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Nov

2023

A Guide to Financial Securities Licenses

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

Before someone can sell securities or offer financial advice they must first obtain the appropriate securities license. The Financial Industry Regulatory Authority (FINRA) is the organization that sets the requirements, oversees the process for earning an investments license, and administers most of the tests.

If you’re considering a career in the financial services industry it’s important to understand how securities licensing and registration works. Investors may also benefit from understanding what the various FINRA licenses signify when selecting an advisor.

Key Points

• Securities licenses are required for individuals to sell securities and offer financial advice.

• The Financial Industry Regulatory Authority (FINRA) sets the requirements and administers most of the tests for earning securities licenses.

• Different licenses allow financial professionals to offer a range of financial products and services to clients.

• The North American Securities Administrators Association (NASAA) is responsible for licensing investment advisor firms and enforcing state securities law.

• Some common FINRA licenses include Series 6, Series 7, Series 3, Series 63, Series 65, and Series 66, each with its own specific focus and requirements.

What Is a Securities License and Who Needs Them?

A securities license is a license that allows financial professionals to sell securities and/or offer financial advice. The type of license someone holds can determine the range of financial products and services they have authorization to offer to clients. Someone who holds one or more securities or investments licenses is a registered financial professional.

FINRA is the non-governmental agency responsible for overseeing the activities of registered financial professionals. That includes individuals who hold FINRA licenses to sell securities or offer advisory services. Individual investors do not need a license to buy and sell stocks.

Under FINRA rules, anyone who’s associated with a brokerage firm and engages in that firm’s securities business must have a license.

Some specific examples of individuals who might need to have a license from FINRA include:

• Registered Investment Advisors (RIAs)

• Financial advisors who want to sell mutual funds, annuities, and other investment packages on a commission-basis

• Investment bankers

• Fee-only financial advisors who only charge for the services they provide

• Stockbrokers and commodities or futures traders

• Advisors who oversee separately managed accounts

• Individuals who want to play an advisory or consulting role in mergers and acquisitions

• IPO underwriters

The North American Securities Administrators Association (NASAA) represents state securities regulators in the United States, Canada, and Mexico. This organization is responsible for licensing investment advisor firms and securities firms at the state level, registering certain securities offered to investors, and enforcing state securities law.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Types of FINRA Licenses

FINRA offers a number of different securities licenses. If you’re considering a career in securities trading, it’s important to understand which one or ones you might need. The appropriate license will depend on the type of securities that you want to sell, how you’ll get paid, and what (if any) other services you’ll provide to your clients.

Here’s a rundown of some of the most common FINRA licenses, what they’re used for and how to obtain one:

Series 6

FINRA offers the Series 6 Investment Company and Variable Contracts Products Representative Exam for individuals who work for investment companies and sell variable contracts products. The types of products you can sell while holding this securities license include:

• Mutual funds (closed-end funds on the initial offering only)

• Variable annuities

• Variable life insurance

• Unit investment trusts (UITs)

• Municipal fund securities, including 529 plans

Obtaining this FINRA license requires you to also pass the introductory Securities Industry Essentials (SIE) exam. This 75-question exam tests your basic knowledge of the securities industry. FINRA offers a practice test online to help you study for the SIE. You can also watch a tutorial to learn how the 50-question Series 6 exam works.

Beyond those options you may consider investing in a paid Series 6 study prep course. Series 6 courses can help you familiarize yourself with the various variable products you can sell with this license and industry best practices. You’ll need to obtain a score of at least 70 to pass both the SIE and the Series 6 exam.

Series 7

People who see stocks and other securities must take the Series 7 General Securities Representative Exam. A Series 7 investments license is typically needed to sell:

• Public offerings and/or private placements of corporate securities (i.e. stocks and bonds)

• Rights

• Stock warrants

• Mutual funds

• Money market funds

• Unit investment trusts

• Exchange-traded funds (ETFs)

• Real estate investment trusts (REITs)

• Options on mortgage-backed securities

• Government securities

• Repos and certificates of accrual on government securities

• Direct participation programs

• Venture capital

• Municipal securities

• Hedge funds

This securities license offers the widest range, in terms of what you can sell.

You’ll need to take and pass the SIE to obtain a Series 7 exam. The Series 7 exam has 125 questions in a multiple choice format and 72% is a passing score. FINRA offers a content outline you can review to get a feel for what’s included on the exam. You may also benefit from taking a study course that covers the various securities you’re authorized to sell with the Series 7 license as well as the ethical and legal responsibilities the license conveys.

Series 3

Investment professionals can earn the Series 3 license by completing the Series 3 National Commodities Futures Exam. This test focuses on the knowledge necessary to sell commodities futures. This is a National Futures Association (NFA) exam administered by FINRA. It has 120 multiple choice questions, with 70% considered a passing score.

