(SmartAsset) - A thousand workers told Schwab that they need an average of $1.7 million in savings to pay for retirement. But inflation, monthly expenses, stock market volatility and other retirement obstacles are keeping them from reaching their goals.
Here’s what the 2022 Schwab survey says and how you can beat inflation and other retirement savings challenges.
A financial advisor could help you put a financial plan together to protect your retirement from inflation, stock market volatility and other savings and investment obstacles.
2022 survey data from the global financial services company Charles Schwab says that inflation (45%), monthly bills (35%), stock market volatility (33%), unexpected expenses (33%), credit card debt (24%) and education savings and costs for children (21%) are preventing American workers from putting more money into retirement savings.
When asked about retirement goals, workers on average told Schwab that they will “need $1.7 million saved” to cover the costs of retirement. This is down from $1.9 million reported in the 2021 survey. But less than half of the workers who participated in the 2022 survey (47%) say they are “very likely to meet their retirement goals,” while 13% reported they are “not likely” to reach them at all.
Catherine Golladay, head of Schwab Workplace Financial Services, said in a statement that “economic and geopolitical turbulence” continues to raise financial uncertainty among workers after dealing with two years of the coronavirus pandemic. But remains optimistic when it comes to how workers can rise above these challenges.
“While plan participants can’t control inflation or the markets, the good news is they are taking steps to manage their finances with an eye to the future,” Golladay said.
The financial services company collected data from 1,000 U.S. 401(k) plan participants between the ages of 21 and 70. Participants worked for companies with more than 25 employees.
How Financial Challenges Affect Retirement Savings
In response to retirement savings challenges like inflation and stock market volatility, Schwab says “79% of workers are changing their saving and spending habits.”
Though, according to the survey, only “44% have altered their 401(k) investments.”
Survey data shows that workers cut spending by reducing their number of purchases (34%), buying cheaper products (32%) and paying off debt more slowly (21%).
But even with these belt-tightening measures, 33% of workers are still saving less and 30% are spending more.
These economic circumstances are also affecting how they are saving for unexpected expenses (20% save less for emergencies), investing for retirement (18% invest less outside of 401(k)s) and are even putting less money into their retirement plans (15% contribute less to their 401(k)s).
As a result, almost one quarter of workers told Schwab that they plan to delay their retirement because of the pandemic. One-third said they “do not know how long their savings are likely to last in retirement.” And two-thirds said “they expect their retirement savings to last 23 years on average.”
Six Ways to Beat Common Retirement Challenges
Workers told Schwab that they expect their 401(k) plans to provide 37% of their retirement income, followed by Social Security with 17%. This adds up to 54% of expected retirement income, which means that 46% will need to come from other sources.
If you want to make your retirement sustainable, here are six common ways to beat financial challenges that are keeping workers from reaching their savings and investment goals:
How to beat inflation. Rising prices are impacting worker’s wallets, and while you may naturally cut spending and perhaps savings, this alone will not be enough to reach your retirement goals.
One common option could be to invest outside of your 401(k). With the Federal Reserve raising interest rates to combat inflation, banks will likely charge more for loans and pay customers higher rates on deposits. And this makes certificates of deposit (CDs) more appealing to investors.
CDs typically offer among the highest yields when compared with other cash instruments—some are now as high as 3.25% in July 2022 with a $1,000 minimum deposit.
You should note, however, that minimum deposits could be even higher for the highest yield rates and you may get charged a withdrawal penalty if you have to pull out money before the maturity date.
How to beat monthly expenses. Consumer prices have gone up fast in 2022 and the buying power of many Americans is shrinking with higher food, rent and gas costs.
SmartAsset’s 2022 study on the “Places Where Inflation Has Spiked the Most” shows that some metro areas have already seen over a 9% inflation hike.
While you can’t control rising prices, you can plan every dollar in your budget with a smart budget strategy. One example is the 50/30/20 rule, which could allow you to set up a budgeting framework that is flexible enough to pay for rising monthly expenses and save for retirement, while also reducing debt.
