Retirement Savers Turning to Cash Amid Market Volatility

For many retirement savers, the ups and downs of the market are too much to bear, as new studies show investors are increasingly turning to cash for retirement, despite its disadvantages.

Cash savings are preferred over volatile markets for 62% of retirement savers, according to the Allianz Life Insurance Company 2023 Q1 Quarterly Market Perceptions Study. That study reinforces data from the Schroders 2023 U.S. Retirement Survey showing workers aged 45 and older allocated 29% of their retirement portfolios to cash.

The survey results come as recent market volatility may have some investors worried about keeping their money in stocks. Rising inflation has put more pressure on stock markets, with the S&P 500 down 14% since the start of 2022, just before rising inflation prompted the Federal Reserve to begin raising interest rates. 

The Schroders poll noted that nearly half of American workers had anxiety from watching their retirement accounts fluctuate throughout the year. Kelly LaVigne, vice president of consumer insights for Allianz Life. said that while market swings can be stressful, retirement investors are losing tremendous opportunities to increase their savings by staying out of the market.  

“I understand it's painful to see those 401(k) balances going down, but to sit it out with cash in everything?” LaVigne said.  “Retirement investment is a long-term investment, it’s not a short-term investment. There are ways that you can still get some market performance that are better than a savings account, and have protections that your money is going to be there.”

Inflation a Top Worry for Retirement Savers

An increasing number of Americans are worried that inflation will price them out of the lifestyle they want during retirement and they aren’t counting on much help from Social Security, the Allianz survey showed.

Higher prices for food, energy, housing and other necessities will put more pressure on their retirement budget and leave less money for leisure, 78% of Americans told Allianz. Only 68% responded with the same answer last year.

“Buying eggs, buying milk, buying meat, those things really affect you, and that’s something everybody sees,” LaVigne said. “Wondering whether or not I’ll be able to afford those things much later, it's certainly understandable that the fear is much greater now than it was before.”

Inflation has always been a top concern for retirement investors, even before the spike consumers saw in 2022, said LaVigne. That’s because retirement plans need to span for 30 years or more, where the cost of living will double in 24 years if inflation runs at 3%. In 2022, inflation came in at 6.5%.

“Being able to afford the retirement that they had planned on, it was never a given,” he said. “You have to account for increasing income over that 30 year period or you’re going to be falling way behind.”

Retirement Savings Falling Short of Goals

As workers project needing even more in retirement savings to retire comfortably, the Schroeders study shows that even fewer believe that they are saving enough to get there. 

So how much will you need to retire? Workers 45 and older believe they will need at least $1.1 million in savings to retire comfortably. However, only 21% of retirement savers surveyed by Schroeders expected to reach $1 million in retirement savings, down from 24% last year. Almost 60% of those surveyed anticipated less than $500,000 in retirement savings, including 34% who said they would have less than $250,000 in retirement savings. 

“There are profound gaps between what American workers say they need for a comfortable retirement and what they expect to have,” said Deb Boyden, head of US defined contributions at Schroders. “This could be from a lack of planning, or for many it might just be too hard to save and invest enough to reach their retirement goals. 

Americans Don't Believe They Can Count on Social Security

Not only are Americans worried they won’t be able to afford retirement spending, they also worry they aren’t saving enough. The survey showed that 74% of Americans don’t believe they can count on Social Security benefits when planning retirement income, while 88% said additional sources of income are needed in order to have a comfortable retirement. Another 66% worried that if they did not increase their retirement savings now, it would be too late.

Meanwhile, retirement worries are worse for Generation X, as 85% of those with birth dates from 1964 to 1978 saying they are afraid that cost of living increases will ruin their retirement, compared with 80% of Millennials and 72% of Baby Boomers. Gen Xers also had more worries employers will suspend their 401(k) matches and they are keeping too much of their money out of the market. 

Banking Crisis Has Little Impact on Retirement Plans

While the Allianz survey was conducted online in March 2023 during the banking crisis, LaVigne didn’t believe the recent news of bank failures had much impact on how the 1,005 respondents answered. However, he said rising inflation and political discussion about the sustainability of Social Security did affect respondents' answers. 

Despite the banking turmoil, fewer said they expected the economy to move into a downturn, with only 57% answering that a recession was right “around the corner,” compared to 62% who provided the same answer in the survey three months ago.