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What Are Tariffs Anyway?

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By now, you’ve probably heard that President Donald Trump wants to up the ante in his trade war with China by unleashing a new round of tariffs. And maybe you remember his metals tariffs that hit the European Union earlier this summer, and now he’s threatening to double metals tariffs for Turkey. But perhaps what you’ve really been wondering all along is: What is a tariff, anyway?

Let us fill you in on some important context before you dive back into the latest trade tension escalations.

Tariffs: Defined

A tariff is a tax that the federal government levies on imported products. It’s often charged as a percentage of the value of a product that a U.S. buyer pays a foreign exporter.

For instance, the general tariff rate on an imported dishwasher is 2.4%. If a foreign exporter sets the price at $500, an American importer would have to pay an additional $12 tariffs on the machine, which makes the dishwasher’s total import price $512.

In the U.S., tariffs are collected at 328 ports of entry, which are controlled by Customs and Border Protection (CBP).

In order to get the foreign goods cleared through customs, U.S. importers have to pay the duties, which they are likely to pass on to consumers later.

The money paid on imported goods flows into the Department of the Treasury. Customs duties make up a small fraction of the federal government’s revenue.

 

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How much are the tariffs?

The United States is one of the world’s largest importers. In 2017, the U.S. imported goods worth $2.4 trillion from other countries. China, Canada and Mexico are America’s top three trading partners.

U.S. tariffs are on the low end among countries in the world. Most foreign goods enter the U.S. duty-free, such as industrial goods and raw material like oil. In 2016, according to The World Bank, the average applied U.S. tariff across all products was 1.7%. In comparison, China placed an average 3.5% tariffs on imported items, and Canada’s applied tariff rate was 1.6%.

Only 30% of the total U.S. imports in 2017 were subject to tariffs, and the average duty applied to those items was less than 5%, according to the Pew Research Center.

The U.S. International Trade Commission listed U.S. tariffs on everything from orange marmalade (3.5%) to dishes (6.5%) in its detailed Harmonized Tariff Schedule.

How are tariff rates decided?

Countries apply different rates of tariffs on different types of products imported from different countries. Some countries have high tariffs on imports, while others are low-tariff countries.

Within the World Trade Organization (WTO) system, members agree to not charge tariffs on imports above certain levels, which are set forth by the WTO in detailed schedules.

Countries can also negotiate tariffs on imports and exports through bilateral or regional agreements, such as the North American Free Trade Act (being renegotiated now), as long as the rates are within the WTO tariff limits.

The U.S. has free-trade agreements (FTA) with 20 countries. FTAs reduce trade barriers, eliminating tariffs charged on products traded between partners. This year, the U.S. has upset some of its trading partners, such as Canada and Mexico, by applying steep tariffs on steel (25%) and aluminum (10%), which we will discuss in a second.

“Once you get into a trade war, it seems like the trade war supersedes any previous agreements you might have,” said Mark Perry, an economics policy scholar at the American Enterprise Institute and professor of finance and business economics at the University of Michigan-Flint.

Trump’s trade war tariffs

To protect certain domestic industries, the U.S. — as well as other countries — sometimes impose additional tariffs, or penalty tariffs, on foreign imports if it determines there is unfairness in trade or some damage to the U.S. economy.

“That’s what you’re talking about when you’re talking about steel and aluminum tariffs that Trump put on,” said Gary Hufbauer, economist and nonresident senior fellow at the Peterson Institute for International Economics (PIIE). “His view, which many disagree with, including me, is that imported steel and aluminum threatens the national security of the United States, so we put on extra tariffs on those.” PIIE is a nonprofit, nonpartisan economics research institution in Washington, D.C.

Imposition of harsh tariffs is both an economic tool and a foreign policy tool. But Trump is wielding it mostly as a foreign policy tool to punish other countries, including U.S. allies, citing national security concerns, which is unusual, said experts who also question the economic benefits.

