Asset Allocation by Age, Explained

Asset allocation is an investment strategy that helps you decide the ratio of different asset classes in your portfolio to ensure that your investments align with your risk tolerance, time horizon, and goals.

In other words, the way you allocate, or divide up the assets in your portfolio helps to balance risk, while aiming for the highest return within the time period you have to achieve your investment goals.

How do you set your portfolio to get the best asset allocation by age? Here’s what you need to know about asset-based asset allocation.

Key Points

•   Asset allocation is the process of dividing investments among different asset classes based on factors like age, risk tolerance, and financial goals.

•   Younger investors can typically afford to take more risks and allocate a higher percentage of their portfolio to stocks.

•   As investors approach retirement, they may shift towards a more conservative asset allocation, with a higher percentage allocated to bonds and cash.

•   Regularly reviewing and rebalancing your asset allocation is important to ensure it aligns with your changing financial circumstances and goals.

•   Asset allocation is a personal decision and should be based on individual factors such as risk tolerance, time horizon, and investment objectives.

What Is Age-Based Asset Allocation?

The mix of assets you hold will likely shift with age. When you’re younger and have a longer time horizon, you might want to hold more stocks, which offer the most growth potential. Also, that longer time horizon gives you plenty of years to help ride out volatility in the market.

You will likely want to shift your asset allocation as you get older, though. As retirement age approaches, and the point at which you’ll need to tap your savings draws near, you may want to shift your retirement asset allocation into less risky assets like bonds and cash equivalents to help protect your money from downturns.

In the past, investment advisors recommended a rule of thumb whereby an investor would subtract their age from 100 to know how much of their portfolio to hold in stocks. What is an asset allocation that follows that rule? A 30-year-old might allocate 70% of their portfolio to stocks, while a 60-year-old would allocate 40%.

However, as life expectancy continues to increase — especially for women — and people rely on their retirement savings to cover the cost of longer lifespans (and potential healthcare expenses), some industry experts and advisors now recommend that investors keep a more aggressive asset allocation for a longer period.

The new thinking has shifted the formula to subtracting your age from 110 or 120 to maintain a more aggressive allocation to stocks.

In that case, a 30-year-old might allocate 80% of their portfolio to stocks (110 – 30 = 80), and a 60-year-old might have a portfolio allocation that’s 50% stocks (110 – 60 = 50) — which is a bit more aggressive than the previous 40% allocation.

These are not hard-and-fast rules, but general guidelines for thinking about your own asset allocation strategy. Each person’s financial situation is different, so each portfolio allocation will vary.

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💡 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.

Asset Allocation Models by Age

As stated, age is a very important consideration when it comes to strategic asset allocation. Here are some asset allocation examples for different age groups.

Asset Allocation in Your 20s and 30s

For younger investors, the conventional wisdom suggests they may want to hold most of their portfolio in stocks to help save for long-term financial goals like retirement.

That said, when you’re young, your financial footing may not be very secure. You probably haven’t built much of a nest egg, you may change jobs relatively frequently, and you may have debt, such as student loans, to worry about. Setting up a potentially volatile, stock-focused allocation might feel nerve-wracking.

If you have a 401(k) at work, this might be your primary investment vehicle — or you may have set up an IRA. In either account you can invest in mutual funds or exchange-traded funds (ETFs) that hold a mix of stocks, providing some low-cost diversification without sacrificing the potential for long-term growth.

You could also invest in a target date fund, which is designed to help to manage your asset allocation over time (more on these funds below).

When choosing funds, it’s important to consider both potential performance and fees. Index funds, which simply mirror the performance of a certain market index, may carry lower expense ratios but they may generate lower returns compared to, say, a growth fund that’s more expensive.

Remember that the younger you are, the longer you have to recover from market downturns or losses. So allocating a bigger chunk of your investments to growth funds or funds that use an active management strategy could make sense if you feel their fees are justified by the potential for higher returns — and the higher risk that comes along with it.

And of course, you can counterbalance higher-risk/higher-reward investments with bonds or bond funds (as a cushion against volatility), index funds (to help manage costs) or target date funds (which can do a bit of both). Just be aware that the holdings within some funds can overlap, which could hamper your diversification strategy and require you to choose investment carefully.

Asset Allocation in Your 40s and 50s

As you enter middle age you are potentially entering your peak earning years. You may also have more financial obligations, such as mortgage payments, and bigger savings goals, such as sending your kids to college, than you did when you were younger. On the upside, you may also have 20 years or more before you’re thinking about retiring.

In the early part of these decades, one approach is to consider keeping a hefty portion of your portfolio still allocated to stocks. This may be useful if you haven’t yet been able to save much for your retirement because you’d be able to add potential growth to your portfolio, and still have some years to ride out any volatility.

Depending on when you plan to retire, adding stability to your portfolio with bonds as you approach the latter part of these decades might be a wise choice. For example, you may want to begin by shifting more of your IRA assets to bonds or bond funds at this stage. These investments may produce lower returns in the short term compared to mutual funds or ETFs. But they can be useful for generating income once you’re ready to begin making withdrawals from your accounts in retirement.

Asset Allocation in Your 60s

Once you hit your 60s and you’re nearing retirement age, your allocation will likely shift toward fixed-income assets like bonds, and maybe even cash. A shift like this can help prepare you for the possibility that markets may be down when you retire.

If that’s the case, you might be able to use these fixed-income investments to provide income during the downturn, so you can avoid selling stocks while the markets are down since doing so would lock in losses and might curtail future growth in your portfolio. Thus, leaning on the fixed-income portion of your portfolio allows time for the market to recover before you need to tap into stocks.

If you haven’t retired yet, you can continue making contributions to your 401(k) to grow your nest egg and take advantage of any employer match.

If you chose to invest in a target date fund within your retirement account when you were younger, it’s likely that fund’s allocation would now be tilting toward fixed-income assets as well.

