Making your client’s retirement a priority even when times are tight

They say that time exists so that everything doesn't happen all at once; however, anyone who has been through a tight financial time when cash flow is more out than in might tell you a different story.

There is no denying tight times happen: your vehicle is totaled in a car accident; your lease is up, and it's time to move; an appliance at home breaks and needs to be replaced; your pet swallows something that isn't food and needs an emergency vet visit. Most households have emergency funds in place for unexpected incidents, but there are times when several events happen at once. Add high inflation into the mix, and suddenly your normal cash flow from income isn't making ends meet.

If this situation hits close to home, you're not alone. According to a survey on retirement and inflation from U.S. News & World Report, 50 percent of respondents reported pausing their retirement savings at some point during 2022, with 41 percent citing they stopped contributions to their 401 (k) or other workplace retirement plans.

Unfortunately, stopping contributions can have a detrimental effect on your future. For example, a 30-year-old with $50, 000 in her 401 (k) who saves $300 a month could have around $830, 000 by age 65, assuming a conservative long-term return of 6 percent, compounded monthly. If she stopped contributing in 2022 for one year, she'd have an extra $3, 600, less taxes, in her take-home pay.

However, by not contributing $3, 600, that money misses out on 35 years of compounding growth. If she resumed her savings the following year, her balance at age 65 may only be around $780, 000, assuming the same return.

Now consider when stopping her contributions, she also doesn't receive her employer matching contribution-an additional $3, 000 she doesn't save in 2022. Without the same 35 years of compounding growth, she could be missing out on an additional $22, 000 in her retirement savings.

This example illustrates why it is better to cut your expenses as much as possible before reducing your retirement savings. Many financially tight times are temporary, and some may warrant pausing your savings. Significant emergencies or a job loss could also be times when you withdraw rather than contribute to long-term accounts; however, retirement accounts should-in most cases-be your last resort.

If you have paused your savings, set a date when you will resume your contributions. Even if you are unable to contribute the same amount as before, something is better than nothing. While I always recommend saving enough to receive your full employer match, remember that matching contributions are not all or nothing. If times are still tight and 1% of your salary is all you can spare, that may still be a 1% match your employer will provide. Rarely will you ever get an instance doubling of your money, so this is an opportunity you should not pass up. Over a career, missing out on a small amount could make nearly a $100, 000 difference in your retirement account.

Furthermore, if you can save now, depressed stock prices should allow you to buy more shares today. Buying at low prices poises your savings for growth when the stock market rebounds.

William G. Lako, Jr., CFP®, is a principal at Henssler Financial and a co-host on "Money Talks"-your trusted resource for your money, your future, your life-airing Saturdays at 10 a.m. on AM 920 The Answer. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.