Americans are doing everything they can to deal with soaring inflation.
According to a new survey by New York Life, U.S. adults say they are eating out less and are putting off big-ticket items like vacations, car purchases or home purchases. This is understandable as consumer prices are up 8.5% year over year through April 2022.
Americans are also reducing their emergency fund contributions, in part to continue to focus on long-term retirement savings, which haven’t met expectations. Monthly household savings contributions are down $243 ($289 for millennials), but 72% of respondents still want to retire at the age they want, according to New York Life.
Keep the retirement train rolling
With so many Americans slashing household budgets, should retirement plan contributions be the next step?
No way, investment experts say.
“It takes a long time to build back good habits that are lost,” said Paul Taylor, chief marketing officer at Nassau Financial Group in Hartford, Connecticut. “Learning how to spend less is much better than regretting your life later.”
According to Taylor, when you stop contributing to your retirement fund, you lose a valuable money-making tool—compound interest.
“Depending on the growth rate of your future savings, the compounding effect — positive or negative — can be eye-popping over a two-decade period,” he said. “So even with the occasional downturn, putting money into a 401(k) or annuity could prove to be by far the best hedge against inflation.”
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Other fund managers say retirement money should be considered a major household financial priority, just like food, mortgages and health insurance.
“It’s a big concern when I hear people tell me they should cut or reduce retirement contributions,” said Ashley W. Folkes, director of growth at BridgeWorth Wealth Management. “I love talking to clients about their financial priorities, which are very similar to the hierarchy of a needs pyramid, because funding for retirement is the foundation of their future.”
Unless you can’t put food on the table and oil in the tank to go to work, Folkes recommends looking at your budget for other ways to keep costs down.
“Cutting superannuation contributions may feel like an easier, gentler way to reduce costs, but it can be harmful,” he said. “It’s very similar to trying to time the market. We don’t know where inflation will be at these levels. How long will it last?”
“You’re not only missing the opportunity to put money in the bucket to fund the future, but you’re also missing the opportunity to buy the fund when it’s cheap,” he added.
If You Have to Cut Your Retirement Savings, Try This
Preston P. Forman, a certified financial planner at Seasons of Advice Wealth Management in New York, said he hasn’t seen clients reduce retirement benefits. However, if you have to cut back on your long-term savings, take a short-term mindset.
“Inflation was an afterthought for most of this century, but I expect some people to cut their 401(k) contributions,” he said. “After the pandemic, no one wants to deprive themselves of anything.”
Forman advises clients to reduce rather than cancel superannuation when necessary, and then reassess within three months.
“By that time, the storm is usually over, and it’s much easier to increase the contribution from 10% to 12% than from 0% to 12%,” he said. “It’s interesting how many clients who were going to cut their donations never made the time to do it. At the end of the day, it’s a good thing.”
