SoFi

Treasury Inflation-Protected Securities, or TIPS, are U.S. government bonds designed to help protect against inflation. When consumer prices rise over time, the purchasing power of money can decline, making it harder for savings and fixed-income payments to keep up with the cost of living.

Unlike traditional Treasury bonds, TIPS adjust their principal based on changes in the Consumer Price Index (CPI). This means the principal can increase with inflation or decrease with deflation, while interest payments are calculated using the adjusted principal.

TIPS may appeal to people who want some inflation protection or are looking to add a relatively conservative, government-backed security to a diversified portfolio. However, they also have risks, including interest rate fluctuations and potential tax liabilities.

What Are TIPS?

TIPS are inflation-protected bonds issued by the U.S. Department of the Treasury. They pay interest twice a year at a fixed rate applied to the bond’s inflation-adjusted principal. When inflation rises, the principal increases. When deflation occurs, the principal decreases. At maturity, the Treasury pays the greater of the bond’s original principal or its inflation-adjusted principal.

To fully understand Treasury Inflation-Protected Securities, it helps to understand how bonds work.

When you purchase a bond issued by a government, corporation, or municipality, you’re essentially lending the issuer money. In return, the issuer agrees to pay interest and repay the principal according to the bond’s terms. Bonds are often used to generate income and balance the risks associated with other assets.

Here are some key facts about TIPS:

•   Terms: TIPS are issued with maturities of five, 10, and 30 years.

•   Interest rate: Each TIPS issue has a fixed coupon rate determined at auction.

•   Minimum purchase: You can purchase TIPS in increments of $100.

•   Electronic issuance: TIPS are issued electronically rather than as paper certificates.

•   Buying and selling: You can hold TIPS until maturity or sell them on the secondary market before they mature.

How Treasury Inflation-Protected Securities (TIPS) Work

TIPS are designed to adjust to changes in consumer prices, helping their principal keep pace with inflation over time.

Inflation refers to a sustained increase in the prices of goods and services. The federal government tracks inflation using measures such as the CPI, which measures changes in the prices consumers pay for a basket of goods and services, including food, gasoline, and housing-related expenses.

Deflation is the opposite: a sustained decline in the general price level. It can occur during economic downturns or when demand falls relative to the supply of goods and services.

Both inflation and deflation can affect the purchasing power of money and the performance of financial assets. TIPS account for these changes through adjustments to their principal.

Here’s how the process works:

•   You purchase TIPS. You can buy them directly from the Treasury or through a bank, broker, or dealer.

•   You receive interest payments. The bond pays interest twice a year at its fixed coupon rate, applied to its adjusted principal.

•   The principal adjusts with inflation. When the CPI rises, the principal increases. Your interest payments can increase as well because they’re calculated using the adjusted principal.

•   The principal can decrease with deflation. If the CPI falls, the principal decreases, potentially reducing your interest payments.

•   You receive a payment at maturity. The Treasury pays the greater of the adjusted principal or the original principal.

The maturity provision is a key feature of TIPS. If deflation reduces the adjusted principal below its original amount, you still receive the original principal when the bond matures. However, this protection doesn’t apply if you sell the bond before maturity, and it doesn’t guarantee a positive return after accounting for inflation, interest payments, taxes, or the price you paid for the bond.

Are TIPS a Good Investment?

TIPS may make sense for people who are seeking to protect some of their purchasing power against inflation. Whether they’re appropriate depends on your financial goals, time horizon, and tolerance for fluctuations in bond prices.

Consider an example. Suppose you purchase a TIPS bond with an original principal of $1,000 and a 2% annual coupon rate. Initially, the bond would pay $20 in annual interest, split into two payments of $10.

Now, assume the bond’s adjusted principal increases by 3% over the next year because of inflation. Its principal would rise to $1,030. The annual interest would increase to $20.60, paid in two installments of $10.30.

If deflation occurred instead, the adjusted principal and interest payments could decline. However, if you hold the bond until maturity, the Treasury will pay at least the original $1,000 principal.

Keep in mind that this example illustrates how principal adjustments affect interest payments, not the bond’s total return. Your actual return also depends on the price you paid for the bond, changes in interest rates, taxes, and the inflation adjustments over the holding period.

Recommended: Understanding Deflation and How It Impacts Investors

Pros of Investing in TIPS

TIPS have several features that may appeal to some investors.

•   Protection against inflation: Traditional bonds generally pay interest based on a fixed principal amount. TIPS adjust their principal with inflation, which can help preserve purchasing power. As the adjusted principal rises, interest payments can rise as well.

•   A fixed real coupon rate: The coupon rate on TIPS is fixed, but it’s applied to the inflation-adjusted principal. This means the coupon rate represents a real interest rate, before taxes and other costs, rather than a fixed nominal rate. Your total return can still fluctuate with changes in market interest rates and bond prices.

•   Low credit risk: Because TIPS are backed by the U.S. government, they have very low credit risk, or the risk that the issuer won’t meet its payment obligations. However, government backing doesn’t eliminate market risk or guarantee that you’ll earn a positive real return.

•   Portfolio diversification: TIPS may help diversify a portfolio that includes stocks and conventional bonds. Their inflation adjustments can be particularly useful when rising consumer prices erode the purchasing power of fixed payments from other securities.

Cons of Investing in TIPS

Despite their inflation protection, TIPS have some potential drawbacks.

•   Interest rate risk: TIPS prices can fall when market interest rates rise. If you sell a bond before maturity, you could receive less than you paid for it, even if its principal has increased because of inflation. Longer-term TIPS can be particularly sensitive to interest rate changes.

