February 06, 2024

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It's well-known amongst employees that the 401(k) is the most common vehicle for retirement investing, but how wide is the margin?

Care to guess what percentage of working individuals have a 401(k) style account? A. 22.5% B. 29.3% or C. 34.6%

Here are the topics for today:

Don't Leave Your 401(k) Behind — An Expensive Lost & Found Box
The 2024 Car Market — Is It Affordable to Buy a Car Yet?
Here's How to Lock In a High Yield on Your Savings

INVESTING

Don't Leave Your 401(k) Behind — An Expensive Lost & Found Box

The 401(k) account has become a vital aspect of our retirement planning in recent years, and yet millions of Americans are leaving them behind.

As of June 2023, it's estimated that millions of "job-changers" had abandoned roughly 30 million 401(k)s or similar forms of retirement accounts — a $1.65 trillion dollar lost and found box.

Capitalize, a company that specializes in helping employees transfer these assets during career shifts, estimates that roughly 20% of Americans have either left or forgotten a retirement account with their former employer, with an average balance of $55,400.

This is an incredibly costly mistake — here's what to do instead

Option 1: Leave it with the current employer

Account balance: If it's less than $5,000, you may need to transfer it. Below $1,000, your former employer may issue a check that needs to be deposited into a new 401(k) or IRA within 60 days.
Employer stock: If your account includes valuable publicly traded stock from your former company, rolling over may result in the loss of tax breaks from in-kind stock distributions.
Vesting: Check if your previous employer's matching funds vest over time. If not fully vested upon leaving, you may retain only a portion or none of the match.

Option 2: Conveniently transfer it over to your new employer

Opting for a direct 401(k) rollover enables tax and penalty-free transfer of funds from your old plan to the new employer's 401(k). Collaborate with the new plan's administrator to allocate savings into desired investment options.
Ensure adherence to transfer rules to avoid additional penalties and taxes. If a direct rollover isn't executed and funds are received as a check, a mandatory 20% withholding is applied. Failing to deposit the check within 60 days, especially if you're under 59 ½, incurs a 10% early-withdrawal penalty in addition to taxes.

Option 3: Push the investments to an IRA instead (popular amongst self-employed)

Traditional IRA Rollover: Move your old 401(k) to a traditional IRA without incurring taxes. Earnings accumulate tax deferred, and taxes are paid upon withdrawals.
Roth Conversion: If eligible, roll over your 401(k) to a Roth IRA. Pay taxes on the conversion as Roth accounts use after-tax dollars. Enjoy tax-free withdrawals after five years and upon reaching 59 ½. No
Contribution Limits: Rollovers from a 401(k) have no contribution limits. Regardless of your 401(k) balance, you can roll over the entire amount into a traditional IRA.

Option 4: Cash it out

Of all the options available to you, cashing out your retirement account is arguably the least appealing of the bunch. Cashing out does exactly what you'd expect — sells your holdings and disperses the cash.

But, but, but, but — for pre-tax accounts like a 401(k), that cash comes at the cost of both income tax, an early withdrawal penalty of 10%, possibly liquidation fees, and the cost of missing out on capital gains and growth over time.

CARS

The 2024 Car Market — Is It Affordable to Buy a Car Yet?

In a healthy economy, we know that the inflation of everything over time is borderline inevitable, and even necessary for growth. Ideally, those price increases happen in lockstep with increasing incomes too, meaning consumers can keep up.

But when inflation gets out of control, supply chains are disrupted, and interest rates rise rapidly, that ideal gets thwarted. The past few years are a prime example of this, and there are a couple of areas that have been hit much harder than others — especially car prices.

Let's take a look at what's happened to car prices in recent years

The cost of new vehicles has skyrocketed since the pandemic. According to KBB, the average new car would cost you about $38,948 back in 2019. As of December though, that number was $48,759 — a 25% increase over 4 years. Combine this with rising interest rates on auto loans, and you also see the average monthly car payment jump from $575 to $736 over the past few years.
As for used vehicles, they've actually been on the decline, but are still up significantly from pre-pandemic. In June 2020, the average used car price was $19,646, peaked at $28,050 in June 2022, and now sits around $27,266 per the most recent data — still a 39% jump in 3 years.
Overall affordability: Despite still being up significantly from 2020, vehicle affordability has actually increased in recent months. Measured in median weeks of income required to purchase the average new vehicle, this number has declined from a peak of over 41 weeks to now 38.6 weeks as of December.

And as for 2024's car market outlook

The era of hypergrowth in vehicle prices appears to be over. Cox Automotive estimates that, in 2024, car shoppers can expect somewhat of a return to normalcy. Most projections aren't expecting massive price decreases, but rather a moderating of what's been an unusual 4 years.
Big driving forces will be inventories and discounts. After supply chain issues and chip shortages drove inventories down, most dealerships have now recovered to 2019 levels and beyond. As a result, deal-sweeteners often worth up to 10% pre-pandemic are making a comeback, with discounts again averaging about 6% of selling prices.
Interest rates will also be a focal point to watch. APRs on auto loans are especially sensitive to a borrower's credit profile, and rising rates have exaggerated this. If the Fed's dovish stance continues, prospective buyers can expect to see moderate rate declines in 2024.

The takeaway for prospective car buyers

In short — vehicle affordability has gotten out of hand in recent years, but the trend over the last 12 months has been an aggregate decline in costs. However, vehicles are still extremely expensive historically speaking, and it might be worth holding out to buy a little longer.

BUDGETING & SAVING

Here's How to Lock In a High Yield on Your Savings

The Federal Funds Rate climbed from 0% to 5.25% between February 2022 and August 2023, where it has held steady ever since as the Fed sustains a pause.

That rapid 2,000% increase in interest rates had drastic impacts on the cost of money, but also on the price that banks will pay you for it.

Savers have seen yields top out at over 5% APY across cash or close-to-cash equivalent vehicles, Americans currently hold a $8.8T pile of cash as a result.

But most expect the Fed to begin decreasing rates this year. Although the drop might not be drastic, savers can begin expecting those precious yields to start declining.

But, there's a way to lock in a higher yield — CDs.

What are CDs? CD stands for certificate of deposit, and it's essentially a savings account with a lock-up period. CDs offer slightly higher yields than HYSAs because of their more stringent requirements. While most savings accounts allow 6 transfers per month, CDs come with a fixed length ranging from 3 months to 6 years.
The fixed-rate benefit is what makes CDs so appealing during times of likely decreasing interest rates. CDs offer a fixed-rate yield over the course of your lock-up period to the CD's maturity date, allowing you to lock in a higher yield, even if overall savings yields are decreasing.
However, this comes at the cost of not having access to your cash for that set period of time. If you do withdraw from your CD early, most come with an early withdrawal penalty that varies depending on your yield, and term length. It's because of this that CDs are best suited for purely excess cash that extends beyond your basic emergency fund of 3-6 months' worth of expenses.

🌊 BY THE WAY

📊 Answer: It's C. 34.6%, followed by 18% with an IRA-style account. (Census.gov)
🍪 Costco fanatics are getting a new, massive cookie (Axios)
🏠 90% of homeowners still have a sub-6 % mortgage rate (MW)
🚘 3.9M student loan borrowers have a $0 payment (White House)

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