Financial Topics Archives | Page 251 of 808

May

2024

NPV Formula: How to Calculate Net Present Value

Net Present Value: How to Calculate NPV

By Rebecca Lake | Growing Wealth, invest, Investing, SMB | Comments Off

Net present value or NPV represents the difference between the present value of cash inflows and outflows over a set period of time. Knowing how to calculate NPV can be useful when trying to determine whether an investment — either business or personal — will eventually pay off.

In capital budgeting, calculating the net present value can help with estimating the profitability of an investment or expansion project. Meanwhile, investors use the net present value calculation to gauge an investment’s potential rate of return based on the present value of its future cash flows and a discount rate, based on the cost of borrowing or financing.

Key Points

• Net Present Value (NPV) measures the difference between the present value of cash inflows and outflows over time.

• Calculating NPV helps determine the profitability of investments or projects by considering future cash flows and a discount rate.

• The NPV formula incorporates the time value of money, emphasizing that money now is worth more than the same amount in the future.

• A positive NPV indicates that the earnings from an investment are expected to exceed the cost.

• NPV is used in capital budgeting to assess the return on project investments before committing funds.

What Is Net Present Value (NPV)?

Net present value is a measure of the value of all future cash flows over the life of an investment, discounted to the present after factoring in inflows, outflows, and inflation, which can erode the value of money over time.

When applying the net present value formula, you’re looking at whether revenues are greater than costs or vice versa to determine whether an investment or project is likely to yield a gain or a loss.

As mentioned, net present value is often used in capital budgeting. Businesses and governments can use capital budgeting methods to determine how much of a return they’re likely to see on a project before funding it. The NPV formula takes into account the time value of money, a concept which suggests that a sum of money received now is worth more than that same sum received at a future date.

How to Calculate NPV

Calculating net present value is a fairly simple operation.

If you want to calculate net present value using the NPV formula, you’d first need to know the expected positive and negative cash flows for an investment or project. You’d also need to know the discount rate. From there, you could complete your calculations in this order:

• List future cash flows for each year you expect to receive them.

• Calculate the present value for each cash flow.

• Add all present values for future cash flows together.

• Subtract cash outflows from the present value sum of future cash flows.

You’ll need to know the present value calculation to complete the second step.

NPV Formula

Here’s what the NPV formula looks like:

PV = FV/(1 + k)^N

In this formula, k is the discount rate and n is the number of time periods.

Again, net present value calculations follow a distinct formula. A positive NPV means earnings from the investment should outpace the cost. Negative NPV, on the other hand, means you’re more likely to lose money on the investment.

The application of the formula depends on the number of expected cash flows for an investment or project.

Example of NPV with a Single Cash Flow Investment

If you’re evaluating potential investments with a single cash flow, then you could use this formula to calculate NPV:

NPV = Cash flow / (1 + i)t – initial investment

In this formula, i represents the required return or discount rate for the investment while t equals the number of time periods involved. The discount rate is an interest rate used to discount future cash flows for a financial instrument.

Weighted average cost of capital (WACC) usually serves as the discount rate for calculating NPV. The WACC measures a company’s cost of borrowing or financing.

Example of NPV with Multiple Cash Flows

If you’re evaluating projects or potential investments with multiple cash flows, you’ll use a different net present value formula. Here’s what the NPV formula looks like in that scenario:

NPV = Today’s value of expected cash flows – Today’s value of invested cash

💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

Tools to Help Calculate NPV

If you want to simplify your calculations you could look for an online net present value calculator. Or you could use the NPV function in spreadsheet software, such as Microsoft Excel or something similar. The NPV function helps calculate net present value for an investment based on the discount rate and a series of future cash flows, both positive and negative.

To use this function, you’d simply create a new Excel spreadsheet, then navigate to the “Formulas” tab. Here, you’d choose “Financial”, then from the dropdown menu select “NPV”. This will bring up the function where you can enter the rate and each value you want to calculate.

What Does NPV Show You?

The NPV formula should tell you at a glance whether you’re likely to make money from an investment, lose money or break-even. This can help when comparing multiple investments to decide where to put your money when you have a limited amount of capital to work with.

It works the same way in capital budgeting. Say a fast-food chain is trying to decide whether to expand into a new market which entails opening up 10 more locations. They could calculate the net present value for each location, based on expected cash flows, to determine whether moving ahead with the project is a financially sound business decision.

What Is a Good NPV?

Generally speaking, a net present value greater than zero is good. This means that the investment or expansion project is likely to yield a gain. When the net present value is below zero, you have negative NPV which means the project or investment is likely to result in a loss.

The higher the number produced by a net present value calculation, the better. But it’s important to remember that the results produced by applying the NPV formula are only as reliable as the data points used in the calculation.

Inaccurate cash flow projections could result in skewed numbers which may produce a net present value estimate that’s above or below the actual returns you’re likely to realize.

Comparing NPV

Here are some ways that NPV stacks up to other types of calculations.

NPV vs Present Value

NPV and present value may sound similar but they measure different things. Present value or PV is the present value of all future cash inflows over a set period of time. Companies use this calculation to estimate values for future revenues or liabilities. When you calculate present value, you’re trying to measure the value of future cash flows today.

Net present value, on the other hand, is the sum of the present values for both cash inflows and cash outflows. With the NPV formula, you’re trying to determine how profitable an investment might be, based on the initial investment required and expected rate of return.

NPV vs IRR

Analysts use IRR or internal rate of return to evaluate proposed capital expenditures. The IRR calculation determines the percentage rate of return at which a project’s cash flows result in a net present value of zero. Like NPV, internal rate of return is also a part of capital budgeting.

Both NPV and IRR measure potential profitability but in different ways. When calculating the net present value of an investment, you’re estimating returns in dollars. With an internal rate of return, you’re estimating the percentage return an investment or project should generate.

Depending on whether you’re trying to target a specific dollar amount or percentage amount for returns, you may apply one or both formulas when evaluating an investment.

NPV vs ROI

Net present value measures expected cash flows for potential investments. You’re looking at future discounted cash flows to determine whether an investment makes sense financially.

Return on investment, or ROI, measures the efficiency of an investment, in terms of the rate of return that the investment is likely to produce. With ROI, you’re looking at the cash flows you’re likely to gain from an investment. To find ROI, you’d add up the total revenues less the total costs involved, then divide that figure by the total costs.