•   Potentially lower returns when inflation is low: TIPS may be less attractive when inflation is lower than expected, particularly if their real yields are low. Conventional Treasury bonds may perform better in some circumstances, depending on their yields and changes in interest rates. TIPS can also lose market value if real interest rates rise.

•   Tax considerations: For taxable accounts, TIPS interest payments and increases in principal attributable to inflation are generally subject to federal income tax, but exempt from state and local income taxes. You may owe federal tax on an inflation-related principal increase even though you haven’t received that amount in cash. This is sometimes called phantom income. Holding TIPS in a tax-advantaged account may change the timing or treatment of these taxes.

•   No guarantee of a positive real return: The maturity guarantee protects the original principal amount in nominal dollars, not its purchasing power. If inflation is high, the bond’s return after taxes and other costs may still fall short of the increase in consumer prices.

How to Invest in Treasury Inflation-Protected Securities

There are three main ways to gain exposure to TIPS:

•   Buy TIPS directly from the U.S. Treasury. You can purchase TIPS through TreasuryDirect, the Treasury’s online platform. After opening an account, you can submit a noncompetitive bid at auction, which means you agree to accept the yield determined at the auction rather than specify your own yield.

•   Buy TIPS through a bank, broker, or dealer. Financial institutions and brokers may offer TIPS at auction or on the secondary market. At auction, you may be able to submit a competitive bid through an eligible institution, specifying the yield you’re willing to accept, or a noncompetitive bid. On the secondary market, prices reflect current market conditions and can be higher or lower than the bond’s adjusted principal.

•   Buy a mutual fund or exchange-traded fund (ETF) that holds TIPS. TIPS funds provide exposure to a collection of inflation-protected Treasury securities without requiring you to purchase individual bonds. This option may appeal to people who want to diversify across multiple TIPS issues or avoid managing individual bonds themselves.

TIPS funds differ from individual TIPS in an important way: They don’t have a single maturity date at which the Treasury guarantees repayment of an original principal amount. Their share prices fluctuate with the market value of their holdings.

The Takeaway

Treasury Inflation-Protected Securities can help protect purchasing power against inflation by adjusting their principal in response to changes in consumer prices. They also provide semiannual interest payments and the backing of the U.S. government.

However, TIPS aren’t risk-free. Their market prices can fluctuate, selling before maturity can result in a loss, and inflation adjustments may create tax liabilities before you receive the associated principal at maturity.

Whether TIPS belong in your portfolio depends on your financial goals, time horizon, and risk tolerance. Comparing them with conventional Treasury bonds and other fixed-income options can help you determine how they might fit into a diversified portfolio.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

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

Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.

FAQ

Are Treasury Inflation-Protected Securities (TIPS) a good investment?

TIPS may be a good option for people who are seeking to protect purchasing power against inflation while earning interest. Their principal adjusts with changes in the Consumer Price Index, and they’re backed by the U.S. government. However, TIPS can lose market value when interest rates rise, and inflation adjustments may create taxable income. Whether they’re appropriate depends on your financial goals, time horizon, and tolerance for risk.

What is the downside of TIPS?

Treasury Inflation-Protected Securities (TIPS) have several potential downsides. Their market prices can fall when interest rates rise, so selling before maturity could result in a loss. They may also be less attractive when inflation is lower than expected. In addition, inflation-related increases in principal are generally subject to federal income tax, even if you haven’t received that amount in cash. TIPS held to maturity return at least their original principal, but that doesn’t guarantee a positive return after inflation and taxes.

Are TIPS a good investment right now?

Whether Treasury Inflation-Protected Securities (TIPS) make sense right now depends on current real yields, inflation expectations, interest rates, and your financial goals. They may appeal to people seeking inflation protection, especially if they expect inflation to exceed what the market anticipates. However, conventional Treasury bonds may be more attractive under some conditions. Compare current yields, maturity dates, and potential tax implications before deciding whether TIPS fit your portfolio.

Which is better, TIPS or Treasury bonds?

Neither Treasury Inflation-Protected Securities (TIPS) nor conventional Treasury bonds are always better. TIPS adjust their principal for inflation, which can help preserve purchasing power. Conventional Treasury bonds generally pay fixed interest on a set principal amount, providing more predictable nominal payments. TIPS may be more appealing when inflation protection is a priority, while conventional Treasuries may suit people seeking predictable payments. The better choice depends on current yields, inflation expectations, your time horizon, and financial goals.

---

This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
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.
Investment Risk: Diversification can help reduce some investment risk, but cannot guarantee profit nor fully protect in a down market.

SOIN-Q426-056

Read more

When investing, you often want to know how much money an investment is likely to earn. That’s where the expected rate of return comes in. Expected rate of return is calculated using the probabilities of investment returns for various potential outcomes. Investors can utilize the expected return formula to help project future returns.

Though it’s impossible to predict the future, having some idea of what to expect can be critical in setting benchmarks for a good return on investment.

What Is the Expected Rate of Return?

The expected rate of return, or expected return, is the profit or loss an investor expects from an investment given historical rates of return and the probability of certain returns under different scenarios. The expected return formula projects potential future returns.

Expected return is a speculative financial metric investors can use to determine where to invest their money. By calculating the expected rate of return of an investment, investors get an idea of how that investment may perform in the future.

This financial concept can be useful when there is a robust pool of historical data on the returns of a particular investment. Investors can use the historical data to determine the probability that an investment will perform similarly in the future.

However, it’s important to remember that past performance is far from a guarantee of future performance. Investors actively investing in stocks should be careful not to rely on expected returns alone when making investment decisions.

