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401(k) Match Suspensions May Cost Workers $13 Billion Over Next Year

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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Workers in nearly every industry have been impacted by the coronavirus pandemic, with the unemployment rate hitting a new high in 2020 and pay decreases becoming typical.

Now, a study from MagnifyMoney estimates that workers may lose $13 billion over the next 12 months as employers suspend matching contributions to 401(k) and other defined contribution plans. At retirement, that would cost workers a total of $58.8 billion based on a 6% annual return.

According to a Plan Sponsor Council of America (PSCA) survey of employers, 16.1% of respondents indicated they were planning to suspend company-match programs this year amid the coronavirus crisis.

Key findings

  • Workers may lose $13 billion in matching contributions to their 401(k) and other defined contribution plans over a 12-month suspension should 16.1% of employers suspend retirement benefits. To put that into context, the company-match losses would be more than double as costly than the $5.7 billion Americans lose annually to early withdrawal tax penalties (prior to 2020).
  • The average company match lost to a 12-month suspension would be $1,134, and it would impact 11.4 million workers.
  • While younger workers typically have lower wages (and thus a lower match), the suspension hits them hardest, as they lose the opportunity to grow that match over their career. At a 6% compound annual growth rate, losing a $1,000 match at age 25 would mean $10,903 less in retirement at age 65.
  • A 30-year-old millennial with a median income of $40,000 potentially has more to lose at retirement from a suspended company match than Generation X and baby boomer co-workers, despite the lower income. At a 6% compound annual growth rate, the $1,106 match they lose would have grown to $8,504 at age 65. The lost match of $1,338 for a 54-year-old Gen Xer with a higher income of $51,571 grows only to $2,540 when they turn 65.

Millennials hit hardest by 401(k) match suspensions

More than 58 million Americans were active 401(k) participants in 2018. By the end of the first quarter of 2020, 401(k) plans held an estimated $5.6 trillion in assets. Now, as more employers are set to suspend matching 401(k) plans, Americans will be without one way to save for retirement.

After many millennials entered the workforce during the Great Recession, they now face another blow from an unprecedented economic disruption. While millennials would lose less ($4.9 billion) in a year from company-match suspensions than Gen Xers ($5.4 billion), they would have a lost opportunity cost almost three times higher than Gen Xers.

In total, at a 6% match rate, millennials may miss out on $29.7 billion in lost opportunity cost, which is more than:

  • Gen Xers at $10.3 billion
  • Generation Zers at $5.1 billion
  • Baby boomers at $0.8 billion

Take a 24-year-old millennial, for example. If they have a median income of $27,000 and lose a company match at a 6% annual growth rate, that $710 lost match could grow to $7,745 by the time they reach age 65.

On the other side of the millennial spectrum, a 39-year-old with a median income of $50,000 would see an average loss of $1,341 — or $6,101 by retirement age.

Since employers are only required to give 30 days’ notice before reducing or suspending contributions, some workers may lose their matches sooner rather than later.

How other generations are affected by 401(k) match suspensions

No generation will be immune to the financial toll of the coronavirus pandemic. As the youngest adult generation in the workforce, Gen Zers have lower median salaries, with longer to work before retirement:

  • At a 6% match rate, 913,000 Gen Z employees would face $444 million in lost matches in the next year and $5.1 billion in lost opportunities by age 65. A 20-year-old with a median income of just over $14,000 may lose just $380 in match suspension in a year, but — over time — that figure could have grown to $5,229 by the time they hit 65.
  • A 45-year-old Gen X employee may have a higher income of $50,100 and a lost match of $1,300. By age 65, however, that figure could have grown to $4,170. Gen Xers stand to lose a total of $10.3 billion in opportunity cost.
  • The 1.9 million baby boomers facing match suspensions will lose $2.2 billion in matches and $783 million in opportunity cost. A 60-year-old making $50,000 would lose $1,140 in a year, totaling just $1,526 lost when they reach retirement in five years.

Why saving for retirement earlier matters

Ken Tumin, founder of DepositAccounts, said it’s crucial to save early for retirement. “Starting early gives you a big advantage in building sufficient retirement savings for financial independence,” Tumin said.

