Growing Wealth Archives

Apr

2025

Simple Interest vs Compound Interest

By Matthew Zeitlin | Growing Wealth, Investing | No Comments

Interest rates are very much in the news, and rightly so: The interest earned on an investment, like bonds or bond funds, can help your investments generate returns. Simple interest refers to the simple accrual of interest on your principal; compound interest refers to the interest accrued on that principal plus the interest already earned.

Note that interest is different from investment gains, which depend on market returns and other factors.

Key Points

• Simple interest applies to the initial principal alone. Most bonds pay simple interest in the form of coupon payments, for example.

• Compound interest accumulates on both the principal and the previously earned interest. If the interest in a bond fund is reinvested, rather than distributed to investors, that creates compound interest.

• Over time, compound interest results in a higher total interest paid. More frequent compounding periods accelerate compound interest growth.

• Simple interest provides a steady increase in the total amount. Compound interest generates more rapid growth in the total amount over time.

• Continuous compounding calculates interest assuming compounding over an infinite number of periods.

What Is Simple Interest?

Simple interest is the amount of money you are able to earn upon your initial investment. Simple interest works by adding a percentage of the principal — the interest — to the principal, which increases the amount of your initial investment over time.

In the case of buying a bond, which is a debt instrument, the investor loans money to the bond issuer, who agrees to repay the principal amount, plus a fixed amount of interest. Most traditional bonds make periodic payments (coupon payments) of a fixed rate of interest on the original amount.

Simple Interest Formula

Calculating interest is important to figure out how much an interest-earning and compounding investment could generate.

The simple interest formula is I = Prt, where I = interest to be paid, P is the principal, r is the interest rate (as a decimal), and t is the time in years.

So if you’re investing $200 in an interest-earning security, such as a bond or bond fund, at a 10% rate over one year, then the interest earned would be 200 x .1 x 1 = $20.

How Bond Interest Works

But let’s say you want to know how much interest you could realize before a bond matures, as that’s what you’re concerned about when initially investing. Then, you would use a different version of the formula:

P + I = P(1 + rt)

Here, P + I is the principal of the investment and the interest, which is the total amount you should earn. So to figure that out you would calculate 200 x (1 + .1 x 1), which is 200 x (1 + .1), or 200 x 1.1, which equals $220.

Benefits and Drawbacks of Simple Interest

Interest is advantageous to investors and savers, as they accrue a bit of money without any effort. If there is a drawback, perhaps it’s that simple interest tends to accrue much more slowly than compound interest.

Example of Simple Interest

For example, let’s say you were to purchase $1,000 in bonds that paid out a simple interest rate of 1%. At the end of a year, without adding or taking out any additional money, your investment would grow to $1,010.00.

In other words, multiplying the principal by the interest rate gives you a simple interest payment of $10. If you had a longer time frame, say five years, then you’d have $1,050.00.

Though these interest yields are nothing to scoff at, simple interest rates are often not the best way to see your wealth accumulate over time. Since simple interest is usually paid out as it’s earned, and isn’t compounded, it’s difficult to make headway. So each year you will continue to be paid interest, but only on your principal — not on the new amount after interest has been added.

What Is Compound Interest?

Most real-life examples of wealth increasing over time, especially in investing, are more complex. In those cases, interest may be applied to the principal multiple times in a given year, and you might have investments for a number of years. That’s compound interest at play.

Compound interest means the amount of interest you gain is based on the principal plus all the interest that has accrued. This makes the math more complicated, but in that case the formula would be:

A = P x (1 + r/n)^(nt)

Where A is the final amount, P is the principal or starting amount, r is the interest rate, t is the number of time periods, and n is how many times compounding occurs in that time period.

Example of Compound Interest

Let’s assume you invested $200 in a bond fund earning 10% interest, but have it compound quarterly, or four times a year.

So we have:

200 x (1 + .1 / 4)^(4×1)
200 x (1 + .025)^4
200 x (1.025)^4
200 x 1.10381289062

The final amount is $220.76, which is modestly above the $220 we got using simple interest. The amount earned changes as the compounding period increases.

More Examples of Compound Interest

Let’s look at two other examples: compounding 12 times a year and 265 times a year.

For monthly interest we would start at:

200 x (1 + .1/12)^(12×1)
200 x (1 + 0.0083)^12
200 x 1.00833^12
200 x 1.10471306744
220.94

If we were to compound monthly, or 12 times in the one year, the final amount would be $220.94, which is greater than the $220 that came from simple interest, above, and the $220.76 that came from the compound interest every quarter.

• Simple interest: $220

• Quarterly interest: $220.76

• Monthly interest: $220.94

Notice how we get the biggest proportional jump when we go from simple interest to quarterly interest, compared to less than 20 cents when we triple the rate of interest to monthly.

Advantages of Compound Interest Over Simple Interest

The most obvious advantage of compound interest compared to simple interest is that it allows for exponential growth of the principal. Since interest compounds on the principal amount and interest previously accrued, a saver’s wealth will increase much faster than with simple interest, which only applies to the principal.

