You’ll often hear that it’s important to save and invest money for retirement. The reason? Without a good-sized nest egg, you might really struggle financially once you no longer have a regular paycheck coming in.
Just take a look at what’s happened over the past year and a half. Inflation in the U.S. surged to a peak last seen four decades ago. And that’s forced a lot of people, seniors included, to make cutbacks, rack up debt, or both.
In fact, Social Security recipients got a 5.9% cost-of-living adjustment (COLA) to start off 2022 based on the inflation that was already running hot in 2021. But 2022’s inflation well outpaced that increase, leaving seniors who are heavily reliant on Social Security with a serious loss of buying power. And while the COLA coming in January will be even larger than the last one, retirees’ budgets will likely still be feeling the pinch in 2023.
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One can never know when similar economic turbulence might occur again, but if you enjoy a long retirement, the odds are good that you will at some point pass through a period when macro conditions take a bite out of your personal finances. That’s just one more reason why it’s crucial that you do what you can to set a sizable nest egg aside for your senior years. And if you have access to a 401(k) plan at work, that can be a really good place to start.
In fact, the vast majority of companies that offer a 401(k) also will match workers’ contributions to some degree. But to claim that money, you’ll need to allocate some of your income to retirement savings. And if you didn’t do that this year, it would be a smart idea to rethink your long-term strategy in 2023.
Do you really want to give up free money?
It may be the case that you were forced to cut back on retirement plan contributions in 2022 as you adjusted your budget to cope with inflation. That’s understandable. You need to put your immediate financial needs ahead of retirement savings. In fact, that’s why personal finance experts commonly advise people to prioritize building up a robust emergency fund ahead of contributing to an IRA or 401(k).
But inflation levels have been dropping since this summer, and the hope is that they’ll keep declining in 2023. And that could spell a world of relief for consumers. It could also make it possible for you to pump more money into your 401(k) next year. And that’s an opportunity worth taking advantage of.
When you give up a 401(k) match, you don’t just lose out on free money. You also miss out on all the compound growth you could have gotten by investing that money for the long term.
So, let’s say you could’ve gotten an extra $4,000 contribution to your 401(k) plan this year via your employer match, but you didn’t. If your 401(k) normally delivers an average annual return of 7% (which is actually below the stock market’s average), and you’re 25 years from leaving the workforce, that missed $4,000 will really cost your nest egg almost $22,000 at the point that you retire. That’s a pretty big deal.
Now, you may need to adjust your budget to carve out more money for 401(k) contributions. That could mean cutting back on non-essential spending, like forgoing some takeout meals or opting for a staycation instead of the trip you’ve been planning on. And it’s likely that you won’t be able to max out your 401(k) in 2023 even if you do cut back on your spending. Next year, the annual contribution limit for those tax-advantaged accounts will rise to $22,500 for workers under 50, and $30,000 for those 50 and older.
But do try to do your best to claim the full employer match you’re eligible for in your 401(k). Opportunities to snag free money don’t pop up in life that often, so you should take advantage of them whenever you can.
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