Rising consumer prices are hurting many Americans right now. They could also cause hardship for savers long after the highest inflation in four decades ends.
Nearly half of American adults rushing to retire stopped earning their nest egg last year due to soaring costs for everything from groceries and rent to monthly credit cards and utility bills public and mortgages. One in three adults dipped into their retirement savings to make ends meet on a daily basis.
The sobering results, from a US News & World Report “Retirement and Inflation” investigation published on January 10, come as new law aims to improve Americans preparing for retirement in the wake of the economic jolts of the COVID-19 pandemic.
Some 41% of Americans stopped investing in retirement vehicles last year as the Federal Reserve embarked on an aggressive hike in interest rates to fight inflation that began to rise in boom in the first quarter of 2021 and economists grew increasingly worried about a recession, according to the survey. . Prices for urban consumers increased by 7.1% last November, the most recent reading, compared with a year earlier, below the previous month’s 7.7%. Inflation peaked last June at 9.1%, and many consumers are paying considerably more for groceries, rent and plane tickets. The magazine surveyed 2,000 Americans ages 18 and older who have been saving for retirement for more than five years.
“The survey data shows a clear correlation between rising inflation and Americans’ delayed or modified retirement plans,” said Scott Nyerges, insurance editor at 360 Reviews, a division of US News, in a press release. “Americans continue to worry about the future repercussions of the COVID-19 pandemic.”
Stopping contributions to individual retirement accounts, 401(k), or brokerage or savings accounts can have a deleterious effect on long-term financial well-being. A 30-year-old woman with $50,000 today in her workplace retirement plan who saves $400 a month would have nearly $920,000 at age 65, assuming a conservative long-term return of 6%. Stop contributing for five years and the pot plunges more than 27% to less than $667,000.
The survey also found that one in three adults, or 32%, withdrew money from their retirement fund to meet day-to-day expenses. In addition to facing potential tax bills by cashing in assets with gains, these savers have also reduced the ability of their nest eggs to appreciate.
The survey cites a 2022 report by the Council of Economic Advisers which found that “the post-pandemic shift in demand towards goods rather than services, coupled with supply chain issues, has contributed to the rise in the ‘inflation.
“As a result, Americans are looking for more ways to save, including allocating less for retirement,” the report continues.
The investigation also revealed that:
- Eight out of 10 Americans, or 82%, fear a recession will affect their retirement.
- Nearly 9 in 10, or 88%, believe that the next generation will have a harder time retiring.
- Eight in 10 Americans think Generation Z (those born between 1997 and 2012) will not be able to retire at age 65.
- Almost as many (79%) think millennials, those born between 1981 and 1996, will also work after age 65.
- Six in 10, or 61%, believe their financial plans for retirement will improve this year.
- Nearly six in 10, or 57%, believe the economy will be stronger by the end of 2023.
- Only six in 10, or 59%, believe the “American dream” of owning a home, being debt-free and retiring comfortably is achievable for their generation.
- Less than half, or 48%, think this dream will be achievable for the generation after theirs.
Robert Thorndike, a partner and wealth advisor at Dominion Capital Partners in Norfolk, Va., said he had a client who was paying an extra $5,000 a year for basic living expenses through a credit card. The client, who owns her home, is single and works part-time because she is ‘semi-retired’, has decided to withdraw this money from her retirement fund to cover increased costs for the same items and lifestyle than the previous year.
“So she has $5,000 less in her retirement nest egg,” Thorndike said. “Inflation will have an effect on savings, in my opinion.”
Groceries may be more expensive, but stocks are cheap after a decline of almost 20% last year. So continuing to contribute to employer-sponsored plans and RIAs may now mean a bigger bump in the road.
“I advise clients to try to take advantage of falling stock prices and keep going if they can,” Thorndike said.