These COLA adjustments for inflation come at the same time as new survey research shows most retirement savers are having to rethink their investing strategy due to inflation. According to two new studies respondents are losing confidence in both the amount needed to retire and the date on which they could retire…. Inflation may be last year’s news, but the impact of it is being felt today.
If you think inflation is last year’s news, you may be out of step with employees. In July of 2023, the Social Security Agency implemented a nearly 9% cost-of-living adjustment (COLA) for 2023.[1] In October of 2023, the New York Times’ Mark Miller noted that while he expected another cost-of-living increase for Social Security yet somewhat smaller, “inflation is an ever-present risk that should be a consideration in your retirement plan.”[2] He also noted that social security increases disproportionately impacted middle income workers. “The risk you’ll face from inflation depends on your circumstances. Social Security replaces a higher share of pre-retirement income for middle- and lower-income retirees than it does for affluent people….” And by November of 2023, even the IRS noted changes to regulations thanks to inflation.[3]
These COLA adjustments for inflation come at the same time as new survey research shows most retirement savers are having to rethink their investing strategy due to inflation. According to the 2023 Global Retirement Survey from MFS Investment Management three quarters of the respondents said they had lost confidence in both the amount needed to retire and the date on which they could retire. 63% of respondents were already strategizing ways to delay retirement, including reducing their hours at work rather than retiring. This sentiment is echoed in 2023 Natixis Global Survey of Individual Investors, which found that even affluent investors said that inflation was crushing their retirement dreams. Inflation may be last year’s news, but the impact of it is being felt today.
Back in the summer of 2019, we noted a new trend of saving by side-hustle.[4] There, we wrote “[s]ome employee’s response to rising daily living costs without a corresponding increase in earnings has been to pick up second or seasonal jobs. This side hustle has become such a staple that some lifestyle writers even coined a term for those with two work identities – the slash workers. Those would be bookkeeper/yoga teacher or teacher/blogger, or on a more mundane level it could be office worker/retail associate. The slash worker’s side hustle has also been a go to for saving for retirement.”
We noticed a survey that found almost one third of respondents picked up a side hustle because they lacked the income to save for retirement, whether due to the need to pay off debt (such as student loans) or just to boost additional income. With changes to retirement accounts, some workers may want to pick up a side hustle to get access to additional retirement options. Retailers like the GAP Target match programs that even part-time employees can access. The GAP offers a 4% match of base pay for part time workers who have accrued 1000 hours.[5] Target offers a 5% match of base pay after 90 days for employees working at least 25 hours.
There are some serious downsides to saving by side hustle. Employees should consider how much time and money they are spending to make money on the side hustle. Additional costs like travel, parking, childcare, or even increased spending on takeout to make up for reduced time can have employees “hustling backwards” - paying more for the side hustle than they earn. Financial planning experts similarly note that workers can be tempted to spend that extra income on it needs less pressing than retirement. Income from a side hustle may have tax implications for employees as well. Depending on how the income from the side hustle is earned, it may be taxed differently than income from employment. Whereas an office worker/retail associate might have two W-2s, a teacher/blogger may have income from the blogging that is taxed as self-employment income.
There are some other, less obvious, drawbacks to managing inflation’s impact on investing: time. While saving for retirement is essential, so too are social connections, family relationships and sleep. Juggling multiple jobs or appointments turns the side hustle into the struggle juggle. Struggling at their main jobs could cause employees a bigger hit to their income if their hours are reduced or they incur health costs due to illness.
Sponsors can help employees avoid these potential downfalls by providing additional information about these drawbacks, along with traditional options for increasing saving, like budgeting worksheets and educational programs.
[1] https://www.cnbc.com/select/social-security-benefits-increase
[2] https://www.nytimes.com/2023/10/06/business/retirement-social-security-cola-inflation.html
[4] https://www.bcgbenefits.com/blog/side-hustle
[5] https://www.gapinc.com/en-us/careers/gap-inc-benefits
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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