Posted in:

Don’t let high inflation stop you from saving for retirement

If you’ve been a bit reticent about saving for retirement because of high inflation, you’re not alone. If you want to fight inflation today you can have an investment proposal tailored to your needs. Signing up and creating one online with Moneyfarm is easy. But it’s understandable if poorly performing markets is still making you hesitant about investing. It’s a worldwide problem.

 According to nearly half of Americans stopped saving for retirement last year because of soaring inflation. Instead of contributing into their retirement nest egg investors from across the pond are using the money to cope with higher grocery bills, bigger utility costs and mortgage payments. The website sourced these findings from a U.S. News & World Report “Retirement and Inflation” survey which was published at the beginning of this month.

Here in the UK, we’ve also seen people reduce their pension and ISA (Individual Savings Account) contributions so that the money could be used elsewhere – particularly to help with higher energy bills and mortgage payments.

Rising costs may be pressuring you to consider doing this too while savings rates from cash accounts offered by banks may be enticing you as well while markets are down. But here’s five reasons why you shouldn’t stop paying into your investment portfolio or pension if you can help it.

  1. The volatility won’t last forever

When stockmarkets are volatile it’s understandable that you want to run for the safety of cash accounts. Days or even weeks of losses may tempt you to sell or reduce your payments. But days when stockmarkets suffer big losses are usually followed by recovery days.

So, if you take your money out or stop contributing to your investments you may lose out when markets recover. Few professionals can time market recovery successfully so unless luck is on your side it’s not possible for you to try and predict when market performance will turn for the better.  If possible, try and keep up your investment payments or reduce them if you’re struggling.

  1. You’ll lose out on the compounding effect

Compound interest is one of the most powerful forces which is why many refer to it as a ‘wonder of the world’. It enables you to maximise your returns and help you reach your goals more quickly. This is because it takes into account the principal amount as well as the interest accumulated previously. For more on how compound interest works and how you can take advantage of it, check out our ‘What is compound interest’ explainer.

  1. You’ll put your longer-term investment goals off course

Last year wasn’t a good year for markets and investors have seen some losses. But while you may see some volatility now, if you’re investing for the long term then those losses will usually be evened out (or typically surpassed) by better performance in times of market recovery.

There are some good cash offerings out there. With central bank rates going up the cash savings accounts are becoming more competitive. But if you save in these accounts instead of a stocks and shares ISA or your pension, for example, there’s an increasing likelihood of you not achieving your long-term investment goals.

We’ll never say cash is bad, because it has its place for shorter term needs and for times where you need to withdraw funds instantly. However, you typically lose out when you hold most of your savings in cash for too long.  

It’s easy to lose sight of your long-term goals in a negative market. But the key is to keep saving – even in the downturn so you can immediately benefit when markets are going back up. 

  1. You won’t benefit from bargains

You may be despairing at the fact that markets are down. But now is one of the best times to buy as you could take advantage of bargain prices. You may not want to invest a big chunk of money right now for fear of markets falling even lower, but there are benefits to investing a little bit of money (that you can afford) on a regular basis.  

Through Moneyfarm, you can drip feed funds into an account. Adopting this strategy enables you to stagger your points of entry into the markets. It enables you to invest while times are tough and then immediately take advantage of the times when markets suddenly turn.

  1. You’ll lose payments from your employer and the government

If you’ve been automatically enrolled in a workplace pension your employer must pay into your pension pot. In most cases employers must pay at least 3% of your earnings alongside your own payments of 5% or more.

So, if you earn £30,000 and you pay 5% of your earnings a year (£1,500) into your pension your employer would need to add in £900 which equates to 3% of your earnings. If you stop making payments into your pension or reduce them to less than 5% then your employer can also stop payments.

The government also gives you a contribution into your workplace or personal pension through tax benefits. If you stop your pension payments, you’ll also lose out from this benefit from the government.

What’s more, if you take a ‘holiday’ from paying into your pension there’s no way of getting any of those ‘lost’ payments back. It could mean you’d need to work for longer to make up for the payments you didn’t make when times were tough.

Protect your future

During tough times it’s understandable that you don’t want to pay into your stocks and shares investments or your pension, especially if markets aren’t performing. But if you don’t make regular contributions, you will lose financial boosts from your employer and the government. You could also lose out on any upswing – no one wants to buy in when markets have hit their peak.

Even if you can only make smaller contributions, it’s far better than stopping altogether and reducing your chances of a more comfortable lifestyle when you retire.

Did you find this content interesting?

You already voted!

*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.