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Why Decreasing 401(k) Contributions Is a Bad Idea

A recent survey revealed that 24% of respondents are thinking about decreasing 401(k) contributions to free up more money.¹

We get it. Times are hard for some people right now.

If you are stressed about your finances, you are not the only one. 

Consider these findings from Empower’s 2024 Money Plans and Goals Survey: 

  • 70% of Americans are feeling uneasy about their financial outlook.
  • 42% of Americans are bracing for a recession. 
  • 77% of Americans are concerned about the cost of goods.
  • 76% of Americans are worried about inflation.
  • More than 1 in 5 Gen Zers (22%) are counting on luck, like winning the lottery or receiving an inheritance, to help pay their bills.²

With inflation still on the rise, many Americans are struggling to find disposable income.

As a result, 1 in 4 Americans plan on decreasing contributions.³

While decreasing 401(k) contributions may mean short-term gains, this reaction may hurt you more in the long run. 

And affect the quality of your retirement years.

Retirement Is Getting More Expensive

decreasing 401(k) contributions

The purpose of contributing to a 401(k) is to prepare for retirement.

If you don’t save enough for your retirement years, you may not be able to retire when or how you’d like.

According to Empower’s survey, two-thirds (65%) of the respondents already believe the economy will impact their ability to retire.⁴ 

Retirement costs are on the rise, and many Americans are shocked to discover just how much they actually need to live reasonably during their retirement years.

Experts suggest the cost of retirement is 80% of your pre-retirement income.

Let’s say you and your spouse bring in $120,000 annual income. If you want to follow the 80% rule, you should plan to bring in $96,000 annual income. This amounts to $8,000 a month.

$8,000 a month is significantly more than the $2,972 you can anticipate receiving from Social Security. This means, as a couple, you need to have an extra $5,000 each month.

During retirement, you should expect to pay for housing, transportation, food, utilities, medical care, and long-term care.

Medical care and long-term care are huge factors in planning for retirement savings.

“According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2022 may need approximately $315,000 saved (after tax) to cover health care expenses in retirement.”⁵

In addition to routine medical care and emergency medical care, the U.S. Department of Health and Human Services estimates, “Someone turning age 65 today has almost a 70% chance of needing some type of long-term care services and supports in their remaining years.”⁶

Long-term care is much more expensive than most people realize.

The estimated median cost of long-term care in 2024 is $5,511 per month ($66,132 a year) for assisted living and $10,025 per month ($120,300) for a private room in a nursing home.⁷

These prices are only going to rise.

We must be prepared for a costly retirement…or be prepared never to retire.

[Related Read: The Real Cost of Retirement: Are You Saving Enough?]

Limiting Your Financial Future

decreasing 401(k) contributions

According to Empower, 26% of Gen Z say they may pull their investment funds to keep more cash on hand.⁸

Again, we understand.

You need money today, so it is hard to put money aside for tomorrow.

But, if you are decreasing contributions today, you are also decreasing your financial future.

When you contribute to a 401(k), your money has time to grow.

You don’t want to decrease contributions today only to realize you don’t have enough money to retire on.

The only time you should seriously consider decreasing contributions is when you are not able to afford your basic needs.

There is a difference between basic needs and wants.

If you are planning on decreasing contributions because you want more disposable income, you should seriously reconsider.

5 Ways to Fill the Cash Gap Now

decreasing 401(k) contributions

Empower’s survey also asked respondents how they plan to boost their overall wealth.

“A quarter of Americans (overall; 33% Gen Z) intend to work a second job, and nearly as many (24%) will start a side hustle. Over a quarter of Gen Zers intend to further their education (26%) as a pathway to higher earnings.”⁹

We also have a few suggestions to help fill the gap so you don’t feel the pressure to decrease contributions.

#1 Ask for a Raise

According to Empower, “More than a third of Americans (34%) plan to seek a raise at work, and Millennials are the most proactive, with 39% intending to ask for a salary hike.”¹⁰

Let these individuals inspire you to also speak with your employer about a raise. 

Understand your value and know your worth. 

#2 Start a Side Hustle

A side hustle is a small way to earn money that is different from traditional jobs. 

It involves your time outside of work and resources separate from your current job.

Some examples of side hustles include dog walking, selling goods on Etsy, driving for Uber, grocery shopping or food delivery services with Grubhub, or working odd jobs via TaskRabbit. 

#3 Take a Second Job

If you have the time and ability, consider working a second job. 

While we wish we could all work great hours and make great money, this simply isn’t the case – especially if we want more disposable income.

For example, many teachers have second jobs and work on weekends or during school breaks.

#4 Cut Back on Non-Essentials

Take an honest look at how you are spending your money and make some cuts.

What are you paying for that you don’t really need? 

Consider cutting streaming services or mowing the lawn yourself instead of paying for lawn services.

Stop eating out as much and save money by eating in.

Trade more expensive options for less expensive options, such as taking the family on a cheap but fun family vacation instead of splurging on a luxury trip. 

Instead of buying ten presents, buy five. 

Ask yourself if you need something or want something before you buy it. 

#5 Borrow instead of Buy 

We live in a time when you can buy what you want when you want it. 

You can order something and get it delivered right away. There is little to no wait.

It’s made us more likely to buy things when we need them – even if we don’t need them for long.

For example, how many tools or kitchen appliances do you own?

Could you borrow these tools from a friend, neighbor, or family member? Probably.

How often do you buy a book, movie, or album? You can borrow these for free from your local library.

Keep this in mind the next time you get ready to make a purchase.

Have questions or concerns about your 401(k) performance? Book a complimentary 15-minute 401(k) strategy session with one of our advisors. 

Book a Call

Sources

  1. https://www.planadviser.com/24-participants-may-cut-401k-contributions/
  2. https://www.empower.com/the-currency/money/2024-money-plans-goals
  3. https://www.usatoday.com/story/money/personalfinance/retirement/2024/04/14/why-decreasing-401k-contributions-could-hurt-you/73271846007/
  4. https://www.empower.com/the-currency/money/2024-money-plans-goals
  5. https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
  6. https://longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html
  7. https://www.seniorliving.org/care/cost/calculator/
  8. https://www.empower.com/the-currency/money/2024-money-plans-goals
  9. https://www.empower.com/the-currency/money/2024-money-plans-goals
  10. https://www.empower.com/the-currency/money/2024-money-plans-goals

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