Retirement Asset Allocation

Once you’ve retired it may seem like you can kick back and relax with all of your asset allocation worries behind you. Yet, your portfolio allocation is as important to consider now as it was in your 20s.

When you retire, you’ll likely be on a fixed income — and you won’t be adding to your savings with earned wages. Your retirement could last 20 to 30 years or more, so consider holding a mix of assets that includes stocks that might provide some growth. Keeping a modest stock allocation might help you avoid outliving your savings and preserve your spending power.

While that may sound contrary to the suggestion above for pre-retirees to keep more of their assets allocated to fixed-income, the difference is the level of protection you might want just prior to retirement. Now as an official retiree, and thinking about the potential decades ahead, you may want to inject a little growth potential into your portfolio.

It might also make sense to hold assets that grow faster than the rate of inflation or are inflation-protected, such as Treasury Inflation-Protected Securities, or TIPS, which can help your nest egg hold its value.

These are highly personal decisions that, again, go back to the three intersecting factors that drive asset allocation: your goals, risk tolerance, and time horizon. There’s no right answer; the task is arriving at the right answer for you.

Understanding Assets and Asset Classes

At its heart, a financial asset is anything of value that you own, whether that’s a piece of property or a single stock. When you invest, you’re typically looking to buy an asset that will increase in value.

The three broad groups, or asset classes, that are generally held in investment accounts are stocks, bonds, and cash. When you invest, you will likely hold different proportions of these asset classes.

Asset Allocation Examples

What are some asset allocation examples? Well, your portfolio might hold 60% stocks, 40% bonds, and no cash — or 70% stocks, 20% bonds, and 10% in cash or cash equivalents. But how you decide that ratio gets into the nuts and bolts of your actual asset allocation strategy, because each of these asset types behaves differently over time and has a different level of risk and return associated with it.

•   Stocks. Stocks typically offer the highest rates of return. However, with the potential for greater reward comes higher risk. Typically, stocks are the most volatile of these three categories, especially in the short term. But over the long term, the return on equities (aka stocks) has generally been positive. In fact, the S&P 500 index, a proxy for the U.S. stock market, has historically returned an average of 10% annually.

•   Bonds. Bonds are traditionally less risky than stocks and offer steadier returns. A general rule of thumb is that bond prices move in the opposite direction of stocks.

When you buy a bond, you are essentially loaning money to a company or a government. You receive regular interest on the money you loan, and the principal you paid for the bond is returned to you when the bond’s term is up. When buying bonds, investors generally accept smaller returns in exchange for the security they offer.

•   Cash. Cash, or cash equivalents, such as certificates of deposit (CDs) or money market accounts, are the least volatile investments. But they typically offer very low returns.

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

How Do Diversification and Rebalancing Fit In?

The old adage, “Don’t put all your eggs in one basket,” is apt for a number of concepts in investing.

Putting all of your money in one investment may expose you to too much risk. When it comes to asset allocation, you can help manage risk by spreading money out over different asset classes that are then weighted differently within a portfolio.

Here is a possible asset allocation example: If your stock allocation was 100%, and the stock market hit a speed bump, your entire portfolio could lose value. But if your allocation were divided among stocks, bonds, and cash, a drop in the value of your stock allocation wouldn’t have the same impact. It would be mitigated to a degree, because the bonds and cash allocation of your portfolio likely wouldn’t suffer similar losses (remember: bond prices generally move in the opposite direction of stocks, and cash/cash equivalents rarely react to market turmoil).

Diversification

Portfolio diversification is a separate, yet related, concept. Simple diversification can be achieved with the broader asset classes of stocks, bonds, and cash. But within each asset class you could also consider holding many different assets for additional diversification and risk protection.

For example, allocating the stock portion of your portfolio to a single stock may not be a great idea, as noted above. Instead, you might invest in a basket of stocks. If you hold a single stock and it drops, your whole stock portfolio falls with it. But if you hold 25 different stocks — when one stock falls, the effect on your overall portfolio is relatively small.

On an even deeper level, you may want to diversify across many types of stock — for example, varying by company size, geography, or sector. One way some investors choose to diversify is by holding mutual funds, index funds, or ETFs that themselves hold a diverse basket of stocks.

Rebalancing

What is rebalancing? As assets gain and lose value, the proportion of your portfolio they represent also changes. For example, say you have a portfolio allocation that includes 60% stocks and the stock market ticks upward. The stocks you hold might have appreciated and now represent 70% or even 80% of your overall portfolio.

In order to realign your portfolio to your desired 60% allocation, you might rebalance it by selling some stocks and buying bonds. Why sell securities that are gaining value? Again, it’s with an eye toward managing the potential risk of future losses.

If your equity allocation was 60%, but has grown to 70% or 80% in a bull market, you’re exposed to more volatility. Rebalancing back to 60% helps to mitigate that risk.

The idea of rebalancing works on the level of asset allocation and on the level of asset classes. For example, if your domestic stocks do really well, you may sell a portion to rebalance your dometic allocation and buy international stocks.

You can rebalance your portfolio at any time, but you may want to set regular check-ins, whether quarterly or annually. There may be no need to rebalance if your asset allocation hasn’t really shifted. One general rule to consider is the suggestion that you rebalance your portfolio whenever an asset allocation changes by 5% or more.

What’s the Deal with Target Date Funds?

One tool that some investors find useful to help them set appropriate allocations is a target date fund. These funds, which were described briefly above, are primarily for retirement, and they are typically geared toward a specific retirement year (such as 2030, 2045, 2050, and so on).

Target funds hold a diverse mix of stocks and fixed-income investments. As the fund’s target date approaches, the mix of stocks and bonds the fund automatically adjusts to a more conservative allocation — aka the fund’s “glide path.”