What Is Continuous Compounding?

Continuous compounding calculates interest assuming compounding over an infinite number of periods — which is not possible, but the continuous compounding formula can tell you how much an amount can grow over time at a fixed rate of growth.

Continuous Compounding Formula

Here is the continuous compounding formula:

A = P x e^rt

A is the final amount of money that combines the initial amount and the interest
P = principal, or the initial amount of money
e = the mathematical constant e, equal for the purposes of the formula to 2.71828
r = the rate of interest (if it’s 10%, r = .1; if it’s 25%, r = .25, and so on)
t = the number of years the compounding happens for, so either the term or length of the loan or the amount of time money is saved, with interest.

Example of Continuous Compounding

Let’s work with $200, gaining 10% interest over one year, and figure out how much money you would have at the end of that period.

Using the continuously compounding formula we get:

A = 200 x 2.71828^(.1 x 1)
A = 200 x 2.71828^(.1)
A = 200 x 1.10517084374
A = $221.03

In this hypothetical case, the interest accrued is $21.03, which is slightly more than 10% of $200, and shows how, over relatively short periods of time, continuously compounded interest does not lead to much greater gains than frequent, or even simple, interest.

To see significant gains, investments or savings must be held for substantially longer, like years. The rate matters as well. Higher rates substantially affect the amount of interest accrued as well as how frequently it’s compounded.

While this math is useful to do a few times to understand how continuous compounding works, it’s not always necessary. There are a variety of calculators online.

The Limits of Compound Interest

The reason simply jacking up the number of periods can’t result in substantially greater gains comes from the formula itself. Let’s go back to A = P x (1 + r/n)^(nt)

The frequency of compounding shows up twice. It is both the figure that the interest rate is divided by, and the figure — combined with the time period — that the factor that we multiply the starting amount is raised to.

So while making the exponent of a given number larger will make the resulting figure larger, at the same time the frequency of compounding will also make the number being raised to that greater power smaller.

What the continuous compounding formula shows you is the ultimate limit of compounding at a given rate of growth or interest rate. And compounding more and more frequently gets you fewer and fewer gains above simple interest. Ultimately a variety of factors besides frequency of compounding make a big difference in how much your principal might increase.

The rate of growth or interest makes a big difference. Using our original compounding example, 15% interest compounded continuously would get you to $232.37, which is 16.19% greater than $200, compared to the just over 10% greater than $200 that continuous compounding at 10% gets you. Even if you had merely simple interest, 15% growth of $200 gets you to $230 in a year.

How Continuous Compounding Impacts Long-Term Growth

Continuous compounding can have a massive effect on long-term growth. Since your principal is earning interest, and that interest (plus principal) is earning interest, it’s possible that your rate of growth could increase exponentially. But it requires time and patience, and the larger your principal, the larger your potential yield from long-term compounding.

Interest and Investments

As noted previously, interest can play a role in an investment portfolio, but it’s important to note the distinction between investing returns and interest. Interest refers to a percentage paid at regular intervals, i.e., quarterly. Investment returns depend on the market, and typically fluctuate widely.

However, if an investor’s portfolio contains holdings in investment vehicles or assets such as bonds, there may be interest payments in the mix, which can and likely will have an impact on overall investing returns.

The Takeaway

Simple interest is the money earned on a principal amount, and compound interest is interest earned on interest and the principal. Understanding the ways in which interest rates can work is important when managing an investment portfolio that may include bonds or bond funds.

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

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

FAQ

Can simple interest ever outperform compound interest?

Simple interest can’t ever outperform compound interest, as compound interest will always result in a higher overall yield over time.

What industries commonly use simple interest?

Simple interest is commonly used by banks and financial institutions as interest paid on some accounts. But certain types of bonds also make simple interest payments, or coupon payments, to the bondholder.

What types of accounts benefit most from compound interest?

Several types of accounts can earn compound interest, including some savings accounts, money market accounts, and even products like CDs.

Are there downsides to compound interest?

Compound interest may work against you if you’re a borrower and your debt compounds. Because the amount you owe, plus interest, earns additional interest, putting you further into debt over time.

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.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q125-086

Apr

2025

What Is the Average Retirement Savings by Age?

By Laurel Tincher | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

The average retirement savings by age depends on people’s income, expenses, and even where they live (with some states having higher retirement savings rates than others). The older you are, the more likely you are to prioritize retirement savings.

How much have Americans saved for retirement? While nearly half (46%) of households have no retirement savings, those that do have an average of about $334,000 saved, according to the Federal Reserve Board’s 2022 Survey of Consumer Finance, which is the most recent data available.

If you look at the median amount Americans have saved in retirement accounts such as IRAs, 401(k) and 403(b) plans, pensions, and so forth, that number is lower: about $87,000 per household.

Key Points

• Average retirement savings by age varies widely, with savings increasing as people get older.

• Though 46% of U.S. households show no retirement savings, those with retirement assets have an average of about $334,000.

• By age 30, it’s generally recommended to save an amount equal to your annual salary, and by age 40, three to four times annual salary.