He also said that, during a pandemic, 401(k) account holders may need to adjust their contributions if they face unexpected expenses or reduced income. Expect the unexpected by paying down debts and budgeting for an emergency fund, he said.

To recap, here are the reasons why saving for retirement early matters:

  • Build compound interest: Contributing even a small amount to your 401(k) will add up over time, potentially resulting in thousands of dollars saved by the time you retire.
  • Provide flexibility: If you’re going through a financial rough spot, starting early may allow for more flexibility to temporarily contribute less.
  • Prepare for income fluctuations: By setting aside money early, you’ll continue to watch your money grow even if you lose a job, are furloughed or are facing a pay cut.

Methodology

In May 2020, MagnifyMoney estimated the impact that company-match suspensions may have on American workers during the COVID-19 pandemic, based on recent surveys, income levels and participation rates of workers with access to 401(k) and similarly defined contribution retirement savings plans. Wage, contribution and match estimates are based on data from the Bureau of Labor Statistics (2019), the 2018 American Community Survey by the U.S. Census, the Plan Sponsor Council of America (2020), Fidelity Investments and Vanguard (2019) and the Stanford Center on Longevity (2018). Assumptions are based on a typical company match of 50% of the first 6% of employee contributions, or 3% total. Calculations presume a 12-month company-match suspension and a 6% compound annual growth rate.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Money Inflation: How Inflation Has Affected Your Money

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

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Do you remember when you used to be able to buy a regular cup of coffee for less than a dollar? How about gasoline? As recently as 2004, the average gallon of gas cost less than $2. Today, these prices are a distant memory. Inflation is the metric we use to describe the phenomenon of rising prices, which is a basic fact of economic life that you should know about.

Inflation is the gradual increase in the price of goods and services over time. As inflation rates rise, you’ll pay more for the same goods and services, which impacts your daily life, as well as your investments. In the U.S., the current inflation rate is 2.2% as of July 2019.

What is inflation?

Inflation is a general upward trend in the cost of goods and services across the economy, from the price of food to the cost of housing, gas and clothing. As inflation rates rise, the buying power of currencies like the U.S. dollar falls, which means you’ll pay more for a product than you did several years ago.

However, it’s not quite as simple as comparing the cost of milk from one year to the next. Rather, economists determine inflation by looking at the prices of a “basket” of products and services and then measure the average price changes over time.

How inflation affects your money

Inflation impacts the buying power of the dollar, which in turn erodes the value of a consumer’s cash reserves. Each year, your dollars buy fewer goods and services, even if it’s a small change from one year to the next.

While inflation is largely inevitable, there are ways you can protect your money against inflation. Start by looking at your savings account. Up to 99% of savings accounts have interest rates that fall below inflation rates, which means that even as your money grows, it’s not growing quickly enough to keep up with inflation. A MagnifyMoney study found the average savings account rate is just 0.26%, well below the average 2% inflation rate.

You are most susceptible to inflation if you keep large reserves of cash rather than investing your money in vehicles that are more resistant to inflation. Look for investments that have historically appreciated at greater rates than inflation, as well as those that are specifically designed to protect against inflation. Treasury Inflation-Protected Securities (TIPS) are the most direct investments that can help keep your money safe from inflation.

Most bond investments set interest rates that account for inflation, but a TIPS investment has a principal adjustment mechanism increases with inflation and decreases during times of deflation. When your TIPS has reached maturity, you’ll be paid the adjusted principal amount or the original amount, whichever is larger. These investments pay out fixed-rate interest twice a year – the rates also rise and fall with inflation and deflation rates. TIPS are a good way to diversify your portfolio and the most direct way to hedge your money against inflation.

How inflation is calculated

Economists measure inflation with the Consumer Price Index (CPI), which focuses on how inflation affects consumers; the Personal Consumption Expenditures (PCE) index, which is more tightly focused version of CPI; and the Producer Price Index (PPI), which is based on surveys of prices businesses charge for goods and services. These three indices measure the cost of baskets of products and services, and each month reports are published on changes in CPI, PCE and PPI.

In 2016 and 2017, the CPI surveyed approximately 24,000 individuals in the U.S. Those consumers provided the CPI with detailed data regarding their quarterly spending habits, while another 12,000 provided information on their spending over a two-week period.

