In 2022, inflation rose by a staggering amount. Currently at 8.6% as of this writing, at least one economic forecast projects inflation could reach 9% before year’s end. To keep up with rising costs, it may be tempting to lower your 401(k) contributions — or stop altogether. But in fact, high inflation means you’ll need to save more aggressively for your future as purchasing power declines.
While 401(k) savers have the option of raising deferral amounts periodically, many employees fail to increase their contribution rates over time. Here’s why you should consider upping your 401(k) contribution, especially when inflation is on the rise.
A Small Increase Can Make a Big Difference
Saving for retirement is a long-term proposition, and small changes to your 401(k) allocations can greatly affect your ability to retire comfortably in the future. For example, according to Fidelity, a 35-year-old earning $60,000 a year can make a significant impact in their retirement savings by the time they’re ready to withdraw with only a 1% increase in their savings rate. In the short term, that’s only $12 more per week, which isn’t enough for most savers to feel an immediate pinch. However, just that small increase can add up to an additional $85,000 more in the fund by age 67, assuming a return rate of 5.5% and a consistently growing salary.
While your particular situation may vary, increasing your 401(k) contribution rate now means that these funds have more time to potentially increase in value thanks to the powerful effects of compounding. And having a little bit less in each paycheck now will likely hurt a lot less than not having enough for a comfortable retirement later on.
Consider Auto-escalation
Even though the math is undeniable, sometimes it can be hard to get yourself to take the plunge, particularly if you’re concerned about rising costs in the near term. To make it easier for employees, some plans offer auto-escalation, in which your 401(k) contributions increase automatically. Typically, these rates increase by 1% each year until federal limits are reached. This is a great option to sign up for if you aren’t already enrolled. And you can always opt out of an increase, so there’s no long-term obligation.
Talk to a Financial Professional
Raising your 401(k) contributions periodically can help put you in a much better position for retirement, without having to take big hits to your available cash flow at any one time. Instead, you can ramp up gradually, upping your contributions whenever you receive a pay increase or at some set interval.
When you’re ready to begin increasing your allocations, talk to a financial professional to find out how you can best augment and manage your retirement savings. As inflation continues to rise, 401(k) savers who periodically increase their contribution amounts are positioning themselves to be better prepared to maintain buying power at retirement, when they’ll likely need it the most.