NPV vs Payback Period

The payback period is the period of time required for a return on investment to equal the initial investment. Payback period calculations don’t account for the time value of money. Instead, they look at how long it will take for you to realize a return from an investment that’s equal to the dollar amount that you invested.

Calculating the payback period helps determine how long to hold onto an investment. You might use this method if you’re trying to compare multiple investments to see which one is a better fit for your personal investing timeline. But if you want to get a sense of the total return you’re likely to realize, then you’d still want to apply the net present value formula.

Benefits and Drawbacks of NPV

Net present value can help analyze and evaluate business projects or personal investments. You can easily see at a glance what you could stand to gain — or lose — from making a particular investment. But the NPV formula does have some limitations that are important to be aware of.

Benefits of NPV

Net present value’s main advantage is that it takes the time value of money into consideration. By looking at discounted cash flows you can get a better understanding of the viability of an investment, based on what you’ll get out of it versus what you’ll put in.

This can help with decision-making when choosing investments for your portfolio or making strategic capital investments in a business. Net present value calculations can also help companies with projecting future value based on the investments they make today.

Drawbacks of NPV

The biggest disadvantage or flow associated with net present value is that results depend on the quality of the information that’s being used. If your projections for future cash flows are off, that can produce inaccurate results when using the net present value formula.

NPV can also overlook some hidden costs involved in an investment or project which may detract from total returns. It also doesn’t take into account the margin of safety, or the difference between an investment’s price and its value.

Finally, it’s difficult to use net present value to evaluate projects or investments that are different in size or nature, as the input values are likely to be very different.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

How Investors Can Use NPV

You can use NPV to evaluate stocks and other securities, including alternative investments, based on your time frame and projected profits. With stocks, for example, net present value can give you an idea of whether a company is a good buy or not by calculating NPV per share.

To do that, you’d divide the company’s net present value by the number of outstanding shares in the company to get this number. If the net value per share is higher than the stock’s current market price, then the stock could be considered a good buy. On the other hand, if the net value per share is below the stock’s current market price that suggests you might lose money if you decide to buy in.

The Takeaway

As discussed, Net present value, or NPV, represents the difference between the present value of cash inflows and outflows over a set period of time. Understanding the net present value formula can help with making smarter investment decisions.

As with any tool, most investors use NPV along with other financial ratios and forms of analysis before deciding whether to purchase any asset. If you have questions about how NPV can be used as a part of an investment strategy, it may be worthwhile to consult with a financial professional.

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).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Is a higher NPV better?

A higher NPV isn’t necessarily a good thing or means that an investment is better than another investment. But in general, a good NPV is a number that’s higher than zero.

What is the basic NPV investment rule?

The basic NPV investment rule is that projects or investments should only be pursued if they’ll lead to gains or productive gains.

Is NPV the same as profit?

NPV is not the same thing as profit, although a positive NPV is indicative of profit, while negative NPV is related to a loss.

Is a NPV of 0 acceptable?

An NPV of zero means that a project or investment isn’t expected to produce significant gains or losses. Whether that’s acceptable or not is up to the individual making the investment decision.

When should NPV not be used?

NPV might not be helpful or useful for comparing investments of drastically different sizes, or projects of different sizes.

Is Excel NPV accurate?

Excel’s NPV calculations should be accurate, but they’re only as accurate as the data that’s entered to make the calculation. So, it could be inaccurate, and it’s a good idea to double-check the calculation.

Photo credit: iStock/Sanja Radin

SoFi Invest®

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

May

2024

The Strategic Guide to Early Retirement

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

An early retirement used to be considered a bit of a dream, but for many people it’s a reality — especially those who are willing to budget, save, and invest with this goal in mind.

If you’d like to retire early, there are concrete steps you can take to help reach your goal. Here’s what you need to know about how to retire early.

Key Points

• Early retirement requires significant savings, often guided by the Rule of 25, which suggests saving 25 times annual expenses.

• The FIRE movement encourages saving 50-75% of income to retire early.

• Effective budgeting and reducing expenses are crucial for accumulating necessary retirement funds.

• Investment strategies should balance growth and risk, adjusting as retirement nears.

• Health insurance planning is essential when retiring before qualifying for Medicare at age 65.

Understanding Early Retirement

Early retirement typically refers to retiring before the age of 65, which is when eligibility for Medicare benefits begins. Some people may want to retire just a few years earlier, at age 60, for instance. But others dream of retiring in their 40s or 50s or even younger.

Clarifying Early Retirement Age and Goals

You’re probably wondering, how can I retire early? That’s an important question to ask. First, though, you have to decide at what age to retire.

Schedule a few check-ins with yourself, and/or a partner or loved ones, to discuss what “early retirement” means. Is it age 50? Age 55? And what might your early retirement look like? Will you stop working completely? Work part-time? Or maybe you want to switch to a different field or start a business? Perhaps you dream of going back to school, volunteering, or traveling.

Early retirement is different for everyone. So the clearer you can get about the details now, the smarter you can be about how much money you need to make your plan work.

Also, consider why you want to retire at a specific age. Is it because you’re financially prepared to take that step? Or are you feeling ready to spend more time with family and friends? Determining what’s motivating you can help you better prepare and plan for your retirement.

Reasons for Retiring

In a recent SoFi survey, respondents cite the following as the top factors influencing their reasons to retire:

• Financial readiness: 54%

• Enjoying more time with family and friends and pursuing hobbies: 50%

• Health considerations: 46%

• More travel and leisure: 43%

• Eligibility for Social Security benefits: 41%

Source: SoFi Retirement Survey, April 2024

Insights into the Financial Independence, Retire Early (FIRE) Movement

There’s a movement of people who want to retire early. It’s called the FIRE movement, which stands for “financially independent, retire early.” FIRE has become a worldwide trend that’s inspiring people to work toward retiring in their 50s, 40s, and even their 30s. In the 2024 SoFi Retirement Survey, 12% of respondents say the retirement age they’re aiming for is 49 or younger.

Here’s how FIRE works: In order to retire at a young age, people who follow the movement allocate 50% to 75% of their income to savings. However, that can be challenging because it means they have to sacrifice certain lifestyle pleasures such as eating out or traveling. Of the SoFi survey respondents who said they want to retire at age 49, 18% are not using any strategies that might help them retire early.

Once they retire, FIRE proponents tend to use investments that pay dividends as passive income sources to help support themselves. However, dividend payments depend on company performance and they’re not guaranteed. So a FIRE adherent would likely need other sources of income in retirement as well.