For example, if you’re 35 and plan to retire at 65, you could purchase shares in a target-date fund with a target date 30 years in the future. While the fund’s stock allocation may be fairly substantial at the outset, as you approach retirement the fund will gradually increase the proportion of fixed-income assets that it holds.

Target-date funds theoretically offer investors a way to set it and forget it. However, they also present some limitations. For one, you don’t have control over the assets in the fund, nor do you control how the fund’s allocation adjusts over time.

Target funds are typically one-size-fits-all, and that doesn’t always work with an individual’s unique retirement goals. For example, someone aggressively trying to save may want to hold more stocks for longer than a particular target date fund offers. Also, as actively managed funds, they often come with fees that can take a bite out of how much you are ultimately able to save.


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The Takeaway

While many investors spend time researching complex issues like bond yields and options trading, understanding and executing a successful asset allocation strategy — one that works for you now, and that you can adjust over the long term — can be more challenging than it seems.

Although asset allocation is a fairly simple idea — it’s basically how you divide up different asset classes in your portfolio to help manage risk — it has enormous strategic implications for your investments as a whole. The three main factors that influence your asset allocation (goals, risk tolerance, and time horizon) seem straightforward enough as separate ideas, yet there is an art and a science to combining them into an asset allocation that makes sense for you. Like so many other things, arriving at the right asset allocation is a learning process.

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).


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About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.



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

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

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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.
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How to Start Investing in Stocks

How to Invest in Stocks: A Beginner’s Guide

Stocks are shares of ownership in a company. To start investing in stocks, you would find a company that you believe may grow or appreciate in value over time, then purchase its stock through a brokerage account. If the stock price rises, you could sell your shares and potentially make a profit — or suffer a loss, if share prices decline.

Of course, when it comes to investing in stocks as a beginner, you’ll want to learn the basics so that you’re confident and comfortable with the decisions you make. Here is a step-by-step guide for those who want to start investing in stocks now.

Key Points

•   Stocks represent shares of ownership in a company and can be purchased through a brokerage account.

•   Before investing in stocks, it may be wise to determine your investing approach and consider your time horizon.

•   Different ways to invest in stocks include self-managed investing, using a financial advisor, or utilizing robo-advisors.

•   The amount you invest in stocks will likely depend on your budget and financial goals.

•   Investors may want to choose stocks based on thorough research, including analyzing a company’s financial statements and valuation metrics.

How to Start Investing in Stocks: 5 Steps

Taking the first step to invest in stocks is more straightforward than you’d expect. But it may be a good idea to sit down and think through your approach, strategy, goals, and more, before actually throwing some money into the markets. Here is a broad, basic rundown of how to start investing in stocks:

▶️ Watch the video: How to Trade Stocks

1. Determine Your Investing Approach

As noted, before you get started investing in stocks, you need to determine your investing approach. Because every person has unique financial goals and risk tolerances, there is no one-size-fits-all strategy to begin investing in the stock market.

Most people will need to decide whether they want a hands-on approach to investing or whether they’d like to outsource their wealth building to some sort of financial professional, or service.

Additionally, investors need to consider their time horizons before investing in stocks. Some investors want to invest long-term — buying and holding assets to build wealth for retirement. In contrast, other investors are more interested in short-term trading, buying and selling stocks daily or weekly to try and make a quick profit. The type of investor you want to be will help determine what kind of stocks you should buy and your investing approach.

2. Decide How Much You Want to Invest in Stocks

How much you invest will likely depend on your budget and financial goals. You may decide to invest with whatever you can comfortably afford, even if that doesn’t amount to much.

Fortunately, it’s fairly easy to start investing even with relatively little money. Many brokerage firms offer low or no trading fees or commissions, so you can make stock trades without worrying about investment fees eating into the money you decide to invest.

Additionally, many brokerage firms offer fractional share investing, which allows investors to buy smaller amounts of a stock they like. Instead of purchasing one stock at the value for which the stock is currently trading — which could be $1,000 or more — fractional share investing makes it possible to buy a portion of one stock. Investors can utilize fractional investing to use whatever dollar amount they have available to purchase stocks.

For example, if you only have $50 available to invest and want to buy stock XYZ trading at $500 per share, fractional share investing allows you to buy 10% of XYZ for $50.

3. Open an Investment Account

Once you’ve determined your investing approach and how much money you can invest, you’ll need to open a brokerage account to buy and sell stocks and other securities.

Several investment accounts might make sense for you, depending on your comfort level in managing your investments and your long-term financial goals. But in a general sense, there are a few options for investors: Full-service brokerages, online brokerages, and robo-advisors. But you can also invest using a retirement account, too.

Full-service brokerages

Many investors may use traditional brokerage firms, also known as full-service brokerages, to buy and sell stocks and other securities. A full-service brokerage offers additional services beyond just buying and selling stocks, such as investment advice, wealth management, and estate planning. Typically, full-service brokerages provide these services at high overall costs, while discount and online brokerages maintain scaled-down services with lower overall costs.

A full-service brokerage account may not be the best option for investors just getting started investing in stocks. These firms often require substantial account minimum balances to open an account. This option may be out of reach for most in the early stages of their investing journey.

Online brokerage

An online brokerage account may be ideal for most beginning investors looking to have a hands-on approach to trading stocks and building a financial portfolio. Many online brokers offer services with the convenience of an app, which can make investing more streamlined. If you feel confident or curious about how to start investing at a lower cost than a full-service brokerage firm, opening an account with an online broker could be a great place to start.

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

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*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.

Robo-advisor

If you’re interested in investing but want some help setting up a basic portfolio, opening an investment account with a robo-advisor might be best for you. A robo-advisor uses a sophisticated computer algorithm to help you pick and manage investments. These automated accounts generally don’t offer individual stocks; instead, they build a portfolio with a mix of exchange-traded funds (ETFs). Nonetheless, it’s a way to become more familiar with investing.