This rule divides your income into three parts:
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50% pays for monthly expenses
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30% pays for other things you may want (and part of it could also get allotted to cover the rising costs of monthly expenses)
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20% goes into retirement savings and debt repayments
As with all financial strategies, you will need to track your progress and make adjustments based on your monthly expenses in order to reach your retirement savings goals.
How to beat stock market volatility. Because 401(k) plans are not adjusted automatically for rising inflation, soaring prices could end up reducing your investment returns over time when they outpace your savings.
One option could involve allocating more investments to mutual funds that hold stocks. These assets can beat inflation because they invest in companies that raise prices as inflation goes up.
Long-term investors also hedge against downsides in a volatile market. This strategy could also include selling shares when prices drop by a specific amount. Investors can also set up stop-loss orders to do this automatically.
Another option may already be available in your 401(k) plan. A 2022 MetLife study says that 82% of plan sponsors offer stable value funds as an option to preserve capital. This asset class is an insured bond portfolio that can protect investors from losing money. And it’s available to 401(k) participants, as well as those in other defined contribution plans like 457s and 403(b)s.
You should note, however, that stable value funds charge annual fees that could be higher than other bond funds.
How to beat unexpected costs. Sudden job loss, health emergencies and other surprise expenses can eat into your savings quickly. One way workers can safeguard their retirement savings is by creating an emergency fund. Though this can be complicated when juggling multiple financial goals and needs.
A common way to turn an emergency fund into a reality is to set up an automatic savings plan that will transfer part of your paycheck to a savings or money market account. If you are already retired, you can also set this up with your Social Security and retirement distributions each month.
Automatic contributions can also boost your retirement savings. A 2022 study from Vanguard says that those with automatic enrollment had a participation rate three times higher than those with voluntary enrollment.
How to beat credit card debt. With rising prices many workers are turning to credit cards to make ends meet. However, credit card debt can get out of control fast. And with the Federal Reserve raising interest rates, the annual percentage rate on your credit card will also likely go up.
One common debt-reducing strategy is to pay down the lowest balance first. This is known as the snowball method. It can motivate you to pay debt off quickly and eliminate outstanding balances. However, the strategy will not be effective against bigger debts with higher interest rates. In that case, you may want to shift to an avalanche method that prioritizes paying high-interest debts first.
Another common option could be to consolidate all of your outstanding balances into a loan so that you can then pay everything off in one monthly payment. But you should note that while loan interests can be lower than credit card interests, you will still need to meet lender requirements. And depending on your credit history, you may only qualify for higher interest loans that are comparable with the interest on your credit card. So make sure to do the math first.
How to pay for education without cutting into retirement. With college expenses rising, parents are also facing difficult decisions where they have to pick between funding a child’s education and saving for retirement. Financial experts generally agree that you should not save money for your child’s education at the expense of your retirement.
To avoid this difficult choice, many parents invest early in a 529 plan, which is a tax-advantaged savings option that allows you to put money away for future education costs. Your after-tax contributions grow tax-deferred over time and could be withdrawn tax-free for qualified education expenses.
Another less known option is using an IRA to pay for your child’s future education. The IRS allows you to make penalty-free withdrawals when you are age 59.5. But you can also take money out early to pay for your child’s college tuition without a penalty. This, however, will not exempt you from owing taxes on those distributions, which you will have to pay at the current income tax rate.
Bottom Line
Inflation, monthly expenses, stock market volatility and other retirement obstacles are preventing Americans from reaching their retirement savings goals. Workers told Schwab that they will need an average of $1.7 million to pay for retirement. In some cases, you will be able to beat these retirement obstacles by investing outside of your 401(k), using budget strategies to keep up with monthly expenses and savings, diversifying your investments to hedge against volatility, using automatic savings to pay for emergencies and retirement, tackling credit card debt strategically and planning ahead to pay for your child’s education with a 529 plan or an IRA.
Retirement Tips
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A financial advisor could help you create a financial plan to protect your retirement savings and investments from inflation, market volatility and other financial challenges. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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If you need help figuring out how much your retirement savings will grow over time, SmartAsset’s free 401(k) calculator can help you get an estimate.
By Arturo Conde, CEPF®
