Oct
29
2024
Can the Government Take Money Out of Your Account?

Can the Government Legally Take Money Out of Your Bank Account?

By | Budgeting & Goals, Financial Independence, money | Comments Off on Can the Government Legally Take Money Out of Your Bank Account?

The government generally can’t take money out of your bank account unless you have an unpaid tax bill (and before they go to that extreme, they will send you several notifications and offer you multiple opportunities to pay your outstanding taxes). If you’re late on a debt or child support payment, on the other hand, the government can’t directly tap your bank account. What they can do, however, is permit other parties to remove the funds. Keep reading for more insight into when and how this can happen.

Key Points

•   The government generally cannot withdraw money directly from bank accounts unless there are unpaid tax obligations, which come after multiple notifications.

•   Financial institutions can exercise the “right of offset,” allowing them to withdraw funds from an account to cover debts owed to the same institution without prior notice.

•   Wage garnishment is another legal method that enables employers to withhold part of an employee’s earnings to satisfy debts, requiring a court order to enact.

•   Certain funds, such as those from tax-deferred retirement accounts, are exempt from being seized under the right of offset or wage garnishment laws.

•   Open communication with financial institutions regarding debts can help avoid unexpected withdrawals, and timely payments can prevent wage garnishment situations.

Times When the Government Can Legally Take Money From Your Account

There are certain situations where the government allows money to be removed from a bank account without the account owner’s permission. Let’s look at a few ways this can happen.

Right of Offset

The “right of offset” is a term that refers to the fact that both banks and credit unions are allowed to take money from an account holder’s checking account, savings account, or certificate of deposit in order to pay off a debt on another account held at the same financial institution. While the government isn’t the one directly taking the money out of a bank account, they do legally allow this to happen.

For example, if you have a checking account and a student loan through a single bank and you fail to pay your student loan, the bank has the right to take money from your checking account to pay for missed loan payments. If you have a bank account with a different financial institution, however, the bank looking for your student loan payments cannot withdraw funds from that account.

Financial institutions don’t have to give account holders advanced warning before exercising the right of offset. This is legally allowed as long as they follow all rules surrounding this practice.

Appeasing Both Sides

Taking funds from your account typically only happens in situations such as a student loan being about to go into default when the person holding the loan has money sitting in checking that could cover the debt. To know whether your funds could be tapped in this way, take a look at the fine print. Financial institutions like banks and credit unions usually have language surrounding this right of offset in the agreement that an account holder signs when they open a savings account, checking account, or a certificate of deposit (CD).

Different financial institutions will have different policies as to how they handle their right of offset process. Typically, credit unions have a bit more leeway when it comes to right of offset, while banks need to stick to stricter standards. For instance, it’s usually illegal for a bank to seize money from an account to pay a credit card debt. However, credit unions may be able to do this.

Which Accounts Can Be Tapped

Here’s another reason why it’s really important to pay close attention to this language: Sometimes a bank or credit union has the ability to access the funds in any joint accounts that the main account holder shares with someone else (like a spouse). So if, say, you had a joint checking account at a bank with funds in it, and the bank also held your student loan which was close to default, both you and your spouse could wind up having your money withdrawn to go towards that overdue loan. Luckily, the right of offset isn’t eligible for tax-deferred retirement accounts (such as IRAs), so the money in those accounts can’t be touched.

Garnishment of Wages

Garnishment of wages is another example of when the government permits taking money from someone without their permission. This is a legal procedure that requires an employer to withhold part of a person’s earnings in order to repay a debt such as child support or a loan. Wage garnishment requires a court order.

Fortunately, Title III of the Consumer Credit Protection Act (CCPA) protects the person who needs to repay their debt. It says that an employer can’t discharge an employee for having their wages garnished for a single source of debt. However, employees with earnings subject to garnishment for a second or subsequent debts do not receive this protection.

Personal earnings such as wages, salaries, commissions, bonuses, and retirement income all qualify for wage garnishment, but tips usually don’t.

Does the Government Take Money From Accounts Often?

Having funds removed from a bank account without the account holder’s permission doesn’t happen all that often. When it does, the account holder can generally anticipate that this scenario is going to unfold, with the exception of it being a right of offset situation and they didn’t read their account holder agreement carefully. Garnishment of wages, however, requires a court mandate and won’t catch anyone off guard.

Let’s look at an example of how these situations can occur. If someone has debt and they don’t respond to a debt collector’s suit against them, the judge usually rules against the person who owes money. The judge may rule that the debt collector can garnish their wages, take a lien out on their property, or take money from their bank accounts.

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Are Any Funds Exempt?

You may wonder if any kinds of funds are exempt from right of offset and wage garnishment. Let’s take a look at the guidelines in this situation. If the documents you signed when you opened a checking account, savings account, or CD included a right of offset agreement, then you’ve permitted the financial institution to take your money to pay a debt under the terms outlined in the agreement. The agreement is a legal contract, and you’re subject to it as long as you’re an account holder.

In some cases, you might not even learn that your bank or credit union has exercised its right of offset until after the fact. The agreement doesn’t, however, open the door for a financial institution to pull money from your account whenever it wants. For instance, federal law prohibits a federally chartered bank from using the right of offset to pay your overdue credit card bill at another bank. Again, it is used to repay a loan that is overdue at the same financial institution.

State laws might also limit a bank’s or credit union’s right of offset. This is the case in California, where a financial institution can’t push your balance below $1,000 when it pulls money from your account to cover a debt. Some states also prohibit draining government benefits like Social Security or unemployment in a right of offset action.

