Sep
24
2025
What is Volatility Skew and How Can You Trade It?

What Is Volatility Skew and How Can You Trade It?

By | Growing Wealth, invest, Investing | Comments Off on What Is Volatility Skew and How Can You Trade It?

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.

Volatility skew describes how implied volatility varies across at-the-money (ATM), in-the-money (ITM), and out-of-the-money (OTM) options with the same underlying asset. It can reflect market sentiment and anticipation of upward or downward price movement.

Volatility skew most commonly refers to vertical skews, which compare options with the same expiration date but different strike prices. However, there are also horizontal skews, or time skews, which look at options with the same strike price, but varying expiration dates.

Learn more about how volatility skew works, why it matters to options traders, and how it relates to strategies like puts, calls, and spreads.

Key Points

•   Volatility skew refers to the variation in implied volatility between at-the-money, in-the-money, and out-of-the-money options for the same asset.

•   Investors can use volatility skew as an indicator to decide on buying or selling options contracts based on market sentiment and price movements.

•   Horizontal skew examines options with varying strike prices and the same expiration date, while vertical skew examines those with varying expirations and the same strike price.

•   Measuring volatility skew involves plotting implied volatility against strike prices or expiration dates, allowing traders to identify potential market trends and opportunities.

•   Trading based on volatility skew can be risky, especially with complex strategies like vertical (strike-based) or calendar (expiration or horizontal) spreads, making it more suitable for experienced investors.

What Is Volatility Skew?

Volatility skew, also known as option skew, is an options trading concept that reflects the difference in implied volatility across in-the-money options, at-the-money options, and out-of-the-money options. These differences can appear across strike prices (vertical skew) or across expiration dates (horizontal skew).

The more common of these is the vertical skew, which investors may use to understand market sentiment. With vertical skews, implied volatility is compared across options contracts for the same underlying asset with the same expiration date but different strike prices. The strike prices may reflect varying levels of implied volatility, each of which can be plotted on a graph.

Volatility skewness refers to the slope of the implied volatility on that graph, which may help inform traders about potential market expectations. A balanced U-shaped curve is called a “volatility smile,” while an unbalanced downward curve is called a “volatility smirk.” Both of these may suggest a market expectation of upcoming price movements.

What Is Implied Volatility (IV)?

Implied volatility, denoted by the sigma symbol (σ), is an estimate of the volatility a given asset may experience between now and the contract’s expiration date. It’s basically the level of uncertainty that investors have about an underlying stock and how much they believe the stock’s price may fluctuate in either direction.

The volatility of an underlying asset changes constantly. The more the price of the asset changes, the more volatility it has. But implied volatility doesn’t necessarily follow the same pattern, because it depends on how investors view the asset and whether they believe it will have volatility. Implied volatility is usually shown using standard deviations and percentages over a particular period of time.

Option pricing assumes that options for the same asset that have the same expiration share the same level of implied volatility. In the Black-Scholes model, strike price is an input, but the assumption is that volatility remains constant across strikes. But investors are often willing to overpay for stock options when they think there is more volatility to the downside than the upside.

Different types of options contracts have different levels of implied volatility, and it’s important for traders to understand this when determining their options trading strategy.


💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.

What Does Volatility Skew Mean for Investors?

Implied volatility depends on supply and demand dynamics as well as investor sentiment about the options. The volatility skew may help investors better understand the market and decide whether to buy or sell particular contracts. It’s an important indicator for investors who trade options.

Stocks that are decreasing in price tend to have more implied volatility on the downside. If there is higher implied volatility in the underlying asset, the price of an option can increase, resulting in a downside equity skew.

If a skew has higher implied volatility, this can indicate that options premiums will be higher. So investors can look at volatility skews to find low- and high-priced contracts when evaluating whether to buy or sell.

There are, again, two types of volatility skew. Vertical skew shows the variation in implied volatility across options contracts that have different strike prices and the same expiration date. This is more commonly used by retail traders. Horizontal skew shows the difference in implied volatility across expiration dates for options contracts that have the same strike price.

How Do You Measure Volatility Skew?

Investors measure volatility skew by plotting implied volatility values across strike prices or expiration dates. For example, with a vertical skew, a trader could look at a list of bid/ask prices for options contracts for a particular asset that expire on the same date. They often take the midpoint of the bid/ask option prices to estimate implied volatility (especially in liquid markets) and chart those values out.

The tilt of the skew can shift over time based on changing market sentiment. Observing these changes may help investors identify potential market trends to inform skew-related strategies. For instance, if the stock price increases significantly, traders might view it as overbought and anticipate a potential pullback. This can shift the skew, steepening its curve and reflecting increased demand for at-the-money or downside put options.

There are five factors that influence the price of options:

• Underlying stock or asset market price

• Strike price

• Time to expiry

• Interest rate

• Implied volatility

Investors can calculate the volatility at different strike prices and graph those out to see the volatility skew.

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*Customer must fund their Active Invest account with at least $50 within 45 days of opening the account. Probability of customer receiving $1,000 is 0.026%. See full terms and conditions.

How Do You Trade With Volatility Skew?

As mentioned above, the two types of volatility skew are horizontal and vertical. These can both be used in options trading.

Vertical Skew

Investors tend to use vertical skew to try to determine market expectations and sentiment, and it is more commonly referenced than horizontal skew. Also referred to as volatility skew and option skew, vertical skew, as mentioned earlier, looks at the variation in implied volatility across strike prices for options that have the same expiration date.

Two common skew patterns that may indicate upcoming price movements are, as noted above, the smile and the smirk:

•   Volatility Smile: Implied volatility is higher for both ITM and OTM than ATM, creating a U-shaped curve.

•   Volatility Smirk: Implied volatility is higher for OTM puts than OTM calls, often reflecting demand for downside protection.

Using vertical skew, traders may find opportunities to trade debit spreads and credit spreads, evaluating which strike prices may offer favorable entry points.

For example, a trader might find a stock they believe will increase in value before its option contract expires. So they may want to use a bull put spread to buy in hopes of profiting bull put spread for a net credit, expressing a moderately bullish or neutral view, to profit from a price rise while limiting downside. They will have many strikes to choose from, so they can use vertical skew to identify potentially mispriced contracts based on relative implied volatility. The trader can identify a strike with favorable pricing, wait for the underlying to move or implied volatility to increase, and potentially sell the spread for a profit.