Penalty tariffs are often much higher than the single-digit regular tariffs. Trump has slapped tariffs of up to 25% on foreign imports so far. Countries hit with Trump’s tariffs include China, Canada, E.U. nations, South Korea, Brazil, Argentina, Turkey and Australia.

Before Trump came into office, about 4% of U.S. imports were covered by penalty tariffs, PIIE researchers estimated in a 2017 study. This figure could increase to 7.4% if the Trump administration were to follow through on the tariff barriers announced during Trump’s first 100 days in the office. That was before Trump threatened to slap new tariffs on billions worth of Chinese imports.

A backlash could hurt American companies who export overseas. Targeted countries often retaliate against U.S. exports, hurting certain domestic industries as foreign demands drop. Companies that heavily relied on exports may slash staff, which could have an impact on the labor market, Perry said.

How much of the tariff gets passed on to consumers?

Duties are incorporated into the retail prices of products, differentiating from your local and state sales taxes. How much duty consumers have to pay on each item depends a lot on the product and on the country from which the product comes into the U.S.

On average, consumers have to bear about half to two-thirds of the tariffs on imported products, according to economists. The rest is absorbed by U.S. companies and/or foreign exporters.

Stiff tariffs on raw materials make it more costly for American manufacturers to produce products, which in general ultimately translate to higher prices on consumer products sold at retail stores.

“The prices would go up for consumers both for the imported goods and then also for the protected goods from the protected industry or protected manufacturer in the U.S. who now is able to raise prices because of less competition,” Perry said.

Sometimes the entire cost of penalty duties gets passed on to consumers. This is because the U.S. imports many types of specialized machinery that have to be approved by some government agencies, for instance, medical equipment, and there may be only one supplier who makes that product. Due to a lack of alternative import sources, the exporter isn’t likely to make a concession, so the U.S. importer is responsible for the full tariff amount and passes it on to consumers, Hufbauer explained.

For lower-end products where a lot of foreign suppliers compete with one another to sell to America, the consumer impact is next to zero. Take T-shirts as an example.

“If you put a tariff on T-shirts from one country, if they want to continue to export in competition with all the other countries, they will have to absorb the tariffs, meaning they will have to cut their prices by the amount of apparel,” Hufbauer said.

Tariffs: A brief history

With all of this chaos caused by tariffs, you may be wondering how President Trump is able to single-handedly wield such a powerful tool. Congress has delegated much of the decision-making power to the president, but there are signs the chambers may want to take it back. Sen. Mike Lee of Utah introduced a bill last year that would require congressional approval for certain trade actions.

But trade upheaval is nothing new here. Tariffs have a long history in the U.S., back to the beginning of the country in the 1700s. Because the country was saddled with debt from the Revolutionary War and had no federal income tax until 1913, customs duties were a major source of revenue for the federal government until the end of the Civil War.

Tariffs were a testy issue in the 19th century, too. The Republican Party, which had close ties to industrial firms, put harsh tariffs on imports to protect U.S.industries, reducing competition from counterparts from Great Britain and France, Hufbauer said.

The state of economic isolation continued through the dawn of the Great Depression. When the infamous Smoot-Hawley Tariff Act was enacted in the 1930s, world trade almost came to a standstill, which further damaged the already-troubled U.S. economy.

“That was kind of the last straw maybe that really turned it from a recession into a depression,” Perry said.

Since World War II, the U.S. has more or less moved in the direction of open trade, until now — tariffs are coming back as Trump further implements his protectionist trade agenda.

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Survey: 55% of Americans Want to Retire Early, But Aren’t Saving Enough

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

Saving for retirement is a lot like hitting the gym: you know you should be doing it, but working up the motivation to go can be challenging. A recent MagnifyMoney survey of over 1,000 Americans found that while 55% of respondents would like to retire early, they simply aren’t saving enough to do so.

