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Mar

2024

How Does Inflation Affect Retirement?

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

For retirees on a fixed income, inflation can have a significant influence on their ability to maintain their budget. That’s because as inflation rises over time, that fixed income will lose value.

That could mean that retirees need to scale back their spending or even make drastic changes to ensure that they don’t run out of money. The average rate of inflation was 8% in 2022, the highest inflation rate in 40 years. By January 2024, the inflation rate had dropped to 3.1%.

When it comes to their retirement money, 90% of Americans ages 60 to 65 say inflation is their biggest concern, according to a 2023 survey by Nationwide. However, by planning ahead, it is possible to minimize some of the impact of inflation on your nest egg.

Read on to learn more about inflation and retirement and what you can do to help protect your savings.

What Is Inflation?

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

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

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

How does inflation affect retirement? When purchasing power declines, the value of your savings and investments goes down. While the dollar amount does not change, the amount of goods or services those dollars can buy falls. In retirement, inflation can be especially harmful, since retirees typically don’t have an income that goes up over time.

Concerns about inflation and retirement may even push back the age at which some people think they can afford to retire.

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5 Ways that Could Potentially Minimize the Impact of Inflation on Retirement

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

1. Invest in the Stock Market

Investing in stocks is one way to potentially fight inflation. A diversified portfolio that includes equities may generate long-term returns that are higher than long-term inflation. While past performance does not guarantee future returns, over the past 10 years, the average annualized return for the S&P 500 has been 12.39%. Even when inflation is factored in, investors still have substantial returns when investing in stocks. When adjusted for inflation, the average annualized return over the past 10 years is 9.48%.

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

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

2. Use Tax-Advantaged Retirement Vehicles

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

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

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

3. Do Not Over-Allocate Long-Term Investments With a Low Rate of Return

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

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

Because of this, retirees may want to consider keeping a portion of their investments in the stock market.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

4. Make Sure You Understand Inflation-Protected Securities

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

However, for some investors, TIPS may have disadvantages. TIPS typically pay lower interest rates than other government or corporate securities. That generally makes them less than ideal for individuals like retirees who are looking for investment income. Also, unless inflation is quite high, and unless they are held for the long-term, TIPS may not offer much inflation-protection. There are also potential tax consequences to consider when the bonds are sold or reach maturity.

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

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

5. Buy Real Estate or Invest in REITs

Retirees may also consider investing in real assets. Real estate is typically an inflation hedge because it holds intrinsic value. During periods of inflation, real estate may not only be able to preserve its value, but it might also increase in value. One of the daily costs impacted by inflation is the cost of housing.

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

Inflation Calculator for Retirement

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

The Takeaway

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

Another way to curb the impact of inflation during retirement is to reduce expenses, which allows the money that you have to go further.

And starting to save for retirement as early as possible could help you accrue the compounded returns necessary to counteract rising prices in the future.

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

Is inflation good or bad for retirees?

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

How can I protect my retirement savings from inflation?

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

Does your pension increase with inflation?

Some pensions have a cost of living adjustment on their monthly payments, so they increase over time. However, this is not the case for all pensions. When inflation increases this can affect your benefits.

Photo credit: iStock/RgStudio

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External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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.

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.

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

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Feb

2024

Aiming to Become a Millionaire? These Steps Could Help

By Samuel Becker | Financial Independence, Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

Do you find yourself dreaming about what you would do if you were a millionaire? Maybe you fantasize about retiring early and traveling the world. Or perhaps what excites you is the thought of being able to donate to causes you care about.

But, you might be wondering, how to become a millionaire? You may suspect the only way you’ll ever be that rich is if you win the lottery.

Fortunately, the road to wealth isn’t that narrow — there are many ways to become a millionaire. For instance, some individuals retire with over a million dollars in savings because they made good financial decisions.

Others may have started businesses that brought them success, advanced their careers so that they made enough to save seven figures, or made smart investments.

Read on to learn more about how to become a millionaire, and strategies that could help get you there.

