Financial Illiteracy and Inflation Are Perfect Storm

One in four Americans has cut their retirement savings because of inflation, according to the latest Personal Finance Index from the TIAA Institute.

That number is worrisome, says Andrea Hasler, deputy academic director, Global Financial Literacy Excellence Center at the George Washington University School of Business, which co-sponsors the index. Even more troubling, she says, is the 12% of workers who have stopped saving completely.

Making financial decisions without understanding the full picture is unfortunately all too common. “One of our main findings is that financial literacy levels remain low,” Hasler adds. ”U.S. adults correctly answered only about one-half of the 28 financial literacy questions, on average.”

“I’m not surprised that inflation forced people to scale back their retirement savings, but I am surprised by how much it caused them to cut back,” says Surya Kolluri, head of TIAA Institute, “[especially] at a time when 40% of Americans already don’t have enough saved for retirement.”

The problem with hitting pause on your retirement contributions is bigger than you might think. As with most things in personal finance, small amounts over time mount up to something big. Kolluri suggests these numbers for one worker as an example:

• Annual salary: $55,000
• 3% retirement contributions: $1,650
• 3% employer match: $1,650 

If this worker had begun saving in 2002, “twenty years later, at the end of 2022, the money would be worth $163,000, according to this historic calculator,” he says. (Numbers are not adjusted for inflation.)

If that same person delayed saving by just one year — stashing that $3,300 for just 19 years instead of 20 — at the end of 2022 their account would have been worth only $148,000.

When you start falling behind on regular contributions, you also miss out on investment earnings. For younger workers, especially, this can take a substantial bite from the total amount you’ll see when you’re  ready to retire, Hasler says.

“In just the most recent years with the pandemic and its financial consequences as well as the historically high inflation, people had to deal with a lot of uncertainty,” Hasler says. “Unfortunately, our research shows that managing and comprehending risk is the topic that people struggle the most with.”

For more on inflation’s impact on retirement savings, read our reporter Brenden Rearick’s story. 

— Jill Cornfield, deputy editor

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