When thinking about wage garnishment, let’s take a look at what the law says. What kinds of funds can be garnished? Title III applies to all individuals who receive personal earnings and to their employers. Personal earnings include wages, salaries, commissions, bonuses, and income from a pension or retirement program, but does not ordinarily include tips.

Ways to Avoid Government Withdrawals

None of these withdrawals are ideal, and there are steps you can take to avoid them. You can avoid the internal revenue service (IRS) from withdrawing money from your bank account by paying all taxes owed each year.

When it comes to right of offset, it’s possible to avoid having this happening with a little communication. If you’re worried you won’t be able to make a debt payment to your bank or credit union, you may be able to connect with your financial institution to work out a repayment plan. Being upfront won’t make the situation worse and can lead to a potential solution. If you lose your job, you can talk to your bank about how to manage your debt until you find a new job.

The best way to avoid wage garnishment is to make the required payments, such as child support, on time. Again, if you’re struggling to make a payment because of financial hardship, it’s best to communicate that upfront and to make a plan for recovery instead of falling behind on payments.

The Takeaway

So can the government take money out of your bank account? The answer is yes if you fail to pay your taxes. In addition, the government permita an employer or financial institution to do so in certain situations.

If you plan for debt and other required payments properly, chances are that money won’t ever have to be removed from your account without your permission. Even though funds can be unexpectedly withdrawn via right of offset and garnishment of wages, a person usually knows they have debt that’s past due and may not be totally surprised by this turn of events. When falling behind in payments, it’s often a good idea to talk directly with creditors and explain the situation. Your lender may be willing to set up a new repayment plan that allows you to avoid these two scenarios we’ve just explored.

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FAQ

What is it called when the government takes money from your bank account?

When the government seizes money in a bank account to cover unpaid taxes, it’s called a tax levy.

You can also have money removed from your bank account through a process known as “right of offset” or garnishment of wages (which is money taken directly from a paycheck). These processes don’t involve the government directly taking money out of your bank account, but laws allow a financial institution or employer to do so under certain circumstances.

Can the government take money from your checking account?

Through the “right of offset,” banks and credit unions are legally allowed to remove funds from a checking account. They can do this to pay a debt on another account that the consumer has with that same financial institution.

The internal revenue service (IRS) also has the power to seize assets, including bank accounts, when a taxpayer fails to satisfy their tax obligations.

Can a government take your savings?

Through “right of offset,” the government allows banks and credit unions to access the savings of their account holders under certain circumstances. This is allowed when the consumer misses a debt payment owed to that same financial institution.

In addition, the internal revenue service (IRS) has the power to seize assets, including bank accounts, when a taxpayer fails to satisfy their tax obligations.

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

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Oct
28
2024

Environmental, Social, and Governance (ESG), Explained

By | Growing Wealth, invest, Investing | Comments Off on Environmental, Social, and Governance (ESG), Explained

ESG stands for environmental, social, and governance criteria that investors can use to evaluate whether companies are making positive changes in these areas — as well as addressing specific ESG risks that can impact company performance.

Environmental factors refer to the ways a company is protecting the physical environment. Social criteria govern the treatment of workers, communities, customers, suppliers, and vendors. Governance factors track issues of leadership, fraud prevention, transparency, and more.

Key Points

•   Environmental, social, and governance factors help investors evaluate a company’s performance in non-financial terms.

•   How well companies address the three ESG pillars may help mitigate certain ESG-related risk factors.

•   As yet there is no universally accepted set of standards for measuring an organization’s commitment to ESG goals or targets, and disclosure of ESG metrics is largely voluntary.

•   There are numerous non-binding frameworks and voluntary standards that companies may use to establish their own ESG criteria and metrics.

•   Investors may invest in ESG-focused ETFs and mutual funds as well as ESG companies.

What Is ESG?

Environmental, social, and governance factors generally fall under the umbrella of socially responsible investing (SRI) or impact investing. Investors can use the ESG pillars to assess a company’s performance, beyond standard financial metrics.

•   Environmental factors may include: fossil fuel vs. renewable energy use; air, water, and ground pollution mitigation; carbon management; compliance with regulations.

•   Social factors may include: Fair labor policies; support for worker safety and diversity; community relationships; customer satisfaction.

•   Governance factors may include: Composition of executive and board leadership; ethics and transparency in management and accounting; fraud prevention, and more.

Lack of ESG Standards

While there is general agreement about the importance of sustainability across industries, there still isn’t a universally accepted set of ESG standards used by all companies, or the regulatory bodies that oversee them.
Rather, many companies rely on a mix of voluntary and/or proprietary standards that different organizations adopt according to their needs.

That said, in recent years there has been a concerted effort on the part of policymakers and regulatory agencies to establish ESG frameworks and disclosure rules, both to insure that companies are held accountable for managing certain risk factors, and that investors are afforded some reliability in terms of their investment choices.

Currently though, the lack of consistent, transparent ESG metrics makes it difficult for investors to evaluate companies’ progress toward ESG targets.

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ESG Concerns

As interest in ESG and green investing strategies in general has risen, as reflected by fund inflows, a growing number of investors (and consumers) are concerned about ESG-related risk factors. Increasingly, investors want to know how a given company or organization is materially addressing these factors, in order to better assess its long-term prospects.

As recent events have shown, environmental, social, and governance issues present different risk factors to different organizations, and can impact performance in the short and long term. While an agricultural business may have issues with chemical groundwater pollution, a financial firm may need to address transparency and ethics, and another may contend with plastic waste.

