In simple terms, inflation is the rate at which the cost of goods and services rises. Due to inflation, it costs more money to buy groceries, gas, or anything else than it did in the past. Inflation can also affect your retirement savings as stocks, and other investments don’t automatically adjust for it. Rising inflation means your investments will have to work harder to keep pace. The extent to which inflation will impact your 401(k) will depend on several factors, like your investing strategy and how close you are to retirement.
What is the Impact of Inflation on a 401(k)?
Unfortunately, you can’t stop inflation as it’s out of our control. But you can be mindful of it and implement certain strategies to help lessen the burden of inflation on your 401(k). Here are some ways to help lessen the impact of inflation on your 401(k):
1. Maintain your contributions.
When your paycheck doesn’t go as far as it used to, it can be tempting to reduce your 401(k) contributions. If possible, maintain them to ensure you get the full match if your company offers it. You might even want to increase your contributions so that more money goes into your account. In 2022, you can contribute up to $20,500 or $27,000 if you’re 50 or older.
2. Diversify. Diversification means spreading your money across different types of investments to reduce risk.
During periods of inflation, it’s a good idea to diversify your portfolio with a mix of strategies that can help weather volatility and inflation.
3. Pay attention to fees.
While minimizing investment fees is important, it’s essential when inflation has the potential to erode your 401(k) returns. The less you pay in fees, the more of your returns you’ll get to keep in the long run. Speak to your financial professional about your fees and what you can do to lower them. Also, consider less expensive strategies that are appropriate for your situation.
4. Be flexible.
If you’re already retired, you might have to make some lifestyle changes to cope with the effect of inflation on your 401(k). Maybe you can move to an area with lower real estate taxes. Or perhaps you can postpone some of your trips or drive less to save on gas. Another option is to pick a side hustle or part-time job to add a cushion to your retirement savings.
Consult Your Financial Professional
A financial professional understands how inflation impacts 401(k) accounts. If you’re unsure what to do with your retirement savings, don’t hesitate to reach out for advice. Contact us today to get started.
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Our family financial services firm, August H. Velten & Associates, has been in business for 12-years in Melbourne, FL. August Velten (CLU) is a 40-year veteran of the Financial Services industry. August is a former instructor for the Life Underwriter Training Council and once occupied the legislative seat for the Maine Association of Life Insurers. In Brevard County, you may have seen him on local access TV or read one of his articles in a local area magazine. Jessica Waterhouse, August’s daughter, left her own practice to join the firm in 2019. Jessica is a Florida licensed insurance producer, securities licensed (Series 65), a long term care specialist (CLTC) and holds certification as a National Social Security Advisor. Both August & Jessica are instructors for financial literacy workshops in both Brevard and Indian River County offering education in Social Security and Financial Planning. Contact the office today to schedule an introductory meeting or review of your current financial plan.
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