur, migrant savers and remitters” and give people who “may have suffered financial distress but are recovering” the opportunity to bounce back and try again.

Their website continues: “Many consumers are still locked out of mainstream credit, including 79 million Americans who have sub-prime scores (680 or below) and 53 million Americans with not enough data on record for a FICO Score to be generated.”

UltraFICO estimates that “seven out of 10 consumers who exhibit responsible financial behavior in their checking and savings accounts could improve their score.” They expect that some consumers could see their base FICO score increase by as much as 20 points.

Of course, it is possible to have a score that decreases upon pulling banking information. At this point, it is up to the bank to determine which score they will use to offer credit.

What Happens Next

The pilot program for the new FICO score rules is supposed to launch early 2019 , with the hopes of having the scoring system available to all lenders by the summer of 2019. The Pentagon Federal Credit Union, the third-largest credit union by housed assets, will run the pilot program.

Whether the score actually gets used widely will likely be determined by the lenders themselves. UltraFICO, like FICO, is simply one of many tools at a lender’s disposal.

Each lender will still have its own rules about how and to whom they offer credit, and the UltraFICO score may or may not fit in with their methodology.

If for whatever reason your credit score isn’t up to par, the new FICO score changes may be your ticket to helping score a better interest rate, or getting approved for a loan that was previously unattainable.

This is the biggest change to FICO scores in decades, and hopefully it will work to help the people that it intends to help. Having access to credit can mean the difference of home ownership, private student loans, business loans, and personal loans. When used correctly, credit can be a powerful tool to build a great life.

Looking for a low-interest personal loan to pay off high-interest credit cards or invest in home improvements? Check your rates at SoFi, where there’s never origination or other hidden fees on your loans.


No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the For details, see the FTC’s website on credit.
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Is Your 401k Enough For Retirement?

Planning for retirement can feel confusing and overwhelming. How is it possible to make financial plans for a time that is so far into the future? What will the future even look like, let alone cost?

Saving for the long run is so important, but is notoriously difficult to do. You may feel like you’re on track, saving and investing, but it’s hard to know for sure. Are you saving enough? Investing enough?

You’ve got a 401k and feel like overall, you’re making good decisions. Maybe you are even maxing the amount that you add to your 401k each year. But there’s still a lingering feeling of doubt.

That’s because you know that people are living deep into old age, enjoying longer retirements, and in general, not saving enough for these retirements. You want to be sure that you are not one of these people.

Here, we will walk through the mechanics of 401k investing (such as the 401k retirement age and a hypothetical 401k retirement withdrawal rate) and the proper use of a 401k account.

Then, we’ll dig into details for anyone who has ever wondered, “is 401k enough for retirement?” and “how much money in a 401k is enough to retire?” and give solutions for people who want to do and save more.

How Does a 401k Work?

A 401k is a retirement account that a person can access through their workplace, often offered as a workplace benefit that may provide an employer match. Though historically you could only access one through your job, nowadays a self-employed person can open up what is called a Solo 401k account.

A 401k is a qualified plan that offers several options to contribute money. The most common way that people contribute to their 401k is by making pre-tax contributions.

This means that you do not pay income taxes on the income that you contribute into the 401k, but you will pay them later, when you draw the money out to use in retirement. The idea is that you might be earning more as a working person than you will be spending as a retired person, and therefore in a lower tax bracket as a retired person.

Why is this important? When you are making retirement spending plans, you need to remember that you’ll have to account for income taxes coming out of any amount you plan to spend from tax-deferred plans such as a 401k. For example, if you are planning to take $80,000 from your 401k each year, plan to pay income taxes on this amount.

In addition to the tax savings when you contribute to a 401k, the money invested within a 401k is allowed to grow free from capital gains taxes. Capital gains taxes are levied on the growth of investments that are not in qualified plans, but your growth in a 401k avoids these taxes.

Each year, a person can contribute up to the allowable limits as designated by the IRS. The 401k contribution amount is reviewed each year. Sometimes, it is adjusted upwards for inflation. In 2018, the annual 401k contribution maximum was $18,500, but was increased to $19,000 in 2019 .

The catch with a 401k is that you typically can’t access the money without penalty until you are 59½ years, the 401k retirement age. At age 70½ a person is required to take a 401k retirement withdrawal in an amount calculated by the IRS, and that amount is called the Required Minimum Distribution.