💡 Quick Tip: Did you know that a traditional IRA, is a tax-deferred account? That means you don’t pay taxes on the money you put in it (up to an annual limit) or the gains you earn, until you retire and start making withdrawals.

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Financial Planning for Early Retirement

In order to start planning to retire early, first ask yourself how confident you are about pulling it off. In the SoFi Retirement Survey, 68% of respondents say they are very or somewhat confident in their ability to retire at their target age, while 15% are very or somewhat doubtful they can do it.

Once you’ve assessed your confidence level, the next step is to calculate how much money you’ll need to live on once you stop working. How much would you have to save and invest to arrive at an amount that would allow you to retire early? Here’s how to help figure that out.

Many people wonder: How much do I need to retire early? There isn’t one answer to that question. The right answer for you is one that you must arrive at based on your unique needs and circumstances. That said, to learn whether you’re on track for retirement it helps to begin somewhere, and the Rule of 25 may provide a good ballpark estimate.

The Rule of 25 recommends saving 25 times your annual expenses in order to retire. Why? Because according to one rule of thumb, you should only spend 4% of your total nest egg every year. By limiting your spending to a small percentage of your savings, the logic goes, your money is more likely to last.

Here’s an example: if you spend $75,000 a year, you’ll need a nest egg of $1,875,000 in order to retire.

$75,000 x 25 = $1,875,000

With that amount saved, and assuming an annual withdrawal rate of 4%, you would have $75,000 per year in income.

Obviously, this is just an example. You might need less income in retirement or more — perhaps a lot less or a lot more, depending on your situation. If your desired income is $50,000, for example, you’d need to save $1,250,000.

The Benefits of Social Security

Once you reach the age of 62, which some consider a traditional retirement age, you are then able to claim Social Security benefits. (Age 67 is considered “full retirement” age for those born in 1960 and later, and you can wait to claim benefits until age 70.)

The longer you wait to claim Social Security, the higher your monthly payments will be. You could add those Social Security benefits to your income or consider reinvesting the money, depending on your circumstances as you get older.

Effective Savings Strategies

How do you save the amount of money you’d need for your early retirement plan?

Having a budget you can live with is critical to making this plan a success. The essential word here isn’t budget, it’s the whole phrase: a budget you can live with.

There are countless ways to manage how you budget. There’s the 50-30-20 plan, the envelope method, the zero-based budget, and so on. You could test a couple of them for a couple of months each in order to find one you can live with.

Another strategy for saving more is to get a side hustle to bring in some extra income. You can put that money toward your early retirement goal.

Adjusting Your Financial Habits

As you consider how to retire early, one of the first things you’ll need to do is cut your expenses now so that you can save more money. These strategies can help you get started.

Lifestyle Changes to Accelerate Savings

Take a look at your current spending and expenses and determine where you could cut back. Maybe instead of a $4,000 vacation, you plan a $2,000 trip instead, and then save or invest the other $2,000 for retirement.

You may be able to live more of a minimalist lifestyle overall. Rather than buying new clothes, for instance, search through your closets for items you can wear. Eat out less and cook at home more. Cut back on some of the streaming services you use. Scrutinize all areas of your spending to see what you can eliminate or pare back.

Debt Management Before Retirement

Obviously, it’s very difficult to achieve a big goal like saving for an early retirement if you’re also trying to pay down debt. It’s wise to work to pay off any and all debts you might have (credit card, student loan, personal loan, car loan, etc.).

That’s not only because being debt-free feels better — it also saves you money. For example, the interest rate you’re paying on credit card or store cards can be quite high, often above 15% or even 20%. If you owe $6,000 on a credit card at 17% interest, for example, when you pay that off, you’re essentially saving the interest that debt was costing you each year.

Health Care Planning: A Critical Component of Early Retirement

When you retire early, you need to think about health insurance since you’ll no longer be getting it through your employer. Medicare doesn’t begin until age 65, so start researching the private insurance market now to understand the different plans available and what you might need.

It’s critical to have the right health insurance in place, so make sure you devote proper time and attention to this task.

Investment Management for Future Retirees

Next up, you’ll need to decide what to invest in and how much to invest in order to grow your savings without putting it at risk.

Understanding Your Investment Options

How do you invest to retire early? You can invest in stocks, bonds, mutual funds, exchange-traded funds (ETFs), target date funds, and more.

One major factor to consider is how aggressively you want to invest. That means: Are you ready to invest more in equities, say, taking on the potential for greater risk in order to possibly reap potential gains? Or would you feel more at ease if you invested using a more conservative strategy, with less exposure to risk (but potentially less reward)?

Whichever strategy you choose, you may want to invest on a regular cadence. This approach, called dollar-cost averaging, is one way to maximize potential market returns and mitigate the risk of loss.

Balancing Growth and Risk in Your Investment Portfolio

Because you have less time to save for retirement, you will likely want your investments to grow. But you also need to consider your risk tolerance, as mentioned above. Think about a balanced, diversified portfolio that has the potential to give you long-term growth without taking on more risk than you are comfortable with.

As you get closer to your early retirement date, you can move some of your savings into safer, more liquid assets so that you have enough money on hand for your living, housing, and healthcare expenses.

Retirement Accounts: 401(k)s, IRAs, and HSAs

If your employer offers a retirement plan like a 401(k) or 403(b), that’s the first thing you want to take advantage of — especially if your employer matches a percentage of your savings.

The other reason to save and invest in an employer-sponsored plan is that in most cases the money you save the plan reduces your taxable income. These accounts are considered tax deferred because the amount you save is deducted from your gross income. So the more you save, the less you might pay in taxes. You do pay ordinary income tax on the withdrawals in retirement, however.

The caveat here is that you can’t access those funds before you’re 59½ without paying a penalty. So if you plan to retire early at 50, you will need to tap other savings for roughly the first decade to avoid the withdrawal penalties you’d incur if you tapped your 401(k) or Individual Retirement Account (IRA) early.

Be sure to find out from HR if there are any other employee benefits you might qualify for, such as stock options or a pension, for instance.

Additionally, if your employer offers a Health Savings Account as part of your employee benefits, you might consider opening one.

A Health Savings Account allows you to save additional money: For tax year 2024, the HSA contribution caps are $4,150 for individuals and $8,300 for family coverage.

Your contributions are considered pre-tax, similar to 401(k) or IRA contributions, and the money you withdraw for qualified medical expenses is tax free (although you’ll pay taxes on money spent on non-medical expenses).

