Building the proper retirement plan means allocating the assets in your portfolio properly for your retirement needs. A good 401k allocation strategy will include a diverse mixture of a number of different asset classes. This mixture could include stocks, bonds, mutual funds, and even cash. All of these asset classes serve a purpose and add a unique element when trying to max out your 401k contribution limits. Here is a look at a few of the more popular asset classes that available for 401k plans.
401k Allocation – Stocks
Stocks are one of the primary assets that make up many 401k portfolios. 401k plans often give investors the chance to buy shares of their own company’s stock as well as general shares from other companies. Stocks are a risky asset class as they represent an investment in a single company. Their value is tied to changes in the company. The 401k allocation of a younger investor is likely to be a lot more stock driven than an older investor’s plan since a younger person has the time to take a larger risk for a larger gain.
401k Allocation – Mutual funds
Mutual funds are the most popular choice for 401k plans. They often provide investors with the easiest way to diversify their retirement plans. Mutual funds can come in many forms such as stock funds, bond funds, and blended funds. Target date funds are funds that automatically rebalance their asset allocations to less risky investments every year based on the date that you have targeted for retirement.
401k Allocation – Bonds
Bonds are solid fixed income investments that provide safety. Fixed income investments are very attractive to older investors because they provide security and a lot less risk than most stocks. Bonds should represent a percentage of the asset allocation for everybody but especially for older investors since risky investments are usually phased out when someone nears their ultimate retirement date.
401k Allocation – CD’s, Money Markets, Cash
There is also usually a segment of a 401k portfolio that is allocated for certificates of deposit, cash, and money market accounts. These are the safe, guaranteed portions of the plan that offer little return but maximum safety. Younger participants will have a lot less money invested in this asset class than an investor that is closer to retirement age since it does offer very small investment returns.
My Personal Take
100% of my own 401k plan is invested in a target date mutual fund. I’ve done this for a few reasons. First, I am lazy and I like the automatic rebalancing. I also am too lazy to pick out a ton of investments. Secondly, my husband already invests our own money in individual high-dividend stocks through our Scottrade account and our second Roth IRA. I feel like that helps us cover our bases – individual investments and automatic management. I’ve also picked an earlier target date than a 28 year old would normally choose since I have a lower risk tolerance than most people my age too.
How do you allocate your 401k? What kind of risk are you comfortable with?