It’s an anxious time to save for retirement, with the double whammy of inflation and a volatile market taking a toll on people’s 401(k) balances.
Investors now see inflation at its highest level 40 years — as the top obstacle to a comfortable retirement, Charles Schwab found in a new survey of 401(k) plan members. The study found that the rising cost of living surpassed stock market volatility as the top obstacle to retirement.
Inflation can be insidious for retirement savers because it affects several fronts. First, it’s harder to meet your budget when the cost of housing, food, and gas is rising, which can make it tempting to cut back on retirement contributions. Second, inflation eats away at the value of investments, especially when the market is far from catching up with the sharp rise in daily spending.
These factors are causing some workers to reduce their retirement savings, experts say. In fact, about 1 in 7 investors told Schwab that they have reduced their retirement contributions to keep up with inflation.
“When you reduce your 401(k) contributions, you undermine that power of compound interest, and that’s so important for a healthy nest egg going forward,” said Catherine Golladay, managing director and head of Workforce Financial Services. by Charles Schwab. CBS MoneyWatch.
Wall Street in June entered a bear market, the term used to describe when stocks are down at least 20% from their most recent high. But in July, the shares bounced to recover some of that lost ground, leaving the Dow Jones Industrial Average down just 10% on the year. Even so, this drop can be particularly painful when inflation exceeds 9%.
Here are three expert tips on mistakes to avoid when managing your 401(k) as stocks falter and inflation rises.
Don’t check your 401(k) balance every day
When the financial markets are on a roller coaster ride, it can be tempting to check your 401(k) balance frequently. After all, you want to be on top of whether you’re taking a dip or avoiding the worst.
But this can backfire, according to research by behavioral economists, who have found that people are often not rational when it comes to money. For example, Richard Thaler, a Nobel Prize-winning behavioral economist, found that retirement savers suffer from what he called “myopic loss aversion” when they see their short-term rates of return worsen.
In other words, when your 401(k) goes down, you may fear more losses and decide to sell or shy away from investments that provide long-term gains. Thaler found that investors who saw simulations of only one-year returns decided to put 41% of their money into stocks, while those who saw long-term returns put 82%.
This research was published in 2007, long before the iPhone and financial apps showed your 401(k) balance at the touch of a screen. Experts say it’s even more relevant today in the digital age to avoid obsessively checking your balance.
“It’s great that consumers are engaged, but looking at it every day could cause some people to panic,” Golladay said.
Don’t reduce your 401(k) contributions.
About 15% of 401(k) investors are reducing their retirement contributions to meet inflation, Schwab found. But this can backfire in the long run because it means you’re reducing investments that will eventually grow to fund your retirement.
“I would say the last resort for someone is to reduce their 401(k) contribution,” Golladay said, though he added that he can understand why some people feel they need to withdraw money given the current strain on the economy. home budgets.
It can also be tempting to pull back given the tough stock market. After all, if stocks are down, why throw more money into the market? But experts note that investing a fixed amount of money in each paycheck through your 401(k) provides “dollar cost averaging,” a technique that has been shown to provide one of the highest investment returns stronger
“One thing we remind families is, yes, money is tight, but if you buy a good investment that’s only temporarily low in value, you’re using the concept of dollar cost averaging which will work to your advantage.” Glenn Williams , CEO of Primerica, told CBS MoneyWatch. “And you’ll have more time, which you won’t have later.”
Don’t focus on your retirement gap
It can be daunting to look at your current savings and realize you have a long way to go to meet your retirement needs. In fact, it can make some people decide that they will never reach their goals.
And those goals are big: When asked recently how much they needed to spend to pay for retirement, Americans with 401(k)s he said $1.7 million. Meanwhile, the average defined contribution plan, which includes both 401(k) and 403(b) plans, had a balance of about $141,000 in 2021, according to Vanguard.
Focusing on the gap between savings goals and actual account balances can be discouraging. But setting financial goals and talking to an advisor can help retirement savers stick to a plan, experts say. And many companies offer professional investment advice to employees, which can be helpful in creating steps to reach your goals.
“It’s a percentage of people who don’t think it’s possible, though [talking with an adviser] it will provide actionable steps that could help them get there,” Golladay said.
Those goals could include slowly increasing your retirement contributions, such as increasing the percentage of your paycheck that goes into your 401(k) when you get a raise, he noted.
“Start small,” he said. “You can feel overwhelmed if you think you have a big gap, but we have so many examples of people starting small and working their way up over time and ending up in a better place.”
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