Threats to your 401(K), Investments & Retirement


Since the recent 2022 inflation spike brought us to the current rate of between 6-7% of inflation, there are projections that inflation will fall to just over 4.3% in 2024; which is just a little above the 2019 rate. So, we can hope to have some light at the end of the tunnel. But, without giving all the gloomy predictions of what would happen if our current inflation perdured, let’s move forward with some previous statistics of inflation that has been previously endured to give us insight as to how inflation can erode our savings. The 20-year period of inflation before 2019 averaged out at about 2.15%. A 20-year period of inflation as the one ending in 2019 would mean that in 20 years prices will nearly double. Here are just a few of the ways that inflation impacts our savings & retirement. 

Inflation Erodes Savings and Investments

CD average return rate – The average 5-year return rate on a CD is 0.36%. With this little of a return, you can’t even beat inflation.
Bond average return rate – Treasury bonds have an average 20-year return rate of 1-2%.
Stock Market average return rate – The Dow Jones has a 122-year market return rate of 5.42%. But when you factor inflation into that, it’s real compounded growth rate is only 2.3%.

With the average rate of inflation after 20 years being 2.15%, these returns are not as comforting as you had hoped or planned on them being and will certainly be worse if inflation continues to hover around 6-7%!

Purchasing Power

Following this current rate of 2.15%, a period of time spanning over 30 years will reduce your spending power by close to 50%. This can be especially alarming when we consider that in 20 years prices nearly double (as mentioned above). And here is another thing to consider: According to a study done by AARP back in 2015, ‘The average annual cost for one brand name drug used to treat a chronic health condition topped $5,800 last year, compared with less than $1,800 a decade ago when AARP began the study' These rates are rising without inflation. Inflation will only compound the expense of medication in retirement that much more.

If your salary in retirement will not have the same purchasing power in 20 years, your budget will not either. When the costs of goods increase faster than your account can keep up with, you will find yourself on a different budget altogether – able to buy fewer quantities than you originally could. Moreover, increasing expenses will require higher withdrawals from your IRA which will trigger higher taxes during your retirement. So, when planning, you must always be mindful of the impact of inflation.