Inflation makes saving for retirement harder. Here's what to do

As persistent inflation pushes many Americans to prioritize everyday living expenses over saving for retirement, it’s reigniting an old debate: whether it’s better to pay off debt before saving for the long-term.

A recent study from Allianz Life found that 67% of Americans are more concerned about paying bills right now than saving for their financial future. The study also found 55% of Americans have stopped or reduced their contributions to retirement plans and savings accounts due to higher consumer prices, now spiking at the fastest rate in four decades.

The study, conducted by the insurer last December, also found that most savers expect market volatility to continue this year and to adjust their investing and retirement plans.

Last but not least, the number of Americans who reported saying that now is a good time to invest in stocks or funds continues to decline, despite many assets going for bargain prices. Only one in four respondents said that putting dollars in the market now was wise, down from 37% in 2021 and higher levels in prior years.

“With all these different factors looming, it’s a critical time for people who are approaching retirement age to think about how to mitigate these risks and adjust their retirement strategies,” said Kelly LaVigne, the vice president of consumer insights at Allianz Life.

Whether to pay off debt before investing in a nest egg is a long-standing debate in personal finance circles. While it might seem counterintuitive, advisors say it’s possible to do both. 

Steve Azoury, the CEO of Azoury Financial, in Troy, Michigan, said it’s never a good idea to abandon retirement savings altogether, no matter how pressured your monthly income is. That’s especially true for the younger generation — Millennials are the most likely to say they are foregoing long-term saving, according to the Allianz study. Azoury explained that putting money into an employer-sponsored retirement plan, like a 401(k), or individual retirement account generates a tax deduction, in turn leaving more space to tweak a monthly budget to help pay off credit card and student loan debt or a mortgage. 

Azoury emphasized that paying off debt and saving money should happen simultaneously. The first step is to look at the interest rate on your credit cards. Focusing on paying off the most expensive card is the way to go. A good rule of thumb, according to Fidelity Investments, is to chip away at debt with an interest rate of 6% or more. That primarily means credit card debt, for which the average monthly rate is now 19.6%. Other rates, such as those for mortgages and student loans, tend to be lower. 

“Pay the minimum on the lower interest rates because you have to pay something, then put as much as you can against the highest interest rate,” Azoury said.

A Bankrate survey showed that over one-third of all U.S. adults now carry monthly credit card debt, up from 29% last year. Some 43% of respondents said they don’t know their interest rates. According to an undated survey by the Financial Industry Regulatory Association, more than one in four polled said they were behind on medical bills, and 21% said they paid their mortgage late at least once a year.

“If you can’t pay off credit card debt immediately, work out a structured plan to pay off the balance as quickly as possible,” the regulator said. “You’ll save money in the long run.”

Debt negotiation should always be on the table, Azoury said, because it’s important not to ignore creditors and risk getting stuck with even higher rates when borrowing or establishing a new credit line in the future. A good strategy is to negotiate to pay, for example, half the rate for a short period of time, all while making sure you can pay off the debt entirely before the end of the promotion.

At the same time, debt negotiation should be combined with monthly automated contributions to retirement accounts. The ideal approach is to save up at least 15% of your paycheck, Azoury said, a habit that helps control monthly spending.

“If you don’t see it,” he said, “you won’t have the temptation to to spend it.” 

Total U.S. household debt rose 2.2% to $16.5 trillion in the third quarter of 2022, according to the Federal Reserve Bank of New York. Mortgage balances — the largest component of household debt — climbed by $282 billion to nearly $11.7 trillion at the end of September 2022. Credit card balances jumped 15% year over year, marking the largest increase in more than 20 years.

“If you earn $100, you can’t spend $110,” Azoury said. “At some point, you have to look at yourself and say, ‘this is not right.'” 

FINRA’s survey found that 19% of people reported spending more than than they took in over the previous 12 months. Some 36% spent proportionally to their income.

As all financial advisors know, budgeting is the best way to gain control over your finances. FINRA has a helpful spreadsheet you can use to calculate monthly cash flow.

“To invest, your net income must exceed your expenses — with some to spare,” the brokerage-industry regulator says. “If this is not the case, look for expenses you could eliminate or reduce. Maybe some of your discretionary expenses are luxuries that you could give up. Perhaps a debt refinancing or consolidation could reduce your monthly payments.”