Horizontal Skew

There are many factors that drive changes in horizontal skew, such as product announcements, earnings reports, and global events. For instance, if traders are uncertain about the short-term future of a stock because of an upcoming earnings report, the implied volatility may increase and the horizontal skew may flatten.

Traders look for opportunities by using calendar spreads to look at the differences between option expiration implied volatility. Where there is implied volatility in a horizontal skew, there may be inefficient pricing that traders can take advantage of.

If the implied volatility is higher than expected in the front month, the option contract may be priced higher, which is referred to as positive horizontal skew.

On the other hand, if the implied volatility of the back month is higher than expected, this is known as negative horizontal skew or “reverse calendar spread.” In this situation, traders would sell the back month and buy the front month because they may profit if the price of the underlying asset increases before the back month contract expires.

For example, a trader might look at the market for a stock and find that there is a horizontal skew in the option calls, meaning traders are putting in buy and sell orders with the prediction that it’s more likely the stock will increase a lot in the long term than in the short term.

If the trader doesn’t think the current market predictions are correct, they might use a reverse calendar call spread, similar to shorting a stock and predicting it may decline. If the price of the stock plummets, both the long- and short-term contracts may lose value, and the trader could buy them back at a lower price than they sold them for.

In this case, the trader could also potentially profit if the implied volatility of the options decreases. They chose to sell when the implied volatility was high during the front month, so if the implied volatility decreases, they may be able to buy back at a lower price.

Although this has the potential to be a profitable way to trade, it also comes with high risk of potential loss because it’s a short call that requires significant margin. Stock exchanges require traders to have significant funds in their account if they want to place this type of trade.


💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

The Takeaway

Options trading is popular with many investors, and volatility skew is one way for options traders to gauge market sentiment and assess relative pricing across strike prices or expirations. Traders might look at either horizontal or vertical skew to help determine an options strategy that aligns with their broader strategy.

However, options trading is risky. It’s generally more appropriate for experienced investors than for beginners. 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.

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 a volatility skew?

A volatility skew is the difference in implied volatility across options with the same expiration date but different strike prices. Volatility skews reflect investor sentiment and demand for downside or upside protection. Traders may watch for steep or unusual skews as signals of potential market movement.

How to trade the market when volatility spikes?

When volatility spikes, options premiums often rise. Some traders may consider selling options to potentially capture high premiums, while others might use spreads or protective puts. These strategies can be risky and may not suit all experience levels.

How can I trade volatility?

Traders may attempt to trade volatility through options strategies that respond to implied volatility changes. These include straddles, strangles, and calendar spreads. The goal isn’t to predict direction but to benefit from volatility shifts. This approach may carry significant risk.

What is skewness in trading?

In options trading, skewness refers to the curve shape of implied volatility across strike prices. A balanced shape is called a volatility smile, while an unbalanced one is a volatility smirk. Skewness helps traders identify where the market is pricing in greater uncertainty.

Photo credit: iStock/Just_Super

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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees 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.

Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.

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Sep
24
2025
What Is a Money Purchase Pension Plan (MPPP)? How Is It Different From a 401k?

What Is a Money Purchase Pension Plan (MPPP)? How Is It Different From a 401(k)?

By | invest, Investing, Preparing for Retirement | Comments Off on What Is a Money Purchase Pension Plan (MPPP)? How Is It Different From a 401(k)?

A money purchase pension plan or MPPP is an employer-sponsored retirement plan that requires employers to contribute money on behalf of employees each year. The plan itself defines the amount the employer must contribute. Employees may also have the option to make contributions from their pay.

Money purchase pension plans have some similarities to more commonly used retirement plans such as 401(k)s, traditional pension plans, and corporate profit-sharing plans. If you have access to a MPPP plan at work, it’s important to understand how it works and where it might fit into your overall retirement strategy.

Key Points

•   A Money Purchase Pension Plan (MPPP) is an employer-sponsored retirement plan in which employers make fixed, pre-determined contributions to the plan on behalf of all employees.

•   MPPP contribution limits are $70,000 annually in 2025, or 25% of compensation, whichever is less.

•   Contributions to MPPPs grow tax-free for employees and are tax-deductible for employers.

•   MPPP distribution options include a lifetime annuity and a lump sum distribution.

•   MPPP advantages include large account balances and tax benefits, but disadvantages include no hardship withdrawals and no catch-up contributions.

What Is a Money Purchase Pension Plan?

Money purchase pension plans are a type of defined contribution plan. That means they don’t guarantee a set benefit amount at retirement. Instead, these retirement plans allow employers and/or employees to contribute money up to annual contribution limits.

Like other retirement accounts, participants can make withdrawals when they reach their retirement age, which can be an important part of their retirement planning. In the meantime, the account value can increase or decrease based on investment gains or losses.

Money purchase pension plans require the employer to make predetermined fixed contributions to the plan on behalf of all eligible employees. The company must make these contributions on an annual basis as long as the plan is maintained.

Contributions to a money purchase plan grow on a tax-deferred basis. Employees do not have to make contributions to the plan, but they can choose to do so.

What Are the Money Purchase Pension Plan Contribution Limits?

Each money purchase plan determines what its own contribution limits are, though the amount can’t exceed maximum limits set by the IRS. For example, an employer’s plan may specify that they must contribute 5% or 10% of each employee’s pay into that employee’s MPPP plan account.

Annual money purchase plan contribution limits are similar to SEP IRA contribution limits. For 2025, the maximum contribution amount allowed is the lesser of:

•   25% of the employee’s compensation, OR

•   $70,000

The IRS routinely adjusts the contribution limits for money purchase pension plans and other qualified retirement accounts based on inflation. The amount of money an employee will have in their money purchase plan upon retirement depends on the amount that their employer contributed on their behalf, the amount the employee contributed, and how their investments performed. Your account balance may be one factor in determining when you can retire.

Rules for money purchase plan distributions are the same as other qualified plans — you can begin withdrawing money penalty-free starting at age 59 ½. If you take out money before that, you may owe an early withdrawal penalty.

Like a pension plan, money purchase pension plans must offer the option to receive distributions as a lifetime annuity. Money purchase plans can also offer other distribution options, including a lump sum. Participants do not pay taxes on their accounts until they begin making withdrawals.

The Pros and Cons of Money Purchase Pension Plans

Money purchase pension plans have some benefits, but there are also some drawbacks that participants should keep in mind.