Despite the inconsistencies in how ESG criteria are applied, however, industry research suggests that funds that use ESG strategies are competitive with funds that adhere to more conventional strategies.

Recommended: Beginner’s Guide to Sustainable Investing

How Does ESG Work?

There are a few ways investors can use ESG criteria to evaluate potential investments via an online investing platform or other means. As noted, there isn’t a unified ESG playbook with a set of rules that apply across the board, yet many companies strive to incorporate certain standards into their processes and products.

Using ESG Criteria

In the last 25 years or so, many organizations have developed voluntary ESG frameworks that some companies embrace, while others may adhere to their own proprietary standards and metrics. Thus, it remains difficult to measure accurately whether an organization has met specific ESG targets owing to a lack of consistency in standards.

Nonetheless, there are numerous non-binding (i.e., voluntary) frameworks available that can provide investors with a basic grounding in ESG standards. A few are more prominent than others, owing to their wide adoption, including:

Global Reporting Initiative (GRI)

Established in 1999, the GRI is an independent organization that helps companies and governments evaluate and disclose their efforts in light of climate change, human rights, and corruption, using their voluntary methodology. Some 78% of the world’s biggest companies have adopted the GRI reporting standards, making it the most widely adopted framework.

International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards

In response to the number of companies seeking ways to incorporate sustainability into their accounting and reporting practices, the IFRS Foundation set up the International Sustainability Standards Board (ISSB) in 2021. The ISSB subsequently developed its Disclosure Standards, which build on a number of pre-existing frameworks.

Sustainability Accounting Standards Board (SASB) Standards

In 2018 SASB Standards were established to support accurate disclosure of sustainability-related information across 77 different industries. These standards were folded into the IFRS Foundation in 2022, and are now maintained by the ISSB for companies that use this method.

CDP

The CDP (formerly the Carbon Disclosure Project) is an international non-profit that helps not only companies, but state and local governments to evaluate and disclose key environmental impacts such as carbon and greenhouse gas emissions, water quality protection, and deforestation on a voluntary basis. According to CDP, over 23,000 companies around the world rely on the CDP disclosure framework.

United Nations Global Compact

Though non-binding, the U.N. Global Compact is one of the world’s most prominent corporate sustainability initiatives. It offers 10 voluntary principles to help organizations adhere to policies that support human rights, fair labor practices, the environment, and more; in general the 10 principles align with the 17 U.N. Sustainable Development Goals.

In addition, investors can do their own research by looking at data on a company’s website, shareholder reports, and other industry studies.

Large financial institutions, such as public pension funds, have started incorporating ESG criteria into their investment selections. In addition, there are now ESG-focused ETFs and mutual funds being offered by mutual fund companies, online investing platforms, and brokerage firms.

Recommended: The Growth of Socially Responsible Investing

The Three Pillars of ESG

Each of the three pillars of ESG include a range of areas that investors can evaluate in two ways: in terms of whether a company is making positive changes in a given area material to its performance, and whether they are addressing potential ESG risks.

Environmental Social Governance

•   Environmental impacts such as pollution, waste, greenhouse gas emissions, and water use

•   Internal environmental policies and goals

•   Adherence to regulations and certifications

•   Potential exposure to risks and measures taken for risk prevention and management

•   Treatment of workers and employees

•   Factory conditions

•   Labor standards

•   Diversity

•   Community engagement

•   Customer satisfaction

•   Volunteer initiatives

•   Internal auditing and reporting

•   Decision-making structures

•   Shareholder rights

•   Makeup of board

•   Leadership performance

•   Ethics and transparency

•   Bribery and corruption

•   Lobbying

•   Executive compensation

Environmental

Environmental criteria for green investments typically set standards for energy use, pollution and waste management, greenhouse gas emissions, water use, chemical use, and other factors that can negatively impact the planet and consume non-renewable resources.

Companies may set policies and goals, such as reducing or eliminating carbon emissions by a certain date, shifting to renewable energy, and limiting pollutants in the air and water.

Risks a company should disclose include reliance on certain types of energy that could compromise production, oil spills or pollution that may occur, or other potential health and environmental hazards.

There are also existing environmental regulations that companies must adhere to, and optional steps they can take such as product and supply chain certifications.

Social

Social criteria involve the ways a company relates to both internal and external individuals and groups. This includes fair labor practices, safe work environments, diversity, support for the community and other stakeholders.

Investors can look at the types of factories and suppliers a company works with, labor standard and the workplace conditions of factory workers and employees. Companies may also have programs in place to give back to local communities, or for employees to volunteer in those communities.

Risks include lack of worker safety, flouting local laws and regulations, and actions that could result in reputational harm.

Governance

The third pillar of ESG is governance. Governance criteria includes internal accounting and auditing standards, leadership performance, shareholder rights, fraud prevention, and general issues relating to transparent and ethical decision making in the organization.

Risks may include lack of consumer data protection, poor capital allocation, inefficient management strategies

Benefits of ESG

ESG strategies may offer investors a few advantages.

•   The most obvious benefit of ESG is that investors can put their money toward goals that they value. The more transparent companies are about their actual progress in specific areas, and how they measure those outcomes, the more this can be tracked and improved upon.

•   While it has been a common assumption that ESG strategies don’t provide competitive returns, there is a body of research that suggests ESG strategies can be competitive with conventional ones in some cases.

