InvestX Archives

Dec

2025

The Black-Scholes Model, Explained

By Brian Nibley | Financial Independence, Growing Wealth, invest, Investing | Comments Off

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

Table of Contents

What Is the Black-Scholes Model?
The History of the Black-Scholes Model
What Does the Black-Scholes Model Tell?
The Black-Scholes Formula
Why Is the Black-Scholes Model Important?
How Accurate Is the Black-Scholes Model?
FAQ

The Black-Scholes option pricing model is a mathematical formula used to calculate the theoretical price of an option. It’s a commonly-used formula for determining the price of contracts, and as such, can be useful for investors in the options market to know.

But there are some important things to know about it, such as the fact that the model only applies to European-style options.

Key Points

• The Black-Scholes model is a mathematical formula used to calculate the theoretical price of an option.

• It is commonly used for pricing options contracts and helps investors determine the value of options they’re considering trading.

• The model takes into account factors like the option’s strike price, time until expiration, underlying stock price, interest rates, and volatility.

• The Black-Scholes model was created by Myron Scholes and Fischer Black in 1973 and is also known as the Black-Scholes-Merton model.

• While the model has some assumptions and limitations, it is considered an important tool for European options traders.

What Is the Black-Scholes Model?

As mentioned, the Black-Scholes model is one of the most commonly used formulas for pricing options contracts. The model, also known as the Black-Scholes formula, allows investors to estimate the value of options they’re considering trading.

The formula takes into account several important factors affecting options in an attempt to arrive at a theoretical price for the derivative. The Black-Scholes options pricing model only applies to European options.

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💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

The History of the Black-Scholes Model

The Black-Scholes model gets its name from Myron Scholes and Fischer Black, who created the model in 1973. The model is sometimes called the Black-Scholes-Merton model, as Robert Merton also contributed to the model’s development. These three researchers were affiliated with the Massachusetts Institute of Technology (MIT) and University of Chicago.

The model functions as a differential equation that requires five inputs:

• The option’s strike price

• The amount of time until the option expires

• The price of its underlying stock

• Interest rates

• Volatility

Modern computing power has made it easier to use this formula and made it more popular among those interested in stock options trading.

The model is designed for European options, since American options allow contract holders to exercise at any time between the time of purchase and the expiration date. By contrast, European options may be priced differently and only allow the owner to exercise the option on the expiration date. So, while European options only offer a single opportunity to exercise, American option traders may choose any of the days up until and on expiration to exercise the option.

What Does the Black-Scholes Model Tell?

The main goal of the Black-Scholes model is to estimate the theoretical price of a European-style contract, giving options traders a benchmark to compare against market prices. To this end, the model goes deeper than simply looking at the fact that the price of a call option may increase when its underlying stock price rises and incorporates the impact of stock volatility.

The model looks at several variables, each of which may impact the value of that option. Greater volatility, for example, could increase the option’s theoretical value since it may have a higher chance of seeing larger price moves. Similarly, more time to expiration may increase the model’s estimate of the option ending in the money, and may lower the present value of the exercise price. Interest rates also influence the price of the option, as higher rates can make the option more expensive by decreasing the present value of the exercise price.

The Black-Scholes Formula

The Black-Scholes formula estimates the theoretical value of a call option or put option using inputs such as current stock price, time to expiration, volatility, and interest rates. It expresses the value of a call option by taking the current stock prices multiplied by a probability factor (d1) and subtracting the discounted exercise payment times a second probability factor (d2).

Explaining in exact detail what d1 and d2 represent can be complex. They are part of the mathematical process used to estimate option prices in the market, and are often debated.

💡 Quick Tip: If you’re an experienced investor and bullish about a stock, buying call options (rather than the stock itself) can allow you to take the same position, with less cash outlay. It is possible to lose money trading options, if the price moves against you.

Why Is the Black-Scholes Model Important?

The Black-Scholes option pricing model is so impactful that it once won the Nobel Prize in economics. Some consider it a foundational idea in financial history.

Some traders use the Black-Scholes model to estimate theoretical values of European options. Since its creation, many scholars have elaborated on and improved this formula. The model is widely recognized as a landmark in mathematical finance.

Some analysts argue that the model has contributed to greater pricing efficiency of options and stock markets. While designed for European options, the Black-Scholes model can still offer insights into how theoretical option values respond to changes in core pricing factors, which may help inform investors’ overall options trading strategies.

Some traders use the model hedge against portfolio risk, which they believe may improve overall market efficiency. However, others assert that the model has increased volatility in the markets, as more investors constantly try to fine tune their trades according to the formula.

How Accurate Is the Black-Scholes Model?

Some studies have shown the Black-Scholes model to be effective at estimating theoretical options prices. This doesn’t mean the formula has no flaws, however.

The model tends to underestimate the value of deep in-the-money calls and overestimate calls that are deeply out of the money.

