Americans are experiencing a rude awakening when it comes to the impact of inflation on their ability to put money away for retirement.
Between the rising cost of groceries, the skyrocketing price of gas and other daily purchases and the volatile swings of the stock market, saving is becoming a pipe dream for many. Seventy-four percent of Americans say inflation has negatively impacted their financial situation, according to a survey by Bankrate. Twenty-five percent plan to delay their retirement, and 21% have reduced their retirement savings, data from BMO Harris Bank and Ipsos found.
While unsettling, these trends and market swings are nothing new, says Michael Majors, VP of HR solutions sales at Paychex, a benefits and payroll platform. He’s worked at the company since 2005, and the topic of inflation was a constant discussion then, too.
“We’ve been talking to business owners and employees in enrollment meetings for years about inflation and why you have to think about it as it relates to your retirement,” Majors says. “But people didn’t understand it until lately, because all of a sudden, they’re going to the grocery store or to the gas pump and now they’re making the connection.”
While inflation won’t change the amount that’s available in your retirement account, it does change what you can do with those funds. Suddenly, robust savings seems less likely to carry employees through decades of spending, and people are panicking.
“A lot of people are delaying retirement. Some people are thinking of getting back into the workforce because the costs have increased so much,” Majors says. “When people plan their retirement, they’re typically only looking at the best case scenario versus a range. You need to be planning on an average or worst case, because it could happen.”
Employees are typically undereducated about retirement savings and their understanding of long-term savings trends. A report by financial resource ValuePenguin found that 60% of people don’t understand how 401(k)s work, and only 37% of people know how to invest in one.
While 56% of employers offer a retirement plan, according to the Bureau of Labor Statistics, they need to take it a step further, Majors says. While it’s good that employers offer plans, setting it and forgetting it is a major misstep.
“We have seen a massive increase in the number of businesses that are offering plans over the last couple of years, and I think that’s driven by the climate of the labor shortage. People have realized they have to offer it,” he says. “But what they’re doing wrong is saying, ‘That’s it. I’m offering it, I’m competitive now.’ But they not only have to offer it, they have to make sure there’s continuing education and people who work with employees to keep them on track.”
Those advisers can also be a vital resource during economic turmoil — they can explain market fluctuations and then work with employees to help them revise their plans, if necessary. Employees should ask their financial adviser to run the numbers and see what adjustments need to be made. It could be increasing contributions to stay within their targeted retirement date, pulling back on their savings, or increasing their contributions to take advantage of stock market lows.
“As an educated consumer, employees can make a decision to continue at their current rate, which may mean pushing back their retirement, or maybe they’re in a position to raise it and still get there,” Majors says. “We need to help people feel empowered. If you just watch the headlines and worry, that’s a feeling of helplessness and hopelessness.”
And if employees are impacted by the headlines, there will most likely be an end in sight, Majors says. If you can ride it out and not react, you’ll be in a better position to withstand not just this phase, but future savings hurdles.
“These things happen in everybody’s course of their working career. We’ve had similar conditions in the past, but we know they course-correct,” Majors says. “The long-term trends never really change and they’re really opportunities to accelerate things and put money into the market, knowing what is going to happen.”