Retirement option: 401(k) and IRAs

Retirement accounts like employer-sponsored 401(k)s or individual retirement accounts (IRAs) are tax-advantaged investment accounts that can be great for the beginning investor trying to build a retirement nest egg. These accounts offer investors a range of investment choices, including individual stocks. You may also have access to tutorials, advisors, or other resources to help you learn how to start investing in these accounts.

💡 Ready to start retirement investing? Consider opening an IRA online.

4. Choose Your Stocks

Deciding what individual stocks to invest in can be challenging for most investors. There are countless ways to evaluate stocks before you buy.

Before choosing your stocks, you generally want to do some homework into a company’s inner workings to understand the company’s overall valuation and the stock’s share price.

As a beginning investor, you want to get comfortable reading a company’s balance sheet and other financial statements. All publicly-traded companies must file this information with the Securities and Exchange Commission (SEC), so it shouldn’t be difficult to track those statements and filings down.

One of the most fundamental metrics for understanding a stock’s value compared to company profits is its price-to-earnings (PE) ratio. Others include the price-to-sales (PS) ratio and the price/earnings-to-growth (PEG) ratio, which may be helpful for companies that have little to no profits but are expanding their businesses quickly.

These metrics, and other financial ratios, may help you determine what stocks to buy. And the advantage of owning individual stocks is that you can get direct exposure to a company you believe has the potential to grow based on your research. The downside, of course, is that investing doesn’t come with guarantees, and your stock’s value could decline.

💡 Recommended: 7 Technical Indicators for Stock Trading

5. Continue Building Your Portfolio

After you’ve decided what stocks to invest in, you generally want to continue building a portfolio that will help you meet your financial goals.

One way to bolster your portfolio is by buying mutual funds and ETFs, rather than individual stocks. A potential benefit to investing in funds that hold stocks is that you may avoid some of the risks of being invested in individual stocks that may not perform well.

Whether investing in individual stocks or funds, you may want to consider the level of diversification in your portfolio that feels right for you. There is no consensus about the right way to diversify investments. For one person, ideal diversification could mean owning 20 stocks in different industries. For another, it could mean owning the “whole” market via a handful of mutual funds.

Once you get more comfortable investing in stocks and funds, you may employ other investing strategies. 

Stock Tips for Beginners

As you wade into the markets, it can be a good idea to keep a few things in mind.

•   Consider Your Approach Carefully: As mentioned, some investors like to have a hands-on approach to investing (active), while others prefer a more passive approach. Active investors want to make decisions on their own, picking what stocks are right for them and building a portfolio from the ground up. This self-managed strategy can be time-consuming but an excellent option for investors who have a general understanding of the markets or would like to learn more about them. Take some time to think about the pros and cons of each approach.

•   Think About Asset Allocation: Asset allocation involves spreading your money across different types of investments, like stock, bonds, and cash, in order to balance risk and reward. Determining a portfolio’s asset allocation can vary from person to person, based on financial goals and risk tolerance.

•   Compare Account Costs and Features: No matter where you decide to open your investment account, be sure to research and compare costs and features within the account. For example, many brokerage accounts charge investment fees and commissions for making trades, while some do not, though other fees may apply. You should check with your brokerage’s fee schedule to get a good idea of what costs may be applicable.


Test your understanding of what you just read.


The Takeaway

Historically, investing in the stock market has been a way for some individuals to build personal wealth. These days, it’s never been easier for new investors considering getting into stocks to start. Whether you choose to work with a financial advisor or use an online broker or app, there are several ways to find a method that makes stock investing approachable, fun, and potentially profitable. 

Of course, there are no guarantees, so it’s wise to take a step-by-step approach, start small if you prefer, do some research using the many resources available, and see what comes as you gain experience and confidence.

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

Do you need a lot of money to start investing in stocks?

You don’t need a lot of money to start investing in stocks. Many brokerages allow investors to start investing with relatively little money, and many also offer fractional investing features and options.

Are there fees when investing in stocks?

There may be fees involved with investing in stocks, such as commissions or trading fees. Whether an investor is charged a fee will ultimately come down to the specific brokerage or platform they’re using to invest.

Is stock trading good for a beginner?

Stock trading, or day-trading, is generally for more advanced investors. But stock trading over longer periods of time may be good for investors to learn to get a hang of the markets. Beginners who are interested in stock trading may want to consult with a financial professional to get a better idea of a suitable trading strategy.

Should beginner investors buy individual stocks or stock funds?

Many financial professionals would likely recommend that beginner investors buy funds rather than individual stocks, as they offer some built-in diversification, in many cases. That said, what an investor ultimately decides to do should be dictated by their overall strategy and goals.

Is stock investing safe for beginners?

Stock investing is not necessarily safe for beginners or veteran investors. Investing has its risks, and there are investment types with different levels of risk that investors should familiarize themselves with.


Photo credit: iStock/

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.

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Tax-Friendly States That Don't Tax Pensions or Social Security Income

Tax-Friendly States That Don’t Tax Pensions or Social Security Income

There are a grand total of nine states that don’t tax retirement income, and that’s because those states don’t tax income at all. This can be important for seniors to know, as holding onto as much retirement income as possible can be important — whether it’s coming from pensions, Social Security, a 401(k), or elsewhere.

Equally important to know: As of 2025, there are 15 states that don’t tax pensions, and 41 states — plus the District of Columbia — that don’t tax Social Security benefits. Paying less in taxes can lower the strain on a retiree’s budget and help their money last longer. That becomes especially important when and if inflation shrinks purchasing power — as it has in recent years.

Key Points

•   Nine states do not tax income, including retirement income, providing significant savings for retirees.

•   Fifteen states exclude pension income from taxes, while 41 states and the District of Columbia do not tax Social Security benefits.