That means the model might assign an artificially low value to options that are significantly in the money, while it may overvalue options that are significantly out of the money. Options tied to stocks yielding a high dividend may also get mispriced by the model.

Recommended: How Do Dividends Work?

Assumptions of the Black-Scholes Model

There are also a few assumptions made by the model that can limit its real-world accuracy. Some of these include:

• The assumption that volatility and the risk-free rate remain constant over the option’s life

• The assumption that stock prices move continuously and without sudden jumps

• The assumption that a stock doesn’t pay dividends during the option’s life

Such assumptions are necessary to simplify the model, even though they may negatively impact results. Relying on assumptions makes the model mathematically tractable, as only so many variables can reasonably be calculated.

Over the years, quantitative researchers have expanded on the original models to address limitations introduced by its assumptions.

This leads to another flaw of the Black-Scholes model: unlike other inputs in the model, volatility must be an estimate rather than an objective fact. Interest rates and the amount of time left until the option expires are concrete numbers, while volatility has no fixed numerical value.

The best a financial analyst can do is estimate volatility using something like the formula for variance. Variance is a measurement of the variability of an asset, or how much its price changes from time to time. One common measurement of volatility is the standard deviation, which is calculated as the square root of variance.

Test your understanding of what you just read.

The Takeaway

The Black-Scholes option-pricing model is among the most influential mathematical formulas in modern financial history, and it may be one of the most accurate ways to determine the theoretical value of a European call option. It’s a complicated formula that has some drawbacks that traders should be aware of, but it’s a useful tool for European options traders.

Given the Black-Scholes model’s complexity, it’s likely that many investors may never apply it directly in their trading decisions. That doesn’t mean it isn’t important to know or understand, of course, but many investors may not get much practical use out of it unless they delve deeper into options trading.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

Explore SoFi’s user-friendly options trading platform.

FAQ

What is an example of the Black-Scholes method?

An example would be using the Black-Scholes formula to estimate the theoretical value of a European call option on a stock trading at $100, with a $105 strike price, 30 days to expiration, 20% volatility, and a 5% risk-free rate. The model would help determine the option’s theoretical worth under these conditions.

What is the 5 step method of Black-Scholes?

The five steps typically include: identifying the input values (stock price, strike price, time to expiration, volatility, and risk-free rate), calculating d1 and d2 (which are probability factors), finding the cumulative normal distribution values of d1 and d2, plugging the values into the Black-Scholes formula, and interpreting the result as the option’s theoretical price.

Is Black-Scholes still used?

Yes, the Black-Scholes model remains widely used as a foundational pricing tool for European options. Many traders and financial institutions still use it, though modifications or alternative models may be applied in complex or non-standard scenarios.

Why are Black-Scholes so important?

The Black-Scholes model helped transform how options are priced by offering a standardized, mathematically grounded method. Some argue that it has helped to improve market efficiency and risk management and pave the way for the modern derivatives market.

Photo credit: iStock/akinbostanci

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q325-076

Nov

2025

A middle-aged couple sits at a table with cups of coffee, smiling and looking at their retirement investments on a phone.

How Does Inflation Affect Retirement?

By Paulina Likos | invest, Investing, Preparing for Retirement | Comments Off

Table of Contents

What Is Inflation?
5 Steps that May Help Minimize the Impact of Inflation on Retirement
Inflation Calculator for Retirement
FAQ

For most retirees, inflation is always a concern because the money they’ve saved buys less over time — and the impact is worse during periods of higher inflation, which can significantly reduce purchasing power.

Higher inflation could mean that retirees, many of whom live on fixed incomes, need to scale back their spending or even make drastic changes to ensure that they don’t run out of money. The average rate of inflation was 8% in 2022, the highest inflation rate in 40 years. By January 2024, the inflation rate had dropped to 3.1%. As of August 2025, the annual rate of inflation had moderated to about 2.9%.

Learn more about inflation and retirement and what you can do to help protect your savings.

Key Points

• Inflation is the rate at which the cost of goods and services increase over a period of time.

• Inflation can impact the cost of living in many ways, from health care to utilities. As such it can affect your retirement.

• While most retirees aim to save a certain amount they can live on, inflation can reduce the buying power of their savings.

• It’s important for retirees to consider ways to maintain the value of their retirement nest egg.

• There are several strategies retirees can use to keep up with inflation, including Treasury Inflation-Protected Securities (TIPS) and reconsidering their equity allocation.

What Is Inflation?

Inflation is the rate at which prices of goods and services increase in an economy over a period of time. This can include daily costs of living such as gas for your car, groceries, home expenses, medical care, and transportation. Inflation may occur in specific segments of the economy or across all segments at once.

Causes of Inflation

There are multiple causes for inflation but economists typically recognize that inflation occurs when demand for goods and services exceeds supply. In an expanding economy where more consumers are spending more money, there tends to be higher demand for products or services which can exceed its supply, putting upward pressure on prices.