Introduction to the Millionaire Mindset and Goals

You may have a certain image of a millionaire in your mind. Maybe it’s a jetsetter or a celebrity. But many millionaires are not born into wealthy families or individuals who suddenly struck it rich. In fact, many millionaires are people who work for a living every day. In general, what tends to set them apart is that they have a millionaire mindset. They are smart and disciplined when it comes to their money. And they stay focused on their financial goals.

Defining What it Means to be a Millionaire

The true definition of a millionaire is someone with a net worth of at least $1 million. That means that their assets, minus any debt, is $1 million or more.

So, if you have $500,000 in savings and investments, plus a house that’s worth at least $500,000, are you a millionaire? Yes, if you own the house outright and don’t have a lot of debt such as car loans, student loans, or credit cards to pay off. But if you still owe money on your house and you’ve got a fair amount of debt to repay, you probably aren’t a millionaire. At least, not yet.

To do the math for your situation, total up your assets. Then subtract your debts from that amount. This will show you how close you are to reaching millionaire status, and possibly give you a sense of what you might have to do to get there.

Following these eight strategies can help when it comes to how to become a millionaire.

💡 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.

Step 1: Stay Away From Debt

As we just saw in the example above, one thing that could be holding you back from becoming a millionaire is debt — especially if that debt is “bad debt,” a term often used for high-interest debt. Eliminating your debt is key because it’s difficult to build wealth if you’re paying a significant portion of your income toward interest.

Paying off debt could help free up money to invest and build wealth. One way to repay debt is to use the debt avalanche method. With this technique, you pay off your debts with the highest interest rates first and then focus on debts with the next highest interest rates (while still making minimum payments on all of your debt, of course).

Eliminating debt isn’t just about paying off existing debt, though, it’s also about avoiding the chances of going into debt in the future. Part of a debt payoff strategy could involve spending less so that you don’t need to rely on credit. You can also set a strict budget and pay with cash whenever possible.

In addition, you may want to create an emergency fund by setting aside a certain amount of money every month. That way, if you have a financial setback, you don’t have to go into credit card debt.

Recommended: Ready to build your emergency fund? Use our emergency fund calculator to determine the right amount.

Step 2: Invest Early and Consistently

Investing successfully doesn’t happen overnight. It takes time. That’s why you need to start early. There are a few rules to know that could help you improve your chances of becoming a millionaire.

Benefits of Compounding Returns

First, compounding returns can make all the difference. They can help your money grow, as long as the returns are reinvested.

Here’s how they work: Compounding returns depend on how much an investment gains or loses over time, which is known as the rate of return. The longer your money is invested, the more compounding it can do. That’s why some individuals start saving aggressively when they’re young.

Saving $100,000 by the time you’re 30 might not be possible for everyone, but the more you save early on, the greater impact it could have on your net worth.

And here’s the thing: Even if you’re in your 30s, 40s, or 50s now, it’s never too late to start saving. The important thing is that you start, period. And that you keep saving.

There are other investing strategies that could help as you work on how to become a millionaire. For instance, you could reduce the amount you spend on investment fees. High investment fees can have a big impact on your returns, so you might want to look into low-fee investments.

Also, you should make sure that you invest in a way that’s right for you throughout your life. That may mean investing more aggressively when you’re younger and gradually becoming more conservative in your investments as you get older and closer to retirement.

Step 3: Make Saving a Priority

Your savings is the amount of money you have left after paying taxes and spending money.

Many Americans aren’t saving enough to become a millionaire — in October 2023, the average personal savings rate was 3.8%, according to the Bureau of Economic Analysis. You’ll likely need to save more than three times that amount to become a millionaire.

Effective Saving Strategies for Long-term Wealth

To save for your goals, start by investing in your company’s 401(k). Max out your 401(k) if you can. At the very least, invest at least enough to earn the employer match, if there is one. That way your employer is contributing to your savings.

In addition, consider opening a traditional IRA or a Roth IRA and contribute as much as possible — up to the limit set by the IRS. These IRAs are tax-advantaged, so they’ll help with your tax bill, too.

And investigate other savings options as well. For instance, you could open a high-yield savings account rather than a regular savings account for a higher return.

