The impact of inflation extends beyond immediate price increases and into long-term, far-reaching consequences for individuals and families. The current surge in inflation rates, particularly in the wake of the COVID-19 pandemic, has created financial strains and challenges that may not be apparent yet.
What Is Inflation?
Inflation is the rate at which the cost of a good or service increases. The cost of food, housing, gasoline, utilities, and other goods have skyrocketed by 7.7% over the past 12 months – nearly a 40-year-high. Rising inflation rates directly affect the purchasing power of individuals and families. As the cost of goods and services increases, it becomes more difficult for households to maintain their standard of living. This can lead to reduced discretionary spending, limited savings, and a need to prioritize basic necessities over other financial goals or aspirations.
While inflation is hitting almost everyone, low-income households are experiencing a harsher impact than others as employee wage increases fail to keep up with inflation. This has forced families to shift their budgets to cover the necessities to survive during these challenging times.
Cutting Back On Retirement Savings
Inflation’s economic influence is so strong that it doesn’t stop at budget adjustments; it also affects Americans' retirement savings habits. With the rising cost of living, individuals and families find it increasingly difficult to allocate funds toward retirement savings. A recent survey found that half of U.S. adults saving for retirement had to pause their saving efforts in 2022 because of inflation. On top of that, 32% withdrew from their retirement savings, and 41% indicated they stopped contributing to their retirement funds altogether. The strain on household budgets due to inflation is providing a real challenge to set aside money for long-term financial goals.
For those already nearing retirement, the increased cost of living poses a significant threat to their retirement savings. Higher prices for essential goods and services can erode the purchasing power of their retirement funds, potentially requiring them to adjust their retirement plans or dip into their savings sooner than anticipated. Furthermore, individuals still in the earlier stages of their careers may face difficulties prioritizing retirement savings amidst the current inflationary environment. When faced with higher costs for daily necessities, there may be less available income to contribute to retirement accounts or invest in long-term financial vehicles.
While inflation may appear to be slightly winding down, it’s not going away anytime soon. Kelly LaVigne, VP of Consumer Insights, Allianz Life, expressed, “While we all hope that the pace of inflation will slow, it will take time to moderate. Consumers need to prepare themselves by talking to a financial professional and incorporating ways to help fight the effects of inflation into their portfolio so that long-term inflation doesn’t affect retirement.”
Tom Smith, Director of Retirement Services at GMS, stated, "With inflation increasing and the cost of living rising, it's essential you are saving in your 401(k), especially if your company offers an employer match. You're leaving free money on the table if you stop contributing altogether. If you've exhausted all options for cutting back on spending and are still looking to dial back your deferral amount, try and take full advantage of the employer match. This means if you're contributing eight percent right now, but the match requires you to contribute at least five percent, don't decrease your contribution to less than five percent. If you want to retire at some point, you need to have a variety of sources to draw income. It's important to pay yourself first, and a 401(k) is a great option to do that with convenient payroll deductions and tax advantages."
How Can You Step In As An Employer
As we all remain concerned about the economy and how it could affect us, it’s essential as a business owner to ensure you take every step to help your employees. Offering a retirement plan is a great way to provide long-term financial security and demonstrate a commitment to their future. By providing a plan, you empower employees to save for retirement and establish a foundation for their financial stability.
Matching program
Furthermore, implementing an employee matching program can significantly enhance the attractiveness of your business’s retirement plan. By matching contributions, employers contribute a percentage or dollar amount corresponding to the employee's contributions. This approach not only motivates employees to save more for retirement but also amplifies the growth of their retirement savings over time.
Plus, matching programs have several advantages for your business. Firstly, they help attract top talent by positioning your company as one that values employees’ financial well-being. It differentiates your business from competitors and becomes a valuable tool in recruitment efforts. Additionally, these programs contribute to higher employee retention rates, as employees are more likely to stay with a company that offers robust retirement benefits.
Retention bonuses
Retention bonuses refer to a one-time payment or reward given to an employee apart from their regular salary. This is given as an incentive to keep a valuable employee in their job, and it can be an effective strategy to help reduce the financial impact of inflation on employees. These bonuses are typically reserved for employees who have been with the company for a specific period, incentivizing them to remain loyal and committed. By offering retention bonuses, you can provide financial relief to employees without directly increasing their base pay.
This approach allows you to address the challenges posed by inflation while maintaining flexibility in their overall compensation structure. There are various ways to structure retention bonuses. For example, they can be a one-time lump sum payment or distributed over a defined period. The bonus amount can factor in tenure, job level, or performance metrics.
Financial education and planning
Additionally, you can offer financial education and planning resources. Financial education programs can cover various topics, including budgeting, saving strategies, debt management, investment basics, and retirement planning. These programs can include workshops, seminars, online courses, or one-on-one sessions with financial experts. Equipping employees with the knowledge and skills to make sound financial choices can positively contribute to your employees' economic resilience and stability.
By offering retirement plans with matching programs, retention bonuses, financial education, and planning tools, you demonstrate a commitment to your employees' economic well-being beyond their working hours. These initiatives not only help employees navigate the challenges of inflation but also contribute to reducing financial stress, improving productivity, and fostering a positive work environment.
Let Us Help
If you're unaware of where to start, contact Group Management Services (GMS). GMS is a professional employer organization (PEO) that helps small businesses by taking on the administrative burdens you don't have the time or expertise to handle. We help in all areas of your business, whether it be risk management, HR, benefits, or payroll; we do it all. We can help you set up a fully customizable retirement savings plan that makes your company more attractive to quality employees. When you partner with GMS, you can easily establish the following for your business:
- 401(k) eligibility requirements
- Vesting schedules
- Tax-deductible matching
- Profit-sharing
Contact us today so you can begin helping your employees during these challenging times.