A larger portion of our salary will pay the bills as we adjust for higher rent and housing costs, rising monthly car payments, and continued high prices for food, clothing and airfare. .
Who doesn’t want to think about how much money you want to set aside from each paycheck for retirement? Throw cash into a 401(k) plan? When you need $700+ monthly car payments What? Or did the rent just go up by $250 a month? At least some people are thinking twice.
According to a newly released survey of the 2023 TIAA Institute-GFLEC Personal Finance Index, one in four adults, including those employed part-time and full-time, will be in financial distress because of the impact of inflation on their finances. says it will reduce retirement savings in 2022. .
Nearly half (about 12%) of those who reduced their savings stopped saving altogether. Working women were slightly more likely than men to reduce or stop saving for retirement.
Retirement savings take a hit
Lowering retirement savings was very common among Hispanic workers. Research shows that in 2022, he cut the amount he set aside in his 401(k) plan and other retirement savings vehicles by 40%. In that group, 24% stopped saving. These figures were about double those of Asian, black and white workers.
The survey found that 26% of the youngest adults (the Generation Z group born after 1997) have reduced their retirement savings and 15% have stopped saving altogether.
Baby boomers born between 1946 and 1964 saw a 25% drop in retirement savings in 2022, with 11% stopping saving altogether.
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Conducted by the TIAA Institute and the George Washington University Business School, the Personal Finance Index survey was conducted online in January among 3,503 US adults ages 18 and older. Asians, blacks, and Hispanics were each assigned to at least her 500 respondents. Generation Z was also quota-sampled with at least 500 respondents to allow comparisons between generations.
Inflation causes anxiety and makes it difficult to pay bills
According to Andrea Hassler, a research assistant professor in financial literacy at the George Washington University School of Business and the Center for Global Financial Literacy Excellence, 30% of consumers surveyed said they had lost their balance after dealing with high inflation. He says it’s getting harder to fit. That’s up from his 24% a year ago.
Consumers were more likely to face financial hardship after taking on debt. The survey found that 26% of his adults (compared with his 20% a year ago) said debt and debt payments were preventing him from adequately coping with other financial priorities. I’m here.
Another concern: consumers don’t have enough emergency savings to cover just one month’s living expenses.
The percentage of people without even such minimal emergency savings jumped from 32% in the survey a year ago to 39%. Researchers say such a dramatic change suggests that many people may have resorted to saving to cope with the rising cost of living.
“When inflation hits and everything becomes more expensive, you have to cut back somewhere,” Hassler said.
How tens of thousands of dollars can be lost
Frankly, stuffing less cash into your retirement nest egg is a logical short-term move. Some argue that it is better to use money from your paycheck to buy essentials such as groceries and gasoline than to take advantage of high credit card debt of 20% or more.
But removing 401(k) contributions is actually a terrible move in the long run.
Surya Kolluri, head of the TIAA Institute, who spoke with me on Zoom on Monday, said workers often set aside an extra $30 or $50 a week to cover immediate needs. I said I was concentrating. Too often, they haven’t added up the wealth-building hit when they stop saving for retirement.
Consider a person who makes $55,000 a year, has a 401(k) employer, and has a job worth up to 3% of the employee’s self-savings. Your her 3% is $1,650. And if you save that much, your employer will end up adding another $1,650 to your 401(k).
“That’s a lot of money,” said Kolluri.
Stopping saving for just one year means you didn’t actually set aside $3,300 that year. Your savings and company match. It also means that the money is giving up the opportunity to double over many years of investment.
Kolluri used this example to give an example of how not saving for retirement for just one year can make a difference of $15,000 in total over 20 years of work. This assumes the saver has invested in her S&P 500 index fund during that time.
“This is a big number,” said Kolluri.
No one can predict future returns in the market. But according to AccurateCalculators.com’s historical calculator, someone who saved $3,300 each year from 2002 through 2022 would make $163,000 if he invested that money in his S&P 500.
Kolluri pointed out that those who saved 19 years from 2003 only have $148,000 in their accounts.
Having your bills covered is important, but living paycheck to paycheck can mean if you lose your job, cut your hours in a down economy, or get older and out of the workforce. Many people are exposed to financial risks.
Many people underestimate their life expectancy and are saving less than they need for a comfortable retirement, according to data released in January through the Personal Finance Index run by the TIAA Institute and the George Washington University Business School. It turns out that
Wall Street also worried depositors
Incredibly high inflation — brought about by pandemic-related supply chain constraints, stimulating cash, high consumer demand, and rising oil prices after Russia’s invasion of Ukraine — has pushed many I am in a predicament.
The violent action on Wall Street is also unsettling. According to Fidelity Investments, the largest U.S. 401(k) plan provider, 401(k) balances held in plans managed by Fidelity will average 20.5% in the fourth quarter of 2022 compared to the same period last year. Decreased.
The average balance decreased to $103,900, down nearly $27,000 from the average balance of $130,700 a year ago for the Fidelity 401(k) plan. However, his average balance has increased by 34% since 2012.
Surprisingly, many savers seem to keep their course.
According to Mike Shamrel, Fidelity’s vice president of workplace investment thought leadership, nearly 55% of savers in Fidelity-managed 401(k) plans in 2022 continued to save at their normal pace. , 11.2% reduced their savings at some point last year. The rest increased their savings.
According to Fidelity, people who don’t save much money on the plan donate less at an average rate of 7.2%. According to Fidelity, he accounted for less than 2% of people who have completely lost their savings. Some dialed back, but the majority never stopped contributing altogether.
Still, the rate of cutting savings is higher than before. Dating back to 2017, about 8.3% of savers had cut back on their retirement savings, Shamrel said.
“It’s nothing to worry about. It’s not like it’s doubled or anything like that, but it’s a little higher than it’s been in some of the previous periods,” Shamrel said.
Fidelity’s latest research shows that inflation is causing a lot of anxiety. Across the world, 74% of people say that rising prices are a source of stress.
Inflation is rising at a moderate pace, but remains high. Inflation rose 5% in the last 12 months through March, according to the US Bureau of Labor Statistics. Shelter is up 8.2% last year. Food sales increased by 8.5% year-on-year. New cars increased by 6.1%. Gasoline fell 17.4%.
Inflation peaked last June at 9.1% year-on-year, the biggest rise in 40 years.
Given these price increases, it might not surprise you to see some people cut back on their retirement savings. It may come as a surprise to see people actually save more money.
Nearly one-third of workplace savers enrolled in Fidelity’s retirement plan saved more money in 2022 than they had in the previous year. But much of it is due to a special feature of workplace planning that automatically increases the savings rate of workers gradually over the years.
Starting in 2025, a new federal law known as Secure 2.0 will allow companies with new 401(k) and 403(b) plans to automatically enroll eligible employees into these plans at a minimum 3% contribution rate. is obliged to register with More than 10. The employee contribution rate increases by 1 percentage point each year until it reaches 15%.
Beginning in 2024, plan sponsors will be able to offer emergency savings accounts linked to defined contribution plans, such as 401(k) plans, for underpaid employees. Contributions are limited to $2,500 annually, but this is set by your employer. His first four withdrawals in a year are tax-free and there are no penalties.
In theory, automatic savings (and a little inertia) is a good thing when it comes to setting aside money for short-term and long-term savings. With money automatically set aside from your paycheck, you may never know you’ve run out of money, and you may not have to take the additional steps necessary to stop your normal savings.
Of course, the problem with stopping saving is that it holds back many people when they start saving consistently again in the future. It’s often better to keep saving as much as you can.
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