You have to pass the Series 3 license exam to join the National Futures Association. In terms of what’s included in the exam and how to study for it, the test is divided into these subjects:

• Futures trading theory and basic functions terminology

• Futures margins, options premiums, price limits, futures settlements, delivery, exercise and assignment

• Types of orders

• Hedging strategies

• Spread trading strategies

• Option hedging

• Regulatory requirements

Neither FINRA nor the NFA offer detailed study guides or practice tests for the Series 3 securities license. But you can purchase study prep materials online.

💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Series 63

The Series 63 Uniform Securities Agent State Law Exam is an NASAA exam administered by FINRA. The test has 60 questions, of which you’ll need to get at least 43 correct in order to pass with a score of 72%.

You’ll need this license if you also hold a Series 6 or Series 7 license and you want to sell securities in any state. The NASAA offers a downloadable study guide that offers an overview of what’s included on the Series 63 securities license exam. Topics include:

• Regulation of investment advisors

• Regulation of broker-dealers

• Regulation of securities and issuers

• Communication with customers and prospects

• Ethical practices

Beyond that, the NASAA offers a list of suggested vendors for purchasing Series 63 exam study materials. But it doesn’t specifically endorse any of these vendors or their products for individuals who plan to obtain a Series 63 license.

Series 65

The Series 65 Uniform Investment Adviser Law Exam is another NASAA test that’s administered by FINRA. Holding this license allows you to offer services as a financial planner or a financial advisor on a fee-only basis. The exam has 130 multiple choice questions and you’ll need to get at least 92 questions correct to pass.

As with the Series 63 exam, the NASAA offers a study guide for the Series 65 exam that outlines key topics. Some of the things you’ll need to be knowledgeable about include:

• Basic economic concepts and terminology

• Characteristics of various investment vehicles, such as government securities and asset-backed securities

• Client investment recommendations and strategies

• Regulatory and ethical guidelines

You can review a list of approved vendors for Series 65 study materials on the NASAA website.

Series 66

The Series 66 Uniform Combined State Law Exam is the third NASAA exam administered by FINRA. Financial professionals who want to qualify as both securities agents and investment adviser representatives take this test.

This multiple choice exam has 100 questions and you’ll need a score of 73 correct or higher to pass. If you already hold a Series 7 license, which is a co-requisite, you could choose to take the Series 66 exam in place of the Series 63 and Series 65 exams.

The study guide and the scope of what the Series 66 exam covers is similar to the Series 65 exam. So if you hold a Series 65 license already, you may have little difficulty in studying and preparing for the Series 66 exam.

The Takeaway

Earning a securities license could help to further your career if you’re interested in the financial services industry. Knowing which license you need and how to qualify for it is an important first step.

Fortunately, you don’t need to hold a FINRA license to invest for yourself. For instance, you could do some research and work at building a diversified portfolio.

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

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

Photo credit: iStock/jacoblund

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

SoFi Invest®

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

Nov

2023

IRA Withdrawal Rules: All You Need to Know

Guide to IRA Withdrawal Rules

By Sheryl Nance-Nash | invest, Investing, Preparing for Retirement | Comments Off

Table of Contents

Roth IRA Withdrawal Rules
Traditional IRA Withdrawal Rules
When Can You Withdraw from an IRA Without Penalties?
9 Exceptions to the 10% Early-Withdrawal Penalty on IRAs
Is Early IRA Withdrawal Worth It?
FAQ

The purpose of Individual Retirement Accounts (IRAs) is to allow you to save for your golden years, so there are strict IRA withdrawal rules meant to make it harder to access that money for other reasons.

Ideally you sock away money consistently and your investment grows over time. You also get the benefit of tax breaks. But it’s important to keep the IRA rules for withdrawals in mind to make the most of your accounts.

Key Points

• Traditional and Roth IRAs have specific withdrawal rules and penalties to protect retirement savings.

• Roth IRA withdrawal rules include the five-year rule for penalty-free withdrawals, and required minimum distributions for inherited IRAs.

• Traditional IRA withdrawals before age 59 ½ incur regular income taxes and a 10% penalty.

• There are exceptions to the penalty, such as using funds for medical expenses, health insurance, disability, education, and first-time home purchases.

• Many experts recommend that early IRA withdrawals should be a last resort due to the potential impact on retirement savings and tax implications.

Roth IRA Withdrawal Rules

When can you withdraw from a Roth IRA? The rules for IRA withdrawals are different for Roth IRAs and traditional IRAs. For instance, qualified withdrawals from a Roth IRA are tax free, since you make contributions with after-tax funds. And there are some other rules about Roth IRAs to keep in mind as well.

The Five-year Rule

If you have a Roth IRA, you may face a Roth IRA withdrawal penalty if you withdraw funds you deposited less than five years ago. This is known as the “five-year rule“. These Roth IRA withdrawal rules also apply to the funds in a Roth rolled over from a traditional IRA. In those cases, if you make a withdrawal from a Roth IRA account that you’ve owned for less than five years, you’ll owe a 10% tax penalty on the account’s gains.

