Don’t Let Inflation Stop You From Building Out Your 401k Plan

Posted: Nov 9, 2022 3:04:36 PM

graphic-of-woman-surprised-by-pricingAs inflation continues to rise in the U.S., consumers are becoming more worried than ever that we are nearing a repeat of the 2008 recession. Still recovering from the major impact that the economy took from the COVID-19 pandemic, inflation rates currently sit at an estimated 8.2% this month alone. 

Impacting everything from housing loans to food prices, many are beginning to wonder what lasting effects this year’s financial environment will have on their retirement plans. In this article, we will walk you through the ways that inflation could potentially impact your 401k and how you can mitigate its damaging effects on your retirement plans.

How Your 401K Could Be Impacted

The economical climate of the nation can have a significant impact on everyone's lifestyle choices and financial decisions. With costs continuing to rise, and people living longer, financial challenges are bound to occur.

Believe it or not, inflation affects retirees more severely than the average consumer, especially if a fixed income is no longer salvageable. When inflation occurs, the general purchasing powers of a retiree can drastically diminish, as they rely heavily on their savings to take care of basic needs.

To get a better understanding of what this means, let’s take a look at the US dollar for example. In 2022, $109.54 is equivalent to the purchasing power of $100 in 2021. This means that today's prices are 1.10 times higher than average prices last year. A dollar today can only buy 91% of what it could get you back then. What does this mean for you?

If inflation continues, then the purchasing power of one’s retirement savings could be at risk. According to, after 10 years, that same $100 would be worth $44.23.

In order to stretch your money out for as long as possible, it is essential to plan for retirement when entering the career field. For many, a 401k plan can have a major impact on how the later years of their life will play out.

This is why it is important to invest in financial markets. All-cash assets will not match inflation and will decline. Build diversified investment portfolios that use asset classes with historical returns that outmatch inflation. This allows you to create asset bases that grow over time.

While there isn't a magic number for the amount you'll need for retirement, it's best to speak with your financial advisor. The cost of retirement often is more than what a retiree expects.

How To Protect Your Savings Against Inflation

Though inflation is out of your individual control, there are always ways to protect yourself against the most damaging effects that it can have on your retirement plan.

  • For starters, diversify your plan investments. Investment dollars should be spread across various assets in order to minimize risk. This can help reduce overall inflation impacts on your 401k. 
  • Contribute enough for the full company match so your money will grow. Increase your contribution rate, so you have more money in your plan. 
  • Check investment fees. The less in fees you pay, the more returns you'll have over time.
  • Pay attention to expense ratios for individual funds. You could also place your savings into an individual retirement account (IRA). 
  • Invest in your 401k even during periods of high inflation. 401k's can offer some protection for investments that move with rising prices. 
  • Keep in mind that Investments in a 401k plan are not adjusted for inflation automatically. Beating inflation depends upon the returns you get back each year and how the cost of living will change over time. 

Are Bonds the Best Option?

While bonds are believed to be the safest part of a portfolio, when inflation is high, the fixed payments in the future will buy less. When interest rates increase, bond funds tend to decrease in price. It's unknown how often the Federal Reserve will continue to increase interest rates to reflect inflation. 

Even if you lose money in the short term, hold onto bonds. Bonds still produce gains, even if stocks decrease a significant amount. 


Long-term bonds

Long-term bonds are hit the hardest by increased rates. There are some bonds that the U.S. government offers to protect against rising prices. With Treasury Inflation-Protected Securities, the principal falls and rises over time, meaning that the interest payments based on the principal amount are impacted as well. (Many TIPS are still offering negative yields, however.) 



An I-Bond from the government might be a better option. I-Bonds pay interest in two parts: one that's set when the bond is purchased, and the other that rises and falls with inflation. It resets twice a year. Keep in mind that I-Bonds do have limits, though. They can't be cashed out for a year. If you cash out before five years, you'll lose three months of interest payments. 

Stocks To Look Out For

Energy stocks have surged with inflation this year. Look for areas in the market that seem less expensive. Big tech stocks with low-interest rates are more likely to get hit. 

Financial stocks weren't hit as hard as the rest of the market. This is due to higher long-term rates raising the prospect of bigger profits from making loans. 

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