How to Calculate Expected Return

To calculate the expected rate of return of a stock or other security, you need to think about the different scenarios in which the asset could see a gain or loss. For each scenario, multiply that amount of gain or loss (return) by its probability. Finally, add up the numbers you get from each scenario.

The formula for expected rate of return is:

Expected Return = (R1 * P1) + (R2 * P2) + … + (Rn * Pn)

In this formula, R is the rate of return in a given scenario, P is the probability of that return, and n is the number of scenarios an investor may consider.

For example, say there is a 40% chance an investment will see a 20% return, a 50% chance that the investment will return 10%, and a 10% chance the investment will decline 10%. (Note: All the probabilities must add up to 100%.)

The expected return on this investment would be calculated using the formula above:

Expected Return = (.4 x 20%) + (.5 x 10%) + (.1 x -10%)

Expected Return = 8% + 5% – 1%

Expected Return = 12%

What Is Rate of Return?

The expected rate of return mentioned above looks at an investment’s potential profit and loss. In contrast, the rate of return looks at the past performance of an asset.

A rate of return is the percentage change in value of an investment from its initial cost. When calculating the rate of return, you look at the net gain or loss of an investment over a particular time period. The simple rate of return is also known as the return on investment (ROI).

Recommended: What Is the Average Stock Market Return?

How to Calculate Rate of Return

The formula to calculate the rate of return is:

Rate of return = [(Current value − Initial value) ÷ Initial Value ] × 100

Let’s say you own a share that started at $100 in value and rose to $110 in value. Now, you want to find its rate of return.

In our example, the calculation would be [($110 – $100) ÷ $100] x 100 = 10

A rate of return is typically expressed as a percentage of the investment’s initial cost. So, if you were to sell your share, this investment would have a 10% rate of return.

Recommended: What Is Considered a Good Return on Investment?

Different Ways to Calculate Expected Rate of Return

How to Calculate Expected Return Using Historical Data

To calculate the expected return of a single investment using historical data, you’ll want to average the rates of return over a span of certain years to determine the probability of those returns. The table below is an example.

Annual Returns of a Share of Company XYZ
Year	Return
2016	16%
2017	22%
2018	1%
2019	-4%
2020	8%
2021	-11%
2022	31%
2023	7%
2024	13%
2025	22%

For Company XYZ, previous returns have been broken down into three scenarios: above 10%, 0%-10%, and negative. The stock generated a 21% average rate of return in 5 of the 10 years (2016, 2017, 2022, 2024, and 2025), a 5% average return in 3 of the years (2018, 2020, 2023), and a -8% average return in 2 of the years (2019 and 2021).

Using this data, you may assume there is a 50% probability that the stock will have a 21% rate of return, a 30% probability of a 5% return, and a 20% probability of a -8% return.

The expected return on a share of Company XYZ would then be calculated as follows:

Expected return = (.5 x 21%) + (.3 x 5%) + (.2 x -8%)

Expected return = 10.5% + 1.5% – 1.6%

Expected return = 10.4%

Based on the historical data, the expected rate of return for this investment would be 10.4%.

However, when using historical data to determine expected returns, you may want to consider all of the data available or only data from a select period. The sample size of the historical data could skew the results of the expected rate of return on the investment.

How to Calculate Expected Return Based on Probable Returns

When using probable rates of return, you’ll need a percentage for the expected probability of a given outcome. This probability can be calculated, or you can make assumptions about the probability of a return. Remember, the probability column must add up to 100%. Here’s an example of how this would look.

Expected Rate of Return for a Stock of Company ABC
Scenario	Return	Probability	Outcome (Return * Probability)
1	14%	30%	4.2%
2	2%	10%	0.2%
3	22%	30%	6.6%
4	-18%	20%	-3.6%
5	-21%	10%	-2.1%
Total		100%	5.3%

Using the expected return formula above, in this hypothetical example, the expected rate of return is 5.3%.

Calculate Expected Rate of Return on a Stock in Excel

Follow these steps to calculate a stock’s expected rate of return in Excel (or another spreadsheet software):

1.    In the first row, enter column labels:

◦   A1: Investment

◦   B1: Gain A

◦   C1: Probability of Gain A

◦   D1: Gain B

◦   E1: Probability of Gain B

◦   F1: Expected rate of return

2.    In the second row, enter your investment name in B2, followed by its potential gains and the probability of each gain in columns C2-E2.

◦   Note that the probabilities in C2 and E2 must add up to 100%.

3.    In F2, enter the formula = (B2*C2)+(D2*E2).

4.    Press enter, and your expected rate of return should now be in F2.

If you’re working with more than two probabilities, extend your columns to include Gain C, Probability of Gain C, Gain D, Probability of Gain D, etc.

If there’s a possibility of loss, that would be a negative gain, represented as a negative number.

Limitations of the Expected Rate of Return Formula

Historical data can be a good starting place to understand how an investment behaves. That said, investors may want to be leery of extrapolating past returns for the future. Historical data is a guide, but it’s not necessarily predictive.

Another limitation of the expected returns formula is that it does not consider the risk involved in investing in a particular stock or other asset class. The risk involved in an investment is not represented by its expected rate of return.

In the historical return example using company XYZ above, 10.4% is the expected rate of return. What that number doesn’t reveal is the risk taken in order to achieve that rate of return. The investment experienced negative returns in the years 2019 and 2021. The variability of returns is often called volatility.

Standard Deviation

To understand the volatility of an investment, you may consider looking at its standard deviation. Standard deviation measures volatility by calculating a dataset’s dispersion (the range of values) relative to its mean. The larger the standard deviation, the bigger the range of returns.