Of the survey respondents who said they’d like to retire before the age of 66, 25% are saving just 4% to 5% of their income, while 19% are saving only 1% to 3% of their income. At this rate, aspiring early retirees are setting themselves up for a major disappointment.

Key findings

  • Nearly 55% of respondents with a retirement savings account want to retire before turning 66, but their contribution levels don’t match up with their goals. Nearly half (44%) of those who aim for early retirement save 5% or less of their income for retirement.
    • A recent MagnifyMoney study on average retirement savings by age found that millennials have saved an average of $34,570 for retirement and Gen Xers have saved an average of $168,480. Given the low contributions uncovered in our studies, though, lofty goals of early retirement may not be a reality for many savers.
  • Almost 3 in 10 millennials want to retire before they turn 60. However, less than a quarter of millennials are saving more than 10% of their income for retirement.
  • People say they are planning to increase their savings: 54% of respondents plan to increase their contribution level in 2020, or the percentage of income going toward retirement.
    • Millennials (69%) are the most likely to say they plan to increase their retirement savings in 2020 — beating their older Gen X counterparts (57%). Meanwhile, 12% of baby boomers will actually decrease their contributions, which is understandable considering many are at or around retirement age.
  • Increasing contributions in 2020 is certainly warranted: Just 26% of savers are currently contributing 10% or more of their income to their retirement savings account. For Gen Xers, that number is 32%.
    • On the other hand, 41% of savers are contributing 5% or less. While that’s better than nothing, it’s hardly enough, especially for older Americans.
  • Men (64%) are more likely to plan on upping their retirement contributions this year, while more women (51%) will keep things the same. This could be because 60% of men want to retire before age 66, compared to just 49% of women.
    • Notably, women are twice as likely as men to say they don’t know when they last increased the amount they contribute to retirement savings (9% vs. 5%).

How much people are saving vs. when they want to retire

For our survey, we asked respondents to come clean about how much they are actually stashing away for their retirement years. We found that 23% of those surveyed contribute just 4% to 5% of their income to retirement — far less than the typical recommended amount of 15%.

Meanwhile, 18% contribute between 1% to 3% to retirement savings, and a stunning 12% don’t contribute anything at all. Not everyone is procrastinating on building a nest egg, though: 16% of respondents are saving between 6% to 9% of their income for retirement, 14% are saving between 10% and 14% and 6% are saving 15% to 19%. At the high end of the curve, only 5% of people are saving 20% or more of their income to retirement savings.

Younger people certainly have room for improvement. Over half of millennial respondents (51%) are saving only 5% or less of their income for retirement, while less than a quarter (24%) are saving over 10% of their income. Despite their relatively low rate of savings, 69% of millennials say they want to retire early, before the age of 66.

Gen Xers seem to be a bit out-of-touch with reality: many aren’t aggressively saving for retirement, but they’re still saying they would like to retire early. While 62% of Gen Xers say they want to retire before age 66, over half of them (56%) are socking away less than 10% of their income for retirement.

Our takeaway: Younger generations might be in for a rude awakening if they crunch the numbers to determine when they’d actually be able to retire, based on their current rate of savings.

Baby boomers are in a different situation, as many of them are close to or already retired. Understandably, as more boomers retire (according to our survey, 39% of that generation said they’re already retired), many are understandably stashing away less in retirement savings. It makes sense that our survey found 29% of boomers said they are not saving anything for retirement.

When comparing retirement contributions by gender, there are a number of stark differences — most notably the 18% of women who said they are not saving anything for retirement, compared to 7% of men. Additionally, only 20% of women are saving at least 10% of their income for retirement — much less than the 30% of men who are doing the same.

One possible reason for this discrepancy could likely be chalked up to the gender wage gap, as women are still earning just 82 cents for every dollar pulled in by a man. Less money earned means less money available to save. Lower earnings might also explain why women are less likely to say they want to retire early: Our survey found that 49% of women want to retire before age 66, compared to 60% of men.