For inherited Roth IRAs, the five-year rule applies to the age of the account, so if your benefactor opened the account more than five years ago, you can access the funds penalty-free. If you tap into the money before that, you’ll owe taxes on the gains.

Required Minimum Distributions (RMDs) on Inherited Roth IRAs

If you’re wondering about Roth IRA distribution rules, in most cases, you do not have to pay required minimum distributions on money in a Roth IRA account. However, for inherited Roths, IRA withdrawal rules mandate that you take required minimum distributions.

There are two ways to do that without penalty:

• Withdraw funds by December 31 of the fifth year after the original holder died. You can do this in either partial distributions or a lump sum. If the account is not emptied by that date, you could owe a 50% penalty on whatever is left.

• Take withdrawals each year, based on your life expectancy.

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.

💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

Traditional IRA Withdrawal Rules

If you take funds out of a traditional IRA before you turn 59 ½, you’ll owe regular income taxes on the contributions and the gains, per IRA tax deduction rules, plus a 10% penalty. Brian Walsh, CFP® at SoFi specifies, “When you make contributions to a traditional retirement account, that money is going to grow without paying any taxes. But when you take that money out—say 30 or 40 years from now—you’re going to pay taxes on all of the money you take out.”

RMDs on a Traditional IRA

The rules for withdrawing from an IRA mean that required minimum distributions kick in the year you turn 73. After that, you have to take distributions each year, based on your life expectancy. If you don’t take the RMD, you’ll owe a 50% penalty on the amount that you did not withdraw.

When Can You Withdraw from an IRA Without Penalties?

You can make withdrawals from an IRA once you reach age 59 ½ without penalties.

In addition, there are other situations in which you may be able to make withdrawals without having to pay a penalty. These include having medical expenses that aren’t covered by health insurance (as long as you meet certain qualifications), having a permanent disability that means you can no longer work, and paying for qualified education expenses for a child, spouse, or yourself.

Read more about these and other penalty-free exceptions below.

9 Exceptions to the 10% Early-Withdrawal Penalty on IRAs

Whether you’re withdrawing from a Roth within the first five years or you want to take money out of a traditional IRA before you turn 59 ½, there are some instances where you don’t have to pay the 10% penalty on your IRA withdrawals.

1. Medical Expenses

You can avoid the early withdrawal penalty if you use the funds to pay for unreimbursed medical expenses that total more than 7.5% of your adjusted gross income (AGI).

2. Health Insurance

If you’re unemployed for at least 12 weeks, IRA withdrawal rules allow you to use funds from an IRA penalty-free to pay health insurance premiums for yourself, your spouse, or your dependents.

3. Disability

If you’re permanently disabled and can no longer work, you can withdraw IRA funds without penalty. In this case, your plan administrator may require you to provide proof of the disability before signing off on a penalty-free withdrawal.

4. Higher Education

IRA withdrawal rules allow you to use IRA funds to pay for qualified education expenses, such as tuition and books for yourself, your spouse, or your child without penalty.

5. Inherited IRAs

IRA withdrawal rules state that you don’t have to pay the 10% penalty on withdrawals from an IRA, unless you’re the sole beneficiary of a spouse’s account and roll it into your own, non-inherited IRA. In that case, the IRS treats the IRA as if it were yours from the start, meaning that early withdrawal penalties apply.

6. IRS Levy

If you owe taxes to the IRS, the agency may take it directly out of your IRA account. In that case, the IRS will not assess the 10% penalty. If you take the money out of the account yourself, however, to pay taxes, you’d also have to pay the 10% penalty.

7. Active Duty

If you’re a qualified reservist, you can take distributions without owing the 10% penalty. This goes for a military reservist or National Guard member called to active duty for at least 180 days after September 11, 2001.

8. Buying a House

While you can’t take out IRA loans, you can use up to $10,000 from your traditional IRA toward the purchase of your first home — and if you’re purchasing with a spouse, that goes for each of you. The IRS defines first-time homebuyers as someone who hasn’t owned a principal residence in the last two years. You can also withdraw money to help with a first home purchase for a child or your spouse’s child, grandchild, or parent.

In order to qualify for the penalty-free withdrawals, you’ll need to use the money within 120 days of the distribution.

9. Substantially Equal Periodic Payments

Another way to avoid penalties under IRA withdrawal rules, is by starting a series of distributions from your IRA, spread equally over your life expectancy. To make this work, you must take at least one distribution each year and you can’t alter the distribution schedule until five years have passed or you’ve reached age 59 ½, whichever is later.

The amount of the distributions must use an IRS-approved calculation that involves your life expectancy, your account balance, and interest rates.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Is Early IRA Withdrawal Worth It?

While there may be cases where it makes sense to take an early withdrawal, most advisors agree that it should be a last resort. These are disadvantages and advantages to consider.

Pros of IRA Early Withdrawal

• If you have a major expense and there are no other options, taking an early withdrawal from an IRA could help you cover the cost.

• An early withdrawal may help you avoid taking out a loan you would then have to repay with interest.