Consider two different investments: Investment A has an average annual return of 10.3%, and Investment B has an average annual return of 6.2%. But when you look at the year-by-year performance, you’ll notice that Investment A experienced significantly more volatility. There are years when returns are much higher or lower than those of Investment B.

Year	Annual Return on Investment A	Annual Return on Investment B
2016	16%	8%
2017	22%	4%
2018	1%	3%
2019	-6%	0%
2020	8%	6%
2021	-11%	-2%
2022	31%	9%
2023	7%	5%
2024	13%	15%
2025	22%	14%
Average Annual Return	10.3%	6.2%
Standard Deviation	13.1%	5.5%

Investment A has a standard deviation of 13.1%, while Investment B has a standard deviation of 5.5%. Although Investment A has a higher rate of return, there is more risk. Investment B has a lower rate of return, but there is less risk. Investment B is not nearly as volatile as Investment A.

Recommended: A Guide to Historical Volatility

Systematic and Unsystematic Risk

All investments are subject to pressures in the market. These pressures, or sources of risk, can come from systematic and unsystematic factors. Systematic risk affects an entire investment type. Investors may struggle to reduce systematic risk through diversification within that asset class.

Because of systematic risk, you may consider building an investment strategy that includes different asset types. For example, a sweeping stock market crash could affect all or most stocks and is, therefore, a systematic risk. However, if your portfolio includes different types of bonds, commodities, and real estate, you may limit the impact of the equities crash.

In the stock market, unsystematic risk is specific to one company, country, or industry. For example, technology companies will face different risks than health care and energy companies. This type of risk may be reduced through portfolio diversification, spreading investments across companies, industries, or asset classes. While it may help reduce the impact of risks specific to an individual investment, it cannot prevent losses from broader market movements.

Expected Rate of Return vs Required Rate of Return

Expected return is just one financial metric that investors can use to make investment decisions. Similarly, investors may use the required rate of return (RRR) to determine the amount of money an investment needs to generate to be worth it for the investor. The required rate of return incorporates the risk of an investment.

What Is the Dividend Discount Model?

Investors may use the dividend capitalization model to determine an investment’s required rate of return. This model is best used for stocks with high dividends and steady growth. This calculation uses a stock’s price, dividend payment per share, and projected dividend growth rate to calculate the required rate of return.

The formula for the required rate of return using the dividend capitalization model is:

RRR = (expected dividend payment/share price) + projected dividend growth rate

So, if you have a stock that pays $2 in dividends per year and is worth $20, and the dividends are growing at 5% a year, you have a required rate of return of:

RRR = ($2 / $20) + .05

RRR = .10 + .05

RRR = .15, or 15%

What Is the Capital Asset Pricing Model?

Another way to calculate the required rate of return is to use a more complex model known as the capital asset pricing model.

In this model, the required rate of return is equal to the risk-free rate of return plus what’s known as beta (the stock’s volatility compared to the market) multiplied by the market rate of return minus the risk-free rate. For the risk-free rate, investors usually use the yield of a short-term U.S. Treasury.

The formula is:

RRR = Risk-free rate of return + Beta x (Market rate of return – Risk-free rate of return)

For example, let’s say an investment has a beta of 1.5, the market rate of return is 5%, and the risk-free rate is 1%. Using the formula, the required rate of return would be:

RRR = .01 + (1.5 x (.05 – .01))

RRR = .01 + (1.5 x (.04))

RRR = .01 + .06

RRR = .07, or 7%

---

---

The Takeaway

There’s no way to predict the future performance of an investment or portfolio. However, by looking at historical data and using the expected rate of return formula, investors can get a better sense of an investment’s potential profit or loss.

There’s also no guarantee that the actual performance of a stock, fund, or other asset will match the expected return. Nor does the expected rate of return consider the risk and volatility of assets. It’s just one factor an investor should consider when deciding on investments and building a portfolio.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

Build your portfolio with SoFi Active Investing.

Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.

FAQ

How do you find the expected rate of return?

An investment’s expected rate of return is the average rate of return that an investor can expect to receive over the life of the investment. Investors can calculate the expected return by multiplying the potential return of an investment by the chances of it occurring and then totaling the results.

How do you calculate the expected rate of return on a portfolio?

The expected rate of return of a portfolio is the weighted average of the expected rates of return of the individual assets in the portfolio. You first need to calculate the expected return for each investment, and then weigh those returns by how much of the portfolio each investment represents.

What is a good rate of return?

A good rate of return varies from person to person. Some investors may be satisfied with a lower rate of return if performance is consistent, while others may be more aggressive and aim for a higher rate of return despite volatility. Ultimately, it is up to the individual to decide what is considered a good rate of return.

---

This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.

SOIN-Q126-119

Read more

While pension plans are less common today than they once were, many workers still receive a pension — a type of retirement plan that provides guaranteed income throughout retirement (or a lump sum at retirement).

Pension plans are known as defined-benefit plans because the benefits the worker will receive during retirement are predictable (i.e., defined). A 401(k) plan, on the other hand, is called a defined-contribution plan — because workers typically contribute a defined amount each month.

Pensions are employer-provided benefits; an individual can’t set up a pension as they would an IRA account. Read on to learn more about what a pension is and how it works.

How to Get a Pension Plan

Unlike other types of retirement plans, such as individual retirement accounts (IRAs), an investor who wants to save for retirement can’t simply fund a pension on their own. Like 401(k) plans, pension plans must be offered by an employer.

While pension plans were once a mainstay of how companies took care of their workers, they’ve become increasingly less common in recent decades. Only a small percentage of private sector and government employers — about 18% — offered some form of pension to their employees as of 2025.