•   Although industries such as oil and gas have historically had high returns, they also come with risks such as negative publicity, lawsuits, and environmental hazards. When these types of events occur, stocks can go down. Companies with an ESG focus may face fewer risks that can impact performance.

•   Also, if a company takes action to better manage its waste, energy, or water use, these efforts potentially help save money and thereby increase profits.

Drawbacks of ESG

There are a few downsides to ESG investing.

One is that some companies engage in greenwashing, the act of making themselves and their products appear to have a more positive environmental impact than they really do. Investors can watch out for this by making sure the companies they invest in publish actual data and reports, rather than just putting out vague marketing materials.

The lack of consistent ESG standards unfortunately can contribute to greenwashing, especially because companies are not required to disclose data about their ESG policies, although many disclose some data voluntarily.

Also, certain activities may appear positive but can have negative side effects. For instance, there have been cases of renewable energy installations displacing communities or creating pollution, as well as irresponsible reforestation practices.

Why ESG May Be Growing in Popularity

Investors today are more aware of where products come from, who makes them, and the impact they have on the world. With this increased awareness, there is a commensurate interest in the value of investing in more responsible companies and sustainable business practices.

Investors have learned that using ESG criteria to evaluate companies can help with identifying potential risks and opportunities as well. Financial criteria are not the only thing one should take into consideration when selecting companies to invest in.

These days, a company’s long-term performance also depends on the organization’s ability to address environmental, social, and governance risk factors proactively.

What Investors Should Know About ESG

If an investor is looking into ESG-related funds or ETFs, they should investigate the specific criteria that particular asset takes into account to see if it fits with their own personal impact goals.

When doing their own research, investors should make sure that company claims are backed up by facts and transparency, wherever possible.

The Takeaway

ESG criteria are becoming a popular way to evaluate companies in addition to traditional financial metrics. Some investors seek to put their money into sustainable businesses, some are concerned about environmental, social, and governance risk factors that can impact performance.

Although there is a push to create clearcut standards for measuring a company’s progress on specific ESG targets, these have yet to be established. Nonetheless, investors continue to find ESG funds of interest.

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28
2024

Understanding the Risks of ESG Investing

By | Growing Wealth, invest, Investing | Comments Off on Understanding the Risks of ESG Investing

Key Points

•   Companies today face material risks pertaining to environmental, social, and governance factors.

•   Many investors now assess company performance in terms of sustainability, in addition to financial factors.

•   Nonetheless, investors may find it challenging to assess which companies meet ESG targets, due to inconsistent frameworks, inaccurate reporting, or false claims.

•   Lack of clarity around ESG standards can lead to greenwashing (the practice of claiming to meet ESG standards when you don’t).

•   Companies which fail to implement effective ESG strategies may face regulatory, reputational, and financial risks.

ESG investing strategies continue to garner strong interest among investors, as well as corporate executives and governments. As recent climate and geo-political events have underscored, companies today face a range of risk factors that may be mitigated by embracing certain environmental, social, and governance standards.

And while many organizations have established methods for evaluating and scoring companies on how well they meet certain ESG benchmarks, there is still no globally accepted set of standards for evaluating and rating company performance according to ESG criteria.

Thus, investors face two potential types of risk when it comes to ESG investing. First, companies today face material challenges in regard to environmental, social, and governance factors, which require ongoing remediation.

But, owing to the lack of widely accepted ESG frameworks and metrics, it can be challenging for companies to evaluate their own progress to ESG targets — and likewise for investors to then evaluate which companies meet ESG targets and which don’t.

Despite the inconsistencies in how various ESG criteria are applied from company to company, however, industry research suggests that ESG funds are competitive with funds that adhere to more conventional strategies.

The State of ESG Standards

In the last 10 years or more, the need to identify and solve for ESG risk factors has prompted numerous organizations to try to develop ESG criteria companies must meet, as well as ways of measuring and disclosing whether they’ve attained specific ESG targets.

In theory, companies that fail to meet certain ESG criteria (e.g., efficient energy use, pollution mitigation, diversity targets, transparency in accounting) would be able to improve their efforts, and thereby mitigate those risk factors.

But the persistent challenge here has been a lack of agreement about how to define and measure — and therefore uphold — meaningful positive strides in terms of key environmental, social, and goverance factors.

A Range of Criteria

ESG criteria and metrics are almost impossible to describe, owing to the wide assortment of public and private (e.g., proprietary) frameworks.

These include the United Nations’ 17 Sustainable Development Goals, a set of non-binding principles that some organizations use as guidelines, as well as frameworks for reporting and disclosures developed by other non-profits, like the Global Reporting Initiative (GRI) and IFRS Sustainability Disclosure Standards. In addition, some financial companies themselves have their own proprietary measures.

In recent years, for example, the Securities and Exchange Commission (SEC), which oversees the securities industry in the U.S., has undertaken the task of combating the practice of so-called greenwashing by permitting financial firms to label funds “ESG” only when the vast majority of holdings (80%) includes ESG investments.

In addition, in March of 2024 the SEC announced a set of climate-disclosure rules that would apply to all U.S. companies of a certain size. But — in a testament to an industry riven by discord on how sustainable investing should be defined — just a month after issuing new rules that would standardize companies’ climate disclosures, the SEC responded to a spate of criticism and temporarily stayed the ruling.

Recommended: A Beginner’s Guide to Sustainable Investing

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ESG vs. Conventional Strategies

Conventional strategies tend to focus on financial and industry metrics such as profit and loss statements, competitive analysis, and so forth. ESG investing introduces new categories with which to evaluate companies beyond their financials. While ESG is a type of sustainable investing strategy, the term ESG is more specific, in that companies must focus on positive environmental, social, and governance outcomes.

