Just as Americans are hoping to start fresh and put the pandemic in the rearview mirror, concerns about the impact of inflation on retirement savings are now among the top worries.
With the annual inflation rate hitting the highest rate in 40 years, Fidelity Investments’ 2022 State of Retirement Planning study finds that 71% of American investors say they are “very concerned” about the impact of inflation on retirement preparedness. What’s more, 31% say they don’t know how to make sure their retirement savings keep up.
And while 79% express confidence they will be able to retire when and how they want, one in four also say they are now less confident than they were before the events of the past two years.
Still, despite the general unease, Fidelity notes that people do seem to be growing somewhat more optimistic, especially among the young. In this case, 65% of respondents say 2022 is the year they put the pandemic behind them and focus on the future, a number that increases to 74% among the next generation (which Fidelity calls “NextGen”) of investors, defined as respondents ages 18-35 (i.e., Millennials and Gen Z).
Nearly 4 in 10 (38%) NextGen investors also say they are more confident than before the events of the past two years regarding their retirement prospects, which is more than twice the number of Gen Xers (17%). For those who report that the pandemic has negatively impacted their retirement plans, 29% of NextGen estimate it will take a year or less to recover—in contrast, only 18% of Gen Xers say the same.
The Good and the Not-So-Good
One thing that’s changed the past two years involves the evolving needs of retirement savers, with each generation’s priorities shifting over time. While most Americans have put into place good financial behaviors and set practical post-pandemic priorities, Fidelity notes that inaction and cashing out too quickly are top problems.
According to the findings, 55% of NextGen investors say they put their retirement planning on hold during the pandemic, which is higher than the general population (41%). Moreover, nearly half (45%) say they do not see a point in saving for retirement until things return to normal.
And yet, waiting until the backdrop feels “safe” to make an investment in stocks has historically not been a good method of achieving future returns, Fidelity observes. Looking back at the performance of the S&P 500, an investor who missed out on just 30 of the best-performing days for the market since 1980 would have reduced their portfolio’s value by about 84%, compared to someone who remained fully invested, the firm notes. Consequently, 39% of Next Gen investors now plan to retire later than expected.
One of the more profound impacts of the pandemic is the rise of the Great Resignation, and 80% of Next Gen investors say they are now more determined than ever to focus on their passions and dreams. Yet, one out of five who quit opted to cash out of their 401(k), a move that could potentially have a longer-term negative impact.
“The fact that so many people who left their jobs as a result of the Great Resignation also cashed out of their 401(k)s may be cause for concern,” says Rita Assaf, vice president of Retirement at Fidelity Investments. “Taking money out of your retirement accounts completely should be avoided unless the immediate need is critical and there are no other options, not only because of the tax implications, but also due to the impact on your retirement nest egg.”
Older Generations Guilty, Too
Still, inertia is not just a problem reserved only for the young, according to the study. Among Gen Xers who say their retirement plans have been negatively impacted by the pandemic, 27% either estimate being four to five years away from getting back on track or admit they are completely off track.
Drawing down too quickly on a retirement nest egg that was decades in the making also appears to be an area of concern. When asked, one in five respondents thought a financial professional would recommend a withdrawal rate of 10-15% of retirement savings every year, far above Fidelity’s suggestion to withdraw no more than 4-5% yearly. Surprisingly, this view was held by 20% of Gen Xers and 15% of Boomers.
One increasing sign of the times is the emerging use of robo-advisors to help with retirement decisions, particularly among younger investors. According to the findings, 61% of NextGen investors say they like using a robo-advisor to help navigate their next steps, compared with 35% of the general population.
Fidelity’s study is based on a national online survey conducted Feb. 5–17, 2022, by Ipsos America among 2,622 adult financial decision makers with at least one investment account.