The main reason many companies no longer offer pensions is that it’s generally cheaper for them to offer defined-contribution plans, such as 401(k) or 403(b) plans. That said, if an individual works for the federal, state, or local government, they may be offered a pension.

Among state and local government workers who participate in a retirement savings plan, a majority are in a pension plan.

Recommended: A 4-Step Guide to Planning Retirement

Pension Plans vs. Other Retirement Accounts

The key difference between pension plans and other retirement plans comes down to the difference between a “defined benefit” plan and a “defined contribution” plan.

•   With a defined benefit plan, such as a pension, the amount workers will receive in retirement is typically predictable: for example, $2,000 per month, which is valuable when you’re living in retirement.

•   With a defined contribution plan, such as a 401(k) or similar, employees’ contributions, or savings, are defined: for example, $500 per month. However, a defined contribution plan doesn’t guarantee a fixed benefit amount once the employee retires.

401(k) vs. Pension Plan

Although 401(k) plans and pension plans are both types of tax-deferred accounts that aim to provide workers with income in retirement, they differ in a few ways.

•   Funding and contribution limits

While the employer generally provides the bulk of funding for a pension plan, 401(k) plans are primarily funded by the employee. In some cases, an employer has the option to contribute to the 401(k) through matching funds. (Employers are not, however, required to provide an employer match.)

Another key difference is the annual contribution limit for each type of account.

For tax year 2026, employee contributions to a 401(k) plan are capped at $24,500 per year, with a total limit of $72,000, including employer contributions. (Those 50 and older may contribute additional catch-up contributions.)

The maximum total annual contribution to a pension plan for 2026 is $290,000.

•   Roth designation

There are other points of distinction between pension plans and 401(k) plans. For example, a 401(k) plan may offer a Roth feature (i.e., a Roth 401(k) account), which allows workers to contribute after-tax funds, and take qualified tax-free withdrawals in retirement. Pensions generally do not offer a Roth option.

•   Income and Taxes

As noted, the income from a pension plan is guaranteed, and thus a defined benefit.

But the income from a 401(k), 403(b), or other defined contribution plan depends on the amount the employee has saved over time, and the investments they selected for their portfolio, and how those investments performed.

The income from both a pension and a regular 401(k) is considered taxable income, however.

Pension Plan vs. IRAs

Individuals can also contribute to tax-advantaged IRAs and Roth IRAs. These are also quite different from pension plans.

Traditional and Roth IRAs are individual retirement savings accounts that individuals can set up. (Small businesses may offer a SEP IRA or SIMPLE IRA to employees.)

•   Funding and contribution limits

The annual contribution limits for traditional and Roth IRAs for tax year 2026 is $7,500 per individual, with an extra $1,100 catch-up contribution for those 50 and older.

Since traditional IRAs and Roth IRA plans are self-funded, there is no employer match. Small-business IRAs, like SEP and SIMPLE accounts, may offer an employer match.

•   Roth accounts

The Roth designation refers to the use of after-tax money to fund a retirement account, such as with a Roth IRA. Roth IRA account holders contribute after-tax funds, and qualified withdrawals are tax-free in retirement.

However, pension plans are tax-deferred accounts; the employee pays tax on their pension income in retirement. Typically, defined-benefit plans don’t offer a Roth option.

•   Income

IRA investors can choose the investments in their portfolio. As a result, the ultimate payout from these plans typically depends on the amount saved and the performance, or returns of the investments in the plan.

Traditional IRAs are tax-deferred accounts, so qualified withdrawals are subject to ordinary income tax. And traditional IRA holders must take RMDs, starting at age 73. Roth IRAs are not subject to RMD rules.

One advantage that pensions have over defined contribution plans is that pensions are guaranteed by the federal government through the Pension Benefit Guaranty Corporation (PBGC). It effectively guarantees the benefits of pension-plan participants. But the PBGC does not cover people with defined contribution plans or IRAs.

Managing Your Pension Plan

Workers with pension plans should talk to a representative in their human resources department and find out what the plan offers. Every pension plan is unique. An employee may benefit from looking into the specifics such as:

•   The pension benefit amount

•   Whether it includes health and medical benefits

•   What kind of benefits the pension will offer a surviving spouse or family members.

Someone just starting in their career may also want to ask when their pension benefits vest. In some plans, the benefits may vest immediately, while many others vest in stages, over the course of as seven or more years, which could affect their plans to move on to a new job or company.

One way to help get a better handle on what a pension may pay over time is to inquire about the pension benefit formula. Utilizing that formula is typically how an employer tallies up its eventual contribution to a pension plan based on years of service and what’s known as final average salary, which is the employee compensation rate the pension is based on.

Most often, the formula will use a percentage of the worker’s final average salary, and multiply it by their years of service to determine how much the employee will receive.

Pros of a Pension Plan

Perhaps the biggest advantage of a defined-benefit plan is the guarantee of predictable income in retirement. That’s the core promise that the PBGC protects.

Many pension plans may also include related medical and other benefits for the employee, as well as related benefits for surviving spouses. However those benefits vary widely from plan to plan and are important to investigate.

With a defined-benefit plan, an employee may be able to generally predict the amount they’ll have to live on after they retire, which could help them decide when they can retire. This might help workers plan for other needs, such as supplemental medical insurance or long-term care insurance, in order to better protect themselves down the road.

Cons of a Pension Plan

One downside of a pension plan is that it may give some would-be retirees a false sense of security.

A pension, with its steady income, might lead some people to avoid budgeting for basic living expenses in retirement, or to believe that their expenses will be the same each month, which is not always the case.