Pros of Money Purchase Plans

Here are some of the advantages for employees and employers who have a money purchase pension plan.

•   Tax benefits. For employers, contributions made on behalf of their workers are tax deductible. Contributions grow tax-free for employees, allowing them to defer taxes on investment growth until they begin withdrawing the money.

•   Loan access. Employees may be able to take loans against their account balances if the plan permits it.

•   Potential for large balances. Given the relatively high contribution limits, employees may be able to accumulate account balances higher than they would with a 401(k) retirement plan, depending on their pay and the percentage their employer contributes on their behalf.

•   Reliable income in retirement. When employees retire and begin drawing down their account, the regular monthly payments through a lifetime annuity may help with budgeting and planning.

Disadvantages of Money Purchase Pension Plan

Most of the disadvantages associated with money purchase pension plans impact employers rather than employees.

•   Expensive to maintain. The administrative and overhead costs of maintaining a money purchase plan can be higher than those associated with other types of defined contribution plans.

•   Heavy financial burden. Since contributions in a money purchase plan are required (unlike the optional employer contributions to a 401(k)), a company could run into issues in years when cash flow is lower.

•   Vesting schedules may be long. Employees who leave the company before they are fully vested in an MPPP may forfeit some or all of their employer’s contributions.

•   No catch-up contributions for older employees. Unlike a 401(k), employees ages 50 and up do not have the option to make an additional annual catch-up contribution to an MPPP.

Money Purchase Pension Plan vs 401(k)

The main differences between a pension vs 401(k) have to do with their funding and the way the distributions work. In a money purchase plan, the employer provides the funding with optional employee contribution.

With a 401(k), employees fund accounts with elective salary deferrals and optional employer contributions. For both types of plans, the employer may implement a vesting schedule that determines when the employee can keep all of the employer’s contributions if they leave the company. Employee contributions always vest immediately.

The total annual contribution limits (including both employer and employee contributions) for these defined contribution plans are the same, at $70,000 for 2025. But 401(k) plans allow for catch-up contributions made by employees aged 50 or older. For 2025, the total employee contribution limit is $23,500 with an extra catch-up contribution of $7,500, and for those aged 60 to 63, there’s a catch-up contribution of $11,250 (instead of $7,500), thanks to SECURE 2.0.

Both plans may or may not allow for loans, and it’s possible to roll amounts held in a money purchase pension plan or a 401(k) over into a new qualified plan or an Individual Retirement Account (IRA) if you change jobs or retire.

Recommended: IRA vs 401(k)–What’s the Difference?

Employees may also be able to take hardship withdrawals from a 401(k) if they meet certain conditions, but the IRS does not allow hardship withdrawals from a money purchase pension plan.

Here’s a side-by-side comparison of a MPPP and a 401(k):

MPPP Plan

 401(k) Plan
Funded by Employer contributions, with employee contributions optional Employee salary deferrals, with employer matching contributions optional
Tax status Contributions are tax-deductible for employers, growth is tax-deferred for employees Contributions are tax-deductible for employers and employees, growth is tax-deferred for employees
Contribution limits (2025) For 2025, lesser of 25% of employee’s pay or $70,000 For 2025, $23,500, with catch-up contribution of $7,500 for employees 50 or older, and $11,250 SECURE 2.0 catch-up for those 60 to 63
Catch-up contributions allowed No Yes, for employers 50 and older
Loans permitted Yes, if the plan allows Yes, if the plan allows
Hardship withdrawals No Yes, if the plan allows
Vesting Determined by the employer Determined by the employer

The Takeaway

Money purchase pension plans can be a valuable tool for employees to reach their retirement goals. They’re similar to 401(k)s, but there are some important differences.

Whether you save for retirement in a money purchase pension plan, a 401(k), or another type of account, the most important thing is to get started. The sooner you begin saving for retirement, the more time your money will potentially have to grow.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

🛈 While SoFi does not offer pension plans or 401(k) plans, we do offer a range of Individual Retirement Accounts (IRAs).

FAQ

What is a pension money purchase plan?

A money purchase pension plan or money purchase plan is a defined contribution plan that allows employers to save money on behalf of their employees. These plans are similar to profit-sharing plans, and companies may offer them alongside a 401(k) plan as part of an employee’s retirement benefits package.

Can I cash in my money purchase pension?

You can cash in a money purchase pension at retirement in place of receiving lifetime annuity payments. Otherwise, early withdrawals from a money purchase pension plan are typically not permitted, and if you do take money early, taxes and penalties may apply. However, if you leave your job, you can roll over the amount of money for which you are fully vested into an IRA or a new employer’s 401(k).

Is a final salary pension for life?

A final salary pension is a defined benefit plan. Unlike a defined contribution plan, defined benefit plans pay out a set amount of money at retirement, typically based on your earnings and number of years of service. Final salary pensions can be paid as a lump sum or as a lifetime annuity, meaning you get paid for the remainder of your life.

Photo credit: iStock/ferrantraite

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.

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.

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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Sep
23
2025

What Is Asset Allocation?

By | Growing Wealth, invest, Investing | Comments Off on What Is Asset Allocation?

Asset allocation is the practice of investing across different asset classes in a portfolio in order to balance the different potential risks and rewards. Asset allocation is closely tied to portfolio diversification, which means spreading one’s money across both asset classes and investment options within those classes. In a general sense, asset allocation is like taking the age-old advice of not putting all your eggs in one basket. An investor can’t avoid risk entirely, but diversifying their investments may help mitigate the risk that one asset class poses.

The three main asset classes are typically stocks, bonds, and cash, but some investors also allocate money into real estate, a range of commodities, private-equity or hedge funds, as well as cryptocurrencies. Determining what kind of asset allocation makes the most sense for you depends on personal goals, time horizon, and risk tolerance.

Key Points

•   Asset allocation involves distributing investments across various asset classes to help balance risks and rewards.

•   Financial goals, risk tolerance, and time horizon shape an asset allocation strategy.

•   Short-term goals generally require lower risk investments, while long-term goals can handle higher risk.

•   The 100 Rule suggests subtracting your age from 100 to determine stock allocation, though some recommend using 110 or even 120.

•   Regular portfolio rebalancing is essential to maintain alignment with financial goals and risk tolerance.

Common Assets

Some of the most common assets you can invest in are stocks, bonds, and cash equivalents.