The benefit of ESG and other impact investing strategies is it can help investors put their money towards ethical companies doing good in the world. Again, as noted above, ESG funds may offer returns that are comparable to conventional funds.

5 Risks of Investing in ESG Stocks

As noted, despite the steady interest in socially responsible investing strategies like ESG, the quality and consistency of reporting frameworks and metrics has lagged behind.

Industries and agencies need to establish agreement about ESG frameworks, implementation, disclosures, reporting, and compliance. Given the current hurdles, investors should bear in mind relevant risk factors.

Five key risks of ESG investing include:

Lack of Support for ESG Standards

Companies can decide to embrace ESG standards and hire third party evaluators, but if their employees and executives aren’t knowledgeable about or in support of using ESG criteria, due diligence and compliance will suffer and the company may not reach its goals.

Weak Monitoring

Related to the lack of support for ESG frameworks and standards, many companies may lack robust systems for implementing, monitoring, and tracking ESG metrics, making it difficult to produce accurate reports and ratings.

Compliance May Not Support ESG Frameworks

Even if a company has a comprehensive set of ESG standards, they may not have a thorough compliance program that keeps tabs on ESG issues — and/or ESG standards aren’t well-integrated into risk evaluation assessments.

Inaccurate Reporting

When a company decides to adhere to a certain set of ESG standards, they also need to install control mechanisms to ensure accurate reporting. The SEC reported that many companies distribute disclosures and marketing materials making them look more sustainable than they really were in practice, or with old information that needed updating, because they didn’t have adequate internal checks and balances.

Lack of Diligence Among Fund Managers

The SEC notes that portfolio managers need to review company policies and procedures in regard to ESG factors before investing in that firm.

Why Companies May Want to Reduce ESG Risks

Not only are the above risks to investors, they pose risks to the company as well:

•   Strategic: The idea behind ESG is that the three pillars measure a company’s overall commitment to making positive strides in those areas. If a company fails to implement ESG strategies it could affect their long-term prospects.

•   Regulatory: Failure to comply with regulations, such as those that reduce environmental risks and prevent illicit practices, can directly impact a company’s ability to do business and meet shareholder expectations.

•   Reputational: If a company misleads investors, consumers, and other stakeholders, it could taint their reputation and can lead to financial losses.

•   Financial: It has been shown that strong ESG metrics may help a company financially. Not only can false ESG reporting lead to fines, failure to implement ESG plans can mean a company hasn’t maximized their chance to offset certain risks and increase profits.

How ESG Mitigates Some Risk Factors

While there are risks involved with ESG-focused investing, companies that seek to embrace ESG standards may also mitigate some risk factors for investors.

Investors may benefit by investing in companies that are proactively addressing the challenges of a changing world. For example, implementing a regular risk-assessment review process may help companies identify and plan for emerging risks that may include:

•   Environmental: Preventing pollution and other hazards, complying with regulations, mitigating and adapting to climate risks, investing in renewable energy and energy-efficient systems.

•   Social: Maintaining a diverse workforce, building relationships with communities, governments, and other stakeholders.

•   Governance: Maintaining a strong leadership culture, preventing fraud and illicit activity, supporting transparency in accounting and management practices.

With this in mind, investors may research companies or funds to assess if they’re meeting their own commitments. What are their reporting and disclosure practices? Are they using one of the more well-known standards? Is their information verified by a third party?

The Takeaway

Understanding ESG risks can help investors make more informed decisions about their investment choices. Investors interested in putting their money into sustainable companies can use existing ESG metrics to evaluate the best options, but should be aware of the potential downsides.

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28
2024

Financial Consulting Services 101

By | Budgeting & Goals, Growing Wealth, invest, Investing | Comments Off on Financial Consulting Services 101

When you need help putting together a solid plan for your money, you might seek out financial consulting services. A financial consultant can offer advice and guidance on things like investing, retirement planning, and building wealth. You may also hear financial consultants referred to as financial advisors, as the terms are often used interchangeably, though there may be some slight differences.

What is financial consulting designed to do? In simple terms, it’s all about helping clients formulate a strategy for managing their money. What working with a personal finance consultant looks like for you can depend on your situation and goals.

Key Points

•   Broadly speaking, financial consultants help clients identify strategies to help them reach financial goals.

•   Services offered by financial consultants may include investment management, estate planning, tax planning, and retirement planning, among others.

•   Financial consultants and financial advisors may hold certificates or designations that reflect advanced training, such as Certified Financial Planner (CFP) or Accredited Financial Planner (AFP).

•   Choosing the right consultant requires evaluating the scope of services they offer, their professional certifications and designations, their fee structure, and more.

What Is a Financial Consultant?

Broadly speaking, a financial consultant is someone who offers advice about money – be it retirement planning or buying stocks or other securities – in a professional capacity. A financial consultant may work independently or be employed by a financial consulting firm, and they may offer services online or in-person.

Examples of Financial Consulting Services

Financial consultants can offer a variety of services to their clients. Again, those clients may be individual investors, business owners, or even a non-profit organization. The types of services a financial consultant may offer can include:

•   Basic financial planning, such as creating a household budget

•   Estate planning

•   Tax planning and legacy planning

•   Retirement planning

•   College planning

•   Succession planning for clients who own a business

A financial consultant’s overall goal is to help clients create a comprehensive plan for managing their money. Financial consultants may work with a diverse mix of clients, or niche down to offer their services to a specific demographic or client base, such as dual income couples, with no kids or members of the LGBTQ community.