As a result, some retirees may not plan for increased overall living expenses due to the effects of inflation in retirement or sudden, unexpected expenses that may crop up.

There’s also the likelihood that their expenses later in life could be significantly higher, especially medical expenses as they get older.

That’s why it can be important to save for retirement in other ways, such as with an IRA, through an online brokerage account, or some other type of retirement savings plan. Just because a worker has a pension, that doesn’t necessarily mean that it’s the only retirement plan that’s right for them.

The Takeaway

Pension plans are a type of retirement savings plan that are offered by some employers that generally guarantee a certain amount of income to workers after they retire. Pension plans are defined-benefit plans, and differ in some key ways from IRAs or 401(k)s. Pensions have become less common in recent decades, and they have pros and cons, like any other financial product. Individuals may want to have other retirement savings plans along with a pension to help build their nest egg.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

Easily manage your retirement savings with a SoFi IRA.

FAQ

What is a pension plan?

A pension plan is a type of defined-benefit retirement plan offered by employers. Pensions are known for providing a guaranteed amount of income to retired workers. But pensions today are much less common, especially for private sector workers, and they have largely been replaced by defined contribution plans like 401(k)s.

How do pension plans work?

Generally, an employer contributes to the pension fund that will pay workers’ income benefits when they retire (in some cases, workers may also contribute to their pensions) and the money is invested. At retirement, the employee receives a guaranteed amount of income, often monthly. Pension income is taxed at ordinary income rates.

What are the different types of pension plans?

Pension plans vary, so it’s important for employees to know what the rules and restrictions of their plan are. For example, a defined-benefit plan uses a basic formula to calculate the amount the employee will receive. A cash-balance plan bases a worker’s payout on the account balance, while still providing a guaranteed income. In addition, some pensions may include insurance or spousal benefits (or not).

How do pension plans compare to 401(k)s and IRAs?

While there are several differences between these accounts, the most important distinction is that pension plans are defined-benefit plans that provide guaranteed income throughout retirement (or a lump sum) for the employee. Defined-contribution plans, like 401(k)s, do not provide guaranteed income, nor do IRAs, which are individual retirement accounts; instead, the account holder takes withdrawals in retirement.

Another important distinction is that an individual can set up a defined contribution plan or IRA and select the investments in their portfolio. But a person cannot join a pension unless they work for a company that offers one.

---

This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.

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.

SOIN-Q326-118

Read more

Age 62 can be an appealing time to step away from the workforce. You’re old enough to start claiming Social Security benefits, yet still young enough to enjoy pursuing hobbies, traveling, and spending time with family. But deciding to retire at 62 is a complicated choice that requires looking carefully at your financial situation, health care needs, and lifestyle goals.

Below are some guidelines to help you decide whether you can (or should) retire at 62, plus a look at the pros and cons of retiring on the early side.

Factors to Consider Before Retiring at 62

If you’re thinking about retiring at 62, you’ll want to explore how it will impact your Social Security benefits, health care costs, living expenses, and lifestyle. Here’s a look at each factor.

Social Security

At 62, you’re eligible to start claiming Social Security benefits, but doing so comes with a caveat. Opting for early benefits reduces your monthly payments compared to waiting until your full retirement age, which is between 66 and 67, depending on your birth year. Claiming benefits at age 62 can permanently reduce your monthly payments by up to 30%, which can significantly impact your long-term financial security.

You can check your Social Security account to see how much you’ll get when you apply at different times between age 62 and 70. If you don’t already have an account, you can create one at login.gov.

Health Care

Health care is a major consideration for anyone looking to retire at 62. Medicare eligibility starts at 65, leaving a potential three-year gap in coverage. That means you’ll need to secure health insurance, which can be costly. Options include purchasing private insurance, relying on a spouse’s employer-sponsored plan, or exploring coverage through the Affordable Care Act marketplace. Evaluating your health care needs and the associated costs is crucial before deciding to retire early.

Expenses

To determine if you can retire at 62, you’ll need to understand your post-retirement expenses, so that you can identify how much you may need in retirement savings. While some costs may decrease, such as commuting or work-related expenses, others may increase, like travel, hobbies, and medical care.

Creating a detailed budget can help you estimate your monthly expenses and determine if your savings and income streams will be sufficient to cover them. When projecting your annual expenses, keep in mind that many expenses will likely go up over time due to inflation.

Recommended: How Much Do You Need to Retire? 3 Rules of Thumb to Consider

Lifestyle Change

Retiring at 62 isn’t just a financial decision; it’s a lifestyle shift. Leaving the workforce means more time for hobbies, travel, and family, but it can also mean a loss of routine, purpose, and regular social interaction. Many retirees struggle with the psychological transition and find themselves missing the structure and camaraderie of the workplace. It’s wise to think about how you’ll fill your days and stay engaged without your old routine. You’ll also want to make sure that your financial resources will support your desired post-retirement lifestyle.

Are You Financially Ready to Retire at 62?

To figure out if you can retire at 62, you can assess your assets and how far they will take you. Here’s how.

Savings and Investments

The earlier you retire, the longer your nest egg needs to last. Do you have enough money set aside in savings and investments to support your desired lifestyle for 30-plus years? One common guideline is to have eight to 10 times your annual income saved by the time you retire.

For example, if you earn $60,000 annually, you should have $480,000 to $600,000 saved. If you’re looking to retire at 62, it may be wise to shoot for the higher end of that range or even beyond it. This may help make up for fewer earning years and (likely) more years to spend your savings.