When inflation increases, the purchasing power of money, or its value, decreases. This means as the price of things in the economy goes up, the number of units of goods or services consumers can buy goes down.

Inflation can also be fueled by the rising cost of goods, as when the cost of raw materials and production rises and gets passed onto the consumer.

Inflation and Retirement

How does inflation affect retirement? When purchasing power declines, the value of your savings and investments goes down, whether you’re investing online or through an employer-sponsored retirement plan. While the dollar amount does not change, the amount of goods or services those dollars can buy falls.

In retirement, inflation can be especially harmful, since retirees typically don’t have an income that goes up over time. Concerns about inflation and retirement may even push back the age at which some people think they can afford to retire.

5 Steps that May Help Minimize the Impact of Inflation on Retirement

While inflation can seem like a challenging or even scary part of retirement, there are several investment opportunities that may help you maintain purchasing power and reduce the potential impact of inflation.

1. Invest in the Stock Market

Investing in stocks is one way to potentially fight inflation. A diversified portfolio that includes equities as well as fixed-income investments may generate long-term returns that are higher than long-term inflation. While past performance does not guarantee future returns, over the past 10 years the average annualized return for the S&P 500 has been 12.89%, though this does not take into account the cost of fees, taxes, or the reinvestment of dividends.

Even when inflation is factored in, investors may have substantial returns when investing in stocks. When adjusted for inflation, the average annualized return over the past 10 years is 9.48%, again without factoring in other costs.

In addition, stocks are subject to risk, which means they are sensitive to market volatility. These price swings may not feel comfortable to investors who are in retirement so retirees tend to allocate a smaller portion of their portfolio to stocks to help manage market risk.

How much you decide to allocate to stocks depends on a number of factors such as your risk tolerance and other sources of income.

2. Use Tax-Advantaged Retirement Vehicles

To maximize the amount of savings you have by the time you reach retirement, start investing as early as you can in young adulthood, using retirement accounts such as employer-sponsored 401(k)s or Individual Retirement Accounts (IRA). The more time your money has to grow, the better.

With 401(k)s and traditional IRAs, the money in them grows tax-deferred; you pay income tax on withdrawals in retirement, when you might be in a lower tax bracket than you were during your working years.

Another option is a Roth IRA. With this type of IRA, you pay taxes on the money you contribute, and then you can withdraw funds tax-free in retirement.

3. Reconsider Long-Term Investments With a Low Rate of Return

Risk-averse investors may be tempted to keep their nest egg invested in securities that are not subject to major price swings, or even to keep their money in a savings account. However, theoretically, the lower the risk investors take, the lower the reward may be. When factoring in fees and inflation, ultra-conservative investments may only break even or perhaps lose value over time.

Savings accounts, for example, typically don’t earn enough interest to beat inflation in the long run. Since savings account rates are not higher than inflation rates, the buying power of your savings will continue to decline. That’s particularly important for retirees who are often living off their savings and investments, rather than off of an income that rises with inflation.

Because of this, retirees may want to consider keeping a portion of their investments in the stock market, and consider using low-cost mutual funds or exchange-traded funds (ETFs), which offer some portfolio diversification.

4. Understand Inflation-Protected Securities

Treasury inflation-protected securities or TIPS, which are backed by the federal government, are fixed-income securities designed to help protect investments against inflation. The principal value of these bonds increases when inflation goes up and if there’s deflation, the principal adjusts lower per the Consumer Price Index.

However, for some investors, TIPS may have disadvantages. Like many bonds, TIPS typically pay lower interest rates than other government or corporate securities. That generally makes them less than ideal for individuals like retirees who are looking for investment income.

Also, unless inflation is quite high, and unless they are held for the long-term, TIPS may not offer much inflation-protection. There are also potential tax consequences to consider when the bonds are sold or reach maturity.

Finally, because they are more sensitive to interest rate fluctuation than other bonds, if an investor sells TIPS before they reach maturity, that individual could potentially lose money depending on the interest rates at the time.

Be sure to carefully weigh all the pros and cons of TIPS to decide if they make sense for your portfolio.

5. Consider Investing in Real Estate or REITs

Retirees may also consider investing in real assets, like real estate. Real estate is typically an inflation hedge because it holds intrinsic value. During periods of inflation, real estate may not only be able to preserve its value, but it might also increase in value, though this is never guaranteed.

That’s why rental income from real estate historically has kept up with inflation. Investing in real estate investment trusts (REITs), may be another way for retirees to diversify their investment portfolio, reduce volatility, and add to their fixed-income. Just be sure to understand the potential risks involved in these investments.

Inflation Calculator for Retirement

It’s important to factor inflation into your plans as you’re saving for retirement. One way to do that is using a retirement calculator like this one, which accounts for how inflation will impact your purchasing power in the future. That calculator uses a 3% inflation rate for retirement planning, but inflation fluctuates and could be higher or lower in any given year.