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Financial Consultants vs. Financial Advisors

The terms “financial consultant” and “financial advisor” are often used interchangeably, as their meaning is roughly, but not quite, the same. There are some important differences, including the licensure that each is required to hold in order to practice, and the regulators each operates under. Generally, they both offer financial advice and guidance in a professional capacity, though.

Other Names for Financial Professionals

Financial consultants and financial advisors can go by more specific names, depending on which professional certifications they hold. Certifications and designations signify that a consultant or advisor has completed advanced training and education in a particular area. Here are some of the most common designations for financial professionals:

•   Certified Financial Planner (CFP®)

•   Chartered Financial Consultant (ChFC)

•   Certified Public Accountant (CPA)

•   Accredited Financial Planner (AFP)

•   Registered Investment Advisor (RIA)

•   Certified Annuity Advisor (CAA)

•   Certified Financial Consultant (CFC)

•   Certified Tax Advisor (CTA)

•   Chartered Financial Manager (ChFM)

Navigating the alphabet soup of designations for financial consulting services can be confusing and it helps to understand what type of advice you need.

For instance, if you want to work with an advisor who can help with everything from budgeting to retirement planning, then you might choose a Certified Financial Planner. On the other hand, you might want to work with a registered investment advisor if you’re specifically seeking investment help.

The main thing to know about financial consulting services is that there’s more than one option to choose from. Taking time to research a consultant or advisor’s background and qualifications can make it easier to find the right person to work with when you need consulting services.

When Would You Need Financial Consulting?

Working with a financial consultant is a personal decision. With that in mind, you might start working with a consultant at any time if you feel that you need help managing your finances. If you need more specific examples of when it makes sense to hire a financial consultant, here are a few scenarios to consider:

•   Your parents pass away, leaving you $500,000 in assets. You might work with a financial consultant to figure out the best way to maximize your inheritance while minimizing taxes.

•   After 15 years of marriage, you and your spouse have decided to divorce. You decide to hire a financial consultant to help you create a plan for managing the assets that you’re leaving the marriage with.

•   You’re a parent to a child with special needs who will require long-term care after you’re gone. You reach out to a financial consultant to discuss setting up a trust to pay for their care when the time comes.

Financial consulting services can be an appropriate choice when you have a difficult financial decision to make or you’re trying to navigate a situation that feels overwhelming. Winning the lottery, for instance, could leave you paralyzed with indecision about what to do with the money.

A financial consultant can also help you move through changing life stages. That can include getting married or divorced, having a child, starting or selling a business, or changing careers. Financial consultants can look at the bigger financial picture to help you get through the changes while keeping your long and short-term goals in sight.

Finding the Right Financial Consultant

Finding a financial advisor starts with taking inventory of your needs to determine what kind of advice is appropriate. Once you’ve figured out what kind of help you need, the next step is creating a list of advisors in your area that you might want to work with.

Asking questions can help you get a feel for how an advisor operates. Here are some examples of the types of questions you might want to ask:

•   What kind of financial consulting services do you offer?

•   Do you hold any professional certifications or designations?

•   Do you specialize in working with a particular type of client?

•   What is your investment style?

•   How are your fees structured and what do you charge for consulting?

•   What is your preferred method of communication?

•   How often will we meet?

If you’re considering a robo-advisor, then it may be a good idea to look at how the platform manages portfolios, what benefits or features are included, and what you’ll pay for consulting services. Should you choose a robo-advisor vs. financial advisor? There are some pros and cons to consider.

On the pro side, a robo-advisor can be a less expensive way to get financial consulting services. The typical financial advisor cost is around 1% of assets under management per year. Robo-advisors may cost much less, with some offering services charging a fraction of what a human advisor would.

Of course, there’s a trade-off to consider, since you’re not getting financial advice with a human element behind it. For instance, if market volatility sets in and you’re tempted to sell off stocks in a panic, a robo-advisor wouldn’t be able to talk you through it the way a human advisor could. Taking that into consideration can help you decide which one might be right for you.

The Takeaway

A financial consultant’s job is to help you feel more secure and confident when making decisions about your money. Whether you need a consultant’s services or not can depend on where you are financially right now and where you want to go in the future.

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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 financial consultant the same as a financial advisor?

Financial consulting and financial advisory services are typically grouped together, as they generally mean the same thing. A financial consultant or a financial advisor can provide advice about things like investing, retirement planning, and estate planning. The difference is that consultants may offer their services on a one-time basis, while financial advisors may work with clients long-term.

What does a financial consultant cost?

What you’ll pay for financial consulting services can depend largely on the type of professional you’re working with. A typical financial advisor’s fee is around 1% annually, though it’s possible to pay more or less, depending on the kind of services you receive. Robo-advisor financial consulting can cost less, though it does lack the human element.

What does a financial consultant do?

Financial consultants help their clients create a plan for managing money. A financial consultant may work with individual investors, businesses, or organizations to offer financial advice. Financial consulting services may cover a broad scope of topics or concentrate in just one or two areas of financial planning.

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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.

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28
2024
The Average 401k Balance by Age

The Average 401(k) Balance by Age

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on The Average 401(k) Balance by Age
Table of Contents

Key Points

•   Establishing the habit of investing in a retirement plan early, even small amounts, may help you benefit from compounding returns.

•   Aim to contribute enough to your 401(k) to get the full employer match, so you don’t leave money on the table.