• By age 50, it’s advised to have six times annual salary saved, and by age 60, eight times.

• Given that many Americans are not saving for retirement, it’s important to consider these broader benchmarks as a way to keep your own savings on track.

Average Retirement Savings By Age

Below is a breakdown of retirement savings by age group, ranging from people in their 20s to people in their 70s, according to the 2022 Survey of Consumer Finance.

Age Group	Mean Retirement Savings
Under age 35	$49,130
35 to 44	$141,520
45 to 54	$313,220
55 to 64	$537,560
65 to 74	$609,230

Source: 2022 Survey of Consumer Finance, Federal Reserve Board, latest data available.

Average Retirement Savings Before Age 35: $49,130

Most Americans in their 20s and early 30s haven’t reached their peak earning years, and many might be paying off student loans, and saving up to buy a house or have kids. Retirement isn’t always top of mind.

But the earlier people can figure out which retirement plan is right for them and commit to actually starting a retirement savings plan, the more they will benefit from compound growth over time.

Average Retirement Savings, Age 35 to 44: $141,520

With their careers and lives generally more established, many people are making more money at this age than they ever have. It can be tempting to spend more on lifestyle choices (e.g., vacations, cars, furniture). Many people also have mortgages, families, and other big-ticket expenses during this time in their lives.

But those who put that money towards retirement may be able to reach their retirement goal with greater confidence. Granted, it can be difficult to juggle competing priorities, but taking advantage of employer-provided retirement accounts, matching funds, and automatic transfers to savings can all help busy people make progress.

Recommended: How to Save for Retirement at 30

Average Retirement Savings, Age 45 to 54: $313,220

At this age, some Americans are on track to reach their retirement goals, while others are far off. There are still ways to catch up, such as cutting unnecessary expenses, moving to a smaller home, or putting any additional pay, income, or bonuses into retirement accounts.

In addition, many retirement accounts offer what’s known as a catch-up provision, which is a way to add more money to certain accounts, once you’re over age 50. Starting in 2025, there is also a new policy that allows people between 60 and 64 to save an extra amount in an employer-sponsored plan.

Average Retirement Savings, Age 55 to 64: $537,560

Although the goal for many is to retire at about age 65, many Americans have to keep working since they don’t have enough savings. In some cases, people plan on working at this stage of life anyway, although it’s not always easy to find work. Ideally, working in later years of life would be a choice and not a necessity.

Retirement contributions tend to increase as people age partly because they are earning more and partly because they are thinking about retirement more — and in some cases because other expenses are lower. For example: Your kids may be done with college, or you may have paid off your mortgage.

Average Retirement Savings, Age 65 to 74: $609,320

Many people in this age group have embarked on retirement, thanks to years of self-directed investing (although many retirees may have consulted a professional as well). This is a time when people need to evaluate the amount they have saved in light of how long they are likely to live — which is the most significant factor impacting retirees, in addition to the cost of living.

It may be possible to enjoy some years of travel, starting a business, helping raise grandchildren — or other adventures. Or it may be a time to adjust living expenses in order to make one’s savings last.

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

Target Retirement Savings by Age

Because the cost and standard of living varies so greatly, there aren’t clear dollar figure amounts that each age group should aim to have saved for retirement. But there are suggested guidelines, and numerous ways to save for retirement as well.

Retirement Savings Benchmarks

• By age 30: It’s generally recommended that people save an amount equal to their annual salary by the time they reach age 30. That may not be a realistic goal for many people, but it can be a general guideline or goal to aspire to.

One way to achieve this is to save 10-15% of one’s gross income starting in one’s 20s. Some employers will match 401(k) contributions if employees save a certain amount each month, so it’s a good idea to contribute at least that much to take advantage of what is essentially free money.

• By age 40: It’s recommended that investors have three to four times their annual salary saved by age 40.

• By age 50: Investors are typically advised to have six times their salary saved by age 50.

• By age 60: It’s recommended that investors have eight times their salary saved by age 60.

• By age 67: Investors are typically advised to have ten times their salary saved by age 67, which is considered full retirement age for Social Security for many Americans.

For example, if a 67-year-old makes $75,000 per year, ideally they would aim to have $750,000 saved, more or less, at the point at which they actually retire and start to claim Social Security.

Is Anyone Saving Enough for Retirement?

Despite the above recommendations, most Americans don’t have nearly these amounts in their retirement accounts. As noted, a significant percentage of Americans don’t have any retirement savings at all — and that includes Americans who are near retirement age.

In a recent SoFi survey of adults aged 18 and over, 59% had either no retirement savings or less than $49,000.

So, while some people are saving enough for retirement, many people aren’t. And relying on Social Security benefits isn’t likely to cover all of a retiree’s living expenses.

Social Security and Your Retirement

Social Security was designed to help people pay some of their expenses during retirement, but it was always assumed these benefits would be part of an individual’s larger income plan, which might include a pension and personal savings.