Finally, consider opening a Roth IRA. The advantage of saving in a Roth IRA vs. a regular IRA is that you’re contributing after-tax money that can be withdrawn penalty- and tax-free at any time.

To withdraw your earnings without paying taxes or a penalty, though, you must have had the account for at least five years (as per the Roth IRA 5-Year Rule), and you must be over 59 ½.

Recommended: How to Open an IRA in 5 Steps

The Pillars of Early Retirement

Retiring early means you’ll need to have income coming in to help support you. You may have a pension, which can also help. Once you’ve identified the income you’ll be generating, you’ll need to withdraw it in a manner that will help it last over the years of your retirement.

Establishing Multiple Income Streams

Having different streams of income is important so that you’re not just relying on one type of money coming in. For instance, your investments can be a source of potential income and growth, as mentioned. In addition, you may want to get a second job now in addition to your full-time job — perhaps a side hustle on evenings and weekends — to generate more money that you can put toward your retirement savings.

The Role of Social Security and Pensions in Early Retirement

Social Security can help supplement your retirement income. However, as covered above, the earliest you can collect it is at age 62. And if you take your benefits that early they will be reduced by as much as 30%. On the other hand, if you wait until full retirement age to collect them, you’ll receive full benefits. If you were born in 1960 or later, your full retirement age is 67. You can find out more information at ssa.gov.

If your employer offers a pension, you should be able to collect that as another income stream for your retirement years. Generally, you need to be fully vested in the plan to collect the entire pension. The amount you are eligible for is typically based on what you earned, how long you worked for the company, and when you stop working there. Check with your HR department to learn more.

The Significance of Withdrawal Strategies: Rules of 55 and 4%

When it comes to withdrawing money from your investments after retirement, there are some rules and guidelines to be aware of. According to the Rule of 55, the IRS allows certain workers who leave their jobs to take penalty-free distributions from their current employer’s workplace retirement account, such as a 401(k) or 403(b), the year they turn 55.

The 4% rule is a general rule of thumb that recommends that you take 4% of your total retirement savings per year to cover your expenses.

To figure out what you would need, start with your desired yearly retirement income, subtract the annual amount of any pension or additional revenue stream you might have, and divide that number by 0.4. The resulting amount will be 4%, and you can aim to withdraw no more than that amount every year. The rest of your money would stay in your retirement portfolio.

Monitoring Your Progress Towards Early Retirement

To stay on course to reach your goal of early retirement, keep tabs on your progress at regular intervals. For instance, you may want to do a monthly or bi-monthly financial check-in to see where you’re at. Are you saving as much as you planned? If not, what could you do to save more?

Using an online retirement calculator can help you keep track of your goals. From there you can make any adjustments as needed to help make your dreams of early retirement come true.

How to Manage Early Retirement When You Get There

The budget you make in order to save for an early retirement is probably a good blueprint for how you should think about your spending habits after you retire. Unless your expenses will drop significantly after you retire (for instance, if you move or need one car instead of two, etc.), you can expect your spending to be about the same.

That said, you may be spending on different things. Whatever your retirement looks like, though, it’s wise to keep your spending as steady as you can, to keep your nest egg intact.

The Takeaway

An early retirement may appeal to many people, but it takes a real commitment to actually embrace it as your goal. These days, many people are using movements like FIRE (financial independence, retire early) to help them take the steps necessary to retire in their 30s, 40s, and 50s.

You can also make progress toward an early retirement by determining how much money you’ll need for post-work life, budgeting, and cutting back on expenses . And by saving and investing wisely, you may be able to make your goal a reality.

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).

Help grow your nest egg with a SoFi IRA.

FAQs

How much do you need to save for early retirement?

There isn’t one right answer to the question of how much you need to save for early retirement. It depends on your specific needs and circumstances. However, as a starting point, the Rule of 25 may give you an estimate. This guideline recommends saving 25 times your annual expenses in order to retire, and then following the 4% rule, and withdrawing no more than 4% a year in retirement to cover your expenses.

Is early retirement a practical goal?

For some people, early retirement can be a practical goal if they plan properly. You’ll need to decide at what age you want to retire, and how much money you’ll need for your retirement years. Then, you will need to map out a budget and a concrete strategy to save enough. It will likely require adjusting your lifestyle now to cut back on spending and expenses to help save for the future, which can be challenging.

SoFi Invest®

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

SOIN0224019

May

2024

6 Investing Tips and Strategies for Retirees

By Michael Flannelly | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

A lot of personal finance advice is about saving for retirement. But the need for saving and investing doesn’t stop once you’re done working; seniors also need to maintain a sound investment strategy during retirement.

Retirees face several challenges that make investing after 65 necessary, including maintaining safe income streams, outpacing inflation, and avoiding the risk of running out of money. Here are some tips seniors may consider as they choose the right path for investing after retirement.

Key Points

• Assessing income sources and budgeting is crucial for retirees to manage financial changes without a steady paycheck.

• Tracking down forgotten 401(k)s can recover significant unclaimed funds.

• Understanding the time horizon and risk tolerance is essential for choosing suitable investments.

• Diversification across various asset classes helps mitigate risks associated with specific investments.

• Regular portfolio rebalancing ensures alignment with changing financial goals and market conditions.

1. Assess Income Sources and Budget

Once in retirement, seniors likely don’t have an income stream from a steady paycheck. Instead, retirees utilize a mix of sources to pay the bills, such as Social Security, withdrawals from retirement and savings accounts, and perhaps passive sources of income such as rental properties. This change, going from relying on a regular salary to relying on savings and investments to fund a particular lifestyle, can be daunting.

Retirees should first understand where their income is coming from and how much is coming in to help navigate this financial change. This initial step can help establish a budget that allows them to comfortably cover typical retirement expenses and map out discretionary spending or new investments in their golden years.

💡 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.

2. Track Down Forgotten 401(k)s and Other Lost Money

If you changed jobs during your career, it’s possible that you left an old 401(k) behind. As of May 2023, there were 29.2 million forgotten or left-behind 401(k) accounts, according to estimates by Capitalize, a company that helps with 401(k) rollovers. These forgotten accounts hold about $1.65 trillion in assets.

To determine if you have a forgotten 401(k), make a list of every company you worked for and where you participated in a 401(k) plan. Contact them to see if they still have an account in your name. If a company no longer exists, or if it merged with another company, check with the U.S. Department of Labor (DOL). Visit the DOL website, where you can track down your former company’s Form 5500, which is required to be filed annually for employee benefit plans. That should give you contact information you can reach out to or at least tell you who your 401(k) plan’s administrator was.