•   Nevada, Wyoming, and Delaware offer low property and estate taxes, benefiting retirees.

•   Dual residency is an option that can influence tax obligations for retirees.

•   When selecting a state, consider the overall cost of living and other taxes, not just income tax.

How Much Can State Taxes Take Out of Retirement Income?

Each state taxes income, including retirement income, differently. So, there are different states that don’t tax pensions, and then there are states that don’t tax Social Security, etc.

Accordingly, how much of a bite state taxes take out of retirement income can depend on several factors, including the applicable tax rate where you live, and your specific tax brackets.

Taxes can be an important consideration when choosing where to retire, and when to retire.

Getting your financial house in order is also important. A money tracker app can give you a bird’s eye view of your finances and help you keep tabs on where your money is coming and going.

Understanding State Income Tax

As of 2025, 41 states levy taxes on wage and salary income, while nine states do not assess individual income tax. The state of New Hampshire exclusively taxes dividend and interest income, while Washington taxes capital gains for certain high-income individuals.

In some states, the same tax rate applies to all taxable income. Other states use a graduated tax system with individual tax brackets, similar to the way the federal tax system works.

California has the highest marginal tax rate, at 13.30%. Other states with double-digit tax rates include Hawaii (11.0%), New York (10.90%), New Jersey (10.75%), and Oregon (9.90%). Aside from the states that have no income tax, the lowest marginal tax rate belongs to North Dakota and Arizona, which both have an income tax rate of 2.50%.

Further, if you were to look at the average retirement savings by state, it may help provide some more insight into where many retirees live — and why.

15 States That Don’t Tax Pensions

Altogether, there are 15 states that don’t tax federal or private pension plans. Some of these are states that have no income tax at all; others have provisions in state law that make them states with no pension tax. Here are which states don’t tax pensions:

State

Pension Tax Policy

Alabama Pension income excluded from state income tax
Alaska No state income tax
Florida No state income tax
Hawaii Pension income excluded from state tax
Illinois Pension income excluded from state tax
Iowa Pension income excluded from state tax
Mississippi Pension income excluded from state tax
Nevada No state income tax
New Hampshire Only taxes interest and dividend income
Pennsylvania Pension income excluded from state tax
South Dakota No state income tax
Tennessee No state income tax
Texas No state income tax
Washington Only taxes capital gains for high income earners
Wyoming No state income tax

Keep in mind that state or local government employee pension benefits may be treated differently. New York, for example, specifically excludes pension benefits paid by state or local government agencies from state income tax. If you move to another state, however, that state could tax your New York pension benefits.

41 States That Don’t Tax Social Security

Understandably, many people have questions about Social Security, including whether the program will remain solvent in the future. Another big one: How will taxes affect your benefit amount? That’s why it’s important to know which states don’t tax Social Security.

The good news is that 41 states and the District of Columbia do not tax Social Security benefits. So if you’ve chosen to retire, or at least are thinking about choosing a retirement date (which can affect your total Social Security payouts), you don’t need to worry about it. Similar to the states that don’t tax pensions, these states either have no income tax at all, offer exemptions, or have elected to exclude Social Security benefits from taxable income calculations.

State

Social Security Tax Policy

State

Social Security Tax Policy

Alabama Not included in income tax calculations Missouri Not included in income tax calculations
Alaska No state income tax Nebraska Not included in income tax calculations
Arizona Not included in income tax calculations Nevada No state income tax
Arkansas Not included in income tax calculations New Hampshire Not included in income tax calculations
California Not included in income tax calculations New Jersey Not included in income tax calculations
Delaware Not included in income tax calculations New York Not included in income tax calculations
Florida No state income tax North Carolina Not included in income tax calculations
Georgia Not included in income tax calculations North Dakota Not included in income tax calculations
Hawaii Not included in income tax calculations Ohio Not included in income tax calculations
Idaho Not included in income tax calculations Oklahoma Not included in income tax calculations
Illinois Not included in income tax calculations Oregon Not included in income tax calculations
Indiana Not included in income tax calculations Pennsylvania Not included in income tax calculations
Iowa Not included in income tax calculations South Carolina Not included in income tax calculations
Kentucky Not included in income tax calculations South Dakota No state income tax
Louisiana Not included in income tax calculations Tennessee No state income tax
Maine Not included in income tax calculations Texas No state income tax
Maryland Not included in income tax calculations Virginia Not included in income tax calculations
Massachusetts Not included in income tax calculations Washington Not included in income tax calculations
Michigan Not included in income tax calculations Washington, D.C. Not included in income tax calculations
Mississippi Not included in income tax calculations Wisconsin Not included in income tax calculations
Wyoming No state income tax

Montana and New Mexico do tax Social Security benefits, but with modifications and exceptions.

8 States That Don’t Tax Capital Gains

Federal capital gains tax applies when an investment or asset is sold for more than its original purchase price. The short-term capital gains tax rate applies to investments held for less than one year. Investments held for longer than one year are subject to the long-term capital gains tax.

States can also tax capital gains, though not all of them do. The states that do not tax capital gains are the same states that do not have income tax or have special tax rules on which income is taxable. They include:

•   Alaska

•   Florida

•   Nevada

•   New Hampshire

•   South Dakota

•   Tennessee

•   Texas

•   Wyoming

As far as how much capital gains are taxed at the state level, the tax rate you’ll pay will depend on where you live. Some states offer more favorable tax treatment than others for capital gains.

