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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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States Most Dependent on Expiring $600-a-Week Unemployment Benefits

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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This week’s expiration of the $600 boost to unemployment benefits would leave millions of Americans without a vital source of income amid a global pandemic.

As of this writing, nearly 32 million Americans are claiming unemployment insurance benefits, according to the U.S. Department of Labor. Some states — including Nevada and Hawaii — are more vulnerable with a higher percentage of residents out of work.

To find the states most affected by the pending expiration of the additional $600 in unemployment benefits, we analyzed earnings data and the number of workers on unemployment insurance to determine the percentage of statewide earnings provided by the coronavirus relief bill.

Key findings

  • Nevada has the most to lose from the expiration of the additional unemployment benefits. In fact, 21.3% of Silver State residents are receiving unemployment insurance, equating to an estimated $178 million weekly in additional unemployment benefits. That total is 14.1% of the state’s weekly earnings.
  • Hawaii comes in second, according to MagnifyMoney’s calculations. In the Aloha State, 20.7% of the workforce is getting unemployment insurance. That extra $600 weekly equals about $77 million, or 11.8% of total earnings here.
  • Louisiana rounds out the top three. Our researchers estimate the value of the $600 unemployment benefits to be worth 11.7% of total weekly earnings in the state.
  • Other states hit harder by the coronavirus pandemic, including Georgia, California, New York and Connecticut, also crack the top 10.
  • Idaho, Utah and Wyoming hold the bottom three spots. In fact, the bottom eight states are all in the West or Midwest.
  • There is an 11.4 percentage-point difference between the top-ranked and bottom-ranked states. The five states at the bottom lose an average of 3.2% of income with the added benefit expiring, while the top five stand to lose an average of 11.5% of income.
  • The states at the bottom also tend to be less populous than states at the top. The top 10 ranked states have an average population of 10.6 million, compared with 2.4 million for the states at the bottom.

States losing most from extra unemployment benefits expiration

No. 1: Nevada

In Nevada, the occupation with the highest number of workers is food preparation and service, but that industry has an unemployment rate of more than 24%, according to U.S. Bureau of Labor Statistics data.

With its major industries struggling, many Nevada workers are relying on unemployment insurance. Overall, the state has an unemployment insurance rate of 21.3%. MagnifyMoney estimates that the extra $600 per week from the coronavirus aid bill was providing nearly $178 million a week, or about 14.1% of total weekly earnings.

Further complicating this, new coronavirus cases remain high in the state, so it’ll be difficult to get workers back if tourists can’t feel safe in Nevada. Consumer spending in Nevada as of July 12 was 8% lower than it was in January, but that likely accounts for recovery payments that began in April. At the lowest point at the end of March, consumer spending in Nevada was 38% lower than in January.

No. 2: Hawaii

Hawaii, like Nevada, depends on tourism to propel its economy. About 13% of employees work in food preparation and serving-related occupations. Overall, roughly 20.7% of state workers are on unemployment insurance. We estimate the additional $600-per-week payments account for 11.8% of total earnings in the state.

Hawaii has the second-lowest number of total cases in the country, behind Vermont. The state requires out-of-state visitors to self-quarantine for 14 days, which could discourage travelers and prevent certain tourism-related industries from ramping up.

Starting Sept. 1, visitors can get a COVID-19 test within 72 hours of their trip to Hawaii and avoid the 14-day quarantine if they can show proof of a negative result.

No. 3: Louisiana

Louisiana is the third-most dependent state on the extra unemployment benefits, according to MagnifyMoney’s analysis. The unemployment insurance rate here — 16.6% — is a bit lower than in Nevada and Hawaii.

But Louisiana benefited more than a lot of states from the flat $600 per week benefit because of lower weekly earnings and the low cost of living in the state. The average Louisiana worker earns $850 a week, compared with $908 a week in Nevada and $1,056 a week in Hawaii. We estimate that the total weekly earnings in the state are $1.6 billion, and that weekly income from the extra $600 in unemployment benefits is equal to just under $188 million — or 11.7% of weekly earnings.

In the state, consumer spending has recovered and is higher now than it was in January. Much of the recovery came after the coronavirus relief bill was signed into law at the end of March. Without the extra unemployment benefits and because of a recent spike in positive cases — in fact, New Orleans has again shut down bars — that spending figure will be one to watch.

States losing least from extra unemployment benefits expiration

No. 51: Idaho

Idaho has the lowest unemployment insurance rate in the country at 3.9%. MagnifyMoney estimates this state receives just over $17 million per week in additional unemployment benefits, compared with overall weekly earnings of just under $643 million. That means the extra unemployment benefits are worth just 2.7% of overall earnings.