Cons of IRA Early Withdrawal

• By taking money out of an IRA account early, you’re robbing your own nest egg not only of the current value of the money but also future years of compound growth.

• Money taken out of a retirement account now can have a big impact on your financial security in the future when you retire.

• You may owe taxes and penalties, depending on the specific situation.

Opening an IRA With SoFi

Like 401(k)s, IRAs are powerful, tax-advantaged accounts you can use to save for retirement. However, it is possible to take money out of an IRA if you need it before retirement age. Just remember, even if you’re able to do so without an immediate tax penalty, the withdrawals could leave you with less money for retirement later.

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

Can you withdraw money from a Roth IRA without penalty?

You can withdraw your own contributions to a Roth IRA without penalty no matter what your age. However, you cannot withdraw the earnings on your contributions before age 59 ½, or before the account has been open for at least five years, without incurring a penalty.

What are the rules for withdrawing from a Roth IRA?

You can withdraw your own contributions to a Roth IRA at any time penalty-free. But to avoid taxes and penalties on your earnings, withdrawals from a Roth IRA must be taken after age 59 ½ and once the account has been open for at least five years.

However, there are a number of exceptions in which you typically don’t have to pay a penalty for an early withdrawal, including: some medical expenses that aren’t covered by health insurance, being permanently disabled and unable to work, or if you’re on qualified active military duty.

What are the 5 year rules for Roth IRA withdrawal?

Under the 5-year rule, if you make a withdrawal from a Roth IRA that’s been open for less than five years, you’ll owe a 10% penalty on the account’s earnings. If your Roth IRA was inherited, the 5-year rule applies to the age of the account. So if you inherited the Roth IRA from a parent, for instance, and they opened the account more than five years ago, you can withdraw the funds penalty-free. If the account has been opened for less than five years, however, you’ll owe taxes on the gains.

Photo credit: iStock/Fly View Productions

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

Nov

2023

What Is Retirement? What Does It Really Mean?

By Rebecca Lake | invest, Investing, Preparing for Retirement | Comments Off

There once was a time was when retirement meant leaving your job permanently, either when you reached a certain age or you’d accumulated enough wealth to live without working. Today’s retirement definition is changing, and it can vary widely depending on your vision and your individual financial situation.

It’s important for each person to develop their own retirement definition. That can help you establish a roadmap for getting from point A to point B, with the money you have, and in the time frame you’re expecting.

Key Points

• Retirement’s definition may vary based on individual financial situations and personal visions.

• Retirement has both financial and lifestyle aspects that need to be considered in its definition.

• Being retired means relying on savings, investments, and perhaps federal benefits for income instead of a regular paycheck.

• Retirement doesn’t necessarily mean individuals completely leave the labor force, as some retirees may have part-time jobs or pursue new careers.

• Retirement statistics show that a significant portion of retirees rely on Social Security, and savings levels vary among individuals.

Retirement Definition

Retirement’s meaning may shift from person to person, but the bottom line is that retirement has a financial side and a personal or lifestyle side. It’s important to consider both in your definition of retirement.

Retirement and Your Finances

Being retired or living in retirement generally means that you rely on your accumulated savings and investments to cover your expenses rather than counting on a paycheck or salary from employment. Depending upon your retirement age, your income may also include federal retirement benefits, such as Social Security and other options.

Retiring doesn’t necessarily mean you stop working completely. You might have a part-time job or side hustle. You may choose to start a small business once you retire from your career. But the majority of your income may still come from savings or federal benefits.

Retirement and Your Lifestyle

Some people embark on a new life or a new career in retirement, complete with new goals, a new focus, sometimes in a brand-new location. But retirement doesn’t have to be a period of reinvention. It depends on how you view the purpose and meaning of retirement. Many people enjoy this period as a time to slow down and enjoy hobbies or priorities that they couldn’t focus on before.

Consider the notion of moving in retirement. While strolling on sandy, sunlit beaches is depicted as a retirement ideal, many people don’t want to move to get there. In fact, 53% of retirees opt to remain in the house where they were already living, according to a 2022 study by the Center for Retirement Research.

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.

Qualified Retirement Plan Definition

A qualified retirement plan provides you with money to pay for future expenses once you decide to retire from your job. The Employment Retirement Security Act (ERISA) recognizes two types of retirement plans:

Defined Contribution Plans

In a defined contribution plan, the amount of money you’re able to withdraw in retirement is determined by how much you contribute during your working years, and how much that money grows as it’s invested. A 401(k) plan is the most common type of defined contribution plan that employers can offer to employees.

There are other kinds of retirement plans that fall under the defined contribution umbrella. For example, if you run a small business, you might establish a Simplified Employee Pension (SEP) plan for yourself and your employees. Profit sharing plans, stock bonus plans, and employee stock ownership (ESOP) plans are also defined contribution plans.

A 457 plan is another defined contribution option. They work similar to 401(k) plans, in that you decide how much to contribute, and your employer can make matching contributions. The main difference between 457 and 401(k) retirement accounts is who they’re designed for. Private employers can offer 401(k) plans, while 457 plans are reserved for state and local government employees.

