As of April 2024, the Consumer Price Index, which tracks changes in the cost of common consumer goods and services, rose by 3.4% annually. Within that index, food costs increased by 2.2% annually, while shelter costs went up by 5.5%.
This rise is putting a strain on American middle-income households, with 67% reporting that their income is lagging behind the cost of living, according to Primerica. The situation is so dire that 36% of those surveyed are using credit cards more frequently to keep up with expenses.
As a result, it's not surprising that middle-class earners are cutting back on retirement plan contributions or pausing their funding for IRAs or 401(k)s. However, this trend could have serious long-term negative repercussions.
The problem with scaling back on savings
Pausing retirement contributions might seem necessary for some middle-income earners. But every month without contributing to your long-term savings means missing out on the opportunity for compounded returns in your IRA or 401(k).
For example, if you typically contribute $3,000 a year toward long-term savings but don't do that in 2024 due to financial strain, and you're 30 years away from retirement, not making that $3,000 contribution could result in $30,000 less in retirement savings due to missed gains over three decades.
This calculation assumes your portfolio normally generates an average annual return of 8%, which is slightly below the stock market’s average.
Another issue with pausing retirement plan contributions is missing out on free money if you have a 401(k).
In 2023, Vanguard reported that 95% of retirement plans on its platform offered an employer contribution.
