August 11, 2022

The top retirement obstacles – and how to manage them

A man and woman holding hands

A version of this article originally appeared on MarketWatch.

After two years that challenged workers personally and financially, Covid began to mellow. Then, gas prices shot up and the markets tumbled into turbulence. Our annual nationwide survey of 401(k) investors found that inflation is the main obstacle to saving for a comfortable retirement this year, followed by keeping up with monthly expenses, stock market volatility and unexpected expenses.* 

It's understandable that people are feeling uneasy, but even in this challenging environment, investors can take steps to protect their retirement. 

Manage spending

One of the most reliable indicators of whether workers are on the right track for retirement is how much they set aside from their paychecks. Reducing this "deferral rate" should be a last resort along with early withdrawals from 401(k)s. Both actions undermine one of the most powerful retirement saving strategies – compounding investment returns over years. 

Continuing to save may be easier said than done in the current economy. Inflation is impacting 79% of workers' spending and saving habits. About a third say they are making fewer purchases or buying cheaper products.

If you aren't already tracking your income and expenses, it's a great time to start. You'll be able to identify "nice to haves" in your budget, such as restaurants and entertainment, which is one place to start looking for cuts if necessary, so that you can keep saving. 

Reduce debt

When I wrote before that debt is a major and sometimes discouraging barrier to retirement, the benchmark federal funds interest rate was near historic lows. But already this year, the Fed has raised rates by more than two percentage points with more rate hikes expected. 

As a result, it has become significantly more expensive for consumers to hold variable interest rate debt like credit card debt. So, I think it's worth repeating myself: The faster you pay off your credit card balances, the faster you can prioritize saving and investing. Start with the highest interest rate first to avoid paying even more later on, and consider refinancing any adjustable-rate loans, like your mortgage, to a fixed rate. 

Save for rainy days

Just reducing expenses may not be enough to protect saving habits established in easier times. Indeed, a third of workers say unexpected expenses are an obstacle to saving as many are saving less (33%) and spending more in general (30%). 

These challenges are a good reminder to set money aside, when you can, for future financial shocks. An emergency fund can soften the impact of medical costs, major repairs, a job loss, or other unwelcome surprises, so that you can avoid drawing from your retirement savings. 

It's prudent to keep three to six months' worth of essential living expenses in an accessible account. That's a lot if you're starting from scratch, but even a small monthly contribution to an emergency savings account can help you out of a jam down the road, or at least soften the blow.

Market volatility: fear not

Down markets are unnerving. It's what you do with the feeling that matters. As my wise colleague Liz Ann Sonders likes to say "panic is never a good investment strategy." 

It's no surprise if you are feeling tempted to tap the brakes or move your 401(k) out of investments and into cash. One-third of workers in our survey say stock market volatility is keeping them from saving for retirement. 

Consider two things before you dump your portfolio or cut your savings rate. First, it is nearly impossible to know when to move in and out of the market, even for professional investors. Second, the overwhelming majority of 401(k) participants have stayed invested so far. Data from Schwab Retirement Plan Services shows that nearly 98% of participants maintained their savings rates in June and were consistent with one year ago even as recession talk heated up. 

Ask for help

We are seeing retirement plan participants take steps to manage their reaction to jittery markets. So far this year they are viewing their 401(k) balances online less frequently, which avoids reinforcing the pain of financial loss that humans tend to feel more acutely than the pleasure of gain. And psychological pain can drive people to make bad investment decisions.  

We've also seen participants reaching out to their workplace retirement plans for more support through call, email, and chat. Your own employer may offer advice at no additional cost or low cost that can help you decide how to invest your retirement savings and offer guidance on other financial issues. Be sure to find out what is available before you make a major investment decision out of fear. 

It can be scary out there for retirement savers but staying invested in a diversified portfolio continues to be a solid strategy, especially for those with many years to go before retirement.