It’s a stressful time to be saving for retirement because people’s 401(k) balances are being negatively impacted by the double whammy of inflation and a volatile market.
According to a recent poll by Charles Schwab of participants in 401(k) plans, investors now see inflation, which is at its highest level in 40 years, as the main barrier to a decent retirement.
According to the study, the biggest barrier to retirement was the rising cost of living event, which outranked stock market volatility.
Because it affects retirees from many angles, inflation may be sneaky. First, rising housing, food, and gas prices make it more difficult to stick to your budget, which may entice you to reduce your retirement payments.
Second, inflation depreciates assets, particularly when the market is far from keeping up with the considerably larger rise in daily expenditure.
According to experts, these issues are leading some employees to reduce their retirement savings.
Actually, approximately 1 in 7 investors admitted to Schwab that they had cut down on their retirement payments to compensate for inflation.
In order to build a strong nest egg for the future, Catherine Golladay, managing director and head of workplace financial services at Charles Schwab, told CBS MoneyWatch that cutting back on 401(k) contributions weakens the power of compound interest.
A bear market, which is the term used to describe when stocks decline by at least 20% from their most recent high, began on Wall Street in June.
However, stocks surged to recoup some of that lost ground in July, and as a result, the Dow Jones Industrial Average is now down only 10% for the year. Even so, a dip like that might feel particularly painful when inflation is above 9%.
Here are three expert tips on how to manage your 401(k) while stocks are shaky and inflation is on the rise.
Don’t constantly check your 401(k) balance.
It might be tempting to often check your 401(k) balance when the financial markets are volatile. After all, whether you’re taking a bath or avoiding the worst, you want to be in control.
However, research from behavioral economics has showed that individuals are often not reasonable when it comes to money, thus that may really be detrimental.
For instance, Nobel Prize-winning behavioral economist Richard Thaler discovered that retirement savers experience “myopic loss aversion” when they see a decline in their short-term rates of return.
In other words, if your 401(k) is losing money, you could opt to sell it or avoid making investments that would provide long-term returns out of concern that you will continue to lose money.
According to Thaler, investors who only viewed simulations of one-year returns chose to invest 41% of their capital in equities, compared to 82% of those who saw simulations of longer-term returns.
That study was released in 2007, years before the iPhone and financial applications that let you touch a screen to see your 401(k) amount.
Experts assert that refraining from compulsively monitoring your balance in the digital age is even more important.
Consumer engagement is excellent, but Golladay warned that daily exposure to it can make some individuals anxious.
Maintain your current level of 401(k) contributions.
According to Schwab, around 15% of 401(k) owners are lowering their retirement payments to keep up with inflation.
But because you’re trimming the assets that will eventually grow to support your retirement, this might have unintended consequences in the long term.
Golladay said, “I would argue that the last option for someone is to lower their 401(k) contribution,” but she noted that she can see why some individuals feel they need to draw back given the present pressure on family budgets.
Given the challenging stock market, it could also be tempting to cut down. After all, why inject additional cash into the market if equities are declining?
However, analysts point out that depositing a certain sum of money via your 401(k) enables “dollar-cost averaging,” a strategy that has been shown to provide some of the best investment results.
According to Glenn Williams, CEO of Primerica, “one thing we tell families is, yeah, money is tight but if you purchase a smart investment that’s just momentarily down in value, you are leveraging the notion of dollar-cost averaging that will work in your favor.”
Additionally, you will have more time now than you will afterwards.
Do not concentrate on the retirement gap.
Looking at your existing savings and realizing that you have a long way to go before you can satisfy your retirement obligations might be intimidating.
In fact, it could lead some individuals to conclude that they would never achieve their objectives.
And those are substantial goals: Americans with 401(k)s said that they needed to save $1.7 million in order to finance retirement.
According to Vanguard, the average balance of a defined contribution plan, which includes 401(k) and 403(b) plans, was nearly $141,000 in 2021.
It might be demoralizing to concentrate on the difference between actual account balances and savings objectives.
However, according to experts, defining financial goals and consulting an advisor may help retirees stay with a plan.
Additionally, a lot of employers provide their staff with expert financial advice, which may be useful in formulating objectives and action plans.
There are some people who don’t think it’s possible, but Golladay said that talking to an advisor would provide them “actionable measures that might help them get there.”
She mentioned that one of those objectives might be to gradually increase your retirement contributions, such as by increasing the percentage of your salary that you contribute directly to your 401(k) when you receive a raise.
Start out small, she said. “If you feel like there is a big gap, it might be overwhelming, but there are so many instances of individuals who start small, make progress over time, and end up in a better position.”