Step 4: Increase Your Income

You can’t join the ranks of millionaires if you’re not bringing in more money than you need for your basic necessities. The more money you make, the more you can save and invest.

Tips for Boosting Earnings and Maximizing Income

Some ways to boost your income include asking for a raise or looking for a new higher-paying job. You could also go back to school to earn an advanced degree that could lead to a position with a higher income. Your current employer might even help you cover the cost; check with your HR department.

Another one of the ways to earn extra money is to take on a side hustle. You could tutor students on evenings or weekends, do freelance writing, or dog sit. And those are just some of the options to consider.

Step 5: Cut Unnecessary Expenses

Getting control of your spending is critical to building wealth. That doesn’t mean you have to cut back on everything that gives you pleasure, but you could consider the happiness return on investment you get from the money that you spend. How big of an apartment or home do you truly need to be content? What kind of car do you need? Do you have to buy lunch out every day or could you bring your own lunch from home?

Identifying and Eliminating Non-Essential Spending

You could find ways to cut back on the things that don’t matter so much, but not skimping to the point that you miss out on things you love. For example, maybe you need your gym sessions (and there are plenty of low-cost gyms out there), but you can do without a $5 latte every morning.

Also, you could focus on cutting back on big expenses instead of those that won’t have a huge impact on your budget. For example, dining out only once a month, adjusting your thermostat higher or lower depending on the season, or finding a less expensive, smaller home could help you save a significant amount of money over time.

💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

Step 6: Keep Your Financial Goals in Focus

To become a millionaire, you’ll need to stay laser-focused on your financial goals. When everyone else around you is spending money, going on fancy vacations, and buying expensive cars, remind yourself what’s truly important to you. Keep your spending in check, continue to save and invest, and avoid taking on debt.

It takes discipline. But instead of thinking about the stuff you don’t have, appreciate all the good things in your life, like your family and friends. Remember that you’re saving for your future. You’ll be able to enjoy yourself then if you have the money you need to live comfortably and happily.

Think of it this way: You’re making yourself and your financial security the priority. Make that your mantra.

Step 7: Consult with Investment Professionals

Investing can be complicated because there are so many options to choose from. If you need help figuring out what investments are right for you, consider working with a qualified financial advisor.

Leveraging Advice for Wealth Building

A good financial advisor could help you select the right investments and the best investing strategies for your situation. They can also help you plan and budget to reach your goals. But be sure to be an active participant in the process. Ask questions, be involved. Why are they suggesting a specific investment? And if you don’t feel comfortable with something, say so.

Finally, be sure to check your investment performance regularly. Know what you are investing in, how much, and why.

Step 8: Repeat and Refine Your Financial Plan

The final step to becoming a millionaire is to stay committed to your goal and your plan. Keep saving and investing your money. Stay out of debt. Let time and the power of compounding returns kick in. Be patient.

But also, don’t be afraid to refine or change your plan if need be. For instance, as you get closer to retirement, you will likely want to choose safer, less aggressive investments. You can keep saving and growing money throughout different ages and stages, but your method for doing so can evolve to make sense for where you are in your life.

Additional Tips for Wealth Building

In addition to all of the strategies above, there are a few other techniques that may help you reach millionaire status.

Lifestyle Considerations and Spending Habits

As you work your way up the ladder and earn more money throughout your career, you may be tempted to increase your lifestyle spending, too. After all, you have more money now, so you may feel the urge to spend it.

But here’s the thing: Giving in to these temptations can be a slippery slope. It might start with a bigger house in a nice neighborhood, and then grow to taking extravagant vacations and driving a luxury car. Before you know it, you could be spending way more than you’re saving.

Try to avoid lifestyle splurging if you want to be a millionaire. Instead, take the extra money and save and invest it. That way, you’ll be able to reach your goal even faster.

The Takeaway

Becoming a millionaire is possible if you take the right approach. It involves saving and investing your money, spending wisely, and avoiding debt. You need to be disciplined and focused, and it won’t always be easy. But staying committed to your goals can reward you with financial security and success.

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.

Photo credit: iStock/pixelfit

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.

