13 Ways to Avoid Cutting Back on 401(k) Contributions amid Inflation
November 14, 2022
With inflation sky-high, many Americans are cutting back on 401(k) contributions.
Inflation is eating away at our purchasing power. Many of us are stretched too thin even trying to cover basic essentials.
It’s not only forcing us to rethink where we put our money, but it’s also increasing our stress levels about our investments.
A survey by Mercer found that “75% were significantly financially stressed because of inflation and market volatility.”¹
This financial stress is causing many Americans to make mistakes regarding their 401(k) contributions.
A recent study by Allianz Life Insurance of North America found that one of the main ways Americans are dealing with these worries is by cutting back on 401(k) contributions.
Here are some of the findings:
- 54% halted or reduced their 401(k) and other retirement savings between July and September.
- Stressed millennials were the most likely to stop or slim their retirement savings due to inflation (65%), followed by gen xers (59%) and baby boomers (40%).²
Cutting back on 401(k) contributions may relieve some stress right now, but it may cause much more stress later on when you realize you may need to push back your retirement date or miss out on making more money.
We get it might not be possible to keep contributing the same amount as you have been. But if you are cutting back on 401(k) contributions, you should at least continue to contribute enough to get the company match.
If you are looking for ways to avoid cutting back on 401(k) contributions, you’ve come to the right place.
#1 Stop Looking at Your 401(k) Daily
When the market is so volatile, it is tempting to constantly check your 401(k).
This is a mistake.
While we do believe you should stay up to date with your 401(k) and read your statements, obsessing during inflation may lead you to make a rash decision.
When it comes to saving for retirement, you want to treat it like a marathon instead of a sprint. You may feel the urge to sprint when you see the financial loss in your portfolio.
That’s why it is important to stay rational and remember that the market will recover.
#2 Reassess Your Budget
Everyone needs a budget – especially during inflation. It’s important to have a spending plan and an idea of where all your money is going.
The problem is that your 2020 budget probably isn’t reflective of 2022’s inflation costs, which means you need to reassess your budget.
Take a good hard look at how you are spending.
Make note of how much money you are bringing in each month, how much money you are spending, and how much money you are saving.
Ideally, you want to adjust the spending part of your budget to account for inflation rather than cutting back on 401(k) contributions.
#3 Check Your Priorities
When it comes to rising costs, it is more important than ever to prioritize your spending and saving.
If you are considering cutting back on 401(k) contributions, remind yourself why these contributions should be a priority.
Financial advisors always tell clients that they should pay themselves first.
This is because, so often, people pay their bills, go shopping, and then don’t have any money left over to save for their future.
Cutting back on 401(k) contributions could mean not retiring, being forced to retire much later than originally planned, or not having the retirement lifestyle you’d like to have.
#4 Cut Back Discretionary Spending
When it comes to prioritizing what you do with your money, consider your discretionary spending.
What things are you paying for that you don’t truly need? By cutting back on these things, you’ll have more money to contribute to your 401(k).
For example, do you need multiple streaming services, subscription boxes, or club memberships?
According to a 2022 Nielsen survey, “93% [of consumers] say they plan to either increase their paid streaming services or make no change to their existing plans over the next year.”³
But here’s the thing. The survey also revealed how much American families spend on streaming services.⁴
- 21% spend between $20 and $29.99 a month.
- 17% spend between $30 and $39.99 a month.
- 15% spend $50 or more a month.
$50 a month equals $600 a year, which could be diverted into your 401(k).
This is just one example.
Consider the other ways you spend. Are you buying everything new? Could you stop buying unless it’s a need (not a want)?
#5 Stop Eating Out
“According to the Bureau of Labor Statistics, the average person spent $3,030 on food away from home in 2021, down from $3,526 in 2019.”⁵
But those prices are only going to rise.
Go Banking Rates explains, “The index for food away from home rose 8% over the last year. Full-service meals cost 9% more than 12 months ago, and the index for limited-service meals rose by 7.2%.”⁶
Yes, the cost of eating at home has also increased by about 2%, but 2% is significantly less than 9%.