The Takeaway

While inflation can have an impact on a retirement portfolio, there are ways to protect the purchasing power of your money over time. Allocating a portion of your portfolio to stocks and other investments that may offer returns, may help reduce the impact of inflation.

Another way to curb the impact of inflation during retirement is to reduce expenses, which may help the money that you have to go further. And starting to save for retirement as early as possible could help you accrue the compound returns necessary to counteract rising prices in the future.

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

Is inflation good or bad for retirees?

A small amount of inflation each year is a normal part of the economic cycle. But over time, inflation eats away at the value of the dollar and the purchasing power of your nest egg is diminished. This can have a negative effect on a retirement investment portfolio or savings, so inflation is something retirees need to be aware of, and to plan for.

How can I protect my retirement savings from inflation?

There are several Investing strategies you can use to protect retirement savings from inflation. These include diversifying your portfolio with inflation hedges including TIPS (Treasury inflation-protected securities) and investments that may provide a higher rate of return. It’s important to keep saving for retirement even if you don’t have a 401(k).

Does your pension increase with inflation?

In some cases yes, some pensions have a cost of living adjustment on their monthly payments, so they increase over time. However, this is not the case for all pensions. When inflation increases this can affect your benefits. Be sure to ask your pension provider about the terms, and consult with a professional, if needed.

Photo credit: iStock/RgStudio

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

CalculatorThis retirement calculator is provided for educational purposes only and is based on mathematical principles that do not reflect actual performance of any particular investment, portfolio, or index. It does not guarantee results and should not be considered investment, tax, or legal advice. Investing involves risks, including the loss of principal, and results vary based on a number of factors including market conditions and individual circumstances. Past performance is not indicative of future results.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN-Q425-023

Nov

2025

How to Sell Options for Premium

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is An Option Premium?
What Is Selling Options Premium?
How Is an Options Premium Calculated?
Options Premiums and the Greeks
FAQ

Options traders may sell (or write) options with the hope of profiting from the premium they receive in return. Options premiums are the fee that options buyers (or holders) pay to purchase an options contract, giving them the option — though not the obligation — to buy or sell an asset at a specific price by a set date.

Unlike options holders, option writers are obligated to fulfill the terms of an options contract in exchange for the premium they receive, which could expose them to the risk of seeing substantial losses, well beyond losing the premium they receive.

While option writing has the potential to generate profits, it’s an advanced investment strategy typically used by traders experienced with risk management techniques.

Key Points

• Selling options generates income via writing call or put contracts, collecting upfront payments.

• Factors affecting option premiums include stock price, time value, and implied volatility.

• Potential losses if the option is exercised represent a significant risk.

• Retaining premiums and assets is a benefit if options are not exercised.

• Financial advice is crucial before trading options due to their complexity and risk.

What Is An Option Premium?

An option premium is the price an option buyer pays to purchase a contract based on its upfront market cost. A seller, conversely, receives the premium upfront as compensation. In other words, it is the current market price of an option contract, and the amount the seller receives when someone purchases the contract.

When investors buy options contracts, they are purchasing a derivative instrument that gives them the right to trade the underlying asset represented by the contract at a specific price within a predetermined period of time. The premium is paid to the option writer at the time of sale, regardless of whether the buyer exercises the option.

The premium amount depends on how much time there is left until the option contract expires, the price of the underlying asset, and how volatile or risky it is.

What Is Selling Options Premium?

Many investors may be familiar with the concept of purchasing an option contract, but on the other side of the market are the sellers who generate income through the premiums they receive from buyers.

Selling options is an options trading strategy in which an investor sells a buyer the right to purchase or sell an asset (typically a stock) at a predetermined price by the option’s expiration date. The premium is collected upfront as payment for the seller taking on the risk that the price of the underlying asset may move in the buyer’s favor during the contract’s term. The premium is not refundable.

If the option expires worthless, and the buyer isn’t able to exercise their right to buy or sell the underlying asset, the seller gets to keep the premium as profit, as well as retain ownership of the underlying asset (in the case of call options).

However, if the option ends up “in the money” for the buyer, the seller could incur a loss, since they’ll have to sell the stock for less than (or buy it for more than) its market price.

How Is an Options Premium Calculated?

The main factors that affect an option contract price are its intrinsic value, as determined by the stock price and strike price, implied volatility, and time value. Options sellers receive premiums upfront when a buyer purchases a call or a put option.

When an option buyer looks at options contract prices, they receive a per share quote, but each contract typically represents 100 shares of the underlying stock. Buyers will decide to either buy call or put options, depending on how they expect the stock’s price to perform in the future.

For example, a buyer could decide to purchase a call option. The seller offers it to them for a $4 premium. If the buyer purchases one contract, which represents 100 shares of that stock, they would pay $400 for it. If the buyer never executes the contract (because the price of the stock doesn’t move in their favor before the contract expires), the seller may keep the full $400 premium as compensation.

