According to a new survey by U.S. News & World Report, "Retirement and Inflation,"  80% of U.S. adults either paused contributions or withdrew savings from their retirement accounts in 2022. Similar findings come from an Empower report released last November, showing that hardship withdrawals rose by 24 percent over the 12 months that ended on September 30, 2022.

Of those surveyed by U.S. News & World Report, 72% say they “reevaluated their retirement plans in some capacity in 2022.” Of these respondents, 27% “greatly reassessed their financial strategies and goals.” Maintaining awareness of the economic challenges at play and how they affect your employees outlook toward retirement planning can help frame your education outreach efforts this year.

Inflation Continues to Hamper Planning Efforts

According to the Council of Economic Advisers’ 2022 Economic Report of the President, the post-pandemic shift in demand toward goods over services, coupled with supply chain issues, has continued to contribute to the rise in inflation. Although the 12-month Consumer Price Index For All Urban Consumers (CPI-U) peaked at 9.1% in June of 2022, it remains relatively high (6.5% as of December, 2022)¹.  Americans are looking for more ways to conserve spending as a result, including cutting back on saving for retirement.

Almost one-third (32%) of the survey respondents said they had to withdraw money to keep up with rising expenses. Forty-one percent stopped contributing to retirement funds like 401(k)s or individual retirement accounts (IRAs). Those surveyed had been saving for retirement for over five years, with 39% saving for six to 10 years and 61% saving for over 10 years.

2023 Outlook: A Mix of Optimism and Pessimism

Some survey respondents remained optimistic about the state of the economy, with 57% believing it will be stronger at the end of this year (although 43% believe it will be weaker). Despite this mixed outlook, the survey found that 61% of participants trust their retirement plans will recover in 2023.

However, when it comes to fears of a potential recession, 83% of respondents are worried it will affect their retirement plans and savings, and over half (57%) said they’ve lost sleep due to stress over their retirement or life savings. In anticipation of the potential for a prolonged market downturn, 65% said they expect to work during retirement to supplement Social Security income.

How Can You Help Your Employees?

Survey results like these help shine a light on potential focus areas for educating employees over the next several months. You can work with your advisor and plan recordkeeper’s relationship manager to create a few strategies to help employees stay on track with their retirement planning. Here are some ideas to consider:

• Given the trend cited in the survey, educating employees on the perils of taking a hardship withdrawal may be your biggest priority. While the IRS does allow some exceptions to the 10% early withdrawal penalty, the majority of employees who are under age 59 ½ could potentially net only 50-70 cents on the dollar, after any federal, state and local taxes are levied (in addition to the penalty and depending on their income tax bracket). Education through hypothetical math examples as well as alternative options available (such as a plan loan) should be considered. While a plan loan is not ideal for maintaining the benefit of tax-deferred compounding, at least it can be paid back eventually and does not get taxed.
• While inflation numbers are trending downward, it’s likely going to be some time before it’s no longer greatly affecting employee attitudes and outlooks toward retirement planning. Continue to drive home the basics, including the definition of inflation, how it’s measured, historical perspective and how to best manage inflation risk in an investment strategy.
• Consider educational content focused on the historical nature of various economic cycles and events, as well as market performance and volatility. Emphasize that staying the course with their saving and investment strategy is their best opportunity for success. This will be especially beneficial to younger workers who have not yet had the time and learning experience that are part of the growing pains of being a long-term investor.
• Continue to promote financial literacy and educate on financial wellness basics, such as budgeting, debt management and building an emergency savings fund. The recently passed Secure Act 2.0 contains opportunities in the near future to formally help employees create workplace emergency savings accounts, as well as manage student loan debt while still being able to accumulate retirement savings.

Saving for retirement is a truly long-term effort. Your employees will see many ups and downs due to a host of factors completely out of their control. While the old adage “it’s a marathon, not a sprint” may seem like a tired topic, it probably can’t be emphasized enough right now.

¹Bureau of Labor Consumer Price Index press release (December, 2022)

The U.S. News & World Report survey can be found at: https://tinyurl.com/5fydvaxd

BLS. (2022, December). CONSUMER PRICE INDEX – DECEMBER 202. Consumer Price Index - December 2022 (bls.gov)

U.S. News. (2023, January). U.S. News & World Report Survey: Retirement and Inflation. https://tinyurl.com/5fydvaxd

Empower. (2022, November). How Americans are preparing for their financial futures. Empowering America’s Financial Journey – 2022 | Empower

Kmotion, Inc., 412 Beavercreek Road, Suite 611, Oregon City, OR 97045; www.kmotion.com

©2023 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance; nor as the sole authority on any regulation, law or ruling as it applies to a specific plan or situation. Plan sponsors should consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.

Pensionmark Financial Group, LLC (“Pensionmark”) is an investment adviser registered under the Investment Advisers Act of 1940.  Pensionmark is affiliated through common ownership with Pensionmark Securities, LLC (member SIPC).