•   Stocks: Stocks can be volatile, with the market going up and down, but they may also offer a higher return than bonds over the long run.

•   Bonds: Bonds, such as Treasuries or municipal bonds, can be viewed as lower risk because they’re backed by government entities, but they also offer lower returns. There are higher-yield corporate bonds, which have greater returns and risk, but also tend to be less volatile than stocks.

•   Cash or cash equivalents: This includes money in savings accounts or money market accounts, as well as certificates of deposit or Treasury bills. Obviously, the returns on these are very low but they’re also very secure. The biggest concern with cash investments is if inflation outpaces the return, then you technically could be losing money (e.g., future purchasing power).

What Factors Determine Your Asset Allocation?

There are three basic factors that will affect your asset allocation: Your goals, your risk tolerance, and your time horizon.

•   Goals. Your goals may be short term, such as starting a business, or saving for a down payment on a house in the next year or two. Or they may be long term, like planning ahead for that child’s education or saving for your retirement.

•   Risk tolerance. Your risk tolerance is how much volatility you can tolerate. Risk tolerance is your willingness to handle potential investment losses against gains, and may be difficult to zero in on. If you take on more risk than you’re comfortable with, and the market starts to drop, you might panic and sell investments at an inopportune time.

•   Time horizon. Finally, your time horizon is the amount of time you have to invest before you need to achieve your goal. This factor can help you determine how much risk you’re comfortable with and influence your portfolio allocation. For example, if you have a long horizon, there is more time to ride out the ups and downs in the market, and as a result, your risk tolerance may be higher.

You can see how these three factors come together to determine your asset allocation. If you have a short-term financial goal and will need to access your money relatively quickly — for example, if you’re about to buy that house you’ve been saving for — your risk tolerance will likely be lower, as you don’t want a market downturn to take a bite out of your investments just when you need to cash them out.

On the other hand, if you have a greater tolerance for risk — and if you think you may need more money for a down payment several years down the road — you may choose a more aggressive allocation in the hope of seeing more growth.

What’s an Effective Asset Allocation Strategy?

The best asset allocation to meet your financial goals depends on a number of factors, most importantly your timeframe and your risk tolerance. For example, if you’re very far away from retirement, then you may be able to handle more risk in your retirement portfolio. But if you’re investing for your teenage kids’ college education, then that’s potentially a shorter time frame and you may not want to take as many risks.

Your risk tolerance may also affect how you react to ups and downs in the market. That’s something to keep in mind.

Also, if you’re someone who worries about every blip in your investment portfolio, then you may want to consider less risky investments. No investment is without risk, but you can spread the risk out across different assets and asset classes. In general, higher-risk investments may offer higher returns, but it’s never guaranteed and most investors will benefit from having a longer time horizon.

The 100 Rule

A common rule of thumb is known as The 100 Rule: Subtract your age from 100 and that’s the percentage of your portfolio that should be invested in stocks. For example, if you’re 25, then the 100 rule would suggest that 75% of your portfolio be in stocks and 25% in safer investments, like bonds, Treasurys, cash or money market accounts.

Target date funds are funds that more or less follow this style of rule — automatically adjusting the make-up of stocks vs. bonds as you near your target retirement date.

However, there are some caveats to this rule of thumb — people are living longer, every person’s situation may be different, and this is really only an asset allocation suggestion for retirement, not other financial goals you might have. Some financial advisors have even adjusted it to “The 110 or 120 Rule” because of increases in life expectancy.

What Is Risk Tolerance-Based Asset Allocation?

Risk tolerance–based asset allocation involves shaping your portfolio based on the level of risk you’re most comfortable with. For example, if you fit into the aggressive investor risk tolerance profile, that means you may commit a larger share of your portfolio to stocks and other higher-risk investments.

On the other hand, you may have a smaller asset allocation to stocks if you lean more toward the conservative end of the spectrum. The style of investor you are will likely shift throughout your lifetime. As discussed above, different life stages bring new concerns and priorities to mind, and this will naturally change how you view your asset allocation.

One thing that’s important to understand when basing asset allocation on risk tolerance is how that aligns with your risk capacity. Your risk capacity is the amount of risk you must take to achieve your investment goals. This is important to understand for choosing assets based on risk tolerance to find the right portfolio allocation.

If you have a low risk tolerance, but a higher risk capacity is required to achieve the investment goals you’ve set, then you may be at risk of falling short of those goals.

Meanwhile, having a higher risk tolerance but a lower risk capacity could result in taking on more risk than you need to in order to achieve your investment goals. Finding the right balance between the two is key when using a risk tolerance based asset allocation strategy.

How to Rebalance Asset Allocation

The other factor to consider is when to rebalance your portfolio in order to stay in line with your asset allocation goals. Over time, the different assets in your portfolio have different returns, so the amount you have invested in each changes — one stock might have high enough returns that it grows and makes up a significant portion of your stock investments.

If, for example, you’re aiming for 70% in stocks and 30% in bonds, but your stock investments grow faster until they make up 80% of your portfolio, then it might be time to rebalance. Rebalancing just means adjusting your investments to return to your desired portfolio make-up and asset allocation.

There are many rebalancing strategies, but you can choose to rebalance at set times – monthly, quarterly, or annually — or when an asset changes a certain amount from your desired allocation (for example, if any one asset is more than 5% off your target make-up).

In order to rebalance, you simply sell the investments that are more than their target and buy the ones that have fallen under their target until each is back to the weight you want.

The Takeaway

The effect of asset allocation has been studied over the years and while the findings varied, one thing has remained constant: how you allocate your money to different assets is vitally important in determining what kind of returns you see.

However, it’s more than just diversifying within each asset class; it’s also about diversifying your entire investment portfolio across asset classes and styles. In general, for instance, stocks are considered riskier than bonds, though there are also different kinds of bonds with different risk levels.

There are many different kinds of funds with different asset allocation, and a fund doesn’t guarantee diversification, especially if it’s a fund that invests in just one sector or market. That’s why it’s important to understand what you want out of your portfolio and find an asset allocation to meet your goals, which may require professional help.

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


¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

FAQ

How often should I review and rebalance my asset allocation?

You can review and rebalance your portfolio and asset allocation at any time, but you may want to set regular check-ins, whether they’re quarterly, biannually, or annually. One general rule to consider is rebalancing your portfolio whenever an asset allocation changes by 5% or more.

What factors should I consider when determining my asset allocation?