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

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Feb

2024

Stochastic Oscillator Explained

By Matthew Warholak | Financial Independence, Growing Wealth, invest, Investing | Comments Off

A stochastic oscillator is a technical indicator that traders use to determine whether a given security is overbought or oversold. Traders will use a stochastic indicator, which is considered a momentum indicator, to compare a specific closing price of a security to a range of its prices over a certain time frame.

In other words, by using a stochastic chart traders can gauge the momentum of a security’s price with the aim of anticipating trends and reversals. A stochastic oscillator uses a range of 0 to 100 to determine if an asset is overbought (when the measurements are above 80) or oversold (when the measurement is below 20).

What Is a Stochastic Oscillator?

Let’s consider two main types of analysis that investors and traders commonly use when trading stocks: fundamental analysis and technical analysis.

Fundamental analysis incorporates earnings data, in addition to economic and market news, to predict how an asset’s price might move. Whereas technical analysis relies on various sets of data and indicators, such as price and volume, to identify patterns and trends.

The stochastic oscillator is a key tool in securities trading because it helps gauge how strong the momentum of the market is. Thus the stochastic oscillator, or sto indicator, is an indicator used in trading to assess trend strength.

History of the Stochastic Oscillator

Developed in the 1950s for commodities traders, the stochastic oscillator is now a common technical indicator that investors use to evaluate a variety of assets in many online investing platforms and price chart services.

💡 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.

How Does a Stochastic Oscillator Work?

The stochastic oscillator has two moving lines, or stochastics, that oscillate between and around two horizontal lines. The primary “fast” moving line is called the %K and reflects with a specific formula, while the other “slow” line is a three-period moving average of the %K line.

The full stochastic oscillator is a line customized by the user that may combine the traits of the slow and fast stochastics.

Slow vs Fast Stochastics

A signal is generated when the “fast” %K line diverges above the “slow” line or vice versa. The two horizontal lines are often pre-set at 30 and 70, indicating oversold and overbought levels, respectively, but can be modified to other levels, such as 20 and 80, to reduce the risk of entering trades on false or premature signals.

The price is considered “overbought” when the two moving lines rise above the upper horizontal line and “oversold” when they fall below the lower horizontal line. The overbought line indicates price action that exceeds the top 20% (or 30%) of the recent price range over a defined period — typically 14-interval period. Conversely, the oversold line represents price levels that fit into the bottom 20% of the recent price range.

The stochastic oscillator is a form of stock technical analysis that calculates statistically opportune times for trade entries and exits. When both stochastics are above the ‘overbought’ line (typically 80) and the fast %K line crosses below the slow %D line, this may signify a time to exit a long position or initiate a short position.

Conversely, when both stochastics are below the oversold line (typically 20), and the %K line crosses above the %D line, this could signify a time to exit a short position or initiate a new long position.

The stochastic oscillator is especially useful among commonly day-traded assets such as low-float stocks that have limited amounts of shares and are more volatile.

However useful these stock indicators are for determining entry and exit points, most readers use them in connection with other tools. While a stochastic oscillator is useful for implementing an overall strategy, it does not assist with identifying the overall market sentiment or trend direction.

It is only when the trend or sideways trading range is well established that traders can safely and reliably use the stochastic oscillator to look for long entries in oversold conditions and shorts entries in overbought conditions.

What Is the Formula for a Stochastic Oscillator?

Below is the calculation for a standard 14-period stochastic indicator, but the time period can be adjusted for any time frame.

Calculation for %K:

%K = [(C – L14) / H14 -L14)] x 100

Key:

C = Latest closing price
L14 = Lowest low over the period
H14 = Highest high over the period

%K is sometimes referred to as the “fast stochastic”, whereas the “slow” stochastic indicator is defined as %D = 3-period moving of %K.

The general idea for this oscillator is that in an uptrending market prices will close near the indicator’s high, and in a downtrending market prices will close near the low. Trade signals are generated when the “fast” %K line crosses above or below the three-period moving average, or “slow” %D.

The Slow %K Stochastic Oscillator incorporates a slower three-interval period that provides a moderate internal smoothing of %K. If the %K smoothing period was set to one instead of three, it would result in the equivalent of plotting the ‘fast stochastic.’

