The Real Toll Inflation Takes on Your IRA or 401(k)Adam Gardiner
How much are you putting away for your retirement? Will it be enough to support you through your golden years? You may have a specific monetary goal in mind for your IRA or 401(k) to reach, but whatever the number is, it’s likely a lot lower than it should be. Why? There are several reasons, but the biggest is that most people fail to take into consideration just how much of a bite inflation takes out of their nest egg.
How Inflation Affects Your IRA or 401(k)
For years, you’ve faithfully put aside a little money from each paycheck to go into your retirement fund. Say your investments do very well, and you’re able to accrue enough to subsist on $50,000 a year for the remainder of your life. It sounds like it will be plenty. However, think about how long it needs to last.
Maybe you assume you’ll live another twenty years or so after you retire. Now, consider how much $50,000 could buy twenty years ago, versus how much it can buy today. Over time, your income will remain fixed, but the buying power of that money will continue to decrease. $50,000 in the year 2036, or even 2020, just four short years from now, won’t get you nearly as far as it does in 2016.
The prices of basic necessities, such as food, clothing, fuel and more will continue to rise over time. As you get older, you’ll likely also need to rely on more medications, doctors’ visits, etc., all of which will continue to rise in price as well. Insurance may cover some of it, but you’ll still have to deal with the premiums. Medical costs are currently going up much faster than the rate of inflation, which will serve to deplete your savings that much more quickly.
How far off the mark your target amount is from what you’ll actually need to live comfortably depends on how close you are to retirement age. Once you get there, you may quickly find that the amount you’ve saved won’t sustain you at all. You’ll be forced to return to work in some capacity in order to make ends meet.
Guarding Your Nest Egg Against Inflation
What can you do to keep your own IRA/401(k) from being depleted too early? Well, there’s the obvious: starting saving more. Take a hard look at your expenditures and ask yourself, “Is this more important than building my security for when I’m older?” As tempting as that big flat screen TV may be, you’re going to live longer than it will.
Also, be sure you’re rebalancing your portfolio at least once a year, adjusting the riskiness of your investments downward as you get closer to exiting the workforce.
Another positive step you can take is to put a percentage of your funds in safe haven assets. These are investments that hold, or even increase their value in times of market downturn.
Real estate used to be reliable as a safe haven, as property is a physical asset that appreciates in value over time. However, after the housing bubble burst in 2008, it became far less of a safe place for your nest egg.
There are a few good options remaining, however. Gold and silver are among the best. Like real estate, gold is a physical asset that maintains its buying power over time. It’s more stable than real estate, though, and not volatile like stocks and bonds. It’s also easier to liquidate than a house.
But perhaps the best thing about gold is that, unlike the dollars in your savings account, it resists inflation. That’s why it’s the go-to asset for those looking to preserve the buying power of their wealth. Whenever you’re ready, it will be there waiting for you, as strong as when you bought it.