Stock Price

If an option buyer purchases a call option, they are hoping the underlying stock price increases, whereas if they buy a put option they hope it decreases. When the stock price goes up, the call option premium tends to increase and the put option premium tends to decrease. When the stock price falls, the call premium decreases and the put premium increases.

Recommended: What Makes Stock Prices Go Up or Down?

Intrinsic Value

The intrinsic value of an option is the difference between the current underlying stock price and the option’s strike price. This difference is referred to as the “moneyness” of the option, where the intrinsic value of the option is a measure of how far in the money the option is.

If the price of the underlying asset is higher than the option’s strike price, a call option is in the money, making it worth more and priced higher. If the stock price is lower than the option’s strike price, this makes a put option in the money and worth more. If an option is out of the money, it has no intrinsic value.

Time Value

Time value is the portion of the option’s premium that exceeds its intrinsic value due to time remaining before expiration. If the option has a longer timeframe left until its expiration date, it has more time to potentially move beyond the strike price and into the money. That makes it more valuable because it gives the investor more time to exercise their right to trade for a potential gain. The decrease in time value over time is called time decay.

The closer the option gets to expiring, the more rapidly time value erodes (and time decay increases). The value of the options contract declines over time due to time decay, which can be a risk for buyers. Options buyers want the stock to move enough, and soon enough to increase the option’s value before time decay reduces it. On the other hand, options sellers want the premium to decrease, which happens with every day that goes by.

Time value, sometimes referred to as extrinsic value, is calculated by subtracting intrinsic value from the option’s premium.

Implied Volatility

High premium options often reflect securities with higher volatility. If there is a high level of implied volatility, it suggests the underlying asset may experience larger price swings in the future, making the option more expensive.

A low level of implied volatility can make the option premium lower. It may benefit buyers to consider options with steady or increasing volatility, because this can increase the chance of the option reaching the desired strike price. Those who are selling options may prefer lower volatility because it may reduce the risk of large price swings, and could create an opportunity to buy back the option at a reduced price.

Other Factors

Other factors that influence option premium prices include:

• Current interest rates

• Overall market conditions

• The quality of the underlying asset

• Any dividend rate associated with the underlying asset

• The supply and demand for options associated with the underlying asset

Options Premiums and the Greeks

Certain Greek words are associated with types of risks involved in options trading. Traders can look at each type of risk to figure out which options they may consider trading, and how those trades might respond to factors like price changes, volatility, or time decay.

• Delta: The sensitivity of an option price to changes in the underlying asset

• Gamma: The expected rate of change in an option’s delta for each point of movement of the underlying asset

• Theta: The rate at which an option’s price decays over time

• Vega: A measure of the amount the option’s price may change for each 1% change in implied volatility

• Rho: The expected change in an option’s price for a one percentage point change in the risk-free interest rate

The Takeaway

Options are one type of derivatives that give the buyer the right, but not the obligation, to buy or sell an asset. To sell options for a premium, options writers must consider several factors that could influence the option’s premium value. Selling options for premium is potentially a strategy that may allow sellers to generate income. However, given that option writing has the potential to result in substantial losses, it should only be undertaken by experienced traders.

While investors are not able to sell options on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.

FAQ

How do you sell options to collect premium?

To sell options to collect premium, a trader writes call or put contracts and receives payment upfront from the buyer. This strategy involves agreeing to buy or sell a stock if the buyer exercises the option by expiration. Common strategies include covered calls and cash-secured puts.

What happens to the premium when you sell an option?

When an option is sold, the premium is paid upfront to the seller. If the seller holds the position to expiration and the contract is not exercised, they may keep the full amount. But if they close the position early by buying it back, the final result depends on the repurchase price.

What is the premium when you sell an option?

The premium when selling options is the amount a buyer pays for the contract. It compensates the seller for taking on the obligation to buy or sell the underlying asset if the option is exercised.

How is the premium of an option determined?

An option’s premium is based on intrinsic value, time value, implied volatility, and the price of the underlying stock. The final premium reflects current market expectations of risk and time until expiration.

Photo credit: iStock/sefa ozel

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q325-012

Nov

2025

A man sitting at a table working on his laptop to find out how much to withdraw from an account like an IRA in retirement.

4% Rule for Withdrawals in Retirement

By Krystal Etienne | invest, Investing, Preparing for Retirement | Comments Off

Table of Contents

What Is the 4% Rule for Retirement Withdrawals?
Drawbacks of the 4% Rule
How Can I Tailor the 4% Rule to Fit My Needs?
Should You Use the 4% Rule?
FAQ

After decades of saving for retirement, many new retirees often find themselves facing a new challenge: Determining how much money they can take out of their retirement account each year without running the risk of depleting their nest egg too quickly.

One popular rule of thumb is “the 4% rule.” Read on to learn more about the rule and how it works.

Key Points

• The 4% rule suggests withdrawing 4% of retirement savings in the first year, and then adjusting for inflation annually.

• The rule assumes a 30-year retirement period and a balanced 50% stock, 50% bond portfolio.