Idaho has a low number of workers in two key industries compared with other states:

  • Arts and entertainment
  • Personal care services

These two industries have been hit particularly hard across the country, so Idaho’s economy may be less vulnerable because of its lack of reliance on these sectors.

The other economic indicators for Idaho are also strong. Spending is up 2.7% as of July 12 compared with January, while time spent outside the home is approaching normal levels.

No. 50: Utah

We estimate additional unemployment benefits from the coronavirus relief bill are worth about 3% of total earnings in Utah. Roughly 4.7% of workers in the state are on unemployment insurance, third-lowest in the country.

Utah is traditionally a good state to find work. In December 2019, the state saw its lowest unemployment rate — 2.4%. Unlike other states where retail salespersons are among the most common workers, the most common in Utah is customer support representatives, a job that generally can be handled remotely.

Workers in Utah make an average of $950 a week, fourth-highest in the bottom 10. Utah has seen a recent rise in coronavirus cases, which may put its strong economic position in jeopardy.

No. 49: Wyoming

Unemployment hasn’t been a huge problem in Wyoming. Department of Labor data shows the state has an unemployed insurance rate of 5.1%, far below other states at the top. One potential reason is the state’s reliance on construction and extraction jobs. The construction industry has an average unemployment rate similar to the national average.

After factoring in local weekly wages of $957 a week, we estimate that the additional unemployment benefits are worth about 3.2% of total earnings.

Latest on extra unemployment benefits expiration

  • Though the enhanced unemployment benefits officially expire July 31, states only provided the $600-a-week boost through the week ending July 25 or July 26 because of how benefits are paid out.
  • Senate Republicans on July 27 unveiled a $1 trillion package that proposes cutting the extra $600-a-week payments to $200, which would last for about two months. At that point, unemployed people would earn 70% of their wages prior to losing work. House Democrats want to see the added $600 benefits extended until January.

If the diminished $200-a-week benefit plan were passed into law, states would lose out on hundreds of millions of dollars per week. Nevada, for example, would go from receiving roughly $178 million a week based on current unemployment numbers to just over $59 million.

A theory behind the less generous benefits is that it will encourage people to return to work. With total job postings — as of July 24 — roughly 20% below where they were in January, it’s hard to see where the jobs might come from.

And according to data from the Census Bureau’s Household Pulse Survey (July 9 to 14), roughly 43% of people relying on unemployment benefits say they have little or no confidence in their ability to pay next month’s rent. With evictions resuming across the country, many unemployment benefits recipients may end up without income or shelter, which could potentially worsen coronavirus outbreaks.

Methodology

To determine the states losing the most from the expiration of the additional unemployment benefits, we first calculated the total amount earned in each state from the benefits by multiplying the number of people on unemployment insurance by $600 (the value of the additional benefits). We divided this number by the total weekly earnings in the state to create a comparative statistic. We then ranked the states from highest to lowest using this figure. Data on uninsurance claims (up to July 18) comes from the Department of Labor, while data on 2019 weekly earnings comes from the Bureau of Labor Statistics.

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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How Much Car Can I Afford: Auto Affordability Calculator

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If you’re asking “How much car can I afford?” use our auto affordability calculator. Television and radio ads talk about getting you into a beautiful new car right now, but it’s smart to see how much you can afford first. Budget methods such as the 20/4/10 rule can give you more guidance.

Auto affordability calculator

Input your desired monthly payment, down payment and other relevant details below to find out how much car you can afford.

Other MagnifyMoney auto loan calculators

After you use our affordability calculator, have our auto payment calculator available on your smartphone when you talk to dealerships. The calculator allows you to estimate your car payment based on a vehicle’s price. This way, you could double-check any quotes a dealer gives you to see whether they’re being accurate or trying to slip in extra products.

If you’re unsure whether you want to get a new car or if refinancing your current vehicle would be more in line with your budget, check out our auto refinance calculator. It allows you to see the estimated savings you would have over the life of your car loan if you refinanced. If your credit score has improved since you first took out your auto loan or loan interest rates have decreased, it may pay off to consider refinancing.

How to use our auto affordability calculator

You need to know a few things to get started, such as your down payment and how long you want the loan term to be. Play around with inputs and adjust various terms to see different results.

Find your desired monthly payment

To figure out what you can afford, first look at what you’re already buying. You should first determine your month-to-month expenses. It’s easy to know how much you make each month, but it’s important to know how much you spend in the same period.