There are three main factors that will affect your asset allocation. First are your goals and whether they’re short term like saving for a house, or long term like retirement. Second is your risk tolerance. Risk tolerance is important because you’ll want to take on only as much risk as you can live with. Otherwise, you might panic during a market downturn and sell investments at a loss. The third factor to consider for asset allocation is your time horizon, or the amount of time you have to invest to achieve your goals.

How can I assess my risk tolerance and align it with my asset allocation strategy?

With risk tolerance–based asset allocation, you shape your portfolio based on the level of risk you’re most comfortable with. That said, the type of investor you are will likely change through the decades. Different life stages come with new priorities, and those will influence how you view your asset allocation.

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.

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.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
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All cryptocurrency transactions, once submitted to the blockchain, are final and irreversible. SoFi is not responsible for any failure or delay in processing a transaction resulting from factors beyond its reasonable control, including blockchain network congestion, protocol or network operations, or incorrect address information. Availability of specific digital assets, features, and services is subject to change and may be limited by applicable law and regulation.

SoFi Crypto products and services are offered by SoFi Bank, N.A., a national bank regulated by the Office of the Comptroller of the Currency. SoFi Bank does not provide investment, tax, or legal advice. Please refer to the SoFi Crypto account agreement for additional terms and conditions.

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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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Guide to Maxing Out Your 401(k)

By | Budgeting & Goals, Growing Wealth, invest, Investing | No Comments

Maxing out your 401(k) involves contributing the maximum allowable amount to your workplace retirement account to increase the benefit of compounding and appreciating assets over time.

All retirement plans come with contribution caps, and when you hit that limit it means you’ve maxed out that particular account.

There are a lot of things to consider when figuring out how to max out your 401(k) account, including whether maxing out your account is a good idea in the first place. Read on to learn about the pros and cons of maxing out your 401(k).

Key Points

•   Maxing out your 401(k) contributions can help you save more for retirement and take advantage of tax benefits.

•   If you want to max out your 401(k), strategies include contributing enough to get the full employer match, increasing contributions over time, utilizing catch-up contributions if eligible, automating contributions, and adjusting your budget to help free up funds for additional 401(k) contributions.

•   Diversifying your investments within your 401(k) and regularly reviewing and rebalancing your portfolio can optimize your returns.

•   Seeking professional advice and staying informed about changes in contribution limits and regulations can help you make the most of your 401(k).

What Exactly Does It Mean to ‘Max Out Your 401(k)?’

Maxing out your 401(k) means that you contribute the maximum amount allowed in a given year, as specified by the established 401(k) contribution limits. But it can also mean that you’re maxing out your contributions up to an employer’s percentage match.

If you want to max out your 401(k) in 2025, you’ll need to contribute $23,500. If you’re 50 or older, you can contribute an additional $7,500, for an annual total of $31,000. In addition, in 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0, for an annual total of $34,750.

Should You Max Out Your 401(k)?

4 Goals to Meet Before Maxing Out Your 401(k)

Generally speaking, yes, it’s a good thing to max out your 401(k) so long as you’re not sacrificing your overall financial stability to do it. Saving for retirement is important, which is why many financial experts would likely suggest maxing out any employer match contributions first.

But while you may want to take full advantage of any tax and employer benefits that come with your 401(k), you also want to consider any other financial goals and obligations you have before maxing out your 401(k).

That doesn’t mean you should put other goals first, and not contribute to your retirement plan at all. That’s not wise. Maintaining a baseline contribution rate for your future is crucial, even as you continue to save for shorter-term aims or put money toward debt repayment.

Other goals might include:

•   Is all high-interest debt paid off? High-interest debt like credit card debt should be paid off first, so it doesn’t accrue additional interest and fees.

•   Do you have an emergency fund? Life can throw curveballs — it’s smart to be prepared for job loss or other emergency expenses.

•   Is there enough money in your budget for other expenses? You should have plenty of funds to ensure you can pay for additional bills, like student loans, health insurance, and rent.

•   Are there other big-ticket expenses to save for? If you’re saving for a large purchase, such as a home or going back to school, you may want to put extra money toward this saving goal rather than completely maxing out your 401(k), at least for the time being.

Once you can comfortably say that you’re meeting your spending and savings goals, it might be time to explore maxing out your 401(k). There are many reasons to do so — it’s a way to take advantage of tax-deferred savings, employer matching (often referred to as “free money”), and it’s a relatively easy and automatic way to invest and save, since the money gets deducted from your paycheck once you’ve set up your contribution amount.

How to Max Out Your 401(k)

Only a relatively small percentage of people max out their 401(k)s, but that doesn’t mean you can’t be one of them. Here are some strategies for how to max out your 401(k).

1. Max Out 401(k) Employer Contributions

Your employer may offer matching contributions, and if so, there are typically rules you will need to follow to take advantage of their match.

An employer may require a minimum contribution from you before they’ll match it, or they might match only up to a certain amount. They might even stipulate a combination of those two requirements. Each company will have its own rules for matching contributions, so review your company’s policy for specifics.

For example, suppose your employer will match your contribution up to 3%. So, if you contribute 3% to your 401(k), your employer will contribute 3% as well. Therefore, instead of only saving 3% of your salary, you’re now saving 6%. With the employer match, your contribution just doubled. Note that employer contributions can range from nothing at all up to a certain limit. It depends on the employer and the plan.

Since saving for retirement is one of the best investments you can make, it’s wise to take advantage of your employer’s match. Every penny helps when saving for retirement, and you don’t want to miss out on this “free money” from your employer.

If you’re not already maxing out the matching contribution and wish to, you can speak with your employer (or HR department, or plan administrator) to increase your contribution amount, you may be able to do it yourself online.

2. Max Out Salary-Deferred Contributions

While it’s smart to make sure you’re not leaving free money on the table, maxing out your employer match on a 401(k) is only part of the equation.

In order to make sure you’re setting aside an adequate amount for retirement, consider contributing as much as your budget will allow. As noted earlier, individuals younger than age 50 can contribute up to $23,500 in 2025, while those 50 and over can contribute $7,500 more in catch-up contributions. And those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.

Those contributions aren’t just an investment in your future lifestyle in retirement. Because they are made with pre-tax dollars, they lower your taxable income for the year in which you contribute. For some, the immediate tax benefit is as appealing as the future savings benefit.