As a result, Social Security benefits are generally modest. As of January 2025, the estimated average Social Security payment for a retired worker was around $1,976 per month. But benefit amounts can be higher or lower, depending on your earning history, how old you are when you file, and other factors.

Perspectives on Social Security Vary Widely

In addition, people have different perspectives about Social Security. According to SoFi’s recent retirement survey, some adults think it will be their main source of income in retirement, while others see it as a supplement to other income sources. And some people aren’t counting on Social Security at all.

Perceptions of Social Security Perceptions in Retirement

• 41% Perceive SS as a supplementary source of income

• 31% Perceive SS as a their primary source of income

• 16% Aren’t relying on SS as a source of income

• 12% Aren’t sure how to perceive SS in their retirement plans

Source: SoFi Retirement Survey, April 2024

The fact that nearly a third of respondents believe Social Security could be their primary source of income reveals a lack of awareness of these benefits and how they work. And it points to a need for greater education around the need for personal savings and careful financial planning.

Strategies to Maximize Retirement Savings

It can be stressful to feel behind on saving for retirement, but it’s never too late to start.

There are several ways to save for retirement — but a good place to start, if you haven’t already, is by creating a budget to track expenses. This allows you to see where your money is going and identify categories of spending that could be reduced. It’s then possible to direct some of those savings to a retirement account, such as a traditional IRA, or a work-sponsored plan such as a 401(k) or 403(b).

Some retirement plans also have catch up options for those who start late — typically, individuals older than 50 can contribute extra funds to their retirement accounts.

No matter how much you put aside for retirement, or whether you contribute to a traditional IRA or a Roth IRA, a 401(k) or an after-tax investment account, a good strategy is to automate savings. With automated savings, the money is deducted from your paycheck or your bank account automatically — making it easy to forget that the money was ever in the account in the first place.

Retirement Account Options

Whether you’re employed full-time, working part-time, or you’re self-employed, there are many types of retirement account options available. Following is a selection of common retirement accounts, but there are others as well.

Bear in mind: Most retirement accounts offer different tax advantages, as well as strict rules about annual contribution limits, withdrawals and early withdrawals, loans, and required minimum distributions (RMDs). Be sure to understand the terms, to ensure a the plan you choose can help you reach your goals before funding a retirement account.

Individual Retirement Accounts, or IRAs

With an IRA, you open and fund a tax-advantaged IRA account yourself or for a custodian (e.g., a minor child). IRAs are for individuals, and are not offered by employers. That said, small businesses may offer a special type of IRA.

IRAs come in two flavors: traditional and Roth IRAs. When considering a Roth IRA vs traditional it’s important to understand the tax implications of each type of account. Traditional IRAs take tax-deferred contributions. This means your contributions are pre-tax, and can reduce your taxable income. You owe ordinary income tax on withdrawals.

Roth IRAs are considered after tax, because you deposit funds that have been taxed already. Qualified withdrawals are tax free.

Employer-Sponsored Plans

A 401(k) plan is a tax-advantaged plan typically offered to the employees of a company. A 403(b) and 457(b) are similar, but offered by governments, schools, churches, or non-profit organizations that are tax exempt.

Traditional accounts allow employees to contribute pre-tax dollars, but withdrawals are taxed as income in retirement. Roth versions of these accounts (you may be able to set up a Roth 401(k) or Roth 403(b) account) allow after-tax contributions, and qualified tax-free withdrawals.

Self-Employed and Small Business Accounts

• A Saving Incentive Match Plan for Employees, or SIMPLE IRA plan, is also a tax-deferred account, similar to a traditional IRA. But these accounts are designed for small businesses with 100 employees or less (including sole proprietors, and people who are self-employed).

As a result, the contribution limits for SIMPLE IRAs are higher, and the tax treatment of these plans is slightly different.

• A SEP IRA is a Simplified Employee Pension Plan that small businesses and self-employed individuals can fund. Here, the employer makes the contributions. Employees do not. Like a SIMPLE IRA, the annual contribution limits are generally higher than for standard IRAs.

The Takeaway

The average American household has about $334,000 in retirement accounts, e.g., IRAs, 401(k) and 403(b) plans, pensions, and so forth. The number varies depending on age groups and other factors. Knowing how much others in your age group are saving for retirement can help provide a benchmark for evaluating whether you’re making the progress you envision.

There are a number of different formulas, calculations, and rules of thumb to help individuals figure out how much money they’ll need in retirement. While these figures can be helpful, it’s also important to take personal goals, financial responsibilities, and lifestyle into consideration.

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

Easily manage your retirement savings with a SoFi IRA.

FAQ

How much money do I need to retire comfortably?

Calculating the amount you need to retire comfortably is highly personal. It depends on how long you’re likely to live, how healthy you are, as well as the lifestyle you envision. It may be worth consulting with a professional to lay out different options, and what the financial implications may be, as this can influence how much you save as well as your investment strategy.

What percentage of my income should I save for retirement?

The general rule of thumb is to save between 10% and 20% of your income for retirement. The exact amount will depend on many factors, including whether you’re saving for yourself or also for a spouse; what your likely longevity will be; whether you might have other financial sources of income (e.g., from a trust or an inheritance); and the retirement lifestyle you hope to have.