How Much Do I Need to Save in Retirement?

Before we can talk about whether saving in a 401k alone is enough to retire from, one must assess, roughly, how much money is needed to live off of in retirement. As could be expected, this calculation is hard to do because it’s a moving target. Still, there is a general method you can use as a starting place.

To begin, determine your replacement rate . Your replacement rate is how much money you’ll need to live from, each year, in retirement. It’s called a replacement rate because it is the amount of money you will need to replace your working income. For example, you may want to live off $50,000 or $100,000 in retirement; it all depends on your wants and needs (and then add $5,000 per person which is roughly what the average retiree spends on healthcare expenses each year).

If you plan on receiving a pension or social security in retirement, then you should subtract that amount to get your overall replacement rate. To put social security in perspective, the average social security benefits replaces roughly 40% of pre-retirement earnings, but the more money you make the less of an impact social security will have.

Next, multiply the replacement rate by 25. This is how much money you should aim for in retirement. Why 25? Because it is the reverse of taking 4% from the total retirement amount. According to personal finance experts, 4% is the amount that you can withdraw from a retirement portfolio without running out of money over a 30+ year period of time. Your aim is to get to a place where you are living off the portfolio’s investment returns.

Here’s an example using a calculator and a pen. Let’s say you have $2 million saved for retirement. Using the 4% rule, you could take $80,000 from your account each year.

Next, let’s do that calculation in reverse. If you start from knowing that you want to spend $80,000 each year, then multiply that number by 25 to get $2 million.

It should be noted that the 4% rule is a great place to start but far from perfect in determining exactly how much money you need for retirement. For example, the 4% rule was based on historical returns.

This means that 4% withdrawals would not have resulted in running out of money assuming history repeated itself. Therefore, it’s always advantageous to work with a financial planner to determine your unique needs and how your plan would perform under various market circumstances.

Is Saving In A 401k Enough?

Is 401k enough for retirement? As you can see, it’s hard to say whether saving in 401k will be enough for every person in retirement, across the board. Every person is going to need a different amount in retirement, and so the number feels like a moving target.

There are three common reasons why people should consider supplementing their 401k savings with other types of accounts.

First, as discussed above there are contribution limits on 401k plans, so if you need or want to save more than the contribution limit you will need to save somewhere else. This is especially common for high income earners, workers who started saving later in life, or those trying to achieve financial independence at a younger age. Therefore, it might make sense to leverage a Traditional IRA, Roth IRA, or after-tax account to save beyond the 401k limits.

Second, many people contribute to their 401k plan by making pre-tax contributions. As discussed above, this means a tax break now but will lead to paying taxes when you take the money out.

The fact is that no one knows where tax rates will be in ten years let alone 30 years from now when you are retired. Therefore, it might make sense to leverage a individual retirement account so you have a pool of money that you can withdraw from in retirement that you would not pay taxes on.

Third, the idea of achieving financial independence at younger ages is gaining traction among younger employees. As discussed above, qualified plans have restrictions on when you can withdraw money without paying a penalty. Therefore, it might make sense to leverage an after-tax account so you have a pool of money that you can withdraw from, without having to worry about penalties if you access prior to 59.5.

So the simple answer is that saving in a 401k may be enough, but there are some very good reasons to leverage other vehicles.

What More Can I Do?

No one says that you can only save for the long-term in your 401k account. These accounts simply happen to have some tax advantages over saving and investing in a typical brokerage account.

As discussed above, there are some very common reasons to leverage a Traditional IRA, Roth IRA, of after-tax account. To get started, you should think through your goals and figure out which one of those account types make the most sense.

Next, you’ll need to decide how to invest the money. When you are saving for retirement, the typical fees that are charged by most finance companies really add up. That is why investing without fees with SoFi Invest® can be so valuable to younger investors.

You can open a Traditional IRA, Roth IRA, or after-tax account with SoFi Invest to supplement your 401k savings.

Ready to get serious about your retirement saving goals? Open a SoFi Invest account to start saving for your future.


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The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Automated and advisory services offered through SoFi Wealth LLC, an SEC registered investment advisor. SoFi Securities LLC, member FINRA / SIPC .
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