Saving for retirement is something best done on a consistent basis. Yet, data points to a pullback in long-term savings contributions among middle-class American workers.
A Primerica survey found that nearly half (46%) of middle-income families are either cutting back on retirement plan contributions or pausing them indefinitely. Stubbornly high inflation is cited as a major culprit.
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As of April 2024, the Consumer Price Index, which measures changes in the cost of common consumer services and goods, had risen 3.4% on an annual basis. Within that index, food costs were up 2.2% annually, while shelter costs were up 5.5%.
All of this is putting a strain on American middle-income households, 67% of whom say their income is falling behind the cost of living, as per Primerica. Things are so bad, in fact, that 36% of those surveyed are using credit cards more frequently to keep up with expenses.
As a result, it’s not surprising that middle-class earners are pulling back on retirement plan contributions or hitting pause on funding their IRAs or 401(k)s. However, this trend could have seriously negative repercussions in the long-term.
The problem with scaling back on savings
Pausing retirement contributions may seem like a necessity for some middle-income earners. But for every month that goes by without adding money to your long-term savings, you miss out on an opportunity to benefit from compounded returns in your IRA or 401(k).
Imagine you typically contribute $3,000 a year toward long-term savings, but you don’t do that in 2024 because money is tight. If you’re 30 years away from retirement, failing to make that $3,000 contribution could result in $30,000 less in retirement savings because you’re missing out on three decades of gains.
This assumes your portfolio normally generates an average yearly 8% return, which is a bit below the stock market’s average.
Another issue with pausing retirement plan contributions: you may be missing out on free money if you have a 401(k).
In 2023, Vanguard reported that 95% of retirement plans on its platform offered an employer contribution.
Giving up a $3,000 contribution to your 401(k) for a year could mean losing out on that same amount from your employer. So, all told, that could leave you with $60,000 less in retirement savings down the line, not just $30,000.
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Is there a light at the end of the tunnel?
It’s easy to see why middle-income earners are struggling to fund their long-term savings these days. The good news is that, as inflation continues to cool, consumers should get relief from soaring prices, thereby freeing up money for their nest eggs.
Also, cooling inflation should lead to interest rate cuts on the part of the Federal Reserve. That could ease the cost of borrowing across products like loans, mortgages, and credit cards so that debt costs consumers less. That, too, could make it easier to find money for a retirement account.
Unfortunately, only 21% of those surveyed by Primerica think they’ll be better off in the next year. And given that inflation seems to be stuck in an elevated state, it may take some time before essential expenses become more affordable for the average worker.
That’s why it pays to talk to a financial advisor if you’re struggling to save for retirement in today’s economy. A professional can review your finances with you and come up with a savings strategy.
Joining the gig economy could also open the door to retirement plan contributions at a time when it feels like your income isn’t keeping up with your expenses. That extra money from a side hustle could not only help you fund an IRA or 401(k), but give you more of a cushion for near-term financial emergencies.
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