A 401(k) is one of the most convenient ways to save for the future. If you enroll in a program and contribute a percentage of your income into the account, your employer may match your contributions up to a certain percentage. This free money can help your account grow faster. But even if you start saving at a young age, the amount you put aside might not be enough to support your lifestyle in retirement, once you factor in inflation. There’s no way to predict the cost-of-living in 20, 30 or 40 years. Even so, a 401k calculator with inflation is an excellent tool for forecasting your future income needs. Once you have an idea of your income needs, you can take steps to ensure you’re putting enough into your retirement account.
Some people fail to consider the impact inflation can have on their 401(k). But you can’t ignore inflation when planning for the future. The truth is, inflation can destroy your nest egg and ruin your retirement.
Inflation is “a general increase in prices, and a fall in the purchasing value of money.” Inflation causes everything — from goods to services — to become more expensive with the passage of time. It’s estimated that inflation averages 3% each year. So, a loaf of bread that’s $1.79 this year may be $2.32 in 10 years.
You might wonder, however, what does all of this have to do with my 401(k)?
Keep in mind that inflation doesn’t only affect the cost of goods and services, it can also change the value of your investments over time.
The amount you’re currently putting into your 401(k) might be more than enough to support your future income needs — if the price of goods and services were to remain the same. But as we know, everything gets more expensive. And if the value of your investments gradually decline, so does your future purchasing power.
On the other hand, if you had some sort of idea of future costs, you can then aim for a certain amount in your 401(k) and adjust your contributions accordingly.
A 401(k) calculator with inflation is an excellent tool for forecasting inflation. These calculators aren’t an exact science, but they can estimate how much your 401(k) will be worth at retirement — and how much income it’ll provide — based on your current 401(k) balance and anticipated future contributions.
These calculators also predict how much you’ll need to maintain your lifestyle, adjusted for inflation, of course. If your 401(k) isn’t likely to provide enough income to maintain your lifestyle at your current rate of saving, you’ll need to make up the difference and save more.
Now that you know how inflation impacts a 401(k), what can you do? Even though an employer-sponsored retirement account is an excellent product, make sure you also consider investments that offer returns greater than inflation.
Take real estate, for example. As the price of goods and services increase, so does the price of real estate. With that being said, a property you buy today will likely have a higher resale value in the future. Once you are ready to downsize, a percentage of the proceeds from the sale of your home can go toward beefing up your retirement savings.
Or, you might invest in rental properties during your younger years. The amount you can command for rent will also increase in time, resulting in substantial passive income in retirement.
Investing in stocks outside of your 401(k) is another way to protect yourself because stocks typically keep pace with inflation.
Also, don’t forget that Social Security benefits adjust with inflation. You can start taking benefits at age 62. But if you were to delay benefits until age 65 or 70, your monthly check would be adjusted to the cost-of-living at the time that benefits start. This can permanently increase your income.
As mentioned, using a 401(k) calculator adjusted for inflation can estimate the future value of your 401(k), which provides an idea of how much you can expect to earn in monthly income after retiring. With a calculator, you’re also able to play around with the numbers to see how much you would need to contribute to your 401(k) to hit a savings goal.
But while a 401(k) calculator is a useful tool for preparing for the future, keep in mind that it isn’t the only retirement planning tool available to you. For example, if you also have an individual retirement account (IRA), you can use a traditional IRA calculator or a Roth IRA calculator to estimate the future value of these accounts. Or, use a Social Security calculator to estimate future benefits based on your earnings history.
Inflation is an important factor to take into account when planning for the future. Take the time to assess how your retirement savings will grow, and evaluate how much income you’ll realistically need in the future. If necessary, modify your savings plan and consider investments outside a 401(k), such as an individual retirement account, real estate and stocks. A comfortable retirement is doable, but only if your savings can keep up with rising costs.