• Flexibility is important to adapt to lifestyle changes and fluctuating expenses in retirement.

• Additional income sources, such as Social Security or pensions, should be considered when it comes to how much to withdraw in retirement.

• For those who hope to retire early, the 4% rule likely won’t provide a sustainable income for all their years of retirement.

What Is the 4% Rule for Retirement Withdrawals?

The 4% rule suggests that retirees withdraw 4% from their retirement savings the year they retire, and adjust that dollar amount each year going forward for inflation. Based on historical data, the idea is that the 4% rule should allow retirees to cover their expenses for 30 years.

The rule is intended to give retirees some planning guidance about retirement withdrawals. The 4% rule may also help provide them with a sense of how much money they need for retirement.

How to Calculate the 4% Rule

To calculate the 4% rule, add up all of your retirement investments and savings and then withdraw 4% of the total in your first year of retirement. Each year after that, you increase or decrease the amount, based on inflation.

For example, if you have $1 million in retirement savings in an online investment account, you would withdraw 4% of that, or $40,000, in your first year of retirement. If inflation rises 3% the next year, you would increase the amount you withdraw by 3% to $41,200.

Drawbacks of the 4% Rule

While the 4% rule is simple to understand and calculate, it’s also a rigid plan that doesn’t fit every investor’s individual situation. Here are some of the disadvantages of the 4% rule to consider.

It doesn’t allow for flexibility

The 4% rule assumes you will spend the same amount in each year of retirement. It doesn’t make allowances for lifestyle changes or retirement expenses that may be higher or lower from year to year, such as medical bills.

The 4% rule assumes that your retirement will be 30 years

In reality, an individual’s retirement may be shorter or longer than 30 years, depending on what age they retire, their health, and so on. If someone’s life expectancy goes beyond 30 years post-retirement they could find themselves running out of money.

It’s based on a specific portfolio composition

The 4% rule applies to a portfolio of 50% stocks and 50% bonds. Portfolios with different investments of varying percentages would likely have different results, depending on that portfolio’s risk level.

It assumes that your retirement savings will last for 30 years

Again, depending on the assets in your portfolio, and how aggressive or conservative your investments have been, your portfolio may not last a full 30 years. Or it could last longer than 30 years. The 4% rule doesn’t adjust for this.

4% may be too conservative

Some financial professionals believe that the 4% rule is too conservative, as long as the U.S. doesn’t experience a significant economic depression. Because of that, retirees may be too frugal with their retirement funds and not necessarily live life as fully as they could.

Others say the rule doesn’t take into account any other sources of income retirees may have, such as Social Security, company pensions, or an inheritance.

How Can I Tailor the 4% Rule to Fit My Needs?

You don’t have to strictly follow the 4% rule. Instead you might choose to use it as as a starting point and then customize your savings from there based on:

• When you plan to retire: At what age do you expect to stop working and enter retirement? That information will give you an idea about how many years worth of savings you might need. For instance, if you plan to retire early, you may very well need more than 30 years’ worth of retirement savings.

• The amount you have saved for retirement: How much money you have in your retirement plans will help you determine how much you can withdraw to live on each year and how long those savings might last. Also be sure to factor in your Social Security benefits and any pensions you might have.

• The kinds of investments you have: Do you have a mix of stocks, bonds, mutual funds, and cash, for instance? The assets you have, how aggressive or conservative they are, and how they are allocated plays an important role in the balance of your portfolio. An investor might want assets that have a higher potential for growth but also a higher risk tolerance when they are younger, and then switch to a more conservative investment strategy as they get closer to retirement.

• How much you think you’ll spend each year in retirement: To figure out what your expenses might be each year that you’re retired, factor in such costs as your mortgage or rent, healthcare expenses, transportation (including gas and car maintenance), travel, entertainment, and food. Add everything up to see how much you may need from your retirement savings. That will give you a sense if 4% is too much or not enough, and you can adjust accordingly.

Should You Use the 4% Rule?

The 4% rule can be used as a starting point to determine how much money you might need for retirement. But consider this: You may have certain goals for retirement. You might want to travel. You may want to work part-time. Maybe you want to move into a smaller or bigger house. What matters most is that you plan for the retirement you want to experience.

Given those variations, the 4% rule may make more sense as a guideline than as a hard-and-fast rule.

Having flexibility in planning for withdrawals in retirement means saving as much as possible first. A starting place for many people is their workplace 401(k), but that’s not the only way you can save for retirement. For instance, those who don’t have access to a workplace retirement account might want to open an IRA or a retirement savings plan for the self-employed to invest for their future.

The Takeaway

The 4% rule represents a percentage that retirees can withdraw from their retirement savings annually (increasing or decreasing the amount each year, based on inflation) and theoretically have their savings last a minimum of 30 years. For example, in the first year in retirement, someone following this rule could withdraw $20,000 from a $500,000 retirement account balance.

