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Your 401 (k) office may seem like an untouchable savings account, but it's actually a powerful, tax-efficient investment tool.
An impressive $ 5.3 trillion was held in 401 (k) plans at the end of 2017, representing nearly one-fifth of all retirement badets in the United States, according to the Investment Company Institute. When you postpone a portion of your paycheck on your 401 (k), the money does not stay there until you need it for retirement – you have to decide how you want it to be. # 39; invest.
About 55 million Americans contribute to a 401 (k) scheme at work and, according to Certified Financial Planner Eric Roberge, too many people make the same mistake regarding the management of theirs. He says it has more to do with perception than anything else.
In a recent tweet, Roberge wrote: "A big mistake # monetary, I see MUCH: ignore the way a 401k wallet is invested, it's like saving reacting emotionally because you constantly check it / make bad choices investment) ".
401 (k) s are designed to make investment quite simple. Most 401 (k) plans offer between eight and 12 investment options, which can be a mix of mutual funds, stock funds, bond funds and even annuities. This is much less than what is available in a typical brokerage account or IRA – and this can be both good and bad.
"With respect to 401 (k) investments, the challenge usually lies in the limited number of investment choices," Roberge told Business Insider. "Many plans offer target date funds with a handful of individual funds, so the final decision is to choose the target date fund closest to your expected retirement date or build your own portfolio with available individual funds. . "
It can be difficult to find exactly what you want in a 401 (k) with limited options, but you'll be in good shape as long as you choose investments that diversify your portfolio – that is, a combination of stocks and bonds – and you do not have one. T charges too much, although management fees are inevitable in most 401 (k) s.
"Sometimes the target date fund provides the diversification of the badet clbad needed and you can not get the same ability to diversify with individual funds.Sometimes the opposite is true," Roberge said. Target date funds are "all-in-one" funds that automatically choose a combination of investments based on your age: the younger you are, the more risky the investments (the more shares).
In your 401 (k), target date funds can be tagged by planned retirement year, such as "target 2040". In this case, the fund is made up of a mix of investments providing for retirement in 2040. Investments should therefore be as conservative as possible at that time. Often, if you do not choose another investment, you will default to a target date fund that usually corresponds to your retirement age.
"One big thing about target date funds is that there is no rebalancing because everything is done for you in the fund," Roberge said. With individual funds, he said, you or your advisor will have to "rebalance" your badet mix each year to match that of your broader portfolio.
When choosing the funds to invest in, you will decide how much of your 401 (k) contributions will go to each, usually expressed as a percentage. If you choose only one fund, 100% of your money will be invested in this fund. If you create a portfolio with three different funds, you can decide what percentage of your contributions will go to each fund.
Do not forget that your investments are not immutable. You can, and probably should, periodically change your allocation to ensure that your overall portfolio – including any other investments you have in an IRA or brokerage account – matches your risk tolerance and time horizon. If you have a 401 (k), you are an investor as much as an investor.
Need help with your 401 (k) investment strategy? The free SmartAsset tool can help you find a financial planner near you »
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