How to Protect Your 401(k) From Inflation

When inflation rises above normal levels, protecting 401(k) accounts from inflation becomes an increasing focus for 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 continue to be widespread even in 2025. 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. While inflation isn’t as high as it was a few years ago, some categories continue to cost a lot more than they used to and some of it doesn’t show signs of letting up.

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 several ways to counter their effects. Here are some of the most widely used:

1. Diversify Your Portfolio

Diversification stands as a cornerstone strategy for protecting your 401(k) from inflation’s eroding effects. By allocating your retirement funds across various asset classes—such as stocks, bonds, real estate investment trusts (REITs) and commodities—you create a portfolio that can weather different economic conditions. When inflation rises, certain investments typically perform better than others, providing a natural hedge against purchasing power loss.

The key to effective diversification lies in finding the right balance between growth-oriented and stability-focused investments. Stocks generally offer higher long-term returns that can outpace inflation, while bonds provide income and reduce overall portfolio volatility. Including both domestic and international investments further spreads risk, as different economies may experience inflationary pressures at different times and to varying degrees.

2. Invest in Equities

Equities, commonly known as stocks, represent ownership in companies and can be a powerful hedge against inflation in your 401(k) portfolio. When prices rise across the economy, many companies can adjust by increasing their prices, potentially leading to higher revenues and stock values. This ability to grow during inflationary periods makes equities an important consideration for retirement savers concerned about maintaining purchasing power.

Historically, equities have outpaced inflation over extended timeframes, making them valuable for retirement planning. While short-term market volatility can be concerning, 401(k) investors typically have time horizons spanning decades. This long-term perspective allows equity investments to potentially overcome inflation’s erosive effects through compound growth, helping preserve your retirement purchasing power even as costs rise throughout your working and retirement years.

3. Add Bonds to Your Investment Lineup

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.

Many 401(k) plans offer bond mutual funds or ETFs rather than individual bonds. These funds provide instant diversification and professional management, which can be advantageous during inflationary times. Some actively managed bond funds specifically focus on inflation protection strategies, adjusting holdings based on economic conditions and inflation forecasts to help preserve purchasing power.

4. Invest in Commodities

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.

5. Consider 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.

Should You Buy Gold During High Inflation?

Gold has long been considered a potential hedge against inflation. When consumer prices rise, many investors turn to this precious metal as a way to preserve purchasing power. Historically, gold has maintained its value over long periods, often moving inversely to the dollar’s strength. This relationship makes it particularly attractive when inflation erodes the value of paper currency.

While gold can shine during inflationary periods, its performance isn’t guaranteed. The metal doesn’t always move in perfect correlation with inflation rates, and its price is influenced by multiple factors, including interest rates, currency fluctuations and market sentiment. Gold prices can be volatile in the short term, even during high inflation, making timing the market challenging for average investors.

Investors have several options for adding gold exposure. Physical gold (coins or bars) offers direct ownership but requires secure storage and insurance. Gold ETFs and mutual funds provide easier access without physical storage concerns. Gold mining stocks offer potential leverage to gold prices but come with company-specific risks. Each approach has distinct advantages depending on your financial situation and goals.

Bottom Line

Inflation can hurt 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. With thoughtful planning and strategic adjustments, you can help ensure your retirement savings maintain their value despite inflationary pressures.

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 vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel 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.