13 States That Don’t Tax 401(k), TSP, or IRA Income

Yet another potential area where states can generate tax revenue is by taxing retirement accounts such as 401(k) plans, individual retirement accounts (IRAs), and Thrift Savings Plans (TSPs). In all, there are 13 states that don’t levy taxes on retirement income derived from these sources:

•   Alaska

•   Florida

•   Illinois

•   Iowa

•   Mississippi

•   Nevada

•   New Hampshire

•   New Hampshire

•   Pennsylvania

•   South Dakota

•   Tennessee

•   Texas

•   Washington

•   Wyoming

35 States That Don’t Tax Retirement Income From the Military

There are certain states that tax military retirement income, but most do not. In all, 35 states don’t tax military retirement income, including those that don’t have income taxes, and others that have specifically carved out exceptions for military retirement income.

•   Alabama

•   Alaska

•   Arizona

•   Arkansas

•   Connecticut

•   Florida

•   Hawaii

•   Illinois

•   Indiana

•   Iowa

•   Kansas

•   Louisiana

•   Maine

•   Massachusetts

•   Michigan

•   Minnesota

•   Mississippi

•   Missouri

•   Nebraska

•   Nevada

•   New Hampshire

•   New Jersey

•   New York

•   North Carolina

•   North Dakota

•   Ohio

•   Oklahoma

•   Pennsylvania

•   South Dakota

•   Tennessee

•   Texas

•   Washington

•   West Virginia

•   Wisconsin

•   Wyoming

9 States That Don’t Tax Retirement Income

As covered, there are a lot of different tax levels and tax types — some include different types of retirement income, some just involve plain old income tax itself. As such, it’s not really easy to determine which states don’t tax retirement income whatsoever. But if you were to boil it down to a list that accurately answers the question “which states don’t tax retirement income,” it would mirror the short list of states that don’t tax income at all.

•   Alaska

•   Florida

•   Nevada

•   South Dakota

•   Tennessee

•   Texas

•   Washington

•   Wyoming

In addition, as mentioned above, while New Hampshire does tax certain types of income, it doesn’t really tax most forms of retirement income. So if you live in this state, your Social Security benefits and pension benefits can go further when it comes to covering your retirement expenses.

5 States With Low Retirement Income Taxes

Taking everything into account — taxes on income, pensions, Social Security, military retirement income, and more — there are several states that offer retirees relatively low retirement income taxes. Aside from the nine that don’t tax income at all, these states may be a good option for seniors, as they offer low retirement income taxes in one form or another:

•   Alabama

•   Georgia

•   Mississippi

•   Pennsylvania

•   Washington

Which States Have the Lowest Overall Tax Burden on Retirees?

Again, there is a lot to consider when trying to determine an overall tax burden, especially on retirees. But if you were to whittle down a list of a handful of states in which the tax burden is the absolute least on retirees? It would come down to the states with the overall smallest income tax burden, and a few other factors.

Delaware

Delaware hasn’t been discussed much, and though it does have state income taxes, a few other factors make it particularly appealing for retirees. Specifically, its state income tax rate tends to be relatively low (2.2% – 6.6%), and it has low property taxes, no sales taxes, and no applicable estate taxes.

Nevada

Nevada is a state with no state income taxes — a big win for retirees — and that also has relatively low property taxes, and no estate taxes. It also doesn’t tax income from most retirement accounts, or military retirement income.

Wyoming

Wyoming is similar to Nevada in that it has no state income taxes, low property taxes, and no estate taxes. There are applicable sales taxes, but it’s a drop in the bucket compared to the overall tax burdens seen in other states.

Can You Have Dual State Residency?

Generally, most people are residents of just one state. It is possible, however, to have dual residency in two different states. This can happen if you live in each state for part of the year to attend school or to work.

For example, the state of Virginia distinguishes between residents who maintain a home in the state for 183 days or more during the year and domiciliary residents who claim Virginia as their legal state of residence. Under state law, it’s possible to be a resident of Virginia and a domiciliary resident of another state.

For instance, a college student from California who lives in Virginia during the school year would be a dual resident. However, you can have only one domicile — in this example, it would be California.

If you live and earn taxable income in two different states during the year, you may have to file tax returns in both those states unless a reciprocity agreement exists. Reciprocity agreements protect taxpayers who work in states other than the one in which they’re legal residents from being hit with double taxation.

What to Consider Before Moving to a Tax-Friendly State

Moving to a state that doesn’t tax pensions and Social Security could yield income tax savings, but it’s important to consider the bigger financial picture. Paying no or fewer income taxes on retirement benefits may not be much of a bargain if you’re stuck paying higher property taxes, or your heirs are left with steep inheritance taxes, for instance.

Also, consider the overall cost of living. If everyday essentials such as housing, food, and gas are higher in a state that has no income tax, then your retirement benefits may have less purchasing power overall. If costs end up being higher than you anticipated, you might end up working after retirement to fill any retirement income shortfalls.

The Takeaway

There are a number of states that tend to be more tax-friendly for retirees, and those generally include the states that don’t levy any income taxes. That list comprises states such as Alaska, Nevada, Texas, Florida, and Tennessee. But there are other potential taxes to take into consideration, and states all have different tax rules in regards to pensions, retirement accounts, capital gains, and more.

As such, if you’re hoping to save on taxes during retirement, you’ll need to do a little digging into the specifics to see what might affect you, given your unique financial picture. It’s wise to take into account other tax types as well (property taxes, etc.), and overall cost of living. Doing a thorough cost-benefit analysis before making a decision to move could be beneficial.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

See exactly how your money comes and goes at a glance.

FAQ

What is the most tax-friendly state to retire in?

The most tax-friendly states for retirees are states that don’t tax pensions and Social Security, and have a low tax-profile overall for sales and property tax. Some of the best states for retirees who want to avoid high taxes include Alabama, Florida, Georgia, Mississippi, Nevada, and South Dakota.

Which states have no 401(k) tax?

States that do not tax 401(k) distributions are generally the same states that don’t tax income. Those states include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming. New Hampshire and Washington don’t tax 401(k) distributions either.

Which states do not tax pensions?