When should I start saving for retirement?

Given that you could live as many years in retirement as you did while you were working, the odds are that you might need more savings than you anticipated. In that light, it’s wise to start as soon as you can, and maximize the savings opportunities available to you.

What happens if I start saving for retirement late?

If you get a late start on retirement, it’s even more important to maximize your savings and your investing strategy. As an older saver, it can be hard to recover from market volatility, so you want to be cautious. It may make sense to work with a professional.

How do I catch up on retirement savings?

Catching up on retirement savings can mean boosting the percentage you save, pairing another retirement account, such as an IRA, with your employer plan, making sure you get your employer match, and — for those 50 and up — being sure to take advantage of catch-up provisions that allow you to save more in most retirement accounts. For those between the ages of 60 and 64, a “super catch-up” amount is now allowed in most employer plans.

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.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

SOIN-Q125-059

Apr

2025

Typical Retirement Expenses to Prepare For

By Michael Flannelly | Budgeting & Goals, Growing Wealth, Preparing for Retirement | Comments Off

Retirement goals — whether they include traveling or relocating to a desired area — are achievable if you can plan for the expenses that need to be covered during those years.

However, not all Americans know what to expect regarding living expenses during their retirement. They may not know how to budget for ordinary costs in retirement, like housing and transportation, or make the most out of retirement income. Here’s a look at typical retirement expenses so individuals can get a handle on how much they’re likely to spend, and how much they need to budget for retirement, and how that might inform their strategies for padding their retirement and investment accounts.

Key Points

• Annual big-ticket costs for retirees include housing, transportation, health care, food, and entertainment.

• Housing is the largest expense, with average annual costs in the tens of thousands of dollars.

• Unexpected expenses can include uncovered health care costs and home repairs, while spending may decrease on insurance, taxes, and transportation.

• Effective retirement financial management involves categorizing expenses, estimating income, and planning for unexpected costs.

• Regularly reviewing and adjusting the budget is crucial to align with changing retirement goals and financial situations.

This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.

Average Monthly Cost of Retirement Expenses

According to the Bureau of Labor Statistics’ 2023 Consumer Expenditures report, Americans age 65 and over spent $60,087 on average during 2023, while those aged 65 to 74 spent $65,149, and those 75 and over spent $53,031.

Looking at those figures by month, a retiree aged 65 and over spent just above $5,000 on average each month, while those aged 65 to 74 spent about $5,400 per month, and those 77 and over spent close to $4,400 per month.

Retirees generally spent less than the average American in 2023, which was $77,280 (or about $6,440 a month). Retirees also spent less than people nearing retirement, those aged 55 to 64, who spent an average of $83,379 that year (just under $7,000 a month).

💡 Recommended: Average Retirement Savings by Age

5 Common Retirement Expenses by Category

The typical budget for retirees needs to cover expenses for a retirement that could stretch over two or three decades. Drilling down to specific categories can help retirement savers determine benchmarks for their own budget.

1. Housing

Housing expenses, such as mortgage payments, insurance, and maintenance costs, are among the highest costs retirees face.

Housing
65 and older	65-75	75+
$21,445	$22,216	$20,370
Source: Bureau of Labor Statistics’ 2023 Consumer Expenditures report

In 2023, Americans over the age of 65 spent an average of $21,445 on housing. Those between the ages of 65 and 74 spent an average of $22,216, and those 75 and over spent $20,370.

These expenses can vary dramatically by location and housing type. For example, housing costs are typically much higher in a coastal California community than in a real estate market in a state with relatively low property taxes, such as Wyoming, South Carolina, or Colorado. This might be a factor to consider when weighing the best states to retire in.

2. Transportation

Many retirees want an action-packed retirement full of entertainment, socializing, visiting family, and traveling the country. That means that transportation costs can be a significant factor in retirement expenses, especially early in retirement.

Transportation
65 and older	65-75	75+
$9,033	$10,899	$6,448

Americans over 65 spent an average of $9,033 on transportation during 2023, and that figure was $10,899 for those between 65 and 74. For those 75 and over, the average was $6,448.

Retirees who don’t own a car may still need to factor the cost of public transportation into their annual retirement costs. Buses, subways, and other public transportation sources cost older generations hundreds of dollars per year.

3. Healthcare

Americans’ healthcare costs — including health insurance, medical services, medical supplies, and prescription drugs — increase as they grow older. With age comes aching joints, injuries from falling, and sometimes chronic diseases like arthritis, diabetes, or Alzheimer’s. Americans spent an average of $4,976 on healthcare annually between 2016 and 2020, but this is one area where retirees spend more than their younger peers.

Health Care
65 and older	65-75	75+
$8,027	$7,942	$8,145

Americans over 65 spent a tad more than $8,000 annually, on average, on health care during 2023. Those between 65 and 74 spent an average of $7,942, and those 75 and over spent $8,145.

