So, you’ve decided to begin or increase saving in your company’s 401k. However, the choices seem overwhelming. Large cap . . . mid cap . . . real estate trusts . . . money markets. You are just not sure where to begin. You are not alone! Many struggle to understand the choices available. Why not put all of your money into the one with the highest recent returns, or the one with the lowest risk? What about those horizon options?
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Well, best of all is that you’ve decided to get started or increase to at least the maximum contributions that your company will match. Putting away at least enough of your pay, before taxes, to also maximize your company’s contribution is the most significant thing you can do to maximize your nest egg. Avoiding income tax and getting that extra money from your employer is critical. Even if you can’t maximize your employer’s contribution, save what you can.
Target Date Options
Horizon, retirement date or age-based options, may be your best bet until you can learn more and sort out the other options, if offered in your plan. These funds allocate your investments among a blend of stocks and bonds, while also taking into consideration investment risk suited to your likely retirement date.
Pick Two
Absent such options in your plan, you can select a large cap stock or index fund (something like S&P Index Fund) and a US-based bond fund. As a beginning point, consider investing 50% of your money in each of them. If you are further away from retirement, increase the amount in the stock fund. Closer to retirement age, increase the amount in the bond fund. Either way, do not exceed 75% in either fund. If your plan includes a number of large cap or bond choices, look for the expense ratios reported for each of them. Other things equal, the one with the lowest ratio will allow you to keep more of your money vs paying the investment firm to manage the fund.
Following Up
It is also important to review your your choices at least annually. Can you save more? Have the investment choices changed? Perhaps the company’s plan has changed? While important to follow up, it is equally important that you not be overly concerned with day to day fluctuations or, worse yet, headline noise. Beyond driving yourself mad with anxiety, when we put too much emphasis on these things, most of us zig when we should zag, selling low or buying high — i.e. doing the opposite of what we should. This is because daily prices and headlines tell us what has happened, not what is going to happen — like driving using your rear view mirror, you will miss the turn.
Of course, we think it also important to periodically meet with a Fee-Only Financial Advisor. Fee-Only means you only pay for the service received and can determine exactly the services you require. At a minimum, best to have a coach to serve as a sounding board and to help you reflect on your situation. We’ve all learned how important it is to have trusted advisors!