💡 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.

Pros of the Stochastic Oscillator

There are several benefits to using the stochastic oscillator when evaluating investments.

Clear Entry/Exit Signals

The oscillator has a simple design and generates visual signals when it reaches an extreme level, which can help a trader determine when it’s time to buy or when to sell stocks.

Frequent Signals

For more active traders who trade on intraday charts such as the five, 10, or 15 minute time frames, the stochastic oscillator generates signals more often as price action oscillates in smaller ranges.

Easy to Understand

The oscillator’s fluctuating lines ranging from 0 to 100 are fairly clear for investors who know how to use them.

Available on Most Trading Platforms

The stochastic oscillator is a ubiquitous technical indicator found in many trading platforms, online brokerages, and technical chart services with similar configurations.

Recommended: How to Open a Brokerage Account

Cons of the Stochastic Oscillator

Despite its benefits, the stochastic oscillator is not a perfect tool.

Possible False Signals

Everyone’s strategy is different but depending on the time settings chosen, traders may misperceive a sharp oscillation as a buy or sell signal, especially if it goes against the trend. This is more common during periods of market volatility.

Doesn’t Measure the Trend or Direction

The stochastic oscillator calculates the strength or weakness of price action in a market, not the overall trend or direction.

How to Trade With the Stochastic Oscillator

Some traders find the stochastic oscillator indicator useful to identify trade entry and exit points, and help decide whether they’re bullish on a stock. The stochastic oscillator does this by comparing a particular closing price based on the user’s selected time frame to a range of the security’s highest and lowest prices over a certain period of time.

Traders can reduce the sensitivity of the oscillator to market fluctuations by adjusting the time frame and range of prices. The oscillator tends to trend around a mean price level because it relies on recent price history, but it also adjusts (with lag) when prices break out of price ranges.

The Takeaway

The stochastic oscillator is a popular technical trading indicator, which can help investors find trading opportunities, measure movements, and calculate valuations. After identifying the direction of a security’s trend, the stochastic oscillator can help determine when the security is overbought or oversold, thus identifying lower-risk trade-entry points.

The oscillator uses a complex formula to calculate recent price averages according to the user’s preset time frame and the most recent price to the average price ranges. The tool plots the final calculation on a scale of 0 to 100, 0 being extremely oversold and 100 being extremely overbought. While technical indicators are not trading strategies on their own, they are useful tools when properly incorporated into an overall trading strategy.

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

Which is more accurate, RSI or Stochastic?

Relative strength index, or RSI, tends to be more useful for investors in trending markets, whereas Stochastics tend to be more helpful or reliable in non-trending markets.

What are the default indicator settings for Stochastic?

The default indicator settings for Stochastic Indicator are 5,3,3, though there are other commonly-used settings.

What is divergence in Stochastics?

Divergences are indications of a change, and can be used by traders or investors to try and determine whether a trend is getting weaker, stronger, or continuing.

Photo credit: iStock/alvarez

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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.
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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.

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Feb

2024

FAFSA Delay: 5 Steps to Ensure Your State and College Aid Aren’t Affected

By Melissa Brock | Going to College, Student Loans, student_loan | Comments Off

The Free Application for Federal Student Aid (FAFSA), an online form that helps determine the amount of federal student aid given to current and prospective college students, has historically launched every year on October 1.

However, the FAFSA for the 2024-2025 school year wasn’t available until December 31, 2023. Ironically, the delay was due to an initiative to simplify the lengthy form, eliminating two-thirds of the questions.

The holdup is affecting other aspects of college admissions and financial aid. Take a look at a few ways to ensure it doesn’t impact your state and college aid, and tips for how to approach the new FAFSA application.

How Might the FAFSA Delay Affect Students?

While the federal deadline to complete the FAFSA is June 30, students are encouraged to submit their application much earlier. One reason is that state and college-based financial aid, which use the FAFSA application and disburse aid on a first-come first-served basis, have earlier deadlines.

For example, Texas and Connecticut students must file the FAFSA by March 15, 2024, for priority consideration. Filing by your state’s deadline ensures that students receive maximum consideration for limited financial aid resources. You can check the deadline for your state on the FAFSA website .