States that do not tax pensions include the nine states that have no income tax — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Additionally, six states — Alabama, Hawaii, Illinois, Iowa, Mississippi, and Pennsylvania — exclude pension income from state taxation.

How can I avoid paying taxes on retirement income?

The simplest way to avoid paying taxes on retirement income is to move to a state that has the smallest applicable tax burden on retirement income sources. That would include the short list of seven states that don’t have any sorts of state income tax. You can also consult a professional.

Which states are tax-free for Social Security?

There are a grand total of 41 states that don’t tax Social Security benefits, and that list includes the nine states that don’t tax income at all.


About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.



Photo credit: iStock/RapidEye

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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.

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Examining the Price of Eating at Home vs Eating Out

Americans are spending more money to eat out than they do for groceries. According to USDA (U.S. Department of Agriculture) data, in the most recent year studied, 58.5% of money spent on food went toward food away from home, and the remaining 41.5% went toward food at home.

These expenses can be tweaked to stick to a budget, if needed. While cooking meals at home can be time-consuming, there are ways to make the process easier. And when you do eat out, there are a few simple steps you can take to save money.

Key Points

•   Americans currently spend more of their food budget on dining out than on groceries.

•   Cooking meals at home can lead to significant savings and healthier eating habits.

•   To save money when dining out, consider sharing meals, skipping drinks, or ordering appetizers.

•   To save on groceries, use what ingredients are on hand, buy what’s on sale, and shop at wholesale clubs.

•   Gradually increasing the number of home-cooked meals can improve both health and finances.

Cooking at Home vs Eating Out: How They Stack Up

The pros and cons of eating at home vs. eating out have long been debated. As you’re deciding between the two, here are some factors to consider.

Is It More Expensive to Eat Out?

Because of inflation, grocery prices have been on the rise over the past year, though not as much as eating out. According to USDA data, the cost of food at home rose 1.2% in 2024, while the cost of food away from home rose 4.1%. That percentage for food at home is a bit below the usual figure, while the change for food away from home outpaced the typical annual statistic. That means dining out may drain your checking account more quickly than eating at home would.

Also, of course, eating out can involve additional charges vs. eating at home. You might have to pay for parking or transportation to the restaurant, you might order a pricey cocktail (or pay for bottled water), and then there will likely be a tip left as well. These can be reasons why eating at home can cost around $4-$6 per person, while dining out can be $15 or significantly more per person.

Is it Healthier to Eat at Home?

When you cook at home, you’re able to control what goes into each dish. You can easily make adjustments like reducing the amount of butter or using milk instead of cream.

And if you have any dietary restrictions or allergies, you don’t have to worry about consuming something you shouldn’t when you cook for yourself.

Research has shown that cooking at home typically leads to healthier choices. Generally, the more people cook at home, the healthier their diet, and the fewer calories they consume.

It can also be financially healthy to eat at home. For instance, you can cook with ingredients you have on hand or design your menu around what’s on sale at the supermarket. These moves can help you save on groceries.

How Much Time Will It Take to Cook at Home?

There’s no way around it, cooking can be time-consuming. But it also takes time to go out to eat or pick up a takeout order.

If you’re trying to do more cooking, don’t overextend yourself upfront. If you’re used to dining out several nights a week, pick one or two nights to make dinner at home. You can gradually increase the frequency to three nights a week, and so on.

Cooking is like any other skill. The more you do it, the better you’ll get. Find some go-to recipes that are easy to prepare and affordable. For instance, sheet pan dinners can be great for those with a hectic schedule. Stock your pantry with the essentials so you’ll have all the staples you need on hand. (Tip: Shopping at wholesale clubs can reduce the costs of those staples.)

Over time, you’ll become more comfortable in the kitchen, and what used to take you a half hour to do, will take you just minutes. Plus, you’ll be rewarded with a delicious meal you made yourself. Now you’ve maximized your time and money!

Recommended: Guide to Practicing Financial Self-Care

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Tips for Saving Money While Dining Out

Going to your favorite restaurant is one of life’s little pleasures. And you don’t have to give it up. There are a few ways to curb your spending, and manage your money, while still enjoying a great meal. Here are some simple strategies that could help reduce your bill.

1. Not Ordering a Drink

Skip the drink the next time you want to cut down on your restaurant tab. Restaurants tend to substantially mark-up the prices of drinks. They may charge two to three times the bottle cost for craft beer, for instance.

Or, if you want to treat yourself to one drink, spend wisely by sticking to just one and really savor it.

2. Skipping Dessert

A lot of the mark-up for desserts goes toward labor costs. A talented, creative pastry chef can be expensive to keep on staff. As a result, many high-volume casual restaurants outsource their desserts.

One creative way to save money is to eat your dinner out and then have dessert at home.

3. Sharing a Meal

Portion sizes at restaurants tend to be oversized. Share a salad and an entree with your dining mate to cut costs and calories. (You can use a peer-to-peer transfer app to split the bill.)

If your friend or family isn’t interested in sharing, save half of your meal for lunch or dinner the next day.

4. Go During Happy Hour

Instead of meeting friends for dinner, join up for happy hour instead. You can catch up over drinks and an appetizer or two, while enjoying discounted happy hour prices. You’ll get the experience of eating out, and pay less for it. You can put the money you save in your bank account.

5. Ordering an Appetizer as Your Meal

Instead of a full entree, order from the appetizer menu instead. These items typically cost less and may come in smaller portion sizes, too.

6. Limiting the Number of Times You Eat Out

If you go to restaurants a lot, you could start to cut back. For example, you could save eating out for once or twice a week. Not only does that make it feel more special, you can savor every bite without blowing your budget.

Recommended: 10 Personal Finance Basics

The Takeaway

Eating out can be expensive, but there are ways to trim costs so that you can enjoy your food without stressing over the bill. For instance, skipping extras like dessert can keep the price down. And eating at home a little more often could help you save money — and may be healthier as well. With a bit of effort, you can likely hold onto more of your cash when paying for food.

