Inflation has made life a lot harder this year. We've all felt its toll when we've made purchases lately, but it has other longer-lasting effects too. A recent Schwab survey named inflation most people's biggest obstacle to retirement right now, with 45% of participants naming it as a major challenge they're facing.
There's no simple solution to this, especially if you're struggling to cover your basic expenses. But here are a few things you can try to get your retirement plan back on track.
1. Make some changes to your budget
There are two ways you can find more money for retirement savings: You can either bring more money in or reduce the money going out. It's wise to explore both possibilities if you're not saving as much as you'd like to right now.
You can bring more money in by working overtime, negotiating a raise, or seeking out better-paying employment elsewhere. If you're not able to find a suitable job, consider starting a side hustle. There are virtually limitless opportunities to earn additional income these days, so you can choose something that matches your interests and talents.
Reducing expenses might be challenging if your budget is already pared down to the essentials. But if there are some areas where you can reduce spending, consider doing so in order to divert more money to retirement savings.
2. Choose the right home for your money
The right accounts can help you grow your retirement savings quickly, but what's best for you may not be what's best for someone else. Look at all your options and weigh their pros and cons before making a decision.
A 401(k) is a great place to begin if you qualify for an employer match. Put all your retirement funds here first until you've claimed your full match. Otherwise, you're just leaving free money on the table. If you still have additional funds you'd like to contribute, you can either stick with your 401(k) or choose another account.
IRAs offer you more investment options than 401(k)s, but they have lower annual contribution limits. You can contribute up to $20,500 to a 401(k) in 2022 ($27,000 if 50+), but just $6,000 to an IRA ($7,000 if 50+). Still, the freedom to invest in just about anything is valuable. If you focus on low-cost investments, like index funds, you can keep more of your earnings over time than you could if you invested in more expensive actively managed mutual funds.
In addition, IRAs enable you to choose when you want to pay taxes on your savings. If you could use a tax break today, a traditional IRA is a better fit. Every dollar you put into one of these accounts reduces your taxable income for the year. Otherwise, a Roth IRA might be a better choice for the long term. You'll pay taxes on your contributions today, but unlike traditional IRAs, you'll get tax-free withdrawals in retirement.
3. Plan to delay retirement
When you can't find a way to contribute more money for retirement, delaying retirement is probably your best move. Even a few extra months in the workforce can make a significant difference in the size of your nest egg. You can use that extra time to save, and in the meantime, the money you've already invested will continue to grow. Plus, you're shortening your retirement, and that reduces the cost too.
Hopefully, inflation doesn't remain as high as it's been lately, and we'll all begin to adjust to the new normal. Until then, we just have to do our best and adapt our retirement plan as we go.