Costs vary from person to person depending on their genetics, injuries, and lifestyle choices. For example, if heart disease runs in the family or you are a smoker, you may want to save extra for retirement health care costs. If you have a high deductible health insurance plan, consider saving with a health savings account (HSA), which offers tax-advantaged savings to cover health care costs.

4. Food

Transportation
65 and older	65-75	75+
$7,714	$8,566	$6,508

When it comes to food expenses, Americans spent $7,714, on average, for those 65 and older, $8,566 for those between 65 and 74, and $6,508 for those 75 and over in 2023.

An individual’s food costs will vary depending on their diet and habits. For example, people who buy organic vegetables will likely spend more on produce than people who don’t. There’s also a good chance that eating at home more frequently will cost less than eating out five times per week.

5. Entertainment

Having fun isn’t just for the young. In 2023, Americans over age 65 spent an average of $2,898 annually on entertainment, which could include fees and admissions to places like museums, theater performances, and movies. Entertainment expenses also include hobbies and pet costs. Those between 65 and 74 spent an average of $3,447, and those 75 and over spent $2,131.

Entertainment
65 and older	65-75	75+
$2,898	$3,447	$2,131

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

What Is the Most Costly Retirement Expense?

Of all of the expenses in retirement, the most expensive is generally housing. While of course exact retirement costs will vary from individual to individual depending on their situation, the average cost of housing even far exceeds costs like health care.

There are steps retirees can take to potentially reduce this expense though. For instance, they may aim to pay off their mortgage before they retire. Or, they could consider moving to a less costly state with lower taxes.

What Are Some Unexpected Retirement Expenses?

Even a well-laid retirement plan can leave someone open to surprise. Some unexpected retirement expenses that retirees might want to factor into their retirement planning include:

• Uncovered health care costs: Health care might not cover anything, and to get total coverage, it might be necessary to get multiple plans under Medicare. However, it’s important to weigh the cost of that over any out-of-pocket costs. Of course, it’s hard to predict the future and because of that, it can be challenging to get the math just right.

• Long-term care: This retirement expense can be steep, and the costs involved continue to rise. Especially for retirees who don’t have family to turn to for assistance, this can constitute a significant portion of a retirement budget. In-home care aids may cost tens of thousands of dollars per year, and a private room in a nursing home facility could easily run more than $100,000 per year.

• Unanticipated housing costs: Retirees’ budgets might also get thrown off by housing costs they didn’t factor into their calculations. For instance, while a retiree may have noted the cost of their monthly mortgage payments, they may not have taken into account potential home repairs and maintenance, or needed additions, like a wheelchair-accessible ramp.

What Will You Spend Less on in Retirement?

We’ve talked a lot about the costs of retirement, but there are some areas where you’ll spend less in this stage of life. One place you’ll shell out less is on insurance (due to Medicare) and taxes (less income to be taxed) — though that’ll depend on each individual’s specific situation.

Other areas where costs might be lower in retirement include on pets and pet supplies; alcohol and tobacco; clothing; and, if you’re giving up your rush-hour commute, transportation.

5 Steps to Set Up a Retirement Budget

Once you have an idea of potential retirement expenses, you can start to save and comprehensively budget for them. Since every retirement looks different, there’s no average retirement budget — a good monthly retirement income for a couple will be different than for a single person. Nonetheless, these are the steps to create a budget that may work for you.

Step 1. Contribute to a Retirement Account

You may already have retirement savings in your company-sponsored 401(k) or a similar retirement plan. But those who don’t have access to a 401(k) or want to increase their savings can also save in an individual retirement account like a Traditional IRA or Roth IRA. These accounts can provide tax-advantaged ways to start retirement with adequate savings to build a budget.

💡 Recommended: 5 Steps to Investing in Your 401(k) Savings Account

Step 2: Make a List of Expected Monthly Expenses

Most expenses can fit into one of three categories: fixed, variable, and one-time. Fixed expenses are payments that occur regularly and stay the same from month to month, like mortgage/rent payments, property taxes, and car payments.

Variable expenses change from month to month, depending on personal usage and price fluctuations. Standard variable costs include utility bills and groceries. Likewise, any entertainment expenses, medical expenses, pet care, and personal care expenses may be variable.

One-time or non-recurring expenses are costs that don’t occur regularly. These might include a new roof, a vacation, or a wedding. You may want to set aside money in an emergency fund for unexpected expenses (like that new roof) and have other funds earmarked for non-essential, one-time expenses (like a wedding or vacation).

To get an idea of your various expenses, gather payment information from bank statements, credit card statements, receipts, and bills. Take a look at what you spend now, then deduct expenses you won’t have at retirement (perhaps you’ll eliminate a car payment or pay off your mortgage). Then you can tally what’s left to get an estimate of your projected expenses and build a line-item budget.

Step 3: Estimate Retirement Income

To get a sense of your potential retirement income, look at projected monthly withdrawals from Social Security, retirement accounts, pensions, real estate investments (like a rental property), and any savings or part-time income. Total them up to figure out what your monthly income will be.