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Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.


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SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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Binary Options Trading vs Gambling: How to Tell Them Apart

Options Trading vs Gambling: How to Tell Them Apart


Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

Gambling is typically defined as risking something of value on an uncertain event. Although common forms of gambling include lottery games, blackjack, or sports betting, the line between gambling and investing can be less distinct. For example, binary options are unlike standard options, as they involve an all-or-nothing payoff that makes them more akin to gambling.

It’s important to know that there are some important differences between options trading and gambling, however. Understanding the similarities and differences can help you decide whether your options trading behavior is investing or gambling.

Key Points

•   Options trading can resemble gambling due to high risks but is legitimate with a solid strategy and risk management.

•   Protective collars, involving holding assets and using options, limit losses and reduce risk.

•   A well-defined trading strategy may incorporate stock analysis, technical and fundamental indicators, and risk mitigation.

•   Social pressure and excitement can blur the line between investing and gambling, leading to irrational decisions.

•   Potential outcomes range from significant losses to profits, emphasizing the need for informed and strategic trading.

What Is Options Trading?

Options trading is the trading of contracts that give a purchaser the right — but not always the obligation — to buy or sell a security, like a stock or exchange-traded fund (ETF), at a fixed price within a specific period of time. Since options contracts fluctuate in value, many traders can buy or sell the contracts before expiration for a profit or loss, just like they would trade a stock or bond.

Options are financial derivatives, meaning an option contract’s value is derived from the value of an underlying asset.

There are two main types of options: call and put options. A call option gives the holder (or buyer) the right to buy an underlying asset, and a put option gives the holder the right to sell it. In general, if you think the underlying asset price will go up, you would buy a call option. But if you believe the underlying asset price will go down, you would buy a put option.

Buying a put or call option, in of itself, is a long strategy. However, options traders may also sell options or use advanced combinations of buying and selling options to pursue certain outcomes. There are many strategies for trading options, whether you anticipate rising, falling, or neutral market trends. Options can be a way to hedge risk or increase leverage for a given investment.

Recommended: Options Trading 101: An Introduction to Stock Options

Weekly Options

Most options contracts expire on the third Friday of each month. However, many underlying securities also have options that expire weekly. These options are referred to as weekly options. Weekly options often have lower liquidity and higher volatility, since there is less time to smooth out the ups and downs of stock movement. This short timeframe makes weekly options more speculative since small price movements can have an outsized impact on your premium.

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.


Is Options Trading Gambling?

There are many risks in playing the market, so investors should be cautious with their investments and have a risk mitigation plan in place before making any type of stock or option trade. Although options trading is a legitimate investment activity, it involves significant risks that, without a solid strategy, can resemble gambling behavior.

Are Weekly Options Gambling?

Weekly options — along with day trading — are another form of investing in the stock market that shares some characteristics with gambling. If you find yourself rapidly making trades in weekly options without a system in place, trading from social pressure, or because of excitement, you may be gambling rather than investing.

Mitigating Risk When Trading Options

Risk management is one of the most important parts of a solid investment strategy. If you are trading options, it’s crucial to have a plan for handling risk. One way that you can protect your capital and manage risk when trading options is through the use of protective collars.

For example, protective collars involve holding the underlying asset, selling a call option, and buying a protective put against it. This is designed to limit potential losses. This may reduce your risk of loss from larger-than-expected moves, but also can reduce your overall gains.

How to Tell if You Are Investing or Gambling

There are no hard-and-fast rules to determine the difference between investing and gambling, but here are a few questions you can ask yourself to help tell the difference.

Trading Due to Social Pressure

If you find yourself trading options due to social pressure, that can signify that your activities are closer to gambling than investing. It can be common — especially in a bull market — for people to talk about investing with friends and co-workers. If you find that you are trading due to social pressure, especially without a financial plan in place or understanding of your risk tolerance, that may be a sign that you should reconsider trading stocks or options.

Trading Without a System

Having a system in place for how and when you trade is a good indicator that you are investing, rather than gambling. An investment system can include things such as stock analysis, technical and fundamental indicators, and a risk mitigation plan for what to do when a trade moves against you. If you are trading based on hunches and chance, that may indicate that you’re gambling and not investing.

Trading Because It Can Be Exciting

For some, there can be a degree of excitement that comes with making money. If that excitement is the primary reason you’re trading, however, that may be more akin to gambling than actual investing. It can be hard to separate emotions from rational thinking when making stock and option trades, which is another reason to have a trading strategy in place.

Investing With SoFi

There are no hard-and-fast rules that determine whether any particular trading behavior is investing or gambling. Instead, you might think about the reasons why you are investing. If you are trading options for the excitement, to fit in with others, or without a system, that may be a sign that your activity is closer to gambling than actual investing.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

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

What are the reasons to consider trading options?

For experienced investors, there may be many reasons to trade options. One reason can be to hedge an existing investment. Another possible reason is to get additional leverage. With leverage in options trading, you may make (or lose) more money with a smaller investment.

What are the reasons to not trade options?

Options trading does carry some risk for investors, which can be one reason not to participate in the options market. Options are also typically more volatile than their underlying stock, and some options strategies run the risk of losing your entire investment or even putting you in a position where you owe more than you have available. If you are just starting your investment journey, it might be a better idea to get practice by making less risky investments to gain experience.

Can you lose money from options trading?

As with nearly all investments, options trading carries the risk of losing money. Some options trading strategies run the risk of losing 100% of your investment. If you buy a call option and the stock closes at expiration below your strike price, your option will expire worthless. If you sell call options, you can even be in a position of losing a potentially unlimited amount.


Photo credit: iStock/fizkes

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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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.
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.

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