Don’t Make This 401(k) Mistake during Inflation
November 7, 2022
The current inflation rate in the United States is 8.2%, so it is not surprising that people are feeling anxious about the future.
So anxious that many are no longer contributing to their 401(k)s.
Given the current prices of food, gas, and shelter, it’s easy to see why people make this 401(k) mistake during inflation. While it is tempting, this 401(k) mistake may be one you may regret.
An Alarming Number of People Are Making This Mistake
A recent study by Allianz Life Insurance of North America found that American workers are struggling with inflation. One of the main ways they are “handling” their struggles is by cutting back or halting their 401(k) contributions.
Here are some of the findings¹:
- 54% halted or reduced their 401(k) and other retirement savings between July and September.
- 62% worry that a major recession is right around the corner.
- 67% say they are nervous about investing but don’t want to miss out on a recovery.
Also, 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%).
More than half of American employees are making this 401(k) mistake during inflation. And we get it. Inflation is taking a toll on many of us.
A survey by Mercer found that “75% were significantly financially stressed because of inflation and market volatility.”²
During these uncertain times, people are taking on additional jobs to cover the costs of inflation to afford basic necessities.
In addition to taking on more work, the study also found that “43% admitted dipping into retirement nest eggs to cope with the higher cost of gas, utilities, health insurance and foods.”³
The Issue with Cutting Back on Your 401(k)
You may be wondering why we keep referring to halting or cutting your 401(k) contributions as a mistake.
The short answer is that your fear-based action today may hurt your future.
The first issue is that, whenever you cut back on your 401(k) contributions, you push back your retirement date.
This is a problem, given how Americans currently feel about retirement.
According to Adam Pressman, Mercer’s U.S. Employee Research Leader, “The ability to retire is now the second top concern amongst all demographics, up from No. 5 in 2021.”⁴
And 45% of Charles Schwab survey participants list inflation as their top retirement obstacle.⁵
The study by Allianz Life also found that “nearly three in four (72%) [Gen-Xers] worry that if they don’t increase their retirement savings soon, it will be too late to have a comfortable retirement.”⁶
If you are already worried that you won’t have enough to retire comfortably, now isn’t the time to stop contributing to your 401(k).
If you significantly cut back or halt your 401(k) contributions, you may have to push back your retirement date. Meaning, you’ll have to work longer than you planned because you lose out on compounded returns which is how your savings grow over time.
Ultimately, this may mean having to save even more in the future to catch up.
And who knows what the future holds and if you will be in a position where you are able to contribute more to catch up.
Plus, there is the concern that a temporary reduction to 401(k) contributions may become a permanent one.
[Related Read: Why a 401(k) Withdrawal Should Be Your Last Resort]
Why You Should Keep Contributing to Your 401(k)
As uncomfortable as inflation makes you feel, it is important not to make any rash decisions, such as halting 401(k) contributions.
History has shown that stocks are the best inflation hedge longer term.
When you look at the 17 highest inflation years, the market was up 12 of those years and up double digits in 8 of the 17 years.
In the 5 highest inflation years, the market was up 4 of those years.
[Related Read: Inflation and the Market – What Every 401(k) Investor Needs to Know]
Throughout history, the market has recovered, but it has taken time.
Moreover, down markets provide an opportunity to accumulate more for your retirement future.
Instead of panicking and making this 401(k) mistake, try viewing this as a chance for you to increase your portfolio holdings.
If you pull back or halt 401(k) contributions, you may miss out on your employee match. This means you are throwing away free money!
If you feel as if you absolutely must pull back on how much you contribute, do not pull back so much that you are no longer contributing enough for the employee match.
That’s not all.
If you wait and ride it out, you may make more money when the market goes back up.
It’s worth waiting for, don’t you think?
Some people actually see this volatility as an opportunity to make more money, so they boost their 401(k) contributions.
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