Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your 401k Match
Transcript
- Lucas: If your employer matches your 401k contributions at 5 percent, and you earn $60,000, that's $3,000 a year in free money. But between the time that match hits your account and the day you actually retire, inflation is quietly stealing a chunk of its purchasing power. Luna: And most people never think about it because the match shows up as a dollar amount, not as a real return. They see the deposit and assume it's full value. Lucas: Exactly. So let's use the latest data to put a number on it. The June CPI came in at 332.6, down slightly from the prior month. Core CPI, which strips out food and energy, is at 336.1. So headline inflation is cooling, but core is still sticky. Luna: Right. And the core PCE price index, which the Fed prefers, actually ticked up to 130.1 in May from 129.67. So we're not out of the woods on underlying inflation. Lucas: That matters for your 401k match because the match is typically a percentage of your salary. If your salary only goes up 2 percent a year but core inflation is running closer to 2.5 or 3, the real value of that match declines every year. Luna: So you're essentially getting a raise in nominal dollars but a cut in real purchasing power. The match amount might grow slightly with your salary, but it's not keeping pace with the cost of living. Lucas: And that's assuming you even get a raise. The current Fed funds rate is at 3.63 percent, flat for months. That's high enough to slow the economy, and we're seeing it in wage growth data. A lot of workers are getting 1 or 2 percent raises, if any. Luna: So what does that mean for someone who's been at the same company for five years, getting 2 percent raises, while core inflation averaged maybe 3 percent over that period? Lucas: Let's run a quick example. Say you started at $60,000 with a 5 percent match — that's $3,000. After five years of 2 percent raises, your salary is about $66,245. The match grows to $3,312. But cumulative inflation over those five years, assuming 3 percent annual core inflation, means that $3,312 today buys about what $2,860 bought five years ago. Luna: So the match actually lost purchasing power in real terms. You're getting a higher number on paper but less buying power. That's the quiet erosion. Lucas: And it gets worse if your company matches in company stock or if the match is invested in a default option like a target-date fund that's heavy on bonds. With the Fed holding rates at 3.63 percent, bonds are yielding more than they were a few years ago, but after inflation, the real yield on a ten-year Treasury is still barely positive. Luna: Right. The ten-year breakeven inflation rate is at 2.23 percent. So if your bond fund is yielding 4.5 percent, your real return is maybe 2.3 percent. That's fine, but if your match is sitting in a money market earning 3.6 percent, that's a real return of only about 1.4 percent after core inflation. Lucas: Which is why the most important thing you can do is not just assume the match is full value. You need to calculate its real trajectory. Look at your last few years of match contributions, adjust them for CPI, and see if the purchasing power is flat or declining. Luna: And if it is declining, what's the move? Bump up your own deferral rate by at least half the gap between your raise and inflation. If you got a 2 percent raise but inflation was 3 percent, increase your contribution by 0.5 percent of salary. Lucas: That's a smart, practical step. And honestly, if our conversations have helped you think about your retirement strategy more carefully, there's a simple way to support our choice to keep this show ad-free. It's buy me a coffee dot com slash fexingo. Luna: Yeah, we don't run commercials or sponsored segments, and listener contributions are what make that possible. A small one-time tip helps cover hosting costs and keeps us independent. Lucas: So back to the match erosion. Another angle is the timing of the match. Some employers match per pay period, others do a true-up at year end. If inflation is running hot, a lump-sum match at the end of the year has already lost some value compared to a per-paycheck match. Luna: That's a good point. If you get a true-up in December, that money has been sitting on the sidelines for months while prices rose. A per-paycheck match gets invested sooner and starts compounding earlier. Lucas: And compounding matters more when real returns are modest. The S&P 500 is at 7,546 today, down about 0.4 percent over the past five days. But the long-term average return is still around 10 percent nominal, which after 3 percent inflation gives you 7 percent real. That's solid, but only if your match is invested early. Luna: So the lesson is: don't treat your 401k match as a static dollar amount. It's a real asset whose value is constantly being eroded by inflation. The only defense is to increase your savings rate and make sure the match is invested as soon as possible. Lucas: And keep an eye on the economic indicators. Core PCE ticked up. The Fed is holding rates. If inflation stays sticky, the erosion continues. But if you're aware of it, you can offset it. Luna: Alright, next episode we'll look at how inflation is quietly eating your HSA contributions. That's another blind spot. Lucas: Good call. Thanks for listening, and if you found this useful, consider supporting the show at buy me a coffee dot com slash fexingo. We'll be back tomorrow.