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Some workers halt 401(k) plan contributions to cope with inflation

Nov. 1, 2022 Updated Tue., Nov. 1, 2022 at 3:21 p.m.

Market corrections and cyclical downturns can happen every few years, and they are likely to occur several times throughout the life of your 401(k).  (Dreamstime)
Market corrections and cyclical downturns can happen every few years, and they are likely to occur several times throughout the life of your 401(k). (Dreamstime)
By Dee DePass (Minneapolis) Star Tribune

More than half of American workers have cut or stopped contributing to their retirement savings plans to cope with soaring prices and 40-year-high inflation rates.

The findings come from a third-quarter market perceptions study by Allianz Life Insurance of North America.

The September survey of 1,004 workers found that 54% halted or reduced their 401k and other retirement savings between July and September.

Perhaps more alarming, 43% admitted dipping into retirement nest eggs to cope with the higher cost of gas, utilities, health insurance and – well, eggs and other foods.

Stressed millennials were the most likely to stop or slim their retirement savings due to inflation (65%), followed by Gen Xers (59%) and baby boomers (40%), the Allianz study found.

Gen Xers, however reported being the most worried about how the rising cost of living will affect their long-term finances and retirement plans.

Clients at ClearPath Advisors in Wayzata, Minnesota, talk about it a lot, said Cory Zafke, the firm’s co-founder.

“We have had some people pull back a little bit. And it’s a bit of a doubled-edged sword because even though inflation is up, the market is down,” Zafke said, “The more you can put in (a 401(k) or similar plan) when the market is down, the more (you) will have when the market goes back up.”

Ameriprise Financial adviser Lisa Tuttle said clients’ stress about inflated prices is so pervasive she tackles the subject head on.

“I have heard the question many, many times over the last year: ‘Should I be cutting back on my 401(k)?’ ” Tuttle said. “(My clients) are certainly feeling the impacts everywhere.”

In a bear market, saving for retirement becomes a conundrum.

People often struggle when they put money into their 401K plan, then immediately see that balance go down because of stock market gyrations. That, piled on top of rising prices, wears on clients emotions, Tuttle said.

Rather than curtailing retirement plan contributions, Tuttle steers clients instead toward cutting expenses. Stop eating out. Put up with that old jalopy of a car for another year. Trade luxury grocery stores for discounters and forget about lavish holiday gifts.

But even with her coaching, roughly 1% of her clients won’t be dissuaded and end up cutting a 401(k) or 403(b) contributions.

“In retrospect, that was a terrible decision to make, but in the moment that was the only decision that (some) thought (they) could make,” Tuttle said.

To be sure, there are many Americans who don’t make enough to regularly contribute to a 401(k) or IRA savings plan. While others already have cut all their excess spending, so have little choice but to trim retirement contributions.

The $20 billion asset management firm Mercer also surveyed workers across various demographics and found 75% were significantly financially stressed because of inflation and market volatility.

The pullback on retirement savings hit just as the federal government boosted limits for tax deferred retirement savings by $2,000 a year. In 2023, those under age 50 can squirrel away $22,500, while those over 50 can stash as much as $30,000 in tax deferred income.

But, for many, such limits are impossibly out of reach, financial planners and economists concede.

One in three workers making less than $60,000 took on second or third jobs so they could handle rising prices of everyday items such as gas, food, utilities and rent, Mercer’s 2022 Inside Employee’s Minds Study found.

In October, the Federal Reserve Bank of Minneapolis reported that Minneapolis food shelves were swamped this summer as average food prices jumped 13% from a year ago, causing many shoppers (60% of those surveyed) to eat less, stop buying costly veggies or to seek help procuring food.

The Joyce Uptown Foodshelf in Minneapolis saw food requests more than double to 6,200 clients from before the pandemic, wrote Fed researcher Haley Chinander in an October report.

Inflation is affecting the cost of basic needs so often that concern over retirement accounts can be shoved to the side.

Because of inflation, “covering monthly expenses now claims the top spot (among concerns), up from No. 9 in 2021,” said Adam Pressman, Mercer’s U.S. Employee Research Leader. “The ability to retire is now the second top concern amongst all demographics, up from No. 5 in 2021.”

It’s a worrisome trend because “inflation is not going away tomorrow” and people still will need to prepare for their financial security when they are old, said Kelly LaVigne, Allianz vice president of consumer insights.

“While we all hope that the pace of inflation will slow, it will take time to moderate,” he said. In the meantime, workers and consumers need to “find ways to help fight the effects of inflation in their portfolio so that long-term inflation doesn’t affect retirement,” LaVigne said.

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