Jill and I recently had a “life-lessons” conversation with Maeve, Phoebe, and Sophie. I usually get the eye-roll from all three of them when I bring up life-lesson conversations, but not this time. You see, with Maeve going through her decision process for her nursing internship, and the twins trying to decide on the perfect college, our conversation circled around how life really is a series of trade-offs. My discussion to them went something like this. I explained how if one thing increases, another must decrease, and gains and losses must be considered. Said plainly, whenever we make choices, we have to consider the implications of both choices, and not only what we get from our choice but what we lose from “the road no taken”.
But you know, this conversation got me thinking. I got thinking about how economics is all about tradeoffs, too. COVID-19 is a perfect example. One of the key political issues during the Covid-19 pandemic has been the extent to which health outcomes should be balanced against the economic costs associated with lockdowns and other virus suppression measures. Countries around the world had to wrestle with this issue and there were trade-offs that had to be made to help support people’s health as well as the world’s economy. Now granted, this is a fairly grand example and luckily, we don’t have to face challenges like this regularly.
A more common example is the trade-off that many of us are making each day to manage our finances. Higher prices at the gas pump, the grocery store, the airport, and many other items affected by today’s high inflation are challenging us to stretch our dollars as far as they can go – and for some, their retirement savings are taking the hit. Inflation and rising costs on many consumer goods have forced Americans to not only cut back on everyday essentials but to reduce retirement savings, too. This is according to BMO Real Financial Progress Index, a quarterly survey conducted by BMO and Ipsos that measures Americans’ sentiment around financial confidence₁.
While the survey showed that the impact of inflation is felt more by younger Americans aged 18 to 34, with sixty percent stating that they have had to reduce contributions to their savings, older savers were not immune. The percentage of working Americans nearing retirement age (60-67 years old) who said they have enough money saved was just 22 percent this year, down from 26 percent a year ago.
Record breaking inflation in 2022 has many older employees worried if they’ve saved enough and if the buying power of their savings will continue to fall in relation to rising prices, according to asset management firm Schroder’s U.S. Retirement Survey 2022. “There’s no question that rising inflation and market volatility have taken a toll on Americans’ belief in being able to achieve a financially comfortable retirement,” said Joel Schiffman, head of intermediary distribution at Schroders₂.
I met with a good buddy of mine, “Josh”, just this past week about this same topic. Josh has spent 30 years working in real estate and has been looking forward to retiring next year to start his new “hobby”, fixing up houses and re-selling them. The money won’t be huge, especially given our current housing market, but he’s good with tools and considers it his dream job. Part of his planning process involves heavily funding his retirement plan in the last few years of his career. He got a late start and didn’t really get serious about retirement until he turned 50, so he was really counting on these last few years to help him catch up.
But like so many others, he has had to reduce his retirement savings due to the inflationary climate . . . and he is not alone. Get this, more than a third (36%) of Americans have reduced their savings and 21% have reduced their retirement savings. Moreover, a quarter of respondents surveyed said they will need to delay their retirement due to the inflationary climate₃.
In addition to dealing with higher prices on nearly all goods and services, Americans are facing a volatile stock market that may have also contributed to shifting retirement timelines. Higher inflation not only means the buying power of money is shrinking, but that the value of the dollars in their 401(k)s and similar retirement plans won’t go as far as they might have hoped.
So, with inflation expected to stick around for the near term – some experts are suggesting until at least 2023 – what can you do to make sure your retirement savings aren’t ignored? First off, make sure you have a system, one that includes downside risk mitigation using quantitative data to help you weather potential short and long-term challenges. This system should evolve over time, including learning what we might do differently now during a period of inflation to help you maintain momentum towards your goals.
Folks, stay focused on your long-term savings goals so you don’t make knee-jerk reactions to short-term market events. As Josh and I discussed, there are creative ways to make daily trade-offs to help keep your retirement on track, such as cutting back on buying brand name items, dining out less often, ridesharing to save on gas, paring back subscriptions and more. I believe that if we actively choose which trade offs we want to make, we can feel much better about it than when we’re forced to let things slide. Actively decide what you value the most and you’ll likely find the process less painful than you thought it would be.
And as always – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS offers investment advisory services through Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield. Jeff can be reached at email@example.com.
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