Investing More in Your 401(k) May Help You Beat Inflation

While data shows more people are saving for the future, others are putting their financial futures at risk by taking 401(k) hardship withdrawals.

401(k) hardship withdrawals should be a last resort, but people are playing fast and loose with their retirement savings, as shown by recent reports from Vanguard, Bank of America, and Fidelity.

According to Bank of America:

  • Roughly 15,950 participants took hardship distributions in the second quarter of 2023, up 36% from 2022.
  • The average participant hardship amount is $5,050

Vanguard’s How America Saves 2023 Report claims, “In 2021, overall hardship withdrawal activity reverted to pre-pandemic levels from 2019, and in 2022, hardship withdrawal activity increased to a new high.”²

Vanguard reports that 2.8% of participants took a 401(k) hardship withdrawal in 2022, up from 2.1% in 2021.³

Additionally, Vanguard reports that 3.6% of participants took a non-hardship 401(k) withdrawal.⁴

The ability to take a withdrawal from your 401(k) plan may seem appealing – especially if you are facing a financial emergency.

However, a 401(k) hardship withdrawal may cost you more than you think.

401(k) Hardship Withdrawals Qualifications

To achieve retirement savings goals, it is crucial to not only protect your savings, but also ensure they grow at a rate that outpaces inflation.

With inflation eroding our purchasing power and hard-earned money, many investors are wondering what this means for their 401(k)s.

The good news is, a powerful tool that may help you beat inflation is your 401(k).

Inflation Is Up…Again

September PPI data came in higher than expected, as did CPI data earlier this month.

The producer price index, which measures costs for finished goods that producers pay,

increased 0.5% for the month, the Labor Department reported Wednesday.

The consumer price index data for September also saw inflation jump from 2.97% in August to 3.67% in September.

And some might argue that 3.67% is way off compared to what we’re feeling whenever we buy something or get in our cars to go to work.

How 401(k)s May Help Beat Inflation

Traditional savings accounts and low-yield investments often fail to keep pace with inflation, resulting in a loss of purchasing power.

On the other hand, stocks have proven to be the best inflation hedge longer term.

The market has averaged about 9.4% a year since 1928, which greatly exceeds inflation measurements by 4 – 5%.

In fact, when you look at the 17 highest inflation years, the market was up 12 of those years and up double digits in 8 of the 17 years.

In the 5 highest inflation years, the market was up 4 of those years.

One reason is that some percentage of inflation itself is corporations passing along higher costs, which stabilizes their earnings. Ultimately, this has led to some of the strongest bull markets on record.

This is where investing in your 401(k) becomes advantageous – especially if you are rebalancing your portfolio to manage risk and maintain growth.

Failing to regularly rebalance your 401(k) portfolio often results in significant losses during bad markets and opens you up to more risk exposure than you initially intended.

So, adjusting your investments based on market conditions and your risk tolerance may increase your chances of beating inflation.

Taking into consideration the data above – and the fact that inflation erodes the value of your savings and your purchasing power – it’s crucial to continue your 401(k) contributions.

Consistently contributing in times like we’re in right now may help you stay ahead of inflation and maintain the growth trajectory needed to achieve your retirement goals.

Other Reasons to Keep Contributing to Your 401(k) Right Now

Aside from beating inflation, here are a few other reasons continuing to contribute to your 401(k) may benefit you in the short term – and the long run.

Tax Advantages
One key benefit of a 401(k) is the ability to contribute pre-tax income, reducing your taxable income for the year. This means you can invest a greater portion of your earnings, maximizing the growth potential of your account.

Compounding Growth
When you reinvest your earnings, your investments generate returns on both the principal amount and the accumulated gains. Keep contributing, and, over time, compounding can significantly boost your savings and help you outpace inflation.

Diversification Options
Your 401(k) allows you a range of investment options to diversify your portfolio. Spreading your investments across different asset classes may help reduce the risk of being heavily impacted by inflation in any single investment.

In addition, if you select investment options that historically provide returns higher than the inflation rate, you may have a greater chance of beating inflation. Just remember, there are no guarantees.

Employer Match
Keep in mind that employer matching contributions may significantly enhance your ability to beat inflation. If your employer offers the match, take full advantage of it to amplify your retirement savings.

Avoid Fear-Based Decisions

As hard as inflation can be on your wallet, halting 401(k) contributions may not be the best decision – especially if you want to beat inflation.

If you’re fighting the urge to move to cash or to stop contributing altogether consider this:

  • Stocks have always been the best inflation hedge longer term. And, this means your 401(k) may be the hedge against inflation you are seeking right now.
  • Down markets provide an opportunity to accumulate more for your retirement future. So instead of panicking and wanting to move to cash, can you instead view this as the chance for you to increase your portfolio holdings?
  • Making fear-based decisions today may hurt your future. Remember, whenever you cut back on your 401(k) contributions, you push back your retirement date.
  • If you pull back or halt 401(k) contributions, you may miss out on your employee match. This means you are throwing away free money.

Have questions about your 401(k) performance? Book a complimentary 15-minute 401(k) Strategy Session with one of our advisors.

Let's Get Started!

or...fill out this form and we will reach out to take the next step