#6 Hold Off on Big Purchases
Inflation will not last forever, even if it feels that way at the moment. Consider this before you make a big purchase, such as a new car.
Try to hold off on big purchases until the market turns around. Keep driving the car if you can. Wait to buy new furniture.
#7 Look for Less Expensive Alternatives
Be cognizant of how you are spending your money. Every little bit adds up, so pay attention!
Are you only buying name brands when you could save by purchasing generic ones?
Do you need to switch from Whole Foods to Aldi for a little while?
Can you buy kids’ clothing at consignment shops instead of high-end department stores?
#8 Go for Less This Holiday Season
As we head into the holidays, strive for less.
Less stress, less busyness, and less money. Use the money you save this holiday season to help you avoid cutting back on 401(k) contributions.
#9 Get a Side Hustle
Pick up a side hustle for the holidays and use that money to live on. This way, you can keep contributing to your 401(k).
- Apply for seasonal work at a store.
- Deliver groceries or food.
- Drive for Uber.
- Sell your crafts on Etsy.
#10 Have a Catch-Up Plan
If you are cutting back on 401(k) contributions, it is important to have a catch-up plan.
Unfortunately, many people tell themselves that they are just cutting back on 401(k) contributions for a little while, but then it becomes permanent.
Instead, go ahead and make a plan for when you can start bumping your 401(k) contributions back up.
Additionally, if you have pushed back retirement due to cutting back on 401(k) contributions, make a plan to catch up.
#11 Avoid High-Interest Rates
Credit card interest rates can drag you down – especially those with high-interest rates.
Rather than continuing to pay these high-interest rates, look for a balance transfer credit card with a much lower interest rate.
You may even find one that offers a 0% APR.
As a result, you can pay off credit card debt much sooner and get back to making larger 401(k) contributions.
#12 Get the Company Match No Matter What
We can’t stress this one enough.
If you are lucky to work somewhere that offers a company match, you get free money for your future!
For example, some companies match 100% up to 6% of your pay.
If you make $40,000 a year and put in 6%, or $2,400, the company will match this amount at 100%.
This means you’d get $2,400 per year of free money for your retirement savings to help you maximize your 401(k) performance over time.
You do not want to miss out on free money!
#13 Ask for Help
Last but not least, don’t be afraid to ask for help.
Speaking with a financial advisor can help you make a plan to stay on track with your 401(k) contributions and give you peace of mind.
In fact, a May 2014 study conducted over a 6-year period compared those who had Help with managing their 401(k)s and those who did not. The study revealed…
“On average, the median annual returns for participants in the study who got Help were more than 3% (332 basis points, net of fees) higher than people who didn’t get Help.”⁷
Think of it this way…if you had heart issues, you wouldn’t make major health decisions without the advice of a cardiologist.
So, why turn what could be your largest financial asset over to chance?
[Check out our 401(k) Calculator to see how professionally managed help may impact your 401(k) balance in retirement.]
If you’d like to take control of your financial future and potentially have more income at retirement, we strongly suggest getting third-party advice.
If you’re hesitant to reach out for advice because you think your account balance isn’t big enough, or you think you’re too close to retirement to get help, don’t let that stop you!
401(k) Maneuver provides professional account management with the goal to help you grow and protect your 401(k).
Our goal is to increase your account performance over time, manage downside risk to minimize losses, and reduce fees that harm your account performance.
There are no time-consuming in-person meetings and nothing new to learn, and you don’t have to move your account.
Simply connect your account to our secure platform, and we regularly review and rebalance your account for you, when necessary. Check here to learn more about how it works.
If you have questions about your 401(k) or if you need help, we’re here for you. Click below to book a complimentary 15-minute 401(k) Strategy Session.
Book a 401(k) Strategy Session
- AON Hewitt “Help in Defined Contribution Plans: 2006 through 2012” Published May 2014