Defined Benefit Plans

A defined benefit plan (typically a pension) pays you a fixed amount in retirement that’s determined by your years of service, your retirement age, and your highest earning years. Cash balance plans are another type of defined benefit plan.

Generally speaking, defined benefit plans have been on the wane in the last couple of decades, with more of the responsibility for saving falling to workers, who must contribute to defined contribution plans.

Retirement Statistics

Retirement statistics can offer some insight into how Americans typically save for the future and when they retire. Here are some key retirement facts and figures to know, according to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2021 – May 2022:

• 27% of adults considered themselves to be retired in 2021, though some were still working in some capacity.

• 49% of adults said they retired to do something else, while 45% said they’d reached their normal retirement age.

• 78% of retirees relied on Social Security for income, increasing to 92% among retirees age 65 or older.

• 55% of non-retired adults had savings in a defined contribution plan, while just 22% had a defined benefit plan.

• 40% of non-retirees felt that they were on track with their retirement savings efforts.

So, how much does the typical household have saved for retirement? According to the Transamerica Center for Retirement Studies, the estimated median retirement savings among American workers is $54,000. Just 27% of adults who are traditionally employed and 24% of self-employed individuals have saved $250,000 or more for retirement.

Saving for Retirement

Saving for retirement is an important financial goal. While Social Security may provide you with some income, it’s not likely to be enough to cover all of your expenses in retirement — particularly if you end up needing extensive medical care or long-term care. In 2022, according to the Social Security Administration, the average monthly benefit amount was $1,542.22.

Financial experts often recommend saving 15% of your income for retirement but your personal savings target may be higher or lower, depending on your goals. The longer you have to save for retirement, the longer you have to take advantage of compounding interest. That’s the interest you earn on your interest and it’s one of the keys to building wealth.

Selecting a retirement plan is the first step to getting on track with your financial goals. When saving for retirement, you can start with a defined benefit or defined contribution plan if your employer offers either one. Defined contribution plans can be advantageous because your employer may match a percentage of what you save. That’s free money you can use for retirement.

If you don’t have a 401(k) or a similar plan at work, or you do but you want to supplement your retirement savings, you could open a retirement investment account, otherwise known as an individual retirement account (IRA).

Is your retirement piggy bank feeling light?

Start saving today with a Roth or Traditional IRA.

Retirement Investment Accounts

A retirement investment account is an account that enables you to save money for the future, but it isn’t considered a federally qualified retirement plan, like a 401(k). IRAs are tax-advantaged investment accounts that you can use to purchase mutual funds, exchange-traded funds (ETFs), and other securities.

There are two main types of IRAs you can open: traditional and Roth IRAs. A traditional IRA allows for tax-deductible contributions in the year that you make them. Once you retire and begin withdrawing money, those withdrawals are taxed at your ordinary income tax rate.

Roth IRAs don’t offer a deduction for contributions because you contribute after-tax dollars. You can, however, make 100% tax-free qualified withdrawals in retirement. This might be preferable if you think you’ll be in a higher tax bracket once you retire.

Both traditional and Roth IRAs are subject to annual contribution limits. The annual limit for 2022 is $6,000, or $7,000 if you’re 50 or older (the extra amount is often called a catch-up provision). There’s an increase for 2023 to $6,500 for the base amount; the catch-up provision is still $1,000 more, for a total of $7,500.

You can open an IRA online, or at a brokerage, alongside a taxable investment account for a comprehensive retirement savings picture.

Pros of Retirement Investment Accounts

Opening an IRA could make sense if you’d like to save for retirement while enjoying certain tax benefits.

• If you’re in a higher income bracket during your working years, being able to deduct traditional IRA contributions could reduce your tax liability.

• And not having to pay tax on Roth IRA withdrawals in retirement can ease your tax burden as well if you have income from other sources.

• IRA accounts often give you more flexibility in terms of your investment choices.

Cons of Retirement Investment Accounts

While IRAs can be good savings vehicles for retirement, there are some downsides.

• Both types of accounts have much lower contribution limits compared to a 401(k) or 457 plan. For example, the maximum you can contribute to a 401(k) in 2022 is $20,500, with an additional $6,500 catch-up provision. For 2023, you can contribute $22,500 per year, plus an additional $7,500 if you’re 50 and up.

• With traditional IRAs, you must begin taking required distributions (RMDs) based on your account balance and life expectancy starting at age 72 (401(k)s have a similar rule). If you fail to do so, you could incur a hefty tax penalty.

• Roth IRAs don’t have RMDs, but your ability to contribute to a Roth may be limited based on your income and tax filing status.

Investing for Retirement With SoFi

However you choose to define your retirement, making a financial roadmap will help you get the retirement you want.