The FAFSA delay may also affect a student’s college search. After all, if you don’t hear about financial aid from a school early in the year, you may have difficulty deciding the right fit. Fortunately, many colleges recognize this issue and have pushed their acceptance deadline — typically May 1 — to May 15 or even June 1.

3 Steps to Hit All Your Financial Aid Deadlines

Meeting your financial aid deadlines ensures that you take advantage of all opportunities.

1. Submit the FAFSA as Soon as Possible

How do you prepare for filing the FAFSA? You can look at our FAFSA 101: How to Complete the FAFSA to learn how to complete the current form. Also consider looking into college financial aid terms for parents.

Submit the FAFSA as soon as you can. Current students need to submit the FAFSA every year, and so will current high school students who plan to apply for federal, state, and institutional aid using the FAFSA.

The new version will include the following changes:

• Fewer questions. The new FAFSA features fewer questions, decreasing application completion times.

• Automated tax data retrieval. The new IRS Direct Data Exchange (DDX) will pull in parents’ and students’ tax information — no manual completion needed.

• More colleges. Students can list up to 20 colleges on the FAFSA, a change from the previous maximum of 10 colleges.

• No benefit from overlap. Previously, families with more than one child in college received additional benefits. The new FAFSA will decrease aid eligibility for middle- and high-income families with multiple children in college.

• Types of income. The FAFSA will no longer ask about some types of untaxed income, such as cash support (from grandparents, for example) or money from a grandparent’s 529 plan.

• Increase in Pell Grant eligibility. Pell Grants typically go to undergraduate students with exceptional financial need. More than 174,000 students will now be eligible for the grant. Students could be eligible for an additional $1.6 billion.

• Divorced or separated parents. Currently, students who have divorced or separated parents list the parent they live with the majority of the time on the FAFSA. However, the FAFSA changes indicate that a student should list the parent that provides the most financial support.

2. Look out for Financial Aid Communications

Keep checking in for news about financial aid deadlines. Remember that you should still file the FAFSA even if you miss your state’s deadline. You may still qualify for federal aid.

School counselors and college access professionals will have information about college deadlines. If you have any questions about the FAFSA, ask your preferred college’s financial aid administrators for direction, whether you’re a prospective or current student.

Recommended: 31 Facts About FAFSA for Parents

3. Learn About Financial Aid Options

Parents should have the college money talk with their student to explain what they can and can’t afford.

Seek out scholarships and grants that are not dependent on the FAFSA.

And use a student loan calculator to decide how much you want to borrow.

The Takeaway

If you haven’t yet submitted your FAFSA form, do so as soon as possible. Some state and college financial aid deadlines are earlier than the federal deadline. Research your state deadline and stay in contact with your preferred colleges and universities.

Once you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

Photo credit: iStock/hobo_018

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Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 04/24/2024 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org).

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Feb

2024

Margin Calls: Defined and Explained

By Inyoung Hwang | Growing Wealth, invest, Investing | Comments Off

Table of Contents

What Is a Margin Call?
How Do Margin Calls Work?
Example of Margin Call
Margin Call Formula
2 Steps to Cover a Margin Call
How Long Do I Have to Cover a Margin Call?
Tips on Avoiding Margin Calls

A margin call is when an investor is required to add cash or sell investments to maintain a certain level of equity in a margin account if the value of the account decreases too much.

Margin trading — when an investor borrows money from a brokerage firm to enhance trades — is a risky endeavor. Placing bets with borrowed funds can boost gains but can also supercharge losses. Brokers require traders to keep a minimum balance in their margin accounts for this reason.

If the margin account dips below a certain threshold, this is when the brokerage firm will issue a margin call. A margin call is one of several risks associated with margin trading.

Margin calls are designed to protect both the brokerage and the client from bigger losses. Here’s a closer look at how margin calls work, as well as how to avoid or cover a margin call

Key Points

• A margin call occurs when an investor must contribute cash or sell investments to uphold a specific equity level in their margin account.

• Margin trading involves borrowing money from a brokerage firm to enhance trades, but it comes with risks.