See how much you spend by adding your fixed expenses or using a budget app. Based on how much you have remaining (and how much you want to continue saving), you’ll know how much you have available to spend on a car payment. If you don’t have much left over, you’ll need to make changes to your spending (or find ways to earn more money) before trying to fit in a car payment.

Keep in mind that a car will cost more than its payment — auto insurance, gas and maintenance should be in your budget, too. These costs highly depend on which type of car you have and how you use it.

  • If you have an older car and a long work commute, you may have to budget a lot for gas, but it may be cheap to insure.
  • If you have a newer car with great gas mileage, you may pay less in gas and maintenance but more in taxes and insurance.

Determine your down payment

The conservative rule of thumb, based on the 20/4/10 rule, is to put down 20% on an auto loan. If you can do more, that’s great!

IMPORTANT: You should still maintain a rainy-day fund. You should have extra cash on hand in case something on the car breaks or you want to take a vacation.

If you can’t put down 20% and need some help saving for a down payment, here are the best money-saving apps. Try to cover the taxes and fees on the car and any negative equity from a trade-in so that you don’t finance more than what the vehicle is worth.

Most states charge a sales tax, and your municipality might, too. You should expect to pay 8% to 10% of the vehicle’s sales price in taxes and fees.

Of course, not all things that a dealer presents as fees are necessary. For example, GAP insurance and an extended warranty are optional products. But some fees are nonnegotiable, including:

  • License
  • Registration
  • New-car delivery fees

Dealers will often say their document fee is nonnegotiable. Depending on the state and the dealership, document fees can range from $200 to near $1,000. If the total takes your breath away, ask them to reduce the car’s price to make up for it. You can read about dealer fees to know when buying a car. And here’s how much to put down on a used car.

Obtain your trade-in value and amount owed on trade

Look up how much your car is worth as a trade-in on a free industry guide site such as Kelley Blue Book. You’ll see a range of trade-in values, depending on the condition of your car — from fair to great.

If you don’t owe anything on your trade, input zero into the affordability calculator. If you still have a lien on your vehicle, contact your lender and ask for the current payoff, which is how much it would cost to pay off your auto loan. Here are further tips and tricks on what to know before you trade in your car.

Look up your credit score

Your credit score is a vital factor in the auto loan interest rates you could get. Typically, the better your credit score, the lower the APR. It’s easy to view your credit score for free. Some businesses also offer free credit score monitoring, so check with your credit card provider or bank.

If your score isn’t where you’d like it to be, here are six ways to improve your credit score. This usually takes some time, however. If you need a new car now, you could consider bad-credit car loans, though you’re likely to get a shorter repayment term and higher APR.

Estimate your interest rate

Now that you know your credit score, here are average APRs broken up by credit score that you could plug into the car loan calculator.

Choose your loan term

Based on the 20/4/10 budgeting rule, you shouldn’t finance a car for more than four years. The longer a car loan is, the more you’ll pay in total interest.

However, many people find a shorter term loan to be a challenge. The average car loan term in the U.S. is just less than six years. If you can, keep your car loan term short. If you can’t, get a longer loan and aim to pay it off faster.

As you pay it off, don’t deplete your savings. If you can, set aside money for unexpected car expenses, such as repairs or traffic tickets (though you should do your best to avoid those). Keep in mind repairs aren’t limited to old cars. For example, the car’s age doesn’t matter much if you run over a nail and need a new tire. Even if a repair is covered by insurance, you may still have to pay a deductible.

Look at more than just the monthly payment

When you pick out and buy a vehicle, the best way to stick to your budget is not to focus on the monthly payment. Instead, focus on:

The total price of the car

It can be easy to justify increases in monthly payments. You may think of a $40 payment increase being equivalent to a nice meal once a month. But $40 a month for four years, even without interest, is almost $2,000. (To avoid costly errors like this, you could read up on the common car loan mistakes many people make.)

The total price of financing

Many people only have eyes for the APR, but a longer loan with a lower APR can mean that you will pay more in interest. Compare the total interest charges of different loan offers as part of judging how much car you can afford.

The total ownership costs

Car ownership also involves paying for gas, insurance, maintenance and, eventually, repairs. The last part of the 20/4/10 rule states that your total transportation cost should be less than 10% of your monthly income.

Take the time to shop around for cars, car loans and even car warranties and insurance, and don’t be afraid to negotiate. You could fill out an online form at LendingTree and receive up to five potential auto loan offers from different lenders, depending on your creditworthiness.

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.