However, the 4% rule has limitations. It’s a rigid strategy that doesn’t take factors like lifestyle changes into consideration. It assumes that your retirement will last 30 years, and it’s based on a specific portfolio allocation. A more flexible plan may be better suited to your needs.

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FAQ

How long will money last using the 4% rule?

The intention of the 4% rule is to make retirement savings last for approximately 30 years. But exactly how long your money may last will depend on your specific financial and lifestyle situation.

Does the 4% rule work for early retirement?

The 4% rule is based on a retirement age of 65. If you retire early, you may have more years to spend in retirement and your financial needs will likely be different. In this instance, the 4% rule may not give you enough income to sustain you through all the years of retirement.

Does the 4% rule preserve capital?

With the 4% rule, the idea is to withdraw 4% of your total funds and allow the remaining money in the account to keep growing. Because the withdrawals would at least partly consist of dividends and interest on savings, the amount withdrawn each year would not come totally out of the principal balance.

Is the 4% rule too conservative?

Some financial professionals say the 4% rule is too conservative, and that by using it, retirees may be too frugal with their retirement funds and not live as comfortable a life as they could. Others say withdrawing 4% of retirement funds could be too much because the rule doesn’t take into account any other sources of income retirees may have, such as Social Security.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q425-016

Oct

2025

Black glasses rest on a background split between vibrant magenta and teal to help the user learn about flexible spending accounts.

What Is a Flexible Spending Account?

By Bonnie Gibbs Vengrow | Budgeting & Goals, Building Your Career, Life & Career | No Comments

Table of Contents

What Is an FSA?
How Do You Fund an FSA?
What Items Qualify for FSA Reimbursement?
Are There Any FSA Limits?
Does an FSA Roll Over Each Year?
How Can You Use Up Your FSA?
Flexible Savings Account (FSA) vs. Health Savings Account (HSA)
The Takeaway
FAQ

Whether you’re purchasing a new pair of eyeglasses, stocking up on over-the-counter medications, or paying for your child’s daycare, there may be certain expenses your health insurance plan doesn’t cover.

In those cases, having a flexible spending account, or FSA, could help you save money. This special savings account lets you set aside pretax dollars to pay for eligible out-of-pocket healthcare expenses, which in turn can lower your taxable income.

Let’s take a look at how these accounts work.

Key Points

• A Flexible Spending Account (FSA) is a tax-advantaged account that allows you to set aside pre-tax dollars for eligible medical expenses.

• There are annual contribution limits for FSAs, which are set by the IRS and can vary each year.

• Funds in an FSA generally must be used within the plan year, or you may lose them, though some plans offer a grace period or carryover option.

• FSAs can be used for a wide range of medical expenses, including copayments, deductibles, prescription medications, and over-the-counter drugs (with a doctor’s note).

• FSAs are typically offered through employers, and both employees and employers can contribute to the account.

What Is an FSA?

An FSA is an employer-sponsored savings account you can use to pay for certain health care and dependent costs. It’s commonly included as part of a benefits package, so if you purchased a plan on the Health Insurance Marketplace, or have Medicaid or Medicare, you may no longer qualify for a FSA.

There are three types of FSA accounts:

• Health care FSAs, which can be used to pay for eligible medical and dental expenses.

• Dependent care FSAs, which can be used to pay for eligible child and adult care expenses, such as preschool, summer camp, and home health care.

• Limited expense health care FSA, which can be used to pay for dental and vision expenses. This type of account is available to those who have a high-deductible health plan with a health savings account.

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How Do You Fund an FSA?

If you opt into an FSA, you’ll need to decide on how much to regularly contribute throughout the year. Those contribution amounts will be automatically deducted from your paychecks and placed into the account. Whatever money you put into an FSA isn’t taxed, which means you can keep more of what you earn.

Your employer may also throw some money into your FSA account, but they are under no legal obligation to do so.

You can use your FSA throughout the year to either reimburse yourself or to help pay for eligible expenses for you, your spouse, and your dependents (more on that in a minute). Typically, you’ll be required to submit a claim through your employer and include proof of the expense (usually a receipt), along with a statement that says that your regular health insurance does not cover that cost.

Some employers offer an FSA debit card or checkbook, which you can use to pay for qualifying medical purchases without having to file a reimbursement claim through your employer.

💡 Quick Tip: When you have questions about what you can and can’t afford, a spending tracker app can show you the answer. With no guilt trip or hourly fee.

What Items Qualify for FSA Reimbursement?

The IRS decides which expenses qualify for FSA reimbursement, and the list is extensive. Here’s a look at some of what’s included — you can see the full list on the IRS’ website.

• Health plan co-payments and deductibles (but not insurance premiums)

• Prescription eyeglasses or contact lenses

• Dental and vision expenses

• Prescription medications

• Over-the-counter medicines

• First aid supplies

• Menstrual care items

• Birth control

• Sunscreen

• Home health care items, like thermometers, crutches, and medical alert devices

• Medical diagnostic products, like cholesterol monitors, home EKG devices, and home blood pressure monitors

• Home health care

• Day care

• Summer camp

Are There Any FSA Limits?

