Your 401k Investing for retirement
For your retirement, 401k investing is
becoming popular among senior generation as well as growing number of
working population nowadays. Once you chose to take participation in
your company's 401k plan, you have several investment options. The plan
offers mutual funds which are very well known to the people. It also has
target date funds, stable value funds, company stock. Among the choices
you made, you would need to decide how to divide your contributions
based on a percentