How to Allocate Your 401K Investments
Trying to figure out how to allocate your 401k investments can be a challenge if your not familiar with the options your plan offers. From large cap funds to target date retirement funds, the choices can be overwhelming. Here are some tips to help you decide which investment options are right for you.
Ways to Allocate Your 401K Investments
Determine what your risk tolerance. Probably the easiest way to gauge this is to know how many years you have until retirement. If you’re 30 plus years away, your risk tolerance is most likely greater than that of someone who has just a few years remaining.
A higher risk portfolio usually consists of a mix of large cap, mid cap, small cap and foreign funds. Some recommend a distribution of 40 percent large cap, 25 percent mid cap, 15 percent small cap and 20 percent foreign funds. If your plan happens to offer several funds for each category, check the Morningstar ratings to determine your best investment choice.
If you’re within five years or so of retiring, consider allocating most of your 401k investments to bonds and money market funds, leaving no more than 30 percent in stocks. Many people make the mistake of maintaining a high risk tolerance too close to retirement, only to lose a substantial amount of money.
If you’re leery of making your own investment choices, most plans offer target date retirement funds, which are designated by the year closest to your retirement date. Your portfolio mix is adjusted accordingly as you near retirement, removing the guesswork on your part. Check out the links below to assist you in making wise investment choices for your retirement savings. Learn how to allocate your 401k investments today.