For 2025, health care FSA and limited health care FSA contributions are limited to $3,300 per year, per employer. Your spouse can also contribute $3,300 to their FSA account, as well.

Meanwhile, dependent care FSA contributions will be increased to $7,500 per household, or $3,750 if you’re married and filing separately, on January 1, 2026.

Does an FSA Roll Over Each Year?

In general, you’ll need to use the money in an FSA within a plan year. Any unspent money will be lost. However, the IRS has changed the use-it-or-lose-it rule to allow a little more flexibility.

Now, your employer may be able to offer you a couple of options to use up any unspent money in an FSA:

• A “grace period” of no more than 2½ extra months to spend whatever is left in your account

• Rolling over up to $660 from 2025 to use in the 2026 plan.

Note that your employer may be able to offer one of these options, but not both.

One way to avoid scrambling to spend down your FSA before the end of the year or the grace period is to plan ahead. Calculate all deductibles, copayments, coinsurance, prescription drugs, and other possible costs for the coming year, and only contribute what you think you’ll actually need.

How Can You Use Up Your FSA?

You can consider some of these strategies to get the most out of your FSA:

• Buy non-prescription items. Certain items are FSA-eligible without needing a prescription (but save your receipt for the paperwork!). These items may include first-aid kits, bandages, thermometers, blood pressure monitors, ice packs, and heating pads.

• Get your glasses (or contacts). You may be able to use your FSA to cover the cost of prescription eyeglasses, contact lenses, and sunglasses as well as reading glasses. Contact lens solution and eye drops may also be covered.

• Keep family planning in mind. FSA-eligible items can include condoms, pregnancy tests, baby monitors, and fertility kits. If you have a prescription for them, female contraceptives may also be covered.

• Don’t forget your dentist. Unfortunately, toothpaste and cosmetic procedures are not covered by your FSA, but dental checkups and associated costs might be. These could include copays, deductibles, cleanings, fillings, X-rays, and even braces. Mouthguards and cleaning solutions for your retainers and dentures may be FSA-eligible as well.

💡 Quick Tip: Income, expenses, and life circumstances can change. Consider reviewing your budget a few times a year and making any adjustments if needed.

Flexible Savings Account (FSA) vs. Health Savings Account (HSA)

When it comes to managing healthcare costs, another popular option is a health savings account (HSA). Both FSAs and HSAs offer tax advantages, but they differ in terms of eligibility, contribution limits, and how the funds can be used.

Both types of accounts:

• Offer some tax advantages

• Can be used to pay for co-payments, deductibles, and eligible medical expenses

• Can be funded through employee-payroll deductions, employer contributions, or individual deductions

• Have a maximum contribution amount. In 2025, people with individual coverage can contribute up to $4,300 per year, while those with family coverage can set aside up to $8,550 per year.

That said, there are some key differences between HSAs and FSAs:

• You must be enrolled in a high deductible health plan in order to qualify for an HSA.

• HSAs do not have a use-it-or-lose-it rule. Once you put money in the account, it’s yours.

• If you quit or are fired from your job, your HSA can go with you. This happens even if your employer contributed money to the account.

• If you’re 55 or older, you can contribute an additional $1,000 to your HSA as a catch-up contribution — similar to the catch-up contributions allowed with an IRA.

• If you withdraw money from your HSA for a non-qualified expense before the age of 65, you’ll pay taxes on it plus a 20% penalty.

• If you withdraw money from your HSA for any type of expense after age 65, you don’t pay a penalty. However, the withdrawal will be taxed like regular income.

Recommended: Benefits of Health Savings Accounts

The Takeaway

Flexible spending accounts are offered by employers and can be a useful tool for paying for health care or dependent-related expenses. Notably, you fund the account with pretax dollars taken from your paycheck, which can lower your taxable income and help you save money.

You typically need to spend your FSA money within a plan year, though your employer may give you the option to either roll over a portion of the balance into the next year or use it during a grace period. There are also guidelines around what you can spend the FSA funds on and how much you can contribute to your account.

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FAQ

How does a flexible spending account work?

A flexible spending account (FSA) lets you set aside pretax money from your paycheck to cover eligible medical, dental, vision, or dependent care expenses. Because contributions reduce your taxable income, you save on taxes.

What is the difference between an FSA and an HSA?

The main difference between an FSA and an HSA is ownership and eligibility. FSAs are employer-owned and require you to spend funds within the plan year, while HSAs are individually owned, available only with high-deductible health plans, and allow funds to roll over and grow tax-free year after year.

Can I withdraw money from my flexible spending account?

Yes, you can withdraw money from your flexible spending account (FSA) to pay for eligible medical expenses such as copays, prescriptions, and medical supplies. However, withdrawals must be for qualified expenses.

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This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

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