Inflation Caused Many Employees to Stop Saving for Retirement in 2022

​Inflation—which hit a 40-year high last year but has recently shown signs of abating—has taken a dramatic toll on consumers' lives and wallets, affecting nearly every aspect of their finances. Now a new report shows how higher costs have impacted one aspect in particular: retirement.

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Nearly half of Americans said they stopped saving for retirement in 2022, as increased costs for groceries, gas, housing and other routine expenses had a significant impact on their budgets and savings, according to a survey released this month by U.S. News & World Report. Meanwhile, roughly one-third of the 2,000 workers surveyed said they dipped into their retirement funds last year.

Specifically, the survey found that 41 percent of respondents stopped contributing money to a retirement account in 2022 as a direct result of skyrocketing everyday costs, while 32 percent withdrew some of their retirement savings to keep up with inflation. Overall, nearly three-fourths (72 percent) said they have re-evaluated their retirement plans due to COVID-19 and its economic effects, with more than one-quarter (27 percent) saying they have greatly done so.

"The survey data shows a clear correlation between the rise of inflation and Americans' delayed or altered retirement plans," Scott Nyerges, senior insurance editor at U.S. News' 360 Reviews, said in a statement. "Americans continue to worry about the future repercussions of the COVID-19 pandemic."

The survey is the latest to paint a sobering picture of the state of retirement, specifically regarding the effects of high inflation on Americans' retirement plans. A recent survey of 1,000 full-time employees by Betterment at Work, a New York City-based financial services firm, found that market volatility has impacted retirement account balances. The survey similarly found that 28 percent of respondents dipped into their retirement savings to pay for short-term expenses—a figure that Kristen Carlisle, general manager at Betterment at Work, told SHRM Online is "a significant and worrisome number."

"Retirement savings should be tapped only in dire scenarios, and withdrawing before the age of 65 can incur steep financial penalties," she said.

The good news is that inflation has cooled in recent months. The latest Consumer Price Index (CPI) for all items rose 6.5 percent for the 12 months ending in December, before seasonal adjustment, according to a Jan. 12 report from the U.S. Bureau of Labor Statistics (BLS). On a monthly basis, the CPI fell 0.1 percent in December, seasonally adjusted, after increasing 0.1 percent in November. But despite the recent slowdown, the inflation rate remains significantly above its multiyear average, as well as above the Federal Reserve's target rate of 2 percent. From 1960 to 2021, the average inflation rate was 3.8 percent per year.

Cooling inflation may be one reason some employees are feeling slightly more optimistic this year about retirement. In the U.S. News survey, 57 percent of respondents said they believe the economy will be stronger by the end of 2023, and 61 percent expect their personal retirement situation will improve this year.

But overall, inflation's toll on employees is troubling, as stopping retirement contributions for any amount of time can have negative impacts on investments and growth.

The data from U.S. News about retirement and inflation comes as a new law aims to help improve employees' retirement readiness. The collection of retirement provisions known as the SECURE 2.0 Act—which builds on the original SECURE (Setting Every Community Up for Retirement Enhancement) Act—was passed by Congress as part of the $1.7 trillion government spending bill for fiscal 2023. President Joe Biden signed the bill into law on Dec. 29.

The new data may be a call to action for employers to help employees during a fragile economic time. Experts say employers should focus on retirement and financial wellness efforts, as employees are clearly struggling with savings and expenses.

Given the growing number of individuals feeling financially squeezed and dipping into their retirement savings, Carlisle said benefits managers need to ask whether their benefits are meeting this macroeconomic moment and whether they have the flexibility to be effective beyond what people are dealing with today.

Offering financial consulting or matching retirement contributions, as well as helping employees  set up emergency savings accounts, are all possible options. Perhaps even more important is reassurance and education, including reminding employees what is at risk if they stop contributing to retirement accounts or start dipping into them, industry insiders said.