Step 4: Compare Expected Expenses to Expected Income

Ideally, your expected income will be larger than your projected expenses. If this is not the case, you can remedy this issue by reducing costs or increasing income.

To reduce expenses, you may consider downsizing your home or going from owning two cars to one. You may also consider streamlining entertainment expenses as a better way to cut costs.

To increase income, you may consider taking on a part-time job when you retire or look to passive income sources to boost the money that you have to spend during retirement.

Step 5: Figure Out When You Can Retire

Once you know how much money you may need in retirement and how long you’ll need to save to get there, you can plan a realistic timeline for when you can retire.

Keep in mind that the plan will likely change over time as you get closer to retirement, depending on how much you’re able to save and how your retirement goals change. Along the way, it could be necessary to boost your retirement savings if you decide you want to retire sooner than later, or you find you’re not quite on-track for your planned age.

The Takeaway

Budgeting for retirement can feel overwhelming, but taking it step by step allows you to create a plan for a retirement you’ll enjoy. It’s helpful to know the average monthly costs and to know in which major categories retirees regularly spend. You might be surprised by where you need to budget more, or where costs might be lower than expected.

Ready to start saving to cover your retirement expenses? Consider an investment account with SoFi Invest®. Investors can trade stocks, exchange-traded funds, and even fractional shares. SoFi members also have access to SoFi Financial Planners, who can provide personalized insights and financial advice so members can make the most of their retirement savings.

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 build your nest egg with a SoFi IRA.

FAQ

What are common expenses in retirement?

Common expenses in retirement include housing, health care, transportation, food, and entertainment. Of course, where you spend — and how much you spend in each category — will vary from retiree to retiree.

What is a reasonable retirement budget?

This depends on a person’s anticipated expenses and the lifestyle they’d like to lead in retirement. That said, the average American over the age of 65 spent just over $60,000 during 2023.

Which is the biggest expense for most retirees?

The largest cost in retirement is generally housing. In 2023, Americans over the age of 65 spent an average of $21,445 on housing.

SoFi Invest®

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

SOIN-Q125-028

Apr

2025

Preferred Stock vs. Common Stock

By Ashley Kilroy | Growing Wealth, invest, Investing | Comments Off

Before you start trading on the market, read our guide to understand the pros and cons of common vs. preferred stock.

Apr

2025

A Brief Overview of the Sarbanes-Oxley Act (SOX)

By Ashley Kilroy | Financial Independence, Growing Wealth, invest, Investing | Comments Off

In the wake of several corporate scandals in the early 2000s, the Sarbanes-Oxley Act was passed in 2002 in order to protect investors, shareholders, and employees from companies misrepresenting their financial records or otherwise engaging in deceitful practices.

Read on to better understand the provisions in the Sarbanes-Oxley Act (SOX) and how the protections that it provides to investors.

What Is the Sarbanes-Oxley Act?

To safeguard investors from corporate fraud, Congress passed the Sarbanes-Oxley Act (SOA) of 2002 . The act aimed to improve corporate financial records, making them more robust, reliable, and precise.

When the law passed, then-President George W. Bush said it was “the most-reaching reforms of American business practices since the time of Franklin Delano Roosevelt.”

Names for Congressional sponsors Sen. Paul Sarbanes and Rep. Michael Oxley, the Sarbanes-Oxley Act came in response to a rash of corporate scandals in the early 2000s, including those involving Enron Corporation, WorldCom, Global Crossing, Tyco International, and Adelphia Communications.

In addition to tightening up corporate responsibility and financial reporting regulations, the Sarbanes-Oxley Act formed the Public Company Accounting Oversight Board (PCAOB), which oversees auditing standards and ensures that companies comply with the new law.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

What Prompted the Passage of the Sarbanes-Oxley Act?

In the 2000s, companies such as Enron Corporation, WorldCom, and Global Crossing among several firms caught up in accounting and financial reporting scandals. As investor confidence fell in the wake of the scandal, Congress passed the Sarbanes-Oxley regulations to prevent further fraudulent financial reporting, minimize future scandals, and protect investors.

What’s Included in the Sarbanes-Oxley (SOX) Act?

Although the SOX Act is extensive, there are a few crucial components, including:

Section 302

This section requires senior corporate officers, such as the CEO and CFO, of public companies to file reports with the Security and Exchange Commission (SEC). All companies publicly traded in the U.S. must create a system for their financial reports.

This system should include a traceable, verifiable pathway for the reports’ source data. None of this source data can be tampered with in any way. Additionally, the method and technology which retrieves that data must be reported on as well. If it’s changed, the company has to document the particulars of that change.

Section 404

This section directs the company to disclose the internal protocols in place for financial reporting to the public. The company must discuss shortcomings and efficacy in these evaluations.

Sections 802 and 906

Both sections impose penalties for mishandling documents. That means companies need to have a financial reporting system with preserved, traceable data and clear documentation on how it’s handled.

