Don't make these 401(k) mistakes as stocks slide and inflation soars

It's an anxious time to be saving for retirement, with the double-whammy of inflation and a volatile market taking a toll on people's 401(k) balances. 

Investors now see inflation — at its hottest level in 40 years — as the primary obstacle to a comfortable retirement, Charles Schwab found in a new survey of 401(k) plan members. The rising cost of living event topped stock market volatility as the main hurdle to retirement, the study found. 

Inflation can be insidious for retirement savers because it hits on a number of fronts. First, it's harder to meet your budget when the cost of housing, food and gasoline is surging, which can make it tempting to scale back retirement contributions. Second, inflation eats away at the value of investments, especially when the market is far from matching the sharply higher increase in day-to-day spending. 

Those factors are causing some workers to pare back their retirement savings, experts say. In fact, about 1 in 7 investors told Schwab they have reduced their retirement contributions in order to cope with inflation. 

"When you reduce your 401(k) contributions, you undermine that power of compounding interest, and that is so important for a healthy nest egg in the future," Catherine Golladay, managing director and head of workplace financial services at Charles Schwab, told CBS MoneyWatch.

Wall Street in June entered a bear market, the term used to describe when stocks decline at least 20% from their most recent high. But in July, stocks rebounded to regain some of that lost ground, leaving the Dow Jones Industrial Average down only 10% on the year. Still, that dip may feel especially painful when inflation is running at more than 9%. 

Here are three tips from experts about mistakes to avoid in managing your 401(k) as stocks wobble and inflation rises.

Don't check your 401(k) balance every day

When financial markets are on a roller-coaster, it can be tempting to check your 401(k) balance frequently. After all, you want to be on top of whether you're taking a bath or avoiding the worst. 

But that can be counterproductive, according to research from behavioral economists, who have found that people often aren't rational when it comes to money. For instance, Richard Thaler — a Nobel-prize-winning behavioral economist — found that retirement savers suffer from what he called "myopic loss aversion" when they see their short-term rates of return take a turn for the worse.

In other words, when your 401(k) is down, you might feel fearful of suffering further losses and decide to sell or shy away from investments that provide long-term gains. Investors who saw simulations of only one-year returns decided to allocate 41% of their money to stocks, while those who saw longer-term returns allocated 82%, Thaler found.  

That research was published in 2007, long before the iPhone and finance apps that display your 401(k) balance with the tap of a screen. Experts say it's even more relevant today in the digital era to avoid obsessively checking your balance. 

"It is great for consumers to be engaged, but looking at it every day could cause some people to panic," Golladay said. 

Don't scale back your 401(k) contributions

About 15% of 401(k) investors are reducing their retirement contributions to cope with inflation, Schwab found. But that can backfire in the long run because it means you're paring the investments that, over time, will grow to fund your retirement. 

"I would say that the last resort for someone is to reduce their 401(k) contribution," Golladay said, although she added that she can understand why some people feel they need to pull back in putting money away given the current strain on household budgets.

It also may be tempting to scale back given the tough stock market. After all, if stocks are down, why throw more money into the market? But experts point out that investing a fixed amount of money every paycheck through your 401(k) provides "dollar-cost averaging" — a technique that's proven to provide among the strongest investment returns. 

"One thing we remind families is, yes, money is tight but if you buy a good investment that's only temporarily down in value, you are using the concept of dollar-cost averaging that will work in your advantage," Glenn Williams, CEO of Primerica, told CBS MoneyWatch. "And you will have more time, which you won't have later on."

Don't focus on your retirement gap

It can be daunting to look at your current savings and realize that you have a long way to go to meet your retirement needs. In fact, it may cause some people to decide they will never reach their goals.

And those goals are big: When recently asked how much they needed to sock away to afford retirement, Americans with 401(k)s said $1.7 million. Meanwhile, the average defined contribution plan, which includes 401(k)s and 403(b) plans, had a balance of about $141,000 in 2021, according to Vanguard.

Focusing on the gap between savings goals and actual account balances can be disheartening. But setting financial objectives and talking with an adviser can help retirement savers stick with a plan, experts say. And many companies offer professional investment advice to employees, which can be helpful in creating steps toward achieving your goals.

"It's a percentage of folks who don't feel that it's achievable, but [talking with an adviser] will provide actionable steps that could help them get there," Golladay said.

Those goals could include slowly increasing your retirement contributions, such as boosting the percentage of your salary that your direct to your 401(k) when you get a raise, she noted. 

"Start small," she said. "You can become overwhelmed if you believe you have a large gap, but we have so, so many examples of where people start small and make strides over time and end up in a better place."