If you still can’t find a forgotten 401(k), you could try the National Registry of Unclaimed Retirement Benefits. Be aware that you’ll need to supply your Social Security number to search on their website. Another option is to check the website for the National Association of Unclaimed Property Administrators, which may be able to help you find unclaimed funds, including an old 401(k). Check under every state that you’ve lived and worked in.

If and when you find an old 401(k), you can roll it over into an IRA. If you don’t yet have an IRA, you can set one up online. From there, you can invest the money as you see fit.

3. Understand Time Horizon and Risk

Retirees must consider time horizon and risk in post-retirement investment plans. Time horizon is the amount of time an individual has to invest before reaching a financial goal or needing the investment earnings for living expenses.

Time horizon significantly affects risk tolerance, which is the balance an individual is willing to strike between risk and reward. Generally speaking, seniors with a time horizon of a decade or more might choose to invest in riskier assets, such as stocks, because they feel they may have time to ride out any short-term downturns in the market. Individuals with a short time horizon of just a few years may stick to more conservative investments, such as bonds, where they can benefit from capital preservation and interest income.

4. Consider Diversification

Diversification involves spreading out investment across different asset classes, such as stocks, bonds, real estate, and cash. Diversification also involves spreading investments out among factors such as sector, size, and geography within each asset class.

It is important to consider diversification when investing after retirement. Diversification may help investors protect their portfolios from the risk and volatility unique to a specific type of investment, although there is still risk involved. Retirees do not want to concentrate a portfolio with any one asset, which may increase volatility during a period when they want a low risk tolerance.

5. Rebalance Regularly

A retiree’s financial goals, risk tolerance, and time horizon generally affect the desired asset allocation in an investment portfolio. However, those initial goals and risk considerations can change during a retiree’s golden years.

Additionally, the market is constantly in flux, shifting the proportions of assets a person holds. It may make sense to rebalance the assets inside a portfolio regularly.

Rebalancing a portfolio can be thought of like the routine upkeep of your investments. For example, if a portfolio has an asset allocation of 70% bonds and 30% stocks and the stocks do well during a year, they might make up a higher percentage of a portfolio than planned. By the end of the year, the asset allocation may be 65% bonds and 35% stocks. The investor may want to rebalance by selling stock and buying more conservative assets, such as bonds, to ensure the portfolio’s asset allocation is in line with their goals. Alternatively, they may use other income to make new bond investments.

6. Keep an Eye on Inflation

Retirees living on a fixed income may be negatively affected by rising inflation. As prices increase, the fixed income that an individual relies on will be worth less the following year. For example, if an individual receives $1,000 a month in a fixed income and inflation rises by a 4% annual rate, then that $1,000 monthly income will be worth $960 in today’s money.

Investments that pay out a fixed interest rate, such as bonds, are most vulnerable to inflation risk as inflation may outpace the earned interest rate. Some other assets may outpace inflation, such as stocks, real estate investment trusts (REITs), or inflation-protected securities.

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Smart, Safer Investment Options for Retirees

Retirees have a lot of choices when it comes to making new investments. But their financial goals, age, and risk tolerance can impact which investments they choose to make. Here are a few investments for seniors in retirement with those factors in mind.

Cash

Cash is the most stable way to hold money, and it is a necessary part of a retiree’s financial portfolio. Keeping cash on hand can help cover necessities like housing, utilities, food, and clothes.

Retirees can put a portion of their cash in a money market account or a high-yield savings account to earn interest while having easy access to their cash. However, the interest paid out in typical savings or checking accounts tends to be very low and may not beat the inflation rate. That means the money in these accounts may slowly lose its value over time.

By comparison, some high-yield savings accounts pay nearly 5% interest, compared to the 0.47% national average rate.

Bonds

Bonds generally don’t offer the same potential for high returns as stocks and other assets, but they may have advantages for investing after retirement. Bonds typically pay interest regularly, such as twice a year, which may provide investors with a predictable income desired in retirement. Also, if investors hold a bond to maturity, they typically get back their entire principal, which can help preserve their savings while investing.

However, it’s important to be aware that while bonds are considered by investors to be a less risky investment, it’s still possible to lose money investing in them. For instance, a bond issuer may fail to make interest payments and default on the bond. Retirees should be aware of the risks involved when considering bonds.

Various types of bonds may help investors preserve capital and realize interest income during retirement, including relatively safe U.S. Treasuries. Additionally, Treasury-Inflation Protected Securities (TIPS) are bonds that hedge against inflation, which can be helpful for retirees worried about rising prices.

Stocks

Stocks are considered a risky investment; they tend to be more volatile than more conservative assets like bonds or certificates of deposit. Though investing in stocks can potentially lead to significant returns, it also means there is the potential for big losses that many retirees may not be able to stomach. However, there may be value in investing in stocks for seniors.

Stock investments may help ensure a portfolio experiences capital gains that outpace inflation and have enough income in the later decades of their retirement. It may not make sense for older investors to chase returns from higher risk stocks like tech start-ups. Instead, retirees may look for proven companies whose stocks offer steady growth. Retirees may consider investing in companies that provide stable dividend payouts that generate a regular income source.

Certificates of Deposit

Certificates of deposit, otherwise known as CDs, are low-risk investments that may offer higher interest rates than typical savings accounts. Investors put their money in a CD and choose a term, or length of time, that the bank will hold their money. The term length is generally anywhere from one month to 20 years, and during this period, the investor can’t touch the money until the term is up. Once the term is over, the investor gets the principal back, plus interest. Typically, the longer the investor’s money is in the account, the more interest the bank will pay.

Fixed Annuities

Fixed annuities may provide retirees with a regular income, bolster the gains from other investments, and supplement savings. In short, an annuity is a contract with an insurance company. The buyer pays into the annuity for a certain number of years, and the insurance company pays back the money in monthly payments. Essentially, an individual is paying the insurance company to take on the risk of outliving their retirement savings.

The Takeaway

Investing for retirement should begin as soon as possible, ideally through a tax-advantaged retirement account. But the need for a sound investing strategy doesn’t stop once you hit retirement. You need to ensure that your savings and investments are working for you throughout your golden years.

Another step that can help you manage your retirement savings is doing a 401(k) rollover, where you move funds from an old account to a rollover IRA. You can even search for a lost or forgotten 401(k) to roll over into an IRA.

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).

Help grow your nest egg with a SoFi IRA.

