What to do with your 401(k) during economic uncertainty

Trying to decipher the state of the U.S. economy in a post-COVID era can feel confusing. Even though supply chain breakdowns of the early pandemic years may have eased, savers might still grapple with headlines dominated by inflation, interest rates, and growth concerns. 

With so many conflicting data points dominating the headlines, it can be hard to get a read. So, how do these broader economic indicators affect retirement investments? Let’s review how proven strategies can help savers navigate economic uncertainty.

What is inflation?

The term “inflation” is frequently used by economists, policymakers, and investors, but what does it actually mean? At its core, inflation represents a decrease in the purchasing power of money over time. This means that as prices for goods and services rise generally across the economy, each dollar you own buys a smaller percentage of a good or service.

Consider an everyday item like a gallon of milk. If it cost significantly less decades ago than today (an average of just over $4.00 per gallon as of early 2025 vs. $2.70 in January 2000), that illustrates inflation in action. The dollar itself hasn't changed, but its ability to purchase milk has diminished due to rising prices.

How is inflation measured?

Economists measure inflation by tracking price changes for various goods and services that represent typical consumer spending. The most common measurement tool for inflation in the United States is the Consumer Price Index (CPI). 

CPI monitors the prices of a "market basket" containing hundreds of items—everything from groceries and clothing to housing, transportation, and medical care—representing goods and services bought by average households. By comparing the total cost of this basket from one period to the next (usually monthly or yearly), economists can calculate percentage changes, which gives us the inflation rate. 

The inflation rate is a way to show us how much prices have risen (or occasionally fallen) on average. Moderate inflation is often associated with a healthy, growing economy, whereas high or volatile inflation rates can create economic uncertainty and impact consumer, business, and government sentiment and decisions.

Does inflation cause a recession?

Inflation over time is normal, but inflation that happens quickly or suddenly can cause economic uncertainty. Yet, this doesn’t mean inflation always causes a recession. A recession is a period lasting more than a few months during which there is a significant decline in economic activity, as seen in production rates, trade activity, and employment levels. 

Economists disagree on what causes a recession, but it typically happens when multiple factors impact the economy. And while inflation can be involved in the events leading up to a recession, it isn’t the sole contributing factor. 

Understanding market volatility

The economy has seen rapid ups and downs over the years following the COVID-19 pandemic. As a result, the stock market has varied over that time period, too. As we saw with the sharp initial downturn from the pandemic, it’s not uncommon to see high market volatility during uncertain times.

Market volatility stems from how quickly or slowly the market moves up and down. A market that changes rapidly over a short period of time is considered to have higher volatility. A market that stays relatively stable, with changes happening steadily over time, has lower volatility. 

Market volatility may be affected by numerous external factors:

• Political events: The election of a new president or the outbreak of war can impact the market, causing it to fluctuate.

• Changes in the economy: Inflation, GDP rates, and consumer spending changes can all impact market volatility. 

• Shifts in a specific industry: Market volatility can increase if a particular sector sees drastic changes due to unforeseen weather or political events.

• The performance of a large company: If a more prominent company sees changes that either increase or decrease investment in their stocks, this can sometimes affect the broader market.

Investing is a long game

High market volatility shouldn’t necessarily deter you from investing or starting a 401(k). Investing in the stock market always involves some risk. Market volatility is a normal part of investing, and it can even help you get a good deal when you start investing. 

The market consistently changes. When investing for your future, you may see many changes in the market over time. While past performance does not guarantee future results, the S&P 500 index—often considered a benchmark of U.S. stock market performance—has seen an annualized average return of nearly 10%. Of course, that number is not without its peaks and valleys. But this doesn’t mean you shouldn’t invest. 

Planning for economic uncertainty

It is a good idea to consider how the current market may impact your 401(k). This means researching the investment options available, ensuring your portfolio is diversified across different asset classes to help manage risk, and selecting an allocation strategy that aligns with your timeline and tolerance for risk. 

This shouldn’t cause you to pull investments or stop you from investing altogether. Consider the following decisions and adjustments you can make to help you weather economic change:

• Diversify your investments: Investing comes with inherent risks. While stocks historically offer a higher rate of return, they have carried higher risk. Bonds may be considered a safer investment option but historically provide lower returns. Investing in mutual funds—which may include stocks, bonds, and other securities—can help make diversification more accessible, including helping you to invest in a mix of investment types to help mitigate risk.*

• Rebalance your portfolio: Evaluating your 401(k) portfolio and how different assets have performed over time allows you to reallocate your investments. Other investment types react differently to the same market conditions, which can cause your portfolio to fluctuate as the market moves. Rebalancing your holdings can help bring your portfolio back into its desired asset mix.*

• Keep some cash on hand: It might be a good idea to keep enough cash on hand to sustain you for a few years, especially during times of economic uncertainty. Having a chunk of cash, you can access allows you to cover living expenses while you wait out any economic downturns that may occur during the early years of your retirement.

*Diversification and rebalancing do not assure a profit or protect against loss.

The bottom line

Retirement savings are typically built over decades. Economic uncertainty shouldn’t keep you from investing—especially in your 401(k). These fluctuations are normal parts of the economic cycle and not necessarily signals to abandon sound financial habits. Maintaining a smart investment strategy through various market conditions is often key to achieving your objectives. 

Dollar-cost averaging, for example, involves steadily investing the same amount of money at regular intervals, even during market fluctuations. Maintaining regular contributions, even during downturns, can help ensure that you’re not always buying when prices are high. However, you should consider your ability to continue investing in down markets. Dollar-cost averaging does not ensure a profit or protect from loss. Investing involves risk, including risk of loss.

Inflation and market changes are normal parts of the economy. If you approach your 401(k) thoughtfully, you can better prepare for inevitable market volatility. Regularly reviewing your plan and making adjustments as needed are also crucial components of effectively setting up your 401(k) to navigate economic uncertain times like these.