Who plans to increase their retirement savings in 2020?

Our survey found that overall, 54% of respondents said they will increase their retirement contributions in 2020. By generation, that included 69% of millennials and 57% Gen Xers. Understandably, only 29% of baby boomers plan to up their contributions in 2020.

Of the respondents who say they plan to increase their retirement contributions in 2020, many aim to retire early: 63% of those who want to retire before age 66 are planning on upping their contributions this year.

Our survey found wide variance regarding when respondents had last increased their contributions. While 38% of respondents said that they have increased their retirement contributions in the past year, 17% admitted that they have never dialed up their contributions. Meanwhile, 24% of people said that the last time they increased their retirement contributions was two to three years ago, 7% said it was four to five years ago, another 7% said it was more than five years ago — and 6% said they do not know when they last increased their contributions.

How much should you be saving for retirement?

Our survey found that when it comes to how much of their income people are devoting to retirement savings, it’s all over the map, from over 20% to nothing at all. So with no clear consensus among our survey respondents, how much should you actually be saving for retirement?

When it comes down to it, there are many factors that play a role in how much you should stash away for your golden years. The most important step, though, is to just start saving — check out our listings of the best IRA providers and the best robo-advisors to begin the process. That might sound simple, but a staggering 12% of our survey respondents did admit to saving nothing at all.

The importance of saving for retirement now rather than later cannot be emphasized enough: It takes time for your returns to compound. The sooner you start, the more time you allow your investments to grow. Additionally, you should contribute up the percentage that your employer matches (if they offer that benefit) — otherwise, you’re essentially leaving money on the table.

For those looking for specific metrics and benchmarks to gauge how much they should be socking away, there are a number of tried-and-true guidelines. Fidelity, for example, recommends saving 15% of your pre-tax income for retirement (that percentage includes any contributions you also get from your employer).

That percentage was calculated with the assumption that you’re saving for retirement between the ages of 25 and 67, and that most people will need to draw around 45% of their retirement income from their own retirement savings in order to live comfortably in their golden years. Looking at Fidelity’s 15% as a guideline, it’s clear that many people are falling behind, as our survey found only 12% of people are saving at least that much. Additionally, Fidelity’s guideline of 15% is assuming that the person wants to retire at age 67, when in fact our survey found most people (55%) want to retire before age 66.

Methodology

MagnifyMoney commissioned Qualtrics to conduct an online survey of 1,064 Americans with a retirement savings account, with the sample base proportioned to represent the overall population. The survey was fielded Dec. 10-16, 2019. For the purposes of our survey, we defined generations as: millennials (ages 23 to 38), Gen Xers (ages 39 to 53) and baby boomers (ages 54 to 73).

Members of Generation Z (ages 18 to 22) and the Silent Generation (ages 74 and older) were also surveyed, and their responses are included within the total percentages among all respondents. However, their responses are excluded from the charts and age breakdowns, due to the smaller population size among our survey sample.

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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Survey: Millennials Are Underestimating Retirement Savings Needs

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 has not been previewed, commissioned or otherwise endorsed by any of our network partners.

For many savers, a cozy retirement can seem like a distant dream rather than a realistic future. Costs of living continue to rise, while it’s becoming harder for many to keep up with saving. More and more senior citizens are working into retirement, and millennials may be underestimating just how much they’d need to save for retirement in the first place.

MagnifyMoney commissioned a survey of 800 full-time workers to get a better look at their understanding of their own retirement savings needs. The results show that while millennials may be underestimating the real costs of retirement, so are baby boomers. Furthermore, some baby boomers indicated that no amount of money would make them comfortable enough to retire.

Key findings

  • 73% of full-time working Americans believe $1 million is enough to get them through retirement if they stop working at age 66. There was widespread agreement on this across all age groups.
    • $1 million in retirement savings is a general rule of thumb to follow, although an individual’s actual retirement savings should be more specific based on projected spending in retirement.