• If the equity in a margin account falls below the maintenance margin, a margin call is issued by the brokerage firm.

• Margin calls are designed to protect both the brokerage and the client from bigger losses.

• To cover a margin call, investors can deposit cash or securities into the margin account or sell securities to meet the requirements.

What Is a Margin Call?

A margin call is when a brokerage firm demands that an investor add cash or equity into their margin account because it has dipped below the required amount. The margin call usually follows a loss in the value of investments bought with borrowed money from a brokerage, known as margin debt.

A house call, sometimes called a maintenance call, is a type of margin call. A brokerage firm will issue the house call when the market value of assets in a trader’s margin account falls below the required maintenance margin — the minimum amount of equity a trader must hold in their margin account.

If the investor fails to honor the margin call, meaning they do not add cash or equity into their account, the brokerage can sell the investor’s assets without notice to cover the shortfall in the account. This entails a high level of responsibility and potential risk, which is why margin trading is primarily for experienced investors, not for investing beginners.

💡 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.

How Do Margin Calls Work?

When the equity in an investor’s margin account falls below the maintenance margin, a brokerage firm will issue a margin call. Maintenance margins requirements differ from broker to broker.

Additionally, regulatory bodies like the Federal Reserve and FINRA have rules for account minimums that all firms and investors must follow to limit risk and leverage.

Regulation T

The Federal Reserve Board’s Regulation T states that the initial margin level should be at least 50% of the market value of all securities in the margin account. The minimum equity amount must be valued at 50% or more of the margin account’s total value. For example, a $10,000 trade would require an investor to use $5,000 of their own cash for the transaction.

Recommended: Regulation T (Reg T): All You Need to Know

FINRA

The Financial Industry Regulatory Authority (FINRA) requires that investors have a maintenance margin level of at least 25% of the market value of all securities in the account after they purchase on margin. For example, in a $10,000 trade, the investor must maintain $2,500 in their margin account. If the investment value dips below $2,500, the investor would be subject to a margin call.

Example of Margin Call

Here is how a margin trade works. Suppose an investor wants to buy 200 shares of a stock at $50 each for an investment that totals $10,000. He or she puts up $5,000 while the brokerage firm lends the remaining $5,000.

FINRA rules and the broker require that the investor hold 25% of the total stock value in his or her account at all times — this is the maintenance requirement. So the investor would need to maintain $2,500 in his or her brokerage account. The investor currently achieves this since there’s $5,000 from the initial investment.

If the stock’s shares fall to $30 each, the value of the investment drops to $6,000. The broker would then take $4,000 from the investor’s account, leaving just $1,000. That would be below the $1,500 required, or 25% of the total $6,000 value in the account.

That would trigger a margin call of $500, or the difference between the $1,000 left in the account and the $1,500 required to maintain the margin account. Normally, a broker will allow two to five days for the investors to cover the margin call. In addition, the investor would also owe interest on the original loan amount of $5,000.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 11%* and start margin trading.

*For full margin details, see terms.

Margin Call Formula

Here’s how to calculate a margin call:

Margin call amount = (Value of investments multiplied by the percentage margin requirement) minus (Amount of investor equity left in margin account)

Here’s the formula using the hypothetical investor example above:

$500 = ($6000 x 0.25%) – ($1,000)

Investors can also calculate the share price at which he or she would be required to post additional funds.

Margin call price = Initial purchase price times (1-borrowed percentage/1-margin requirement percentage)

Again, here’s the formula using the hypothetical case above:

$33.33 / share = $50 x (1-0.50/1-0.25)

💡 Quick Tip: When you trade using a margin account, you’re using leverage — i.e. borrowed funds that increase your purchasing power. Remember that whatever you borrow you must repay, with interest.

2 Steps to Cover a Margin Call

When investors receive a margin call, there are only two options:

1. They can deposit cash into the margin account so that the level of funds is back above the maintenance margin requirement. Investors can also deposit securities that aren’t margined.

2. Investors can also sell the securities that are margined in order to meet requirements.

In a worst case scenario, the broker can sell off securities to cover the debt.

