They say that time exists so that everything doesn’t happen all at once; however, anyone who has been through a tight financial time when cash flow is more out than in might tell you a different story.
There is no denying tight times happen: your vehicle is totaled in a car accident; your lease is up, and it’s time to move; an appliance at home breaks and needs to be replaced; your pet swallows something that isn’t food and needs an emergency vet visit. Most households have emergency funds in place for unexpected incidents, but there are times when several events happen at once. Add high inflation into the mix, and suddenly your normal cash flow from income isn’t making ends meet.
If this situation hits close to home, you’re not alone. According to a survey on retirement and inflation from U.S. News & World Report, 50% of respondents reported pausing their retirement savings at some point during 2022, with 41% citing they stopped contributions to their 401(k) or other workplace retirement plans.
Unfortunately, stopping contributions can have a detrimental effect on your future. For example, a 30-year-old with $50,000 in her 401(k) who saves $300 a month could have around $830,000 by age 65, assuming a conservative long-term return of 6%, compounded monthly. If she stopped contributing in 2022, she’d have an extra $3,600, less taxes, in her take-home pay. However, by not contributing $3,600, that money misses out on 35 years of compounding growth. If she resumed her savings the following year, her balance at age 65 would only be around $780,000, assuming the same return.
Now consider when stopping her contributions, she also doesn’t receive her employer matching contribution. Let’s assume that is an additional $3,000 she doesn’t save in 2022. Without the same 35 years of compounding growth she could be missing out on an additional $22,000 in her retirement savings.
This example illustrates why it is better to cut your expenses as much as possible before you reduce your retirement savings. Many financially tight times are temporary, and some may warrant pausing your savings. Significant emergencies or a job loss could also be times when you withdraw rather than contribute to long-term accounts; however, retirement accounts should—in most cases—be your last resort.
If you have paused your savings, set a date when you will resume your contributions. Even if you are unable to contribute the same amount as before, something is better than nothing. While we always recommend, at a minimum, saving enough to receive your full employer match, remember that matching contributions are not all or nothing. If times are still tight and 1% of your salary is all you can spare, that may still be a 1% match your employer will provide. Rarely will you ever get an instance doubling of your money, so this is an opportunity you should not pass up. Over a career, missing out on a small amount could make nearly a $100,000 difference in your retirement account.
Furthermore, if you can save now, depressed stock prices should allow you to buy more shares today. Buying at low prices poises your savings for growth when the stock market rebounds.
If you have questions on how to make the most of your retirement savings, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the January 21, 2023 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
