Inflation is hitting Americans where it hurts – their finances. According to a 2022 retirement planning study by Fidelity, more than 70% of individuals in the U.S. admit they are concerned about the impact of inflation on saving for retirement. In addition, close to a third are unclear about how to ensure their retirement savings keep up with inflation.
When it comes to putting away money for the future, it is not exactly America's forte. And with almost all generations of Americans balancing the impact of competing financial priorities, saving has become even more challenging.
Even with all the sensationalized doom and gloom coming from the media, all is not lost. All inflation is not inherently bad. In fact, the government aims to keep inflation around 2% each year to avoid the economy slipping too far into a deflation cycle.
1. Stick with your plan. For those who have an updated financial plan, don't rush to make a change just because something you heard sounds interesting or a friend or colleague is doing it. If you don't have an updated plan, consider investing in your future and working with a financial planner to create a plan specific to your needs and life stage.
2. Focus on what is in your control. Many things in life are out of our control, and giving your precious time and energy to those things is a waste. It is generally better to review the things you have control over to see if there is anything you can do.
If you were fortunate enough to receive a raise, bonus, or compensation adjustment recently, it's key to ensure that the additional income doesn't just wash down the stream. Now is not the time to throw away your budget.
Making more money provides the perfect opportunity to grow your retirement fund. Take the time to review your monthly contributions to an Individual Retirement Account (IRA), 401(k), or other retirement accounts you have in place. After taking a look at other monthly expenses, you may want to increase your contribution to the highest level you can afford.
Without a plan, it is easy for that bump to be absorbed into your lifestyle, which is not what you want to happen.
Deciding how much to contribute to your retirement account will depend on your unique situation. Keep in mind during times of inflation the cost you will likely want to contribute enough so that you can qualify for any match offered by your employer. However, you don't need to limit your contributions to the required amount for the match. Instead, you may want to think about putting in as much as possible. The more you can contribute early in your career, the best of you will be when retirement time comes.
For 2023, the 401(k), 403(b), and 457(b) employee contribution limits have increased from $20,500 to $22,500. And the catch-up contribution for ages 50 and over has risen to $7,500. In addition, the IRA and Roth IRA annual contribution limit has increased from $6,000 to $6,500. Those aged 50 and up are eligible for an additional $1,000.
If you aren't able to maximize your retirement contribution, see if your company offers automatic escalation to your organization's 401(k). Automatic escalation is a 401(k) plan feature that automatically increases an employee's contribution amount. For example, you can set this feature to increase employee contributions by 1% yearly to 15% or more.
It should come as no surprise that everyone needs to have some money in savings and checking accounts to pay for everyday expenses, save for emergencies, and plan for large purchases. But when talking about long-term investments or plans, keeping your money in cash will not grow your money, especially when there are high levels of inflation. As you well know by now, the prices of goods and services have continued to rise with growing inflation.
Instead of holding on to more cash than you need, consider investing some of it in long-term investments, which are more likely to maintain your purchasing power over time. It is true that you should have around 3 to 6 months' worth of expenses saved in an emergency fund. However, if you have more than that just lying around, you are likely better off if you invest.
If you are unsure where your money is allocated, it may be time to review where it is and what it's doing. Reach out to your financial planner to better understand your plan. During times of uncertainty, it can be essential to have a higher focus on diversification of where you are saving while keeping tax benefits in mind. Everyone's finances are different, so it's critical that your plan is built around your unique needs and goals.
This recommendation isn't just in times of inflation; it is relevant no matter how the economy is faring. One of the surest ways to protect yourself from running short on money is to save as much as possible and spend less when possible. Setting aside more money today should allow it to compound for longer, building the amount you will ultimately have when you retire.
During times of uncertainty, including inflation at decades-high levels, it is natural to want to protect your savings from the impact of higher prices. However, deviating too much from your long-term strategy likely isn't the solution. So remember, stand fast, tune out the noise and continue to work on your long-term plan.
If you do not have a comprehensive financial plan that is specific to your needs and goals, please reach out to our team at Spaugh Dameron Tenny. We believe that through personal financial planning, we equip clients to make decisions, so they feel secure, free, and successful, and we inspire them to a legacy of generosity and stewardship.
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This article was written in collaboration with the financial professionals at Spaugh Dameron Tenny. Our team features CERTIFIED FINANCIAL PLANNER® professionals, Certified Exit Planning Advisors, insurance specialists, investment coordinators, and experienced analysts – all dedicated to addressing the unique financial needs of physicians, dentists, executives, and retirees. With decades of collective experience, we provide clear and comprehensive guidance in all areas of financial planning, wealth management, retirement planning, investment strategies, and practice transitions.
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