One easy way to understand inflation is to compare the buying power of $100 over the course of the last several decades. Think of how much rent and other housing costs have increased over the years. Those increases are likely be due to a wide variety of factors, but one of them is inflation and the declining buying power of the dollar. This graph indicates the changing value of $100 in 2019 money:

A closer look at inflation rates historically

As you can see in the graph, inflation has held pretty steady since 1940. However, there are also some aberrations that reflect the state of the U.S. economy at any given time. For example, the economy experienced deflation during the years of the Great Depression through the 1930s, when markets crashed and unemployment rates sat at historic highs. Deflation is the opposite of inflation: When the buying power of a currency increases over time.

You can also see rapid inflation growth in the 1970 to 1980 period. The Great Depression and the 1970s are outside of the norm, and the Federal Reserve Bank tempers inflation rates to keep them around 2%. The Fed aims to keep inflation rates at about this rate to provide greater spending stability for consumers, promote high employment rates and to temper long-term interest rates.

The bottom line

Inflation is inevitable, and it has a direct effect on your money. It’s important to understand how inflation affects your money and to keep an eye on the rate of inflation over time.

Despite the fact that you can’t stop inflation and the impact it has on your cash reserves, you can take steps to protect your finances from inflation. Look into investments that have inflation embedded into their returns, such as as fixed-income securities. You can also explore bond investments that account for inflation in their interest rates and principal payouts, such as TIPS.

Seek out investments that have historically appreciated more quickly than inflation has increased at a rate greater than 2% each year. You may not be able to stop inflation, but by diversifying your portfolio and monitoring the CPI over the years, you can know what to expect and how best to protect your money.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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SIPC vs FDIC: What’s the Difference?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

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The Securities Investment Protection Corporation (SIPC) and the Federal Deposit Insurance Corporation (FDIC) each play a major role in consumer financial protection. The two agencies insure banks and other financial entities, so that if a bank were to fail, consumers and their money would remain protected.

The SIPC and FDIC serve different purposes, so you won’t necessarily be making a choice between the two. Rather, you should have an informed understanding of each entity, their similarities and differences and how these agencies can help you protect your money.

What’s the difference between FDIC and SIPC insurance?

While both the FDIC and SIPC insure banks and other financial institutions, they’re not interchangeable, and each serves a different purpose. In broad strokes, the FDIC is an independent federal agency that protects losses in deposit accounts, while the SIPC is a nonprofit membership corporation that protects clients of broker-dealers that are members of SIPC.

Here are a few key differences between the two entities.

 SIPCFDIC
What it is
  • Nonprofit membership corporation founded by federal statute
  • Independent federal agency formed to protect consumers against bank failures
What it covers
  • Stocks, bonds, CDs, Treasury securities, mutual funds and money market mutual funds
  • Deposit accounts (checking and savings accounts), CDs and money market accounts
What it does not cover
  • Declines in investment value
  • Commodity futures, investment contracts or fixed annuity contracts that aren’t SEC-registered

  • Stocks, bonds, annuities, mutual funds, money market funds, municipal securities or life insurance policies
How much it insures
  • Up to $500,000 per customer
  • Up to $250,000 per account holder for each deposit account type

SIPC vs. FDIC: What each one protects

The SIPC and FDIC offer financial protections for consumers. Both serve as essential entities to ensure financial safety for investors, whether large or small. The SIPC and FDIC, however, protect different types of accounts, which is why it’s important for consumer investors to understand what these entities do and do not insure.

The FDIC is primarily concerned with insuring various types of deposit accounts. It covers the following:

The SIPC covers clients of broker-dealers for investments, such as stocks, bonds, and CDs. More specifically, the SIPC covers the following:

  • Notes
  • Stocks
  • Bonds
  • Treasury stocks
  • Evidence of indebtedness
  • Debentures
  • Voting trust certificates
  • Collateral trust certificates, preorganization subscriptions or certificates
  • Puts, straddles, calls or privileges made on a national securities exchange in regard to foreign currency
  • Puts, straddles, calls, options or privileges on a security or collection of index securities. This includes interest made or based on its value
  • Investment contracts, certificates of interest or participation in profit-sharing agreements. These include in oil, gas or mineral royalties or leases
  • Security futures as defined in section 78c(a)(55)(A) of the Securities Investor Protection Act

It’s important to understand that SIPC insurance makes you whole if the firm managing your investments goes out of business. What it does not cover are losses from either bad investing strategy or market downturns. SIPC insurance won’t make you whole if the person managing your money makes terrible investment decisions, or if the account underperforms.