•   Automating contributions can make it easier to consistently build retirement funds over time.

•   If you’re over 50, making catch-up contributions can boost your retirement savings.

•   Paying attention to asset allocations, investment performance, and fees can help you make regular adjustments to target your goals.

What’s the Average 401(k) Balance?

The average 401(k) balance for all ages is $134,128, according to Vanguard’s How America Saves Report 2024. However, the average 401(k) balance by age of someone in their 20s is very different from the balance of someone in their 50s and 60s. That’s why it’s helpful to know how much you should have saved in your 401(k) at different ages.

Seeing what others are saving in their 20s, 30s, 40s, 50s, and beyond can be a useful way to gauge whether you’re on track with your own retirement plans and what else you can do to maximize this critical, tax-deferred form of savings.

Average and Median 401(k) Balance by Age Group

Pinning down the average 401(k) account balance can be challenging, as only a handful of sources collect information on retirement accounts, and they each have their own methods for doing so.

Vanguard is one of the largest 401(k) providers in the U.S., with nearly 5 million participants. For this review of the average and median 401(k) balance by age, we use data from Vanguard’s How America Saves Report 2024.

It’s important to look at both the average balance amounts, as well as the median amounts. Here’s why: Because there are people who save very little, as well as those who have built up very substantial balances, the average account balance only tells part of the story. Comparing the average amount with the median amount — the number in the middle of the savings curve — provides a reality check as to how other retirement savers in your age group may be doing.

Age Group

 Average 401(k) Balance

 Median 401(k) Balance
Under 25 $7,351 $2,816
25-34 $37,557 $14,933
35-44 $91,281 $35,537
45-54 $168,646 $60,763
55-64 $244,750 $87,571
65+ $272,588 $88,488

Source: Vanguard’s How America Saves Report 2024

Average 401(k) Balance for Ages 25 and Under

•   Average 401(k) Balance: $7,351

•   Median 401(k) Balance: $2,816

•   Key Challenges for Savers: Because they are new to the workforce, this age group is likely to be making lower starting salaries than those who have been working for several years. They may not have the income to put towards a 401(k). In addition, debt often presents a big challenge for younger savers, many of whom may be paying down student loan debt, credit card debt, or both.

•   Tips for Savers: While being debt-free is a priority, it’s also crucial to establish the habit of saving now — even if you’re not saving a lot. The point is to save steadily, whether that’s by contributing to your 401(k) or an investment account, and to automate your savings.

By starting early, even small contributions have the potential to grow over time because of the power of compounding returns.

Average 401(k) for Ages 25 to 34

•   Average 401(k) Balance: $37,557

•   Median 401(k) Balance: $14,933

•   Key Challenges for Savers: At this stage, savers may still be repaying student loans, which can take a chunk of their paychecks. At the same time, they may also be making big — and expensive — life changes like getting married or starting a family.

•   Tips for Savers: You’ve got a lot of competing financial responsibilities right now, but it’s vital to make saving for your future a priority. Contribute as much as you can to your 401(k). If possible, aim to contribute at least the amount needed to get your employer’s matching contribution, which is essentially free money. And when you get a raise or bonus at work, direct those extra funds into your 401(k) as well.

Average 401(k) for Ages 35 to 44

•   Average 401(k) Balance: $91,281

•   Median 401(k) Balance: $35,537

•   Key Challenges for Savers: While your late 30s and early 40s may be a time when salaries range higher, it’s also typically a phase of life when there are many demands on your money. You might be buying a home, raising a family, or starting a business, and it could feel more important to focus on the ‘now’ rather than the future.

•   Tips for Savers: Even if you can’t save much more at this stage than you could when you were in your early 30s, you still may be able to increase your savings rate a little. Many 401(k) plans offer the opportunity to automatically increase your contributions each year. If your plan has this feature, take advantage of it. A 1% or 2% increase in savings annually can add up over time. And because the money automatically goes directly into your 401(k), you won’t miss it.

Average 401(k) for Ages 45 to 54

•   Average 401(k) Balance: $168,646

•   Median 401(k) Balance: $60,763

•   Key Challenges for Savers: These can be peak earning years for some individuals. However, at this stage of life, you may also be dealing with the expense of sending your kids to college and helping ailing parents financially.

•   Tips for Savers: The good news is, that starting at age 50, the IRS allows you to start making catch-up contributions to your 401(k). For 2024, the regular contribution limit is $23,000, but individuals ages 50 and up can make an additional $7,500 in 401(k) catch-up contributions for a total of $30,500. While money may be tight because of family obligations, this may be the perfect moment — and the perfect incentive — to renew your commitment to retirement savings because you can save so much more.

If you max out your 401(k) contributions, you may also want to consider opening an IRA. An individual retirement account is another vehicle to help you save for your future, and depending on the type of IRA you choose, there are potential tax benefits you could take advantage of now or after you retire.

Average 401(k) for Ages 55 to 64

•   Average 401(k) balance: $244,750

•   Median 401(k) balance: $87,571

•   Key Challenges for Savers: As retirement gets closer, this is the time to save even more for retirement than you have been. That said, you may still be paying off your children’s college debt and your mortgage, which can make it tougher to allocate money for your future.

•   Tips for Savers: In your early 60s, it may be tempting to consider dipping into Social Security. At age 62, you can begin claiming Social Security retirement benefits to supplement the money in your 401(k). But starting at 62 gives you a lower monthly payout for the rest of your life. Waiting until the full retirement age, which is 66 or 67 for most people, will allow you to collect a benefit that’s approximately 30% higher than what you’d get at 62. And if you can hold off until age 70 to take Social Security, that can increase your benefit as much as 32% versus taking it at 66.

