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How to Protect Your 401(k) From Inflation


When inflation rises above normal levels, protecting 401(k) accounts from inflation becomes an increasing focus of 401(k) owners. Diversifying your 401(k) portfolio, especially with value-priced shares of companies that make consumer staples value-priced and recently issued short-term bonds represents a good first step in this effort. The next moves could include investing in commodities funds, real estate and inflation-protected government securities. We’ll go over in detail how to protect your 401(k) from inflation.

Consider talking to a financial advisor about ways to counter inflation’s effects on your retirement plan.

Why Inflation Matters

Inflation occurs when prices rise over time. Some inflation is good, but high higher-than-normal inflation can hurt the performance of investments, including the ones in 401(k) retirement accounts. Certain investments, such as long-term fixed-rate bonds, tend to do poorly when inflation is high. But other assets have good track records of performance during inflationary periods.

Worries about inflation are currently widespread. For example, in February 2023, the Consumer Price Index calculated by the Bureau of Labor Statistics was reported at 6.4%. This means prices for a basket of goods and services increased by that amount over the previous year.

While recent inflation is below 2022 peaks, it’s three times the target rate of 2% set by the Federal Reserve Board, which seeks to manage inflation by, among other things, raising and lowering interest rates. And the Fed has indicated that it expects inflation to continue higher than normal during 2023.

With the Fed policy outlook in mind, inflation is likely to mean higher interest rates. If rates get high enough, it can lead to a recession, which is generally bad news for investment performance. As a result, 401(k) owners and other investors are looking for ways to counter the erosion of purchasing power and the potential for low returns until inflation is brought back into line.

5 Ways to Protect a 401(k) From Inflation

SmartAsset: How to protect your 401(k) from inflation

Inflation hasn’t been such a preoccupation for several years at least. However, during past inflationary spikes investors have developed a number of ways to counter its effects. Here are some of the most widely used:


A well-diversified portfolio with an asset allocation made up of stocks, bonds and cash remains one of the best all-weather approaches to handling inflation or whatever else the economy and markets can throw at us.


The stock market has consistently generated returns above inflation, making equities a reliable way to protect your 401(k) against the effects of higher prices. Buying shares or investing in funds that focus on specific categories such as consumer staples including food and energy is a more focused approach to using equities to counter inflation.


Fixed-income investments often get de-emphasized in inflationary periods because long-term bonds tend to lose value when interest rates rise. Bonds can still help manage risk in any environment, however. Recently issued bonds, short-term bonds and inflation-protected government securities such as TIPS and I Series Savings Bonds are often refuges for fixed-income investors when inflation rises.


Gold, oil, wheat, beef and some other commodities can be effective hedges against inflation but many 401(k) accounts do not allow trading of commodities or derivatives such as futures based on commodities.

Commodity-focused exchange-traded funds (EFTs) are more likely to be allowed and will let anyone gain exposure to inflation-resistant commodities while maintaining ease, convenience and diversification.

Real estate

Values for real assets tend to keep up with inflation, so investing in land and buildings is widely employed as an inflation hedge. Rather than purchasing individual real estate properties, 401(k) owners generally prefer investing in publicly traded Real Estate Investment Trusts (REITs) that offer diversification and freedom from management headaches.

There is no foolproof way for a 401(k) owner to counter inflation. The market tends to price inflation expectations into security values, so that short-term bonds, for instance, will rise in value when inflation projections go up.

And it’s hard to get a good return when you buy high. Commodities, especially gold, can be quite volatile and don’t always represent a comfortable refuge from inflation.

Bottom Line

SmartAsset: How to protect your 401(k) from inflation

Inflation can have a negative impact on a 401(k). But inflation hedges can help generate good performance even when inflation is high. Diversification, especially into consumer staple stocks and short-term bonds, is one approach. Investors also often look to inflation-protected government securities, REITs and funds that specialize in commodities during inflationary periods.

Tips on Inflation Protection

  • Settling on an inflation hedge that fits your timeline and risk profile, is a challenge. A financial advisor’s insights and guidance can be helpful. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Because inflation eats away at purchasing power, it’s good to have an estimate of how current inflation is affecting you. SmartAsset’s inflation calculator can quickly give you such an estimate.

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