SoFi Invest offers traditional and Roth investment accounts to help you build the future you envision. You can also open a SEP IRA if you’re self-employed and want to get a jump on retirement savings. Another way to keep track your retirement savings is to roll over your old accounts to a rollover IRA, so you can manage your money in one place.

SoFi makes the rollover process seamless and straightforward. There are no rollover fees, and you can complete your 401(k) rollover without a lot of time or hassle.

Help grow your nest egg with a SoFi IRA.

FAQ

What is the meaning of retirement?

Retirement generally means leaving your job or the workforce, and living off your savings and investments, but that definition is changing for some. Some people may choose to continue working in retirement, though it may not be their primary source of income. Others may shift their work to focus more on lifestyle changes.

How common is retirement?

According to the Federal Reserve, about 27% of adults considered themselves to be retired in 2021, though some were still working in some capacity. Of these, 49% said they had retired to do something else, while 45% said they’d reached their normal retirement age.

How does retirement work?

When someone retires, they stop working at their job. Or, in the case of a business owner, they hand the business over to someone else. At that point, it’s up to them to decide how they want to spend their retirement, which might include taking care of family, traveling, working part-time, or exploring new hobbies. Their sources of income might include savings, investments, a pension, and Social Security benefits.

Photo credit: iStock/Alessandro Biascioli

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.

SOIN0722010

Nov

2023

Average Retirement Savings By Age

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

The average American has less than $90,000 in retirement savings, as of mid-2023. That’s far below what many people will likely need, and many Americans aren’t really sure what sorts of goalposts or milestones they should be striving for by certain ages when it comes to saving for retirement.

It can be helpful to see how one compares to others in their age range. Averages can help investors see if they are on track to retire when they plan to. While each person is different in terms of their personal retirement goals, lifestyle, ability to save, and projected expenses, setting goals and benchmarks can help an individual figure out how much to save and where to put money for retirement.

Key Points

• The average American has less than $90,000 in retirement savings, which is less than what many people will likely need.

• Retirement savings vary by age group, with average savings increasing as people get older.

• By age 30, it’s generally recommended to save an amount equal to 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.

• Most Americans aren’t saving enough for retirement, and it’s important to create a retirement plan and consider personal goals and financial responsibilities.

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.

Age Group	Average Retirement Savings
20s	$35,800
30s	$67,400
40s	$77,400
50s	$110,900
60s	$112,500
70s	$113,900

Average Retirement Savings in Your 30s: $67,400

Most Americans in their 20s and 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 you and commit to actually starting a retirement savings plan, the more they will benefit from compound interest over time.

Recommended: How to Save for Retirement at 30

Average Retirement Savings in Your 40s: $77,400

Since most people are making more money at this age than they ever have, it can be tempting to spend it on fancy vacations, cars, and other things. Many people also have mortgages, families, and other big-ticket expenses during this time in their lives as well.

But those who put that money towards retirement may be able to reach their goals early and retire relatively young.

For men, these are peak earning years, as they tend to continue increasing their earnings until age 55. Women tend to reach their peak earnings much younger at age 44. Either way, retirement savings should be top of mind for people in this age group.

Average Retirement Savings in Your 50s: $110,900

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.

Average Retirement Savings in Your 60s: $112,500

Although the goal for many is to retire at around 60, 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, so it’s not a bad thing. A lot of people work during retirement, although some do so out of necessity.

Ideally, working in later years of life is a choice and not a necessity. After this age, people tend to be spending rather than saving, so the average retirement savings amounts decline.

Retirement contributions tend to increase as people age partly because they are earning more and partly because they are thinking about retirement more.

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Ideal Retirement Savings Amounts 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.

• 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 their 20s. Some employers will match retirement 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. For example, if a 67 year old makes $75,000 per year, they should have $750,000 saved.

Is Anyone Saving Enough for Retirement?

Despite the above recommendations, most Americans don’t have nearly these amounts in their retirement accounts. A significant portion 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, a lot of people aren’t. Social Security may not be enough for a lot of people to make ends meet, either.

Social Security and Your Retirement

It’s more important than ever to create a retirement plan and stick to it, because America is facing a retirement crisis. Social Security was designed to help people pay their expenses during retirement, but it currently pays less than half of the average retiree’s monthly expenses. As of mid-2023, the average Social Security payment is around $1,800 per month.

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

Best Ways to Save for Retirement

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, with the money redirected to a retirement savings account.

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.

The Takeaway

The average American has less than $90,000 in retirement savings, though the number varies depending on age groups and other factors. Knowing how much others in your age group are saving for retirement can help give you a sense of comparison, but it’s important to remember that most Americans aren’t saving enough.

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.

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Nov

2023

Understanding Market Capitalization

By Austin Kilham | Growing Wealth, invest, Investing, Terminology | Comments Off

What Is Market Capitalization?

Market capitalization (market cap) represents the total market value of a company’s outstanding shares. A company’s market capitalization, or market cap, provides a good measure of its size and value versus revenue or sales figures.

Knowing what the market cap is for a given company can help investors compare it to other companies of a similar size.