  • Meanwhile, nearly 1 in 5 millennials said having $500,000 in their retirement savings account would make them comfortable enough to stop working tomorrow. Another 14% of millennials would retire after amassing $750,000.
    • Millennials aren’t alone in believing less than $1 million is enough. Across all age groups, 20% of respondents said that $500,000 in retirement savings was enough. The next largest cohort — 17.4% of respondents — said $1 million in retirement savings was enough.
  • Interestingly, more than 1 in 5 baby boomers responded similarly to millennials, saying just $500,000 would get them through retirement if they stopped working tomorrow. Another 15% of boomers said $750,000 would be enough to retire.
  • Some baby boomer respondents offered a bleaker outlook: More than a quarter of Americans ages 54-73 reported that no amount of money would make them comfortable enough to retire.
    • Boomers were almost twice as likely to say that no amount of money would make them comfortable enough to stop working compared to younger Americans. 14.4% of millennials and 15.2% of Gen X-ers had the same sentiment.
    • Boomers may be less willing to stop working than other age cohorts because they believe they need to save more before they stop working, or because some feel you can never really have enough money saved for retirement.
  • More than 1 in 10 Americans have lofty goals for their retirement savings. Just under 12% of our respondents want to accumulate at least $3 million before ending their career.

How much should I save for retirement?

Saving for retirement is not an exact science. Shooting for a $1 million nest egg is a common rule of thumb — and most survey respondents agree that $1 million would be enough.

However, the amount of retirement savings you need depends on your estimated expenses in retirement. Your exact number could be more or less than $1 million, depending on how much you expect to spend on housing, discretionary costs or lingering debts.

For example, $1 million in savings would fund a 20-year retirement where you’re limited to $50,000 in annual spending. If you anticipate a 30-year retirement, $1 million in savings would only cover around $33,000 in annual spending.

How much you should have saved for retirement also depends largely on your age. For example, it’s unlikely that at 30 years old, you’ll already have $1 million set aside unless you’re extremely blessed. You’ll have to build up your savings as you go and as your income, hopefully, increases with age.

Fidelity offers a different take on savings guidelines by age. According to Fidelity, by age 30 you should have 1x your annual salary saved, growing to 3x your annual salary saved by age 40, 6x by 50, and 8x by 60.

How do I save for retirement?

If you think you’ve underestimated how much you truly need to save for retirement, there’s still time to get your savings on track.

A common retirement savings tool is the 25x rule, which dictates you need to have 25 times your annual retirement expenses saved. Core to this rule is the assumption that you’ll need to cover 25 years of retirement. So if you calculate an estimated $70,000 in annual spending in retirement, for example, following the 25x rule would indicate a nest egg goal of $1.75 million.

That’s a far cry from the mere $500,000 that 20% of our respondents indicated would be adequate for retirement. If you stuck to that goal, by the 25x rule, your annual spending in retirement would be cut down to $20,000.

It’s best to throw your retirement savings into an investment account, rather than a high-yield savings account. Over time, investing can post returns around 8%, well above the 2% savings APYs we see today. Retirement savings are more than just your 401(k), too: individual retirement accounts, or IRAs, allow you to save on your own, whether instead of or in addition to your 401(k).

If you’re an investing beginner, there are a ton of resources out there to help you get started. Robo-advisors and online brokerages offer an easily navigable investing experience that allow you to set your own goals and preferences.

Methodology

MagnifyMoney by LendingTree commissioned Qualtrics to conduct an online survey of 816 full-time American workers. The survey was fielded October 1-3, 2019.

We define millennials as those aged 23 to 38, Gen X as those 39 to 53 and Boomers as those aged 54 to 73. Members of Gen Z (ages 18 to 22) and the Silent Generation (ages 74 and up) were also surveyed, and their responses are included within the overall total percentages. However, they were excluded from the age breakdowns due to the lower sample size among respondents in those age groups.

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.