How Long Do I Have to Cover a Margin Call?

Brokerage firms are not required to give investors a set amount of time. As mentioned in the example above, a brokerage firm normally gives customers two to five days to meet a margin call. However, the time given to provide additional funds can differ from broker to broker.

In addition, during volatile times in the market, which is also when margin calls are more likely to occur, a broker has the right to sell securities in a customer’s trading account shortly after issuing the margin call. Investors won’t have the right to weigh in on the price at which those securities are sold. This means investors may have to settle their accounts by the next trading day.

Tips on Avoiding Margin Calls

The best way to avoid a margin call is to avoid trading on margin or having a margin account. Trading on margin should be reserved for investors with the time and sophistication to monitor their portfolios properly and take on the risk of substantial losses. Investors who trade on margin can do a few things to avoid a margin call.

• Understand margin trading: Investors can understand how margin trading works and know their broker’s maintenance margin requirements.

• Track the market: Investors can monitor the volatility of the stock, bond, or whatever security they are investing in to ensure their margin account doesn’t dip below the maintenance margin.

• Keep extra cash on hand: Investors can set aside money to fulfill the potential margin call and calculate the lowest security price at which their broker might issue a call.

• Utilize limit orders: Investors can use order types that may help protect them from a margin call, such as a limit order.

The Takeaway

While margin trading allows investors to amplify their purchases in markets, margin calls could result in substantial losses, with the investor paying more than he or she initially invested. Margin calls occur when the level of cash in an investor’s trading account falls below a fixed level required by the brokerage firm.

Investors can then deposit cash or securities to bring the margin account back up to the required value, or they can sell securities in order to raise the cash they need.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

Get one of the most competitive margin loan rates with SoFi, 11%*

FAQ

How can you satisfy your margin call in margin trading?

A trader can satisfy a margin call by depositing cash or securities in their account or selling some securities in the margin account to pay down part of the margin loan.

How are fed and house calls different?

A fed call, or a federal call, occurs when an investor’s margin account does not have enough equity to meet the 50% equity retirement outlined in Regulation T. In contrast, a house call happens when an investor’s margin equity dips below the maintenance margin.

How much time do you have to satisfy a margin call?

It depends on the broker. In some circumstances, a broker will demand that a trader satisfy the margin call immediately. The broker will allow two to five days to meet the margin call at other times.

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*Borrow at 11%. 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.

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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5 Ways that Could Potentially Minimize the Impact of Inflation on Retirement

1. Invest in the Stock Market

2. Use Tax-Advantaged Retirement Vehicles

3. Do Not Over-Allocate Long-Term Investments With a Low Rate of Return

4. Make Sure You Understand Inflation-Protected Securities

5. Buy Real Estate or Invest in REITs

Inflation Calculator for Retirement

The Takeaway

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Step 1: Stay Away From Debt

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Step 5: Cut Unnecessary Expenses

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Step 6: Keep Your Financial Goals in Focus

Step 7: Consult with Investment Professionals

Leveraging Advice for Wealth Building

Step 8: Repeat and Refine Your Financial Plan

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How Does a Stochastic Oscillator Work?

Slow vs Fast Stochastics

What Is the Formula for a Stochastic Oscillator?

Pros of the Stochastic Oscillator

Clear Entry/Exit Signals

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Easy to Understand

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FAFSA Delay: 5 Steps to Ensure Your State and College Aid Aren’t Affected

How Might the FAFSA Delay Affect Students?

3 Steps to Hit All Your Financial Aid Deadlines

1. Submit the FAFSA as Soon as Possible

2. Look out for Financial Aid Communications

3. Learn About Financial Aid Options

The Takeaway

Margin Calls: Defined and Explained

What Is a Margin Call?

How Do Margin Calls Work?

Regulation T

FINRA

Example of Margin Call

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 11%* and start margin trading.

Margin Call Formula

2 Steps to Cover a Margin Call

How Long Do I Have to Cover a Margin Call?

Tips on Avoiding Margin Calls

The Takeaway

FAQ

How can you satisfy your margin call in margin trading?

How are fed and house calls different?

How much time do you have to satisfy a margin call?

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