Note the market cap (the value of a company’s total equity) is different than a company’s market value, which is a more complex calculation based on various metrics, including return-on-equity, price-to-earnings, and more.

Key Points

• Market capitalization (market cap) represents the total market value of a company’s outstanding shares and provides a measure of its size and value.

• Market cap helps investors compare companies of similar size and evaluate their potential risk and reward.

• Companies are categorized into small-cap, mid-cap, large-cap, and mega-cap based on their market cap range.

• Smaller companies (nano-cap and micro-cap) can be riskier but offer growth opportunities, while larger companies (large-cap and mega-cap) tend to be more stable.

• Market cap can be calculated by multiplying the current price per share by the number of outstanding shares.

Market-Cap Categories

Analysts, as well as index and exchange-traded fund (ETF) providers commonly sort stocks into small-, mid-, and large-cap stocks, though some include a broader range that goes from micro or nano-cap stocks all the way to mega cap on the large end.

The size limits of these categories can change depending on market conditions but here are some rough parameters.

Nano-cap and Micro-cap Stocks

Nano- and micro-cap companies are those with a total market capitalization under $300 million. Some define nano-cap stocks as those under $50 million, and micro-cap stocks as those between $50 million and $300 million.

These smaller companies can be riskier than large-cap companies (though not always). Many microcap stocks trade over-the-counter (OTC). Over-the-counter stocks are not traded on a public exchange like the New York Stock Exchange (NYSE) or Nasdaq. Instead, these stocks are traded through a broker-dealer network.

As a result there may be less information available about these companies, which can make them difficult to assess.

Small-cap Stocks

Small-cap companies are considered to be in the $300 million to $2 billion range. They are generally younger and faster-growing than large-cap stocks. Investors often look to small-caps for growth opportunities.

While small-cap companies have historically outperformed large-caps, these stocks can also be more risky, and may require more due diligence from would-be investors.

Mid-cap

Mid-cap companies lie between small- and large-cap companies, with market caps of $2 billion to $10 billion.

Some investors may find mid-cap stocks attractive because they can offer some of the growth potential of small-caps with some of the maturity of large-caps. But mid-cap stocks likewise can share some of the downsides of those two categories, being somewhat vulnerable to competition in some cases, or lacking the impetus to expand in others.

Large-cap

Large-cap stocks are those valued between $10 billion and $200 billion, roughly. Large-cap companies tend not to offer the same kind of growth as small- and mid-cap companies. But what they may lack in performance they can deliver in terms of stability.

These are the companies that tend to be more well established, less vulnerable to sudden market shocks (and less likely to collapse). Some investors use large-cap stocks as a hedge against riskier investments.

Mega-cap

Mega cap describes the largest publicly traded companies based on their market capitalization. Mega cap stocks typically include industry-leading companies with highly recognizable brands with valuations above $200 billion.

Recommended: Investing 101 Guide

How to Calculate Market Cap

To figure out a company’s market cap, simply multiply the number of outstanding shares by the current price per share. If a company has 10 million outstanding shares of stock selling for $30 per share, the company’s market cap is $300 million.

Share prices fluctuate constantly, and as a result, so does market cap. You should be able to find the number of outstanding shares listed on a company’s balance sheet, where it’s referred to as “capital stock.” Companies update this number on their quarterly filings with the Securities and Exchange Commission (SEC).

Market Cap Formula

The formula for determining a company’s market cap is fairly simple:

Current price per share x Total # of outstanding shares = Market capitalization

Remember that the share price doesn’t determine the size of the company or vice versa. When measuring market cap you always have to look at the share price multiplied by the number of outstanding shares.

• Company A could be worth $100 per share, and have 50,000 shares outstanding, for a total market cap of $5 million.

• Company B could be worth $25 per share, and have 20 million shares outstanding, for a total market cap of $500 million.

Market Cap and Number of Shares

In some cases, market cap can change if the number of stocks increases or decreases. For example, a company may issue new stock or even buy back stock. When a company issues new shares, the stock price may dip as investors worry about dilution.

Stock splits do not increase market share, because the price of the stock is also split proportionally.

Changes to the number of shares are relatively rare, however. More commonly, investors will notice that changes in share price have the most frequent impact on changing market cap.

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

Market Cap Versus Stock Price

If you’re new to investing, you may assume a company’s share price is the clearest indicator of how large a company is. You may even assume it’s as important in choosing a stock as market cap.

While the share price of a company tells you how much it costs to own a piece of the company, it doesn’t really give you any hints as to the size of the company or how much the company is worth.

Market cap, on the other hand, might give you some hints about how a particular stock might behave. For example, large companies may be more stable and experience less volatility than their smaller counterparts.

Recommended: Intrinsic Value vs. Market Value

Evaluate Stocks Using Market Cap

Understanding the market cap of a company can help investors evaluate the company in the context of other companies of similar size.

For instance, as noted above market cap can clue investors into stocks’ potential risk and reward, in part because the size of a company can be related to where that company is in its business development. Investors can also evaluate how a company is doing by comparing its performance to an index that tracks other companies of a similar size, a process known as benchmarking.