3. Take Advantage of Catch-Up Contributions

As mentioned, 401(k) catch-up contributions allow investors aged 50 and over to increase their retirement savings — which is especially helpful if they’re behind in reaching their retirement goals.

Individuals 50 and over can contribute an additional $7,500 for a total of $31,000 in 2025. And again, in 2025, those aged 60 to 63 can contribute an additional $11,250, instead of $7,500, for a total of $34,750. Putting all of that money toward retirement savings can help you truly max out your 401(k).

As you draw closer to retirement, catch-up contributions can make a difference, especially as you start to calculate when you can retire. Whether you have been saving your entire career or just started, this benefit is available to everyone who qualifies.

And of course, this extra contribution will lower taxable income even more than regular contributions. Although using catch-up contributions may not push everyone to a lower tax bracket, it will certainly minimize the tax burden during the next filing season.

4. Reset Your Automatic 401(k) Contributions

When was the last time you reviewed your 401(k)? It may be time to check in and make sure your retirement savings goals are still on track. Is the amount you originally set to contribute each paycheck still the correct amount to help you reach those goals?

With the increase in contribution limits most years, it may be worth reviewing your budget to see if you can up your contribution amount to max out your 401(k). If you don’t have automatic payroll contributions set up, you could set them up.

It’s generally easier to save money when it’s automatically deducted; a person is less likely to spend the cash (or miss it) when it never hits their checking account in the first place.

If you’re able to max out the full 401(k) limit, but fear the sting of a large decrease in take-home pay, consider a gradual, annual increase such as 1% — how often you increase it will depend on your plan rules as well as your budget.

5. Put Bonus Money Toward Retirement

Unless your employer allows you to make a change, your 401(k) contribution may be deducted from any bonus you might receive at work. Some employers allow you to determine a certain percentage of your bonus check to contribute to your 401(k).

Consider possibly redirecting a large portion of a bonus to 401k contributions, or into another retirement account, for example, if you open an IRA. Because this money might not have been expected, you won’t miss it if you contribute most of it toward your retirement.

You could also do the same thing with a raise. If your employer gives you a raise, consider putting it directly toward your 401(k). Putting this money directly toward your retirement can help you inch closer to maxing out your 401(k) contributions.

6. Maximize Your 401(k) Returns and Fees

Many people may not know what they’re paying in investment fees or management fees for their 401(k) plans. By some estimates, the average fees for 401(k) plans are between 0.5% and 2%, but some plans may have higher fees.

Fees add up — even if your employer is paying the fees now, you’ll have to pay them if you leave the job and keep the 401(k).

Essentially, if an investor has $100,000 in a 401(k) and pays $1,000 or 1% (or more) in fees per year, the fees could add up to thousands of dollars over time. Any fees you have to pay can chip away at your retirement savings and reduce your returns.

It’s important to ensure you’re getting the most for your money in order to maximize your retirement savings. If you are currently working for the company, you could discuss high fees with your HR team.

One way to potentially lower your costs is to find more affordable investment options. Generally speaking, index funds often charge lower fees than other investments. If your employer’s plan offers an assortment of low-cost index funds, you may want to consider investing in these funds to save some money and help build a diversified portfolio.

If you have a 401(k) account from a previous employer, you might consider moving your old 401(k) into a lower-fee plan. It’s also worth examining what kind of funds you’re invested in and if the plan is meeting your financial goals and risk tolerance.

What Happens If You Contribute Too Much to Your 401(k)?

After you’ve maxed out your 401(k) for the year — meaning you’ve hit the contribution limit corresponding to your age range — then you’ll need to stop making contributions or risk paying additional taxes on your overcontributions.

In the event that you do make an overcontribution, you’ll need to take some additional steps such as letting your plan manager or administrator know, and withdrawing the excess amount. If you leave the excess in the account, it’ll be taxed twice — once when it was contributed initially, and again when you take it out.

What to Do After Maxing Out a 401(k)?

If you max out your 401(k) this year, pat yourself on the back. Maxing out your 401(k) is a financial accomplishment. But now you might be wondering, what’s next? Here are some additional retirement savings options to consider if you have already maxed out your 401(k).

Open an IRA

An individual retirement account (IRA) can be a good complement to your employer’s retirement plans. With a traditional IRA, you can contribute pre-tax dollars up to the annual limit, which is $7,000 in 2025. If you’re 50 or older, you can contribute an extra $1,000, for an annual total of $8,000 in 2025.

You may also choose to consider a Roth IRA. As with a traditional IRA, the annual contribution limit for a Roth IRA in 2025 is $7,000, and $8,000 for those 50 or older. Roth IRA accounts have income limits, but if you’re eligible, you can contribute with after-tax dollars, which means you won’t have to pay taxes on earnings withdrawals in retirement as you do with traditional IRAs.

You can open an IRA at a brokerage, mutual fund company, or other financial institution. If you ever leave your job, you can typically roll your employer’s 401(k) into your IRA without facing tax consequences as long as both accounts are similarly taxed, such as rolling funds from a traditional 401(k) to a traditional IRA, and funds are transferred directly from one plan to the other. Doing a 401(k) to IRA rollover may allow you to invest in a broader range of investments with lower fees.

Boost an Emergency Fund

Experts often advise establishing an emergency fund with at least three to six months of living expenses before contributing to a retirement savings plan. Perhaps you’ve already done that — but haven’t updated that account in a while. As your living expenses increase, it’s a good idea to make sure your emergency fund grows, too. This will cover you financially in case of life’s little curveballs: new brake pads, a new roof, or unforeseen medical expenses.

The money in an emergency fund should be accessible at a moment’s notice, which means it needs to comprise liquid assets such as cash. You’ll also want to make sure the account is FDIC insured, so that your money is protected if something happens to the bank or financial institution.

Save for Health Care Costs

Contributing to a health savings account (HSA) can reduce out-of-pocket costs for expected and unexpected health care expenses, though you can only open and contribute to an HSA if you are enrolled in a high-deductible health plan (HDHP).

For tax year 2025, those eligible can contribute up to $4,300 pre-tax dollars for an individual plan or up to $8,550 for a family plan. Those 55 or older can make an additional catch-up contribution of $1,000 per year.

The money in this account can be used for qualified out-of-pocket medical expenses such as copays for doctor visits and prescriptions. Another option is to leave the money in the account and let it grow for retirement. Once you reach age 65, you can take out money from your HSA without a penalty for any purpose. However, to be exempt from taxes, the money must be used for a qualified medical expense. Any other reasons for withdrawing the funds will be subject to regular income taxes.