If your savings aren’t quite where you’d like them to be, there are ways to catch up, such as working a bit longer or adjusting your investment strategy. Perhaps you could contribute more to your 401(k) or open an IRA, for instance.

Retirement Withdrawals

Understanding how much you can withdraw from your retirement savings each year is crucial to avoid outliving your money. One guideline to consider is the 4% withdrawal rule. This rule suggests withdrawing 4% of your retirement investments (such as a 401k or a Roth IRA) annually, adjusting that percentage each year for inflation, to fund a 30-year retirement.

As an example, let’s say you want to retire at 62 with $500,000 saved. If you follow the 4% rule, you’d only be able to withdraw $20,000 your first year in retirement, or just under $1,700 per month. That could constrain your lifestyle, though it doesn’t include what you may get from Social Security.

When calculating your annual retirement withdrawals, keep in mind that the 4% rule isn’t foolproof, especially during market downturns. You may need to adjust withdrawals based on your expenses and the performance of your investments.

Pros and Cons of Retiring at 62

To decide if you should retire at 62, it’s a good idea to weigh both the advantages and disadvantages of early retirement. Here’s how they might stack up.

Benefits of Retiring at 62

•   More time for personal goals: Retiring early gives you extra time to pursue passions, hobbies, or travel while you’re still relatively young.

•   Less work-related stress: Exiting the workforce can alleviate stress and allow you to focus on your well-being.

•   Family time: Retiring early lets you spend more quality time with loved ones, which might include helping with grandchildren or caregiving for aging parents.

•   Opportunities for a second act: Early retirement can free up time to start a small business, volunteer, or explore a new career on your terms.

Drawbacks of Retiring at 62

•   Reduced Social Security benefits: Claiming Social Security at 62 permanently reduces your monthly benefits.

•   Health care costs: Without Medicare coverage, health insurance expenses can take a significant bite out of your savings.

•   Longevity risk: Retiring early increases the risk of outliving your savings, particularly if you live well into your 80s or 90s.

•   Missed earnings: Leaving the workforce early means missing out on additional income, savings, and potential employer contributions to retirement accounts.

Tips to Live Comfortably If You Decide to Retire at 62

If you’re looking to retire at 62, keep these retirement planning strategies in mind.

•   Create a budget: Before you leave the workforce, it’s a good idea to track your expenses and come up with a realistic budget for your retirement years. Keep in mind that some expenses (like commuting to work) will go down, while others (like health care and discretionary spending) will likely go up once you retire.

•   Consider downsizing: To make your retirement savings go further, you might look into moving to a smaller home or a more affordable area to reduce housing costs.

•   Explore part-time work: Even if you choose to retire from your full-time job, you don’t have to fully exit the workforce. You might explore part-time work or consulting to supplement income while maintaining flexibility.

•   Delay Social Security (if possible): Consider using savings to bridge the gap and delay claiming Social Security benefits for a higher payout. The amount you can receive will be higher the longer you wait to apply, up until age 70.

•   Stay healthy: Prioritizing preventive health care and maintaining an active lifestyle may help minimize medical expenses.

•   Maximize investments: It’s generally a good idea to keep your investments, such as those in an online brokerage or other investment accounts, diversified and regularly review your portfolio with a financial advisor.

The Takeaway

Retiring at 62, which is the earliest age you can receive Social Security benefits, may be a viable option. But it’s important to look before you leap. To determine if you can realistically retire at 62, assess your current assets, estimate future income, consider your preferred lifestyle, and determine how you’ll pay for health care until Medicare starts at age 65. You’ll also want to weigh the benefits of retiring early (such as reduced stress and more personal time) against the potential drawbacks (like reduced income and less social interaction).

If your dream is to retire early, you’ll want to implement financial strategies that can help you achieve your goal. With the right preparation, retiring at 62 could be a rewarding new chapter of life.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

Easily manage your retirement savings with a SoFi IRA.

FAQ

How much money do you need to retire at 62?

The amount you need to retire at 62 depends on your lifestyle, health care costs, and expected longevity. One common guideline is to have eight to 10 times your annual income saved before retiring. For example, if you earn $70,000 annually, you would need at least $560,000 to $700,000. To retire at 62, you likely want to aim for the higher end of that spectrum to make up for fewer working years and, presumably, more years to spend your savings.

How much Social Security will you get if you retire early at 62?

If you retire at 62, you can claim Social Security benefits, but your payments will be reduced by as much as 30%. The exact reduction will depend on your full retirement age, which is somewhere between age 66 and 67, depending on your birth year. You can see how much you’ll get when you apply at different times between age 62 and 70 by logging into your Social Security account.

Is retiring at 62 a good idea?

Retiring at 62 may be a good idea if you’re financially prepared and eager to enjoy more leisure time. It allows for early access to Social Security benefits and freedom from work-related stress. However, early retirement also comes with challenges, which include reduced Social Security benefits, a health insurance gap before Medicare eligibility at 65, and a longer retirement period to fund.

To determine if you should retire at 62, consider your savings, expenses, and desired lifestyle. If you have sufficient resources to fund early retirement, retiring at 62 could be rewarding. Otherwise, waiting may offer greater financial stability.

---

Photo credit: iStock/kate_sept2004

This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOIN-Q326-111

Read more

Divorce can be emotionally and financially challenging, and one of the biggest concerns people have is how to finance the process. From filing and attorney fees to establishing separate households, the costs can quickly add up.

Knowing how to pay for divorce is particularly tricky because most people don’t plan for a divorce and, as result, likely don’t have a special bank account in which they’ve been saving up for a divorce. This can leave them feeling stuck in a tight corner.