SoFi Invest®

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

May

2024

How to Buy Treasury Bills, Bonds, and Notes

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

Investors can buy Treasury bills, bonds, and notes a few ways, including through TreasuryDirect, through a broker or bank, or even through an ETF or mutual fund. Treasury bills, bonds, and notes are stable, profitable, and less-risky investments that can be a key part of a diverse investment portfolio. Learning how to purchase Treasuries may be important, regardless of your experience level with fixed-income investments.

With the full faith and credit of the US government behind them, these government-issued securities are among the least-risky investment options out there. We’ll explore the principles of buying Treasury bills, bonds, and notes in this article.

Key Points

• Treasury bills, bonds, and notes can be purchased through TreasuryDirect, banks, or brokers.

• These securities are backed by the full faith and credit of the U.S. government, making them low-risk investments.

• Investors can also buy Treasury securities indirectly through ETFs or mutual funds.

• TreasuryDirect allows direct purchases without a broker, saving on transaction costs.

• Investing in Treasury securities through ETFs and mutual funds offers ease and diversification.

How Can You Buy US Treasuries?

Both individual and institutional investors can invest in U.S. Treasury bonds through a variety of methods. Getting them straight from the US Department of the Treasury through their web portal, TreasuryDirect, is one of the easiest ways to do so.

With the use of this platform, investors can purchase Treasury bills, bonds, and notes straight from the government. Alternatively, investors can purchase Treasuries via a financial institution or brokerage house. Treasury securities are accessible through a number of brokerages, which also offer a variety of services and choices to help investors make purchases.

Investors can also purchase Treasury assets indirectly through mutual funds, exchange-traded funds (ETFs), or investment vehicles dedicated to Treasury securities. This allows investors to have diversified exposure to Treasuries in a single investment instrument.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

1. Direct through TreasuryDirect

The U.S. Department of the Treasury offers an online platform called TreasuryDirect for investors who want direct access to U.S. Treasury securities. People can take part in Treasury auctions, which are public sales of recently issued securities, through TreasuryDirect.

Pros

• Buying Treasury securities directly from TreasuryDirect can save transaction costs by eliminating the need for a brokerage middleman.

• With capabilities like managing maturing securities and reinvesting interest, investors can easily manage their Treasury holdings through the site.

Cons

• A less user-friendly interface than an online broker.

• Less customer service in comparison to brokerage firms.

Purchasing Limits

Purchase restrictions may apply, limiting the quantity of Treasury securities that a person can acquire in a given period of time. The minimum amount that you can purchase of any given Treasury Bill, Note, Bond, TIPS, or FRNs is $100. Additional amounts must be in multiples of $100. The maximum amount of Treasury bills that you can buy in a single auction is $10 million if the bids are noncompetitive, or 35% of the offering amount for competitive bids.

2. Broker or Bank

Investors can buy U.S. Treasury bonds through banks or brokerage houses, which provide access to secondary market transactions as well as primary market Treasury auctions.

Pros

• Banks and brokers offer extra support and services, such as financial advice, research tools, and customer help.

• Certain brokerage houses give investors access to the primary and secondary markets, giving them a wide selection of Treasury securities and investing choices.

Cons

• Transaction fees and costs associated with utilizing a bank or broker may increase the total cost of investing in Treasuries.

Purchasing Limits

Purchasing restrictions may apply, depending on the bank’s or brokerage company’s specific policies.

3. ETFs and Mutual Funds

Investments in mutual funds or ETFs with a Treasury concentration are an option for investors who want exposure to U.S. Treasuries without having to buy individual securities directly. These investment vehicles combine money from many individual investors and use it to buy a variety of Treasury securities.

Pros

• The ease of use and accessibility of ETFs and mutual funds, which provide investors with a diverse portfolio of Treasuries with a single investment, is one of their main benefits.

• These funds usually offer expert supervision and management.

• Mutual funds and ETFs also provide liquidity, enabling investors to purchase and sell shares on the secondary market at any time during the trading day.

Cons

• Particularly for long-term investors, expense ratios and management fees associated with mutual funds and ETFs can gradually reduce returns.

• The costs of purchasing and selling securities inside the fund, such as brokerage commissions and bid-ask gaps, are also indirectly paid for by investors.

• While mutual funds and ETFs provide diversification and relatively low risk, they carry some risk of market volatility and possible losses.

Purchasing Limits

ETFs usually have no minimum investment limits, making them widely accessible. There may be minimum initial investment restrictions for mutual funds, which could prevent certain individuals from participating. Ongoing mutual fund contributions, however, are frequently flexible, enabling investors to gradually make lower installments.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Portfolio Considerations When Buying Treasuries

When incorporating U.S. Treasuries into a portfolio, investors should consider several key factors to optimize their investment strategy. Due to their low correlation with other asset classes, treasuries are essential for offering stability and diversification within a portfolio. They are frequently seen as a safe haven investment, especially in volatile markets or uncertain economic times – though it’s important to remember that no investment is completely safe.

Using Treasury bill (T-bill) and Treasury bond (T-bond) ladders is one way to optimize the returns on Treasuries. Buying Treasury bills with staggered maturities — typically a few weeks to a year — is known as a T-bill ladder. Because T-bills mature on a regular basis, this strategy offers investors a consistent flow of income and liquidity, allowing them to reinvest the proceeds or access cash as needed. T-bond ladders, on the other hand, are a way to spread out interest rate risk and keep exposure to longer-term rates by buying Treasury bonds with different maturities.

Investing in a group of Treasury-focused ETFs with staggered durations is known as an ETF ladder. ETF ladders enable investors to manage interest rate risk and take advantage of a variety of yields.

Whichever strategy is chosen, adding Treasuries to a portfolio can offer a good balance between risk and return, especially for investors who prioritize income generation and capital protection.

The Takeaway

Investment funds, brokers, and TreasuryDirect are a few of the ways to buy U.S. Treasury securities. Additionally, by combining ETF ladders with effective portfolio management techniques like T-bond and T-bill ladders, investors can maximize the contribution of Treasuries to their investment portfolios.

Investors wanting to optimize returns on their investments might reduce risk by diversifying across a range of Treasury securities and maturities. Securities are a low risk investment that can be a great way to diversify one’s portfolio.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

How do I buy Treasury notes and bonds?

A few of the most common ways that investors can buy Treasuries is through TreasuryDirect.gov, a bank, broker, or dealer.

Do you pay taxes on T-Bills?

