Two new surveys released this week show just how bad inflation is impacting Americans’ retirement saving these days.
One survey released today shows that 25% of workers have cut their retirement savings because of financial pressures created by inflation, and almost half of those (12%) stopped saving entirely. That’s from the 7th annual Personal Finance (P-Fin) Index, a joint initiative of the TIAA Institute and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business.
The other survey, from D.A. Davidson & Co., found that more than three-quarters of Americans (77%) report that inflation is impacting, or will impact, their ability to save enough money for retirement—a significant increase from 64% surveyed in April 2022.
‘Findings are troubling’
As inflation hit a 40-year high in 2022, the TIAA/GFLEC survey found American workers of all ages cut their retirement savings, struggled with debt and found it difficult to make ends meet.
Hispanic Americans were impacted the most. They were twice as likely (24%) to stop saving altogether, and 40% saved less compared to the 25% rate for the entire survey.
“This steep of a drop—on top of a crisis where 40% of Americans already don’t have enough saved for retirement—means many families will have to work even harder to achieve a secure retirement,” said Surya Kolluri, head of the TIAA Institute. “There are no simple solutions to this challenge, but we need to take a holistic approach, because health and wealth are two sides of the same coin. It’s just as important to know about someone’s medical condition as it is to know about the health of their retirement savings accounts, and employers need to engage workers on both fronts.”
The cuts in retirement savings mirror a larger financial challenge. The P-Fin Index also found that:
• 30% of those surveyed often found it difficult to make ends meet in 2022, up from 24% in 2021.
• 26% were debt constrained, up from 20%.
• 39% lacked nonretirement savings sufficient to cover one month of living expenses, up from 32%.
“Every year we say the findings are troubling, but this year, more than ever, we see how low levels of financial literacy in a volatile economy can lead to problems”
GFLEC’s Annamaria Lusardi
These problems are particularly pronounced among some groups. Approximately 40% of Blacks, Hispanics, and Gen Z typically find it difficult to make ends meet and about 50% of each lack enough nonretirement savings to cover one month of living expenses. Roughly one-third of Blacks, Hispanics, Gen X and Gen Y are debt constrained.
The results also show a gender gap in financial literacy. Men correctly answered about 25% more questions than women, on average (53% compared with 43%).
“Every year we say the findings are troubling, but this year, more than ever, we see how low levels of financial literacy in a volatile economy can lead to problems,” said Annamaria Lusardi, University Professor at GW and GFLEC’s Academic Director. “It’s important we focus on helping people of all ages, races and genders, especially the ones who are the most vulnerable.”
The P-Fin Index is an annual barometer of financial literacy based on a 28-question survey. Adults correctly answered about one-half of the questions, which has been the norm since the project began, but the share of adults who cannot correctly answer even 7 of the questions has increased. Today, one in four people cannot correctly answer more than a quarter of the questions.
The questions that have always been the most difficult for people to answer are the ones about comprehending risk. This year, barely a third (35%) answered those correctly.
American workers with a very low level of financial literacy are twice as likely to have decreased their retirement savings and more than 4 times as likely to have stopped saving for retirement compared to their peers with very high levels of financial literacy, according to the survey.
Compared to those with a very high level of financial literacy, those with a very low level of financial literacy are:
• More than 4 times as likely to typically have difficulty making ends meet (44% vs 10%).
• Nearly 3 times as likely to be debt constrained (34% vs 12%).
• More than 4 times as likely to lack emergency savings sufficient to cover one month of living expenses (56% vs 13%).
The full report can be found at https://www.tiaa.org/public/institute.
Increased longevity exacerbates retirement challenges
The D.A. Davidson & Co. survey found increased longevity is further exacerbating retirement savings challenges, as 63% of Americans expect to live to be at least 80 years old, and 27% expect to live more than 90 years. Younger generations are increasingly expecting to live to be 100 years old (14% for Gen Z; 15% for Millennials; 12% for Gen X; 9% for Baby Boomers).
When thinking about retirement, Americans’ top concerns are outliving their money (45%), paying for the costs of healthcare and/or long-term care (40%) and fearing the loss of independence (26%). Perhaps because they are closer to retirement, Baby Boomers (34%) fear the loss of their independence far more than younger generations—Gen X (21%), Millennials (20%) and Gen Z (25%).
“With pensions on the wane and uncertainty around Social Security, the onus of achieving a secure retirement falls largely on the individual today,” said Andrew Crowell, Vice Chairman of Wealth Management at D.A. Davidson. “Increased life expectancies and high inflation are certainly increasing that pressure, but working with a financial advisor can help individuals really put a plan in place to make their vision of retirement a reality.”
This data reveals a pressing need for financial education on Social Security, as more than half of Americans (59%) do not accurately understand Social Security distribution strategies.
Almost one-third of respondents (32%) mistakenly think there is no benefit to delaying Social Security, and more than a quarter (27%) do not know if there is a benefit to doing so. Men understand the benefits to delaying taking Social Security benefits better than women (47% vs. 35%).
Consumers also need additional education on how to factor Social Security into their retirement savings strategy. Only half of Americans (53%) expect Social Security benefits to last through their retirement. Further, three in 10 Americans (31%) do not expect Social Security benefits to last through their retirement, and 16% do not expect to be able to take any Social Security benefits.
SEE ALSO:
• Financial Confidence Remains Low Despite Smaller Recession Fears
• 4 Senators Want Americans to Wait Until 70 to Claim Social Security
• Americans Score Low on Longevity Literacy
• New Inflation Data Shows 2024 Social Security COLA Still Headed Below 3%
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
