How Inflation Is Affecting Americans’ Ability to Save

By Rachel Hartman
Rachel Hartman
Rachel Hartman
Business Reporter
Rachel Hartman is a freelance writer with a background in business and finance. Her work has appeared in national and international publications for more than 10 years. She resides in Miami and travels frequently.
March 20, 2022 Updated: March 20, 2022

Inflation hit a 40-year-high in February, reaching 7.9 percent year-over-year and reflecting another month of higher prices across the board for Americans.

Some sectors rose at a faster pace than others, with the cost of gas, shelter, and food up the most. Fuel shot up by more than 43 percent, as those filling up saw continued high prices at the pump. In California, gas hit $5.75 per gallon at some gas stations. In Nevada, prices of $5 per gallon for gas were seen. Shelter rose by 4.7 percent and food went up by 8.6 percent for food at home and by 6.8 percent for food away from home.

Given the day-to-day effect that these expenses can have on workers and companies, it’s likely that many budgets are shifting.

“Your purchasing power decreases as inflation rises,” Elena Jones, founder of Finance Jar, which provides credit and financial information for consumers, told The Epoch Times.

Those who had previously paid an average of $100 for gas each month will need to pay nearly $150 per month to account for price increases if the inflationary rate continues.

While some companies are raising wages to attract and retain workers, not all salaries have kept pace with inflation.

“If a couple makes $100,000 after taxes and spends $80,000, they can save $20,000 to their 401(k) plans,” Doug Carey, owner of Wealth Trace, which provides retirement and financial software for consumers, told The Epoch Times. “If their spending increases to $90,000 due to inflation and their salaries don’t move, they can now only save $10,000 to their 401(k) plans.”

In such a case, if the decrease in savings continues for 10 years, Carey estimates the couple will have $125,000 less in their retirement accounts, compared to what they would have had by saving $20,000 per year.

For some workers nearing retirement, the increase in costs could mean putting in more hours before stepping away from a job. One of Carey’s clients had their expenses increase by almost 10 percent during a year, with no increase in salary.

“We looked at her retirement plan projections and found that if this keeps up, she will have to work two years longer to ensure she doesn’t run out of money in retirement,” Carey said.

The IRS contribution limits for 401(k) plans and IRAs increased by about 5 percent from 2021 to 2022, moving from $19,500 in 2021 to $20,500 in 2022. If the inflation rate of 7.9 percent continues, the overall allotted savings level will be lower for 2022.

“In real dollar terms, the allowed contributions to 401(k) plans has decreased,” he said.

When families are unable to make the contribution limit because of increased expenses in other areas, they could ultimately feel a triple-whammy effect, according to Stacy Mastrolia, associate professor of management at the Freeman College of Management, Bucknell University. This can happen if the workplace provides an employer match to a 401(k) plan, which the household isn’t able to take because of lower contributions.

There are also tax implications, as money placed in retirement accounts is typically tax-deductible, meaning that the household income is reduced for that year and no taxes need to be paid on the amount contributed until it’s withdrawn.

“They will have less in savings at retirement, they may miss out on ‘free’ employer-match contributions, and they will sacrifice the tax advantage and have to pay income taxes on the amount they take home instead of saving for retirement,” Mastrolia told The Epoch Times.

For low-income households that live paycheck to paycheck, there may be fewer opportunities to start saving, coupled with a higher risk of going into debt. When searching for ways to cut back on costs, look at your housing situation, suggested Mark Chen, founder and CEO of BillSmart, a negotiation service for credit cards and other bills.

If you rent, “ask your landlord if you can extend your lease for an additional year or two,” he told The Epoch Times. Opting for an extension could help you avoid rent increases that typically come if you renew or select paying on a month-to-month basis.

Other ways to cut back on expenses for the short-term include reducing the number of trips you make for errands and groceries to lower gas costs, carpooling when possible, and shopping for generic brands. Cutting back on restaurants and entertainment is another way to lower costs to make ends meet.

“Cook more of your own food and buy in bulk to save money,” Chen said.

In March, the Federal Reserve raised interest rates by 0.25 percent—the first increase in three years—and signaled that more increases are on the way in coming months. Officials at the Federal Reserve expect inflation to remain elevated during 2022, with ending rates of potentially 4.3 percent, above the Fed’s 2 percent target.

Historically, a move to increase interest rates is done to slow borrowing and curb inflation. When loan rates rise, typically less debt is taken out, and overall spending could slow as well.

Rachel Hartman
Business Reporter
Rachel Hartman is a freelance writer with a background in business and finance. Her work has appeared in national and international publications for more than 10 years. She resides in Miami and travels frequently.