Section 802 pertains to altering or destroying documents with the intent to affect a legal investigation, which can lead to a prison sentence of up to 20 years. It also enforces proper auditing maintenance requirements. Section 906 forbids certifying misleading or fraudulent reports, which can incur fines up to $5 million and upwards of 20 years imprisonment.

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

The Sarbanes-Oxley Act: Penalties

A non-compliant company and its executives could face severe penalties for violating the Sarbanes-Oxley Act. As mentioned in Sections 802 and 906, there are legal ramifications, including fines and prison sentences. For example, 802 imposes a penalty on any individual who knowingly does not preserve financial and audit records. This failure can result in up to 10 years in prison; however, other violations can lead to millions of dollars in fines and up to 20 years imprisonment.

Earlier Legislation

Before the Sarbanes-Oxley Act was in place, there were other laws governing the securities industry, most of which had been put in place during or after the financial crisis that led to the Great Depression.

The Securities Act (1933)

This law required more transparency around securities sold on public exchanges, and banned insider trading.

The Glass-Steagall Act (1933)

Also known as The Banking Act, this legislation forced banks to split up their investment banking and commercial banking operations. It also established the Federal Deposit Insurance Corp.

The Securities Exchange Act (1934)

This act created the SEC, which regulates the securities industry and holds disciplinary powers over publicly traded companies that violate the law, along with associated individuals.

The Trust Indenture Act (1934)

This act created formal agreement standards that bond issuers must uphold in every sale to the public.

The Investment Company Act Act (1934)

This act requires that companies that invest and trade securities must regularly disclose their financial condition and investment policies to investors.

The Investment Advisers Act (1940)

This act requires that investment advisers must register with the SEC and adhere with its regulations.

The Securities Acts Amendments (1975)

These amendments prohibited brokers from self-dealing, aimed to minimize conflicts of interest, and required additional disclosures by institutional investors.

The Takeaway

Regulators have many tools they can use to discourage financial institutions and advisers from unethical activities, and to penalize those who fail to comply with the rules. That said, it’s important for all investors to do their due diligence and research any company with which they want to invest or adviser with whom they want to work.

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.

Photo credit: iStock/vadimguzhva

About the author

Ashley Kilroy

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

SoFi Invest®

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

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SOIN0523127

Simple Interest vs Compound Interest

What Is Simple Interest?

Simple Interest Formula

How Bond Interest Works

Benefits and Drawbacks of Simple Interest

Example of Simple Interest

What Is Compound Interest?

Example of Compound Interest

More Examples of Compound Interest

Advantages of Compound Interest Over Simple Interest

What Is Continuous Compounding?

Continuous Compounding Formula

Example of Continuous Compounding

The Limits of Compound Interest

How Continuous Compounding Impacts Long-Term Growth

Interest and Investments

The Takeaway

FAQ

Can simple interest ever outperform compound interest?

What industries commonly use simple interest?

What types of accounts benefit most from compound interest?

Are there downsides to compound interest?

What Is the Average Retirement Savings by Age?

Average Retirement Savings By Age

Average Retirement Savings Before Age 35: $49,130

Average Retirement Savings, Age 35 to 44: $141,520

Average Retirement Savings, Age 45 to 54: $313,220

Average Retirement Savings, Age 55 to 64: $537,560

Average Retirement Savings, Age 65 to 74: $609,320

Get a 1% IRA match on rollovers and contributions.

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

Target Retirement Savings by Age

Retirement Savings Benchmarks

Is Anyone Saving Enough for Retirement?

Social Security and Your Retirement

Perspectives on Social Security Vary Widely

Strategies to Maximize Retirement Savings

Retirement Account Options

Individual Retirement Accounts, or IRAs

Employer-Sponsored Plans

Self-Employed and Small Business Accounts

The Takeaway

FAQ

How much money do I need to retire comfortably?

What percentage of my income should I save for retirement?

When should I start saving for retirement?

What happens if I start saving for retirement late?

How do I catch up on retirement savings?

Typical Retirement Expenses to Prepare For

Average Monthly Cost of Retirement Expenses

5 Common Retirement Expenses by Category

1. Housing

2. Transportation

3. Healthcare

4. Food

5. Entertainment

Get a 1% IRA match on rollovers and contributions.

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

What Is the Most Costly Retirement Expense?

What Are Some Unexpected Retirement Expenses?

What Will You Spend Less on in Retirement?

5 Steps to Set Up a Retirement Budget

Step 1. Contribute to a Retirement Account

Step 2: Make a List of Expected Monthly Expenses

Step 3: Estimate Retirement Income

Step 4: Compare Expected Expenses to Expected Income

Step 5: Figure Out When You Can Retire

The Takeaway

FAQ

What are common expenses in retirement?

What is a reasonable retirement budget?

Which is the biggest expense for most retirees?

Preferred Stock vs. Common Stock

A Brief Overview of the Sarbanes-Oxley Act (SOX)

What Is the Sarbanes-Oxley Act?

What Prompted the Passage of the Sarbanes-Oxley Act?

What’s Included in the Sarbanes-Oxley (SOX) Act?

Section 302

Section 404

Sections 802 and 906

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