• The S&P 500, a common benchmark, is a market-cap weighted index of the 500 largest publicly traded U.S. companies.

• The S&P MidCap 400, for example, is a market-cap weighted index that tracks mid-cap stocks.

• The Russell 2000 is a common benchmark index for small cap stocks.

Within this system, companies with higher market cap make up a greater proportion of the index. You may often hear the S&P 500 used as a proxy for how the stock market is doing on the whole.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

What Market Cap Can Tell You

Here are some characteristics of larger market-cap companies versus smaller-cap stocks:

Volatility: Larger companies, also often dubbed blue-chip stocks, tend to be less volatile than smaller stocks and tend to offer steady returns. What’s more, compared to larger companies, they have relatively few resources, such as access to cheaper credit and access to liquidity.

Revenue: Larger stocks tend to have more international exposure when it comes to their sales and revenue streams. Meanwhile, smaller stocks can be more oriented to the domestic economy.

Growth: Smaller companies tend to have better odds of offering faster growth.

Valuation: Larger stocks tend to be more expensive than smaller ones and have higher valuations when it comes to metrics like price-to-earnings ratios.

Dividends: Many investors are also drawn to large cap stocks because companies of this size frequently pay out dividends. When reinvested, these dividends can be a powerful driver of growth inside investor portfolios.

Market Cap and Diversification

So how do you use market cap to help build a portfolio? Market cap can help you choose stocks that could help you diversify.

Building a diversified portfolio made up of a broad mix of investments is a strategy that can help mitigate risk.

That’s because different types of investments perform differently over time and depending on market conditions. This idea applies to stock from companies of varying sizes, as well. Depending on market conditions, small, medium, and large cap companies could each beat the market or trail behind.

Because large-cap companies tend to have more international exposure, they might be doing well when the global economy is showing signs of strength. On the flip side, because small-cap companies tend to have greater domestic exposure, they might do well when the U.S. economy is expected to be robust.

Meanwhile, larger-cap companies could also be outperforming when there’s a downturn, because they may have more cash at hand and prove to be resilient. In recent years, the biggest companies in the U.S. have been linked to the technology. Therefore, picking by market cap can have an impact on what kind of sectors are in an investor’s portfolio as well.

What Is Free-Float Market Cap?

Float is the number of outstanding shares that are available for trading by the public. Therefore, free-float market cap is calculating market cap but excluding locked-in shares, typically those held by company executives.

For example, it’s common for companies to provide employees with stock options or restricted stock units as part of their compensation package. These become available to employees according to a vesting schedule. Before vesting, employees typically don’t have access to these shares and can’t sell them on the open market.

The free-float method of calculating market cap excludes shares that are not available on the open market, such as those that were awarded as part of compensation packages. As a result, the free-float calculation can be much smaller than the full market cap calculation.

However, this method could be considered to be a better way to understand market cap because it provides a more accurate representation of the movement of stocks that are currently in play. Many of the major indexes, such as the S&P 500 and the MSCI indices, use the free-float method.

Market Cap vs Enterprise Value

While market cap is the total value of shares outstanding, enterprise value includes any debt that the company has. Enterprise value also looks at the whole value of a company, rather than just the equity value.

Here is the formula for enterprise value (EV):

Market cap + market value of debt – cash and equivalents.

A more extended version of EV is here:

Common shares + preferred shares + market value of debt + minority interest – cash and equivalents.

The Takeaway

Market capitalization is a common way that analysts and investors describe the value and size of different companies. Market cap is simply the price per share multiplied by the number of outstanding shares. Given that prices fluctuate constantly, so does the market cap of each company, but the parameters are broad enough that investors generally know whether a company is a small cap vs. a mid cap vs. a large or mega cap.

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FAQ

What is the maximum market cap?

In theory there is no cap on market cap; i.e. there is no maximum size a company can be. As of Aug. 21, 2023, the top five biggest companies by market cap, according to Forbes, are: Apple ($2.744 trillion), Microsoft ($2.353 trillion), Saudi Aramco ($2.224 trillion), Alphabet (Google) ($1.624 trillion), Amazon ($1.336 trillion).

How does market cap go up?

A company’s market cap can grow if the share price goes up.

Are large-cap stocks good?

The market cap of any company is neither good nor bad; it’s simply a way to measure the company’s size and value relative to other companies in the same sector or industry. You can have mega cap companies that underperform and micro-cap companies that outperform.

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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.

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

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

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Average Retirement Savings By Age

Average Retirement Savings in Your 30s: $67,400

Average Retirement Savings in Your 40s: $77,400

Average Retirement Savings in Your 50s: $110,900

Average Retirement Savings in Your 60s: $112,500

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Ideal Retirement Savings Amounts by Age

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Understanding Market Capitalization

What Is Market Capitalization?

Market-Cap Categories

Nano-cap and Micro-cap Stocks

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