American workers need approximately 20 percent more in their 401(K) to maintain their pre-Covid quality of life, as rising inflation is eroding household savings and jeopardizing retirement plans, warns economist Paul Mueller from the American Institute for Economic Research.
While annual inflation has slowed to 3.7 percent from last year's peak of 9.1 percent, prices are still nearly 20 percent higher than pre-pandemic levels.
Mueller told news sources that between November 2020 and now, prices have risen by 17.9 percent in inflation rates, requiring people to have almost 20 percent more money to maintain their previous quality of life.
The economist stressed that individuals saving for retirement in the US now require substantially more funds to cover the shortfall caused by the pandemic's economic effects. Those with a retirement pot of $500,000 need an additional $100,000, while those with $700,000 need $129,500 more, and a person with $1 million requires an extra $185,000. Even someone with savings of $100,000 would need to find $18,500 more. This situation has led experts to raise concerns about a 'retirement crisis' in America.
According to Fidelity, the average baby boomer's retirement savings amount to $220,900, equivalent to $180,034 pre-pandemic. A Bankrate survey also reveals that over half of workers feel behind on their retirement savings, with 25 percent having not contributed to their retirement funds in the past year.
Inflation and rising interest rates are straining budgets, leading to more workers not only struggling to save for retirement but also withdrawing from their 401(k)s, with Bank of America reporting a 36 percent rise in hardship withdrawals. According to Mueller, the ideal savings amount varies due to living costs.
Mueller also mentioned the importance of households considering their desired quality of life during retirement and the cost of living in their retirement location.
The IRS has approved an increase in the annual contribution limit for 401(k)s and other retirement accounts by $500. The White House estimates that these changes would expand savers' returns by up to 1.2 percent annually, potentially boosting their retirement savings by as much as 20 percent over a lifetime.
Furthermore, IRA contribution limits will climb from $6,500 to $7,000, though the extra catch-up contributions will remain at $1,000.