Average 401(k) for Ages 65 and Older

•   Average 401(k) balance: $272,588

•   Median 401(k) balance: $88,488

•   Key Challenges for Savers: It’s critical to make sure that your savings and investments will last over the course of your retirement, however long that might be. You may be underestimating how much you’ll need. For instance, healthcare costs can rise in retirement since medical problems can become more serious as you get older.

•   Tips for Savers: Draw up a retirement budget to determine how much you might need to live on. Be sure to include healthcare, housing, and entertainment and travel. In addition, consider saving money by downsizing to a smaller, less costly home, and continue working full-time or part-time to supplement your retirement savings. And finally, keep regularly saving in retirement accounts such as a traditional or Roth IRA, if you can.

Recommended: When Can I Retire?

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How Much Should I Have in My 401(k)?

The amount you should have in your 401(k) depends on a number of factors, including your age, income, financial obligations, and other investment accounts you might hold. According to Fidelity’s research on how much is needed to retire , an individual should aim to save about 15% of their income a year (including an employer match) starting at age 25.

To get a sense of how this looks at various ages, the chart below shows the average 401(k) balance by age, according to Vanguard’s research, as well as Fidelity’s rule of thumb for what your target 401(k) balance should roughly be at that age. Note that these are just guidelines, but they can give you a goal to work toward.

Age Group

 Average 401(k) Balance*

 Approximate Target 401(k) Balance**
Under 25 $7,351 Less than 1x your salary
25-34 $37,557 1x your salary by age 30
35-44 $91,281 2x your salary by age 35
3x your salary by age 40
45-54 $168,646 4x your salary by age 45
6x your salary by age 50
55-64 $244,750 7x your salary by 55
8x your salary by 60
65+ $272,588 10x your salary by age 67

*Source: Vanguard’s How America Saves Report 2024
**Source: Fidelity Viewpoints: How Much Do I Need to Retire?

Tips for Catching Up If You’re Behind

If your savings aren’t where they should be for your stage of life, take a breath — there are ways to catch up. These seven strategies can help you build your nest egg.

1. Automate your savings.

Automating your 401(k) contributions ensures that the money will go directly from your paycheck into your 401(k). You may also be able to have your contribution amount automatically increased every year, which can help accelerate your savings. Check with your employer to see if this is an option with your 401(k) plan.

2. Maximize 401(k) contributions.

The more you contribute to your 401(k), the more growth you can potentially see. At the very least, aim to contribute enough to qualify for the full employer matching contribution if your company offers one.

3. Make catch-up contributions if you’re eligible.

As mentioned, once you turn age 50, you can contribute even more money to your 401(k). If you can max out the regular contributions each year, making additional catch-up contributions to your 401(k) may help you grow your account balance faster.

4. Consider opening an IRA.

If you’ve maxed out all your 401(k) contributions, you could open a traditional or Roth IRA to help save even more for retirement. For 2024, those under age 50 can contribute up to $7,000 to an IRA or up to $8,000 if they’re 50 and older.

5. Make sure you have the right asset allocations.

The younger you are, the more time you have to recover from market downturns, so you may choose to be a little more aggressive with your investments. On the other hand, if you have a low risk capacity, you may opt for more conservative investments.

Either way, you want to save and invest your money wisely. Consider using a mix of investment vehicles, such as stocks, bonds, exchange-traded funds (ETFs), and mutual funds, to help diversify your portfolio. Just be aware that investing always involves some risk.

6. Pay Attention to Fees.

Fees can erode your investment returns over time and ultimately reduce the size of your nest egg. As you choose investments for your 401(k), consider the cost of different funds. Specifically, look at the expense ratio for any mutual funds or ETFs offered by the plan. This reflects the cost of owning the fund annually, expressed as a percentage. The higher this percentage, the more you’ll pay to own the fund.

7. Conduct an Annual Financial Checkup.

It can be helpful to check in with your goals periodically to see how you’re doing. For example, you might plan an annual 401(k) checkup at year’s end to review how your investments have performed, what you contributed to the plan, and how much you’ve paid in fees. This can help you make smarter investment decisions for the upcoming year.

The Takeaway

The average and median 401(k) balances and the target amounts noted above reflect some important realities for different age groups. Some people can save more, others less — and it’s crucial to understand that many factors play into those account balances. It’s not simply a matter of how much money you have, but also the choices you make.

For instance, starting early and saving regularly can help your money grow. Contributing as much as possible to your 401(k) and getting an employer match are also smart strategies to pursue, if you’re able to. And opening an IRA or an investment account are other potential ways to help you save for the future.

With forethought and planning, you can put, and keep, your retirement goals on track.

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


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

FAQ

What is a good 401(k) balance?

A good 401(k) balance is different for everyone and depends on their age, specific financial situation, and goals. The general rule of thumb is to have 401(k) savings that’s equivalent to your salary by age 30, three times your salary by age 40, six times your salary by age 50, 8 times your salary by age 60, and 10 times your salary by age 67.

How much do most people retire with?

According to the Federal Reserve’s most recent Survey of Consumer Finances, the average 401(k)/IRA account balance for adults ages 55 to 64 was $204,000. Keep in mind, however, that when it comes to savings, one rule of thumb, according to Fidelity, is for an individual to have 8 times their salary saved by age 60 and 10 times their salary saved by age 67.

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

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.

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