Increase College Savings

If you’re feeling good about maxing out your 401(k), consider increasing contributions to your child’s 529 college savings plan (a tax-advantaged account meant specifically for education costs, sponsored by states and educational institutions).

College costs continue to creep up every year. Helping your children pay for college helps minimize the burden of college expenses, so they hopefully don’t have to take on many student loans.

Open a Brokerage Account

After you max out your 401(k), you may also consider opening an online brokerage account. Brokerage firms offer various types of investment accounts, each with different services and fees. A full-service brokerage firm may provide different financial services, which include allowing you to trade securities.

Many brokerage firms require you to have a certain amount of cash to open accounts and have enough funds for trading fees and commissions. While there are no limits on how much you can contribute to the account, earned dividends are taxable in the year they are received. Therefore, if you earn a profit or sell an asset, you must pay a capital gains tax. On the other hand, if you sell a stock at a loss, that becomes a capital loss. This means that the transaction may yield a tax break by lowering your taxable income.

Pros and Cons of Maxing Out Your 401(k)

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Pros:

•   Increased Savings: Your retirement savings account will be bigger, which could lead to more growth over time.

•   Simplified Saving and Investing: Maxing out your 401(k) can also make your saving and investing relatively easy, as long as you’re taking a no-lift approach to setting your money aside thanks to automatic contributions.

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Cons:

•   Affordability: Maxing out a 401(k) may not be financially feasible for everyone. It may be challenging due to existing debt or other savings goals.

•   Opportunity Costs: Money invested in retirement plans could be used for other purposes. During strong stock market years, non-retirement investments may offer more immediate access to funds.

Test your understanding of what you just read.

The Takeaway

Maxing out your 401(k) involves matching your employer’s maximum contribution match, and also, contributing as much as legally allowed to your retirement plan in a given year. If you have the flexibility in your budget to do so, maxing out a 401(k) can be an effective way to build retirement savings.

And once you max out your 401(k)? There are other smart ways to direct your money. You can open an IRA, contribute more to an HSA, or to a child’s 529 plan.

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


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

FAQ

What happens if I max out my 401(k) every year?

Assuming you don’t overcontribute, you may see your retirement savings increase if you max out your 401(k) every year, and hopefully, be able to reach your retirement and savings goals sooner.

Will you have enough to retire after maxing out a 401(k)?

There are many factors that need to be considered to determine if you’ll have enough money to retire if you max out your 401(k). Start by getting a sense of how much you’ll need to retire by using a retirement expense calculator. Then you can decide whether maxing out your 401(k) for many years will be enough to get you there, assuming an average stock market return and compounding built in.

First and foremost, you’ll need to consider your lifestyle and where you plan on living after retirement. If you want to spend a lot in your later years, you’ll need more money. As such, a 401(k) may not be enough to get you through retirement all on its own, and you may need additional savings and investments to make sure you’ll have enough.

What is the best way to max out a 401(k)?

Some effective ways to max out a 401(k) include contributing up to the allowable amount for the year (for 2025, that’s $23,500 for those under age 50); using catch-up contributions if you’re aged 50 or older ($7,500 in 2025, or $11,250 if you’re ages 60 to 63); contributing enough to get your employer’s matching contributions if offered; automating your contributions and increasing them yearly, if possible; and directing a percentage of any bonus you receive into your 401(k).

About the author

Ashley Kilroy

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.


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.

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SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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

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.

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When Can I Retire This Formula Will Help You Know_780x440

When Can I Retire Calculator

By | Budgeting & Goals, invest, Investing, Life & Career, Preparing for Retirement | No Comments

When it comes to figuring out when you can retire, there are a number of factors to consider, including Social Security, other sources of income like a pension, and expenses such as health care costs.

Thankfully, there’s retirement calculators for figuring out these costs, which might help you plan for the future. But first, to decide when you can retire, determine at what age you want to retire and then see how that decision affects your finances.

Key Points

•   Factors to consider when deciding when to retire include Social Security benefits, other sources of income, and expenses like health care costs.

•   The full retirement age for Social Security benefits varies based on birth year.

•   Early retirement can result in reduced Social Security benefits, while delaying retirement can increase monthly benefits.

•   Different retirement accounts, such as Roth IRAs and traditional IRAs, have specific rules for withdrawals.

•   Other sources of retirement income to consider include part-time work, pensions, inheritance, and rental income.

When Can You Get Full Social Security Benefits?

As you consider when to apply for Social Security, you’ll want to understand at what age the government allows people to retire with full Social Security benefits. Not only that, at what age can people start withdrawing from their retirement accounts without facing penalties? For Social Security, the rules are based on your birth year.

The Social Security Administration (SSA) has a retirement age calculator. For example, people born between 1943 and 1954 could retire with full Social Security benefits at age 66.

Meanwhile, those born in 1955 could retire at age 66 and two months, and those born in 1956 could retire at age 66 and four months. Those born in or after 1960 can retire at age 67 to receive full benefits. This can help with your retirement planning.

When you plan to retire is important as you consider your Social Security benefits. What you can collect at full retirement age is different from what you can collect if you retire early or late.

In a 2024 SoFi Retirement Survey, two out of three respondents say they are somewhat or very confident they can retire on time: 70% are hoping to leave the workforce at age 60 or older. Others hope to retire early —17% would like to retire between the ages of 50 and 59.

Target Retirement Age
Source: SoFi’s 2024 Retirement Survey

Social Security Early Retirement

A recipient’s benefits will be permanently reduced if they retire before full retirement age. That’s because the earlier a person retires, the less they’ll receive in Social Security.

Let’s use Jane Doe as an example and say she was born in 1960, so full retirement age is 67. If she retires at age 66, she’ll receive 93.3% of Social Security benefits; at age 65 will get Jane 86.7%. If she retires on her 62nd birthday — the earliest she can receive Social Security — she’ll only receive 70% of earnings.

Here’s a retirement planner table for those born in 1960, which shows how one’s benefits will be reduced with early retirement.

How Early Retirement Affects Your Social Security Benefits
Source: Social Security Administration

Social Security Late Retirement

If a person wants to keep working until after full retirement age, they could earn greater monthly benefits. This is helpful to know when choosing your retirement date.