Interest from Treasury bills (T-bills) is subject to federal income taxes, but not state or local taxes.

What happens when a T-Bill matures?

When a Treasury bill matures, you are paid its face value. You can hold a bill until it matures or sell it before it matures.

Photo credit: iStock/kate_sept2004

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Advisory services are offered through SoFi Wealth LLC, an SEC-registered investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
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.

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

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN0224008

May

2024

How Much Should I Contribute to My 401(k)?

By AJ Smith | Growing Wealth, Investing, Life & Career, Preparing for Retirement | No Comments

Once you set up your retirement plan at work, the next natural question is: How much to contribute to a 401(k)? While there’s no ironclad answer for how much to save in your employer-sponsored plan, there are some important guidelines that can help you set aside the amount that’s right for you, such as the tax implications, your employer match (if there is one), the stage of your career, your own retirement goals, and more.

Here’s what you need to think about when deciding how much to contribute to your 401(k).

Key Points

• Determining the right 401(k) contribution involves considering tax implications, employer matches, career stage, and personal retirement goals.

• The 2024 contribution limit for a 401(k) is $23,000, with a $7,500 catch-up for those 50+.

• Early career contributions might be lower, but capturing any employer match is beneficial.

• Mid-career individuals should aim to increase their contributions annually, even by small percentages.

• Approaching retirement, maximizing contributions and utilizing catch-up provisions can significantly impact savings.

401(k) Contribution Limits for 2024

Like most tax-advantaged retirement plans, 401(k) plans come with caps on how much you can contribute. The IRS puts restrictions on the amount that you, the employee, can save in your 401(k); plus there is a cap on total employee-plus-employer contributions.

For tax year 2024, the contribution limit is $23,000, with an additional $7,500 catch-up provision for those 50 and older, for a total of $30,500. The combined employer-plus-employee contribution limit for 2024 is $69,000 ($76,500 with the catch-up amount).

Those limits are up from tax year 2023. The 401(k) contribution limit in 2023 is $22,500, with an additional $7,500 catch-up provision for those 50 and older, for a total of $30,000. The combined employer-plus-employee contribution limit for 2023 is $66,000 ($73,500 with the catch-up amount).

401(k) Contribution Limits 2024 vs 2023

	2024	2023
Basic contribution	$23,000	$22,500
Catch-up contribution	$7,500	$7,500
Total + catch-up	$30,500	$30,000
Employer + Employee maximum contribution	$69,000	$66,000
Employer + employee max + catch-up	$76,500	$73,500

💡 Quick Tip: How much does it cost to set up an IRA account? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.

How Much Should You Put Toward a 401(k)?

Next you may be thinking, now I know the retirement contribution limits, but how much should I contribute to my 401(k)? Here are some guidelines to keep in mind as you’re deciding on your contribution amount.

When You’re Starting Out in Your Career

At this stage, you may be starting out with a lower salary and you also likely have commitments to pay for, like rent, food, and maybe student loans. So you may decide to contribute a smaller amount to your 401(k). If you can, however, contribute enough to get the employer match, if your employer offers one.

Here’s how it works: Some employers offer a matching contribution, where they “match” part of the amount you’re saving and add that to your 401(k) account. A common employer match might be 50% up to the first 6% you save.

In that scenario, let’s say your salary is $100,000 and your employer matches 50% of the first 6% you contribute to your 401(k). If you contribute up to the matching amount, you get the full employer contribution. It’s essentially “free” money, as they say.

To give an example, if you contribute 6% of your $100,000 salary to your 401(k), that’s $6,000 per year. Your employer’s match of 50% of that first 6%, or $6,000, comes to $3,000 for a total of $9,000.

As You Move Up in Your Career

At this stage of life you likely have a lot of financial obligations such as a mortgage, car payments, and possibly child care. It may be tough to also save for retirement, but it’s important not to fall behind. Try to contribute a little more to your 401(k) each year if you can — even 1% more annually can make a difference.

That means if you’re contributing 6% this year, next year contribute 7%. And the year after that bump up your contribution to 8%, and so on until you reach the maximum amount you can contribute. Some 401(k) plans have an auto escalation option that will automate the extra savings for you, to make the process even easier and more seamless. Check your plan to see if it has such a feature.

As You Get Closer to Retirement

Once you reach age 50, you’ll likely want to figure out how much you might need for retirement so you have a specific goal to aim for. To help reach your goal, consider maxing out your 401(k) at this time and also make catch-up contributions if necessary.

Maxing out your 401(k) means contributing the full amount allowed. For 2024, that’s $23,000 for those 49 and under. If, at 50, you haven’t been contributing as much as you wish you had in previous years, you can also contribute the catch-up contribution of $7,500. So you’d be saving $30,500 for retirement in your 401(k) in 2024. With the potential of compounding returns, maxing out your 401(k) until you reach full retirement age of 67 could go a long way to helping you achieve financial security in retirement.

The Impact of Contributing More Over Time

The earlier you start saving for retirement, the more time your money will potentially have to grow, thanks to the power of compounding returns, as mentioned above.

In addition, by increasing your 401(k) contributions each year, even by just 1% annually, the savings could really add up. For instance, consider a 35-year-old making $60,000 who contributes 1% more each year until their full retirement age of 67. Assuming a 5.5% annual return and a modest regular increase in salary, they could potentially save more than an additional $85,000 for retirement.

That’s just an example, but you get the idea. Increasing your savings even by a modest amount over the years may be a powerful tool in helping you realize your retirement goals.

Factors That May Impact Your Decision

In addition to the general ideas above for the different stages of your life and career, it’s also wise to think about taxes, your employer contribution, your own goals, and more when deciding how much to contribute to your 401(k).

1. The Tax Effect

The key fact to remember about 401(k) plans is that they are tax-deferred accounts, and they are considered qualified retirement plans under ERISA (Employment Retirement Income Security Act) rules.

That means: The money you set aside is typically deducted from your paycheck pre-tax, and it grows in the account tax free — but you pay taxes on any money you withdraw. (In most cases, you’ll withdraw the money for retirement expenses, but there are some cases where you might have to take an early 401(k) withdrawal. In either case, you’ll owe taxes on those distributions.)

The tax implications are important here because the money you contribute effectively reduces your taxable income for that year, and potentially lowers your tax bill.

Let’s imagine that you’re earning $100,000 per year, and you’re able to save the full $23,000 allowed by the IRS for 2024. Your taxable income would be reduced from $100,000 to $77,000, thus putting you in a lower tax bracket.

