Financial experts almost never advise reducing the amount you put toward retirement savings. But with inflation outpacing wage growth, there’s an argument for cutting back temporarily if you’re feeling the pinch, financial planners say.
“Yes, it’s OK to lower your contributions if you are broke. However, you may push back your retirement date by doing so,” says Danielle Miura, a certified financial planner (CFP) based in California.
By contributing less to retirement accounts like a 401(k), you lose out on compound interest, which grows your savings over time, Miura says.
To make up for it, you’ll likely need to save even more later. Financial services firm Fidelity recommends saving 23% of your pre-tax income if you start saving for retirement at 35, compared to 15% if you start at 25, for example.
But sometimes, cutting back is necessary, especially if not doing so means taking on more high-interest debt, financial planners tell CNBC Make It. If you think you need to cut back, take these three steps first.
1. Consider a revised budget or other sources of income
Not everyone’s idea of “broke” is the same.
Before you cut back on retirement contributions, either create a budget or revisit the one you have. Be sure to review all of your recurring expenses, most of which can be found in your bank and credit card statements, to identify and cut out unnecessary costs.
You might also need to change your lifestyle, says Sean Michael Pearson, a CFP in Pennsylvania.
“I always cringe at the articles that blame brand-name coffee or avocado toast for financial woes,” he says. Often, “people need to make big changes to the largest monthly expenses.”
Examples of this include consolidating debt and converting it into a fixed-rate loan, sticking with a car longer than planned or finding a less expensive place to live, he says. Another possibility is finding a part-time job to increase your income.
By either increasing your income or finding savings elsewhere, you might not need to cut back on retirement savings after all.
2. Don’t miss out on an employer match
Employer matches, often referred to as “free money,” occur when an employer also contributes a certain amount to an employee’s 401(k) plan. Typically, your employer will match a percentage of your contributions, often up to 6% of your pre-tax income.
If you need to reduce your contributions, try to avoid going below the amount that qualifies for an employer match, so you don’t miss out on any of that free money.
“Keep contributing the employer match amount — that’s preferable,” advises Joey Loss, a CFP based in Florida. However, “if doing so means credit card debt will accumulate, then give up the match for now and look for opportunities to resume that saving in the future.”
3. Have a plan for increasing your contributions later
Reducing your retirement contributions makes sense as long as you have a plan to catch up on payments later, says Jason Siperstein, a CFP based in Rhode Island.
“Lowering contributions temporarily is a fine solution to cover growing costs,” he says. “Many people are hesitant to cut back contributions, but saving for retirement is a marathon not a sprint,”
Of course, the risk is that even with the best intentions, a “temporary reduction may become permanent,” says Peter Palion, a CFP based in New York. That’s why he recommends “maintaining the contributions, unless things are truly dire.”