For example, if the magic retirement number is 66 years but retirement is pushed back to 66 and one month, then Social Security benefits rise to 100.7% per month. So if your monthly benefit was supposed to be $1,000, but you wait until 66 years and one month, then your monthly allotment would increase to $1,007.

If retirement is pushed back to age 70, earnings go up to 132% of monthly benefits. But no need to calculate further: Social Security benefits stop increasing once a person reaches age 70. Here is a SSA table on delayed retirement .

Other Retirement Income to Consider

In retirement, you may have other income sources that can help you support your lifestyle and pay the bills. These might include:

Part-Time Work

Working after retirement by getting a part-time job, especially if it’s one you enjoy, could help cover your retirement expenses. And as long as you have reached your full retirement age (which is based on your year of birth, as noted above), your Social Security benefits will not be reduced, no matter what your earnings are.

However, if you retire early, you need to earn under an annual limit, which is $23,400 in 2025, to keep your full benefits. If you earn more than that, you’ll lose $1 in Social Security benefits for every $2 you earn over the limit. (Note that if some of your retirement benefits are withheld because of your earnings, your monthly benefit will increase once you reach full retirement age, taking into account the withheld benefits.)

Pension

A pension plan, also sometimes known as a defined benefits plan, from your employer is usually based on how long you worked at your company, how much you earned, and when you stopped working. You’ll need to be fully vested, which typically means working at the company for five years, to collect the entire pension. Check with the HR rep at your company to get the full details about your pension.

A pension generally gives you a set monthly sum for life or a lump sum payment when you retire.

Inheritance

If you inherit money from a relative, these funds could also help you pay for your retirement. And fortunately, receiving an inheritance won’t affect your Social Security benefits, because Social Security is based on money you earn.

Rental Income

Another potential money-earning idea: You could rent out a home you own, or rent out just the upper floors of the house you live in, for some extra income in retirement. Like an inheritance, rental income will generally not affect your Social Security benefits.

Major Expenses in Retirement

It’s important to draw up a budget for retirement to help determine how much money you might need. The amount may be higher than you realize — which is one of the reasons it’s beneficial to start saving early. In SoFi’s retirement survey, more than half of respondents (51%) say they started saving before age 35.

Age People Start Saving for Retirement
Source: SoFi’s 2024 Retirement Survey

As you put together your retirement budget, these are some of the major expenses retirees commonly face.

Healthcare

For most people, health care costs increase as they get older, as medical problems can become more serious or pervasive. According to Fidelity, based on 2024 numbers, the average amount that a couple who are both age 65 will spend on health care during their first year of retirement is $12,800.

Housing

Your mortgage, home insurance, and the costs of maintaining your house can be a significant monthly and yearly expense. In fact, according to the Bureau of Labor Statistics’ 2023 Consumer Expenditures report, Americans aged 65 and older spent an average of $21,445 on housing in 2023.

Travel

If you’re planning to take trips in retirement, or even just drive to visit family, transportation costs can quickly add up. The Bureau of Labor Statistics Consumer Expenditures report found that in 2023, people over age 65 averaged about $9,033 in transportation costs a year, including vehicles, maintenance, gas, and insurance.


💡 Quick Tip: You can’t just sit on the money you save in a traditional IRA account forever. The government requires withdrawals each year, starting at age 73 (for those born in 1950 or later). These are called required minimum distributions or RMDs.

When Can You Withdraw From Retirement Accounts?

Now that you have a sense of your expenses in retirement, let’s look at retirement accounts. Each type of account has different rules about when money can be taken out.

If a Roth IRA account has existed for at least five years, withdrawals can generally be taken from the account after age 59 ½ without consequences. These are known as qualified withdrawals. Taking out money earlier or withdrawing money from a Roth IRA that’s been open for fewer than five years could result in paying penalties and taxes.

There is a little wiggle room. Contributions (but not earnings) can be withdrawn at any time without penalty, no matter the age of the account holder or the age of the account.

Roth IRA withdrawal rules also have some exceptions. Qualified withdrawals may be made from an account that’s been open at least five years for the purchase of a first home (up to a $10,000 lifetime limit), due to a disability, or after the account holder’s death to be paid to their estate or a beneficiary.

People with a traditional IRA can make withdrawals after age 59 ½ without being penalized. The government will charge a 10% penalty on withdrawals before age 59 ½. There are some exceptions, such as the purchase of a first home (up to a $10,000 lifetime limit), some medical and educational expenses, disability, and death.

People with 401(k)s can make withdrawals after age 59 ½ without paying a 10% penalty. Again, there are some exceptions. For example, an individual can generally retire at age 55 and make withdrawals without penalty. There are also exceptions for those under age 59 ½ for hardship withdrawals, disability, and death, among others.

It’s important to be aware that with a traditional IRA and a 401(k), individuals must start making required minimum distributions (RMDs) by age 73 or face a penalty.

Test your understanding of what you just read.

The Takeaway

Deciding at what age to retire is a personal choice. However, by planning ahead for some common expenses, and understanding the age at which you can get full Social Security benefits, you can use a retirement calculator formula to estimate how much money you’ll need each year to live on. And you can supplement your Social Security benefits with other forms of income and by making smart decisions about savings and investments.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

FAQ

How do I calculate my retirement age?

To calculate your full retirement age, which is the age you can receive your full retirement benefits, you can use the Social Security administration’s retirement age calculator . Essentially, if you were born in 1960 or later, your full retirement age is 67. For those born between 1954 and 1959, the full retirement age is between 66 and 67, depending exactly how old they are when they retire (such as age 66 and two months). And for those born between 1943 and 1954, full retirement age is 66.

The earlier you retire before your full retirement age, the less you’ll receive in benefits. Conversely, the longer you keep working, up to age 70, the more you can receive.

Can you legally retire before 55?

Yes, you can legally retire before age 55. However, your Social Security benefits typically won’t kick in until age 62. And even then, because you’ll be tapping into those benefits before your full retirement age of 66 or 67, you’ll get a reduced amount.

The rule of 55 generally allows you to withdraw funds from a 401(k) or 403(b) at age 55 without paying a penalty. That may be something to look into if you’re planning to retire early.

Can you retire after 20 years of work?

In some lines of work, you can retire after 20 years on the job and likely get a pension. This includes those in the military, firefighters, police officers, and certain government employees.

That said, anyone in any industry can retire at any time. However, Social Security benefits don’t typically begin until age 62.

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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.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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.

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