2. Your Earning Situation

One rule-of-thumb is to save at least 10% of your annual income for retirement. So if you earn $100,000, you’d aim to set aside at least $10,000. But 10% is only a general guideline. In some cases, depending on your income and other factors, 10% may not be enough to get you on track for a secure retirement, and you may want to aim for more than that to make sure your savings will last given the cost of living longer.

For instance, consider the following:

• Are you the sole or primary household earner?

• Are you saving for your retirement alone, or for your spouse’s/partner’s retirement as well?

• When do you and your spouse/partner want to retire?

If you are the primary earner, and the amount you’re saving is meant to cover retirement for two, that’s a different equation than if you were covering just your own retirement. In this case, you might want to save more than 10%.

However, if you’re not the primary earner and/or your spouse also has a retirement account, setting aside 10% might be adequate. For example, if the two of you are each saving 10%, for a combined 20% of your gross income, that may be sufficient for your retirement needs.

All of this should be considered in light of when you hope to retire, as that deadline would also impact how much you might save as well as how much you might need to spend.

3. Your Retirement Goals

What sort of retirement do you envision for yourself? Even if you’re years away from retirement, it’s a good idea to sit down and imagine what your later years might look like. These retirement dreams and goals can inform the amount you want to save.

Goals may include thoughts of travel, moving to another country, starting your own small business, offering financial help to your family, leaving a legacy, and more.

You may also want to consider health factors, as health costs and the need for long-term care can be a big expense as you age.

4. Do You Have Debt?

It can be hard to prioritize saving if you have debt. You may want to pay off your debt as quickly as possible, then turn your attention toward saving for the future.

The reality is, though, that debt and savings are both priorities and need to be balanced. It’s not ideal to put one above the other, but rather to find ways to keep saving even small amounts as you work to get out of debt.

Then, as you pay down the money you owe — whether from credit cards or student loans or another source — you can take the cash that frees up and add that to your savings.

The Takeaway

Many people wonder how much to contribute to a 401(k). There are a number of factors that will influence your decision. First, there are the contribution limits imposed by the IRS. In 2024, the maximum contribution you can make to your 401(k) is $23,000, plus an additional $7,500 catch-up contribution if you’re 50 and up.

While few people can start their 401(k) journey by saving quite that much, it’s wise, if possible, to contribute enough to get your employer’s match early in your career, then bump up your contribution amounts at the midpoint of your career, and max out your contributions as you draw closer to retirement, if you can.

Another option is follow a common guideline and save 10% of your income beginning as soon as you can swing it. From there, you can work up to saving the max. And remember, you don’t have to limit your savings to your 401(k). You may also be able to save in other retirement vehicles, like a traditional IRA or Roth IRA.

Of course, a main determination of the amount you need to save is what your goals are for the future. By contemplating what you want and need to spend money on now, and the quality of life you’d like when you’re older, you can make the decisions that are best for you.

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).

Help grow your nest egg with a SoFi IRA.

FAQ

How much should I contribute to my 401(k) per paycheck?

If you can, try to contribute at least enough of each paycheck to get your employer’s matching funds, if they offer a match. So if your employer matches 6% of your contributions, aim to contribute at least 6% of each paycheck.

What percent should I put in my 401(k)?

A common rule of thumb is to contribute at least 10% of your income to your 401(k) to help reach your retirement goals. Just keep in mind the annual 401(k) contribution limits so you don’t exceed them. For 2024, those limits are $23,000, plus an additional $7,500 for those 50 and up

Is 10% too much to contribute to 401(k)? What about 20%?

Contributing at least 10% to your 401(k) is a common rule of thumb to help save for retirement. If you are able to contribute 20%, it can make sense to do so. Just be sure not to exceed the annual 401(k) contribution limits of $23,000, plus an additional $7,500 for those 50 and older for 2024. The contribution limits may change each year, so be sure to check annually.

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.

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

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SoFi Invest®

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

Net Present Value: How to Calculate NPV

What Is Net Present Value (NPV)?

How to Calculate NPV

NPV Formula

Example of NPV with a Single Cash Flow Investment

Example of NPV with Multiple Cash Flows

Tools to Help Calculate NPV

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

What Does NPV Show You?

What Is a Good NPV?

Comparing NPV

NPV vs Present Value

NPV vs IRR

NPV vs ROI

NPV vs Payback Period

Benefits and Drawbacks of NPV

Benefits of NPV

Drawbacks of NPV

How Investors Can Use NPV

The Takeaway

FAQ

Is a higher NPV better?

What is the basic NPV investment rule?

Is NPV the same as profit?

Is a NPV of 0 acceptable?

When should NPV not be used?

Is Excel NPV accurate?

The Strategic Guide to Early Retirement

Understanding Early Retirement

Clarifying Early Retirement Age and Goals

Insights into the Financial Independence, Retire Early (FIRE) Movement

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

Financial Planning for Early Retirement

The Benefits of Social Security

Effective Savings Strategies

Adjusting Your Financial Habits

Lifestyle Changes to Accelerate Savings

Debt Management Before Retirement

Health Care Planning: A Critical Component of Early Retirement

Investment Management for Future Retirees

Understanding Your Investment Options

Balancing Growth and Risk in Your Investment Portfolio

Retirement Accounts: 401(k)s, IRAs, and HSAs

The Pillars of Early Retirement

Establishing Multiple Income Streams

The Role of Social Security and Pensions in Early Retirement

The Significance of Withdrawal Strategies: Rules of 55 and 4%

Monitoring Your Progress Towards Early Retirement

How to Manage Early Retirement When You Get There

The Takeaway

FAQs

How much do you need to save for early retirement?

Is early retirement a practical goal?

6 Investing Tips and Strategies for Retirees

1. Assess Income Sources and Budget

2. Track Down Forgotten 401(k)s and Other Lost Money

3. Understand Time Horizon and Risk

4. Consider Diversification

5. Rebalance Regularly

6. Keep an Eye on Inflation

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

Smart, Safer Investment Options for Retirees

Cash

Bonds

Stocks

Certificates of Deposit

Fixed Annuities

The Takeaway

How to Buy Treasury Bills, Bonds, and Notes

How Can You Buy US Treasuries?

1. Direct through TreasuryDirect

Pros

Cons

Purchasing Limits

2. Broker or Bank

Pros

Cons

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.¹

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.¹

Student Loan
Refinancing

Personal
Loans

Online
Investments