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Can My Retirement Accounts Keep Up with Inflation?

Theoretically in response to inflation, the IRS recently announced that the contribution limits for 401(k)/403(b) retirement accounts is being raised from $19,500 in 2021 to $20,500 in 2022. In response to this, a reader asked me the following 2 questions:

(1) How can I boost my retirement savings?, and
(2) Does this increase in contribution limits help our retirement accounts keep up with inflation?

retirement accounts inflation
Different kind of inflation?

Let’s answer these questions….

How can I boost my retirement account savings [to combat inflation]?

The simplest strategy to boost your retirement contributions is to increase your savings rate.

Then invest it.

The way to build wealth is to increase and invest the margin between what you earn and what you spend. What you earn is somewhat in your control but what you spend is 100% in your control.

Here are some actionable tips:

  • Build and track a budget
  • Aim to save 20% of your pre-tax income
  • If you can’t do this, then try to save 1%. Then increase your savings rate by 1% each month until you reach 20%
  • Then invest this money
  • Investing money in your retirement accounts is the first place to do it because they are tax protected
  • Then you can work into taxable investing accounts after you fill all of your retirement accounts!

Does this increase in contribution limits help our retirement accounts keep up with inflation?

Well…not really.

The retirement contribution increases are not tied well to inflation.

Current inflation estimates are at 5.4%, which is much higher than the goal of 3%.

However, despite this increase in inflation, the IRS contribution limits only went up $1,000, not nearly enough to accomodate for this.

This is not good for the average investor because you need to be investing your money for more than 5.4% to beat inflation…or else you are losing money!

And retirement accounts reduce your tax burden so you can achieve better returns on your invested money.

Despite pushes to index the IRS contribution increase to inflation, this hasn’t happened.

So, how can you make sure your retirement accounts and savings keep up with inflation?

Luckily, your ability to keep ahead of inflation with your investments (retirement accounts and otherwise) is not tied to where you place those investments.

Don’t get me wrong, it helps to invest in tax advantaged spaces like a 401(k) or 403(b). However, I know plenty of people whop have their 80%+ of their 401(k) investments in a money market fund. This is not beating inflation despite being in a good asset location.

So, what I am saying is that your asset allocation is a much more important factor in beating inflation than your asset location.

Your ideal asset allocation

Your ideal asset allocation needs to be aggressive enough to beat inflation. But not just that, it needs to have a high enough after-tax, after-fees return to keep growing even after you stop working. That’s basically how retirement works. And you can figure out how much you need to retire here.

Related Post:
Stress Free Stock Market Investing Is Easier Than It Seems!

Your ideal asset allocation also needs to be conservative enough to not exceed your risk tolerance. That way, you don’t sell your assets low when a dip in the market or bear market occurs.

So it’s a bit like threading a needle or the Goldilocks principle…you need it just right.

If you need help figuring out your asset allocation to make sure your investments are beating inflation and preparing you for financial independence, this guide will show you how. Then you will be ready to prepare your own written financial plan using this guide.

What do you think? How do you make sure your retirement accounts and investments beat inflation? What is your asset allocation and location? Let me know in the comments below!

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    The Prudent Plastic Surgeon

    Jordan Frey MD, a plastic surgeon in Buffalo, NY, is one of the fastest-growing physician finance bloggers in the world. See how he went from financially clueless to increasing his net worth by $1M in 1 year and how you can do the same! Feel free to send Jordan a message at [email protected]

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