For anyone scratching their head and wondering how to pay for a divorce, here are some answers. Take a look at how you can cover the cost of a divorce while still keeping an eye on your long-term (post-divorce) financial health.

How Much Does Divorce Cost?

We’ll start with the crummy news: Getting a divorce, already a difficult experience, is also expensive. While the cost varies depending on where you live and the complexity of the divorce, the average cost of a divorce in the U.S is $12,900. That said, a simple DIY divorce could run a lot less (typically a few hundred dollars). A complicated divorce (with disagreements around child custody or dividing up property), on the other hand, could run well over $100,000. Gulp.

Factors that can affect the cost of a divorce include:

•   The state where the divorce takes place

•   Whether the couple lives in an urban or a rural area

•   Whether it is contested or uncontested

•   Whether or not the couple hires professional legal help

•   The complexity of the couple’s finances

•   Whether or not there are child custody issues involved

How Do I Pay for My Divorce?

Ideally, every person, couple, and family would have some emergency money set aside to cover unforeseen events. While many wouldn’t consider this money would be for a divorce,it could qualify as an unexpected expense.

If you don’t have much, or any, rainy day savings, here are some steps that can help you manage the cost of your divorce.

•   Create a budget. A good place to start is to assess your financial situation and create a realistic budget for your divorce. Take a look at your income, expenses, and any debts you may have. This will help you determine how much you can allocate toward your divorce costs, find areas where you may be able to cut costs, and develop a strategy to finance your divorce.

•   Negotiate with your spouse. If possible, see if you can reach an amicable agreement with your spouse regarding the division of assets and expense payments. This can help reduce your legal fees and minimize the overall cost of the divorce process.

•   Explore mediation. Mediation is a cost-effective alternative to traditional divorce litigation. A neutral mediator helps facilitate discussions between you and your spouse, allowing you to work together to reach mutually agreeable solutions. Mediation can often be less expensive and less time-consuming than going to court.

Borrow From Friends and Family

If you need some financial assistance to cover the costs of your divorce, reaching out to friends and family is one option to consider. Loved ones who understand your situation may be willing to lend you money to help you through this challenging time.

You’ll want to approach borrowing from friends and family with caution, however. You want to be sure that you can eventually pay the money back and clearly communicate that you intend to do so. Also, discuss any expectations or terms, and ensure that the arrangement is legally documented to avoid misunderstandings or strain on personal relationships.

Recommended: Am I Responsible for My Spouse’s Debt?

Is a Personal Loan a Good Option to Pay for Divorce?

Another option to finance your divorce is to consider a personal loan.

Personal loans are often unsecured (meaning you don’t have to put up an asset as collateral) and can be used for a variety of purposes, including legal costs. They can provide you with the necessary funds to cover divorce-related expenses while allowing you to make manageable monthly payments over a fixed period, typically two to five years.

If you have good to excellent credit, a personal loan can be a better choice than using a credit card for your divorce costs, since rates are typically lower. A personal loan may also allow you to borrow a larger amount than your current credit card limit allows. Personal loans also come with fixed monthly payments, which can be easier to budget for.

Before applying for a personal loan for your divorce however, you’ll want to consider the annual percentage rates (APRs) and repayment terms offered by different lenders. Be sure to carefully assess your ability to repay the loan to avoid adding further financial stress during and after the divorce process.

Putting Your Financial Health First

While it’s crucial to address the immediate financial challenges of a divorce, it’s equally important to prioritize your long-term financial health. Here are some tips to help you navigate this process.

•   Protect your credit. Divorce can have a significant impact on your credit score. To minimize the impact, you’ll want to be sure to close joint accounts and establish individual accounts. It’s also advisable to monitor your credit report regularly to ensure it’s accurate and address any issues promptly.

•   Update legal and financial documents. It’s a wise idea to review and update your will, insurance policies, retirement accounts, and other legal and financial documents to reflect your new circumstances. You’ll also want to update beneficiaries and ensure your assets are distributed according to your wishes.

•   Focus on rebuilding. After the divorce, take steps to rebuild your financial stability. Set financial goals, create a savings plan, and consider ways to increase your income or reduce expenses. Building a solid financial foundation will help you regain control of your life and prepare for the future.

Recommended: Budgeting Tips for Life After Divorce

The Takeaway

Financing a divorce can be a challenging task, but with careful planning and consideration, it is possible to navigate this process successfully. Key steps include assessing your financial situation, exploring various options such as negotiation and mediation, and, if needed, borrowing from friends and family or getting a personal loan to help cover the costs of the divorce.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

SoFi’s Personal Loan was named a NerdWallet 2026 winner for Best Personal Loan for Large Loan Amounts.

✓ Checking your rate will not affect your credit score.

FAQ

How are finances split in a divorce?

Before a divorce can be finalized, couples will need to draft a legal document that outlines how they’ll split their assets. Once a judge determines the agreement to be fair and legal, it becomes part of the divorce settlement.

Do I have to pay my spouse’s credit card debt in divorce?

In general, you’re responsible for any credit card debt that’s in your name or for joint credit card debt. But if you live in a community property state, you may also be on the hook for a portion of your spouse’s credit card debt, as long as the debt was incurred during your marriage.

How can I prepare my finances for divorce?

There are steps you can take to prepare your finances before the paperwork is filed. One helpful strategy is to keep track of your income and household expenses, such as food, child care, home repairs, and housing. It’s also a good idea to estimate future expenses, such as your child’s school tuition. This information will come in handy as you create a post-divorce budget, but it can also help the judge determine how to split your combined assets and debts.

---

About the author

---

This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.

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

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOPL-Q326-057

Read more