Until a few months ago, Chloe Lloyd, a policy and advocacy associate at a research firm in Washington, D.C., didn't have saving for retirement on her to-do list.
“It's been tough,” the 25-year-old told Yahoo Finance. “For many Gen Zers like me, the pandemic has delayed the start of our careers, and inflation has completely decimated our ability to save for retirement. , how can you even think about saving for the future?”
But she did. Starting in November, Lloyd started saving her money in a Roth IRA, which automatically debited $25 from her checking account every Monday. “It makes me feel better,” she said. “I'd like to do more, but I can't afford it. I'm just trying to cover the necessities.”
For many Americans like Lloyd, rising prices are making it difficult to save for retirement. They suspended or reduced contributions to retirement accounts. Some people put money into these accounts through loans or direct withdrawals. For example, in 2023, the highest percentage of Vanguard 401(k) holders had their accounts raided due to financial emergencies.
read more: Planning for Retirement: A Step-by-Step Guide
The other side of the saving mirror
This comes on the back of encouraging news that a strong stock market has reduced the balances in many Americans' retirement accounts in recent months.
“Retirement saving is like the Wild West right now,” Josh Hodges, chief customer officer at the National Council on Aging, told Yahoo Finance. “So many people have a lot of money saved for retirement, which is great, but the majority of Americans are probably under-saving for retirement because of inflation.”
Many of these likely include the estimated 56 million private sector workers who do not have employer-sponsored retirement plans at work. Retirement plans automatically enroll you in a savings plan and set aside a portion of your pre-tax profits tax-deferred. account.
Vanguard data shows that employees who work for companies that offer automatic enrollment save nearly 50% more than those who save voluntarily.
the price of inflation
Costs have been rising for nearly two years, from gasoline and groceries to home repairs and rent. According to the Labor Department's latest report, consumer prices rose 3.2% year-on-year.
result: According to a Q1 2024 survey by Allianz Life Insurance Company, a whopping 7 in 10 Americans have reduced contributions to their retirement savings accounts due to the rising cost of living. About two in three people are more worried about paying their bills than saving for retirement.
Another alarming finding is that more than two in five Americans say they have drained their retirement savings because of rising inflation.
“What we're seeing these days is that many Americans are using stopgap methods to make ends meet,” Kelly Lavigne, vice president of consumer insights at Allianz Life Insurance, told Yahoo Finance. That means we are doing it,” he said. “While some people may have been able to withstand inflation initially, a prolonged period of price increases, especially increases in necessities such as food and energy, without a commensurate increase in wages, has reached a breaking point for many people. There is.”
Current and future needs
It's not that people are doing anything wrong.
“People are really being forced to choose between their current needs and their retirement plans, which could take 30 or 40 years of their lives depending on the income they save now.” says Hodges.
The challenges of the future should not be underestimated, as the Census Bureau predicts that the population of Americans age 100 and older will quadruple over the next 30 years. A recent Fidelity report found that more than half of Gen Z and Millennials believe the higher cost of living will make it harder to save for retirement than when their parents retired.
Even if you temporarily stop making regular contributions to your retirement savings account, calculating the growth lost over time due to compound interest can have a lasting impact.
Mindy Yu, director of investments at Betterment at Work, told Yahoo Finance: “After a year hit by inflation and rising costs of living, despite a broad rebound in stock markets, 2023 “We found that the financial health of employees continued to decline in 2019.” “Emergency funds have been significantly depleted and individuals are increasingly relying on their retirement savings.”
A recent Betterment at Work survey found that one-third of workers are using their retirement savings to pay for necessities like rent, car repairs, and medical bills, and 42% are spending more than their paychecks. They answered that they could not afford to use it for savings. .
Retirement planning movement
Economic realities force difficult choices.
“My clients aren't tapping into their retirement accounts early, but some are delaying retirement due to concerns about rising costs, or are cutting back on work hours instead of abruptly stopping their jobs,” Financial said. -Tricia Rosen, planner and founder of Access. a financial planner told Yahoo Finance.
While there's no getting around the tough cash flow dilemma facing many workers right now, there are some things you can do to reset the way you think about saving for retirement.
Step one is to run one of the free online calculators offered by AARP, Bogleheads, Fidelity, Schwab, or Vanguard. This will give you an idea of how much you need to save for a comfortable retirement.
Another step is to save 15% of your annual income (including employer contributions). Generally speaking, this is a savings level that works for most people when inflation rates are not very high. That doesn't mean you can work that hard at 25, but he could start with, say, 6% and slowly increase it little by little until you reach your goal.
The goal is to have about 10 times your pre-retirement income saved by age 67, according to Fidelity. Specifically, you need to have one year's salary saved by the age of 30. By the age of 40, your income will triple. By age 50, your income will increase 6 times, and by age 60, your income will increase 8 times.
The good news is that saving for retirement just got a little easier thanks to the phased-in implementation of several provisions of the Secure 2.0 Act. Under the law, employers can now consider student loan payments as eligible contributions to retirement matching programs. It is also permissible to offer employees the option to put money into an emergency fund that is combined with a retirement plan.
Financial literacy is important
Finally, early financial education is key to strengthening retirement savings through all types of business cycles. It's important to have a basic understanding of concepts such as investing, taxes, insurance, and even budgeting.
Just under a quarter of employers offer financial wellness programs, but that number is growing, according to a 2023 report from the Transamerica Institute. Please contact Human Resources to find out what is available.
If you're serious about understanding, consider enrolling in a free online course such as “The Finance for Everyone,” a course developed by the University of Michigan that covers the basics of finance. Or pick up a personal finance book. Two books I recommend are Get a Financial Life: Personal Finance in Your Twenties and 30ties by Beth Kobliner and his book by Mark Miller. “Reboot After Retirement: Common Sense Financial Strategies to Get Back on Track.””
“I had never even heard of a Roth IRA until a few months ago,” Lloyd said. There's just a gap in financial literacy, especially for people from rural Mississippi. No one told me about these things. ”
It's also frustrating to hear about people whose retirement accounts have skyrocketed because of the stock market's rise.
“These benefits don't measure what people are actually dealing with,” Lloyd said. “Even if General Motors stock were doing well, you still wouldn't be able to pay $4 for a pepper.”
Kelly Hannon is a senior columnist at Yahoo Finance. She is a career and retirement strategist and the author of 14 of her books, including “The World's Best.''Taking Control Even Over 50: How to Succeed in the New World of Work.” and “You’re never too old to get rich.” Follow her on X @Kellyhannon.
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