Additionally, the SIPC does not insure commodity futures, investment contracts or fixed annuity contracts that are not SEC-registered.

SIPC vs. FDIC: Coverage amount

Both the FDIC and SIPC also adhere to coverage limits, with coverage amounts differing under the two agencies. The SIPC covers up to $500,000 per customer, while the FDIC protects up to $250,000.

If a financial institution fails, the FDIC will replace consumers’ funds to the dollar up to $250,000, plus interest, up to the date the bank or other institution failed. That $250,000 coverage applies per individual per account account type. This means that if a customer has both a checking account and a savings account at one financial institution, they will be insured up to $250,000 per account, for a total of $500,000 in coverage. For those with a joint account, each individual will be covered for up to $250,000 each, for a total of $500,000 in coverage.

The FDIC provides a tool, called the Electronic Deposit Insurance Estimator (EDIE), that consumers can use to determine what will be insured, what won’t be and which limits and rules apply to an account.

The SIPC, meanwhile covers up to $500,000 per customer, with a $250,000 limit for cash. The SIPC offers limited protections for consumers, only offering protection when a broker-dealer fails. In other words, SIPC will not protect consumers from the decline in value in any securities, bad advice from a broker or inappropriate investment recommendations. Rather, the SIPC will insure investors’ money up to $500,000 per customer, replacing lost securities and stocks if a broker-dealer agency fails.

SIPC vs. FDIC: Which is better?

The SIPC and FDIC operate differently while still serving the same overall purpose of protecting consumer investments. If you hold a diverse portfolio that includes both deposit accounts and securities investments with a broker, you’ll likely need to find institutions that offer both SIPC and FDIC coverage.

Keep coverage limits in mind when making large investments, as that is a risk of this insurance. Remember that the SIPC, for example, will cover up to $500,000 in investments, but will only protect $250,000 in cash. The FDIC, meanwhile, will protect up to $250,000 per deposit account per customer, which means you can potentially protect $1 million across several types of accounts at one bank.

If you’re investing in securities, you’ll need SIPC insurance. When deciding on how to best invest your money, you may want to consider insurance coverage. You can also keep your investments spread across multiple financial institutions, further maximizing FDIC and SIPC coverage.

Neither the SIPC or FDIC directly charge for insurance. As such, consumers won’t pay anything or have to enroll in these programs. The coverage will be applied automatically to their accounts when working with an insured financial institution. However, these costs can be passed on to customers through charges and fees from a financial institution, which customers will not be able to control.

SIPC vs. FDIC: How to know if your account is insured

Not all banks or brokerages are insured. Before you invest or store your money with any institution, make sure it’s FDIC and/or SIPC protected, depending on the type of investment you’re making. Simply put, you can never escape the risk that a bank or brokerage will fail, so you shouldn’t go without FDIC or SIPC insurance.

Use the FDIC website to make sure your bank is backed by the FDIC. Once you’ve confirmed a given financial institution is covered by the FDIC, use the agency’s Electronic Deposit Insurance Estimator to learn the specifics of the kind of coverage you’ll receive. You can then keep that information on record so you can always have the information at hand.

The same applies if you hold securities investments with a brokerage. Check with your individual brokerage firm to make sure they’re insured by the SIPC. If you’re working with a firm that is currently or recently was insured by the SIPC but no longer is, the SIPC will protect your investments for up to 180 days after the brokerage firm ends their SIPC membership. If this happens, you may want to consider switching your investments to another brokerage firm that is insured by the SIPC.

SIPC vs. FDIC: The final word

It’s essential to protect your money, whether it’s stored in a checking account, savings account, a CD or any type of security. The FDIC and SIPC were established to do just that — protect consumer finances.

Every investment is worth protecting, both large and small, short-term or long-term, low-risk or high-risk. Before you commit to an investment or a financial institution, do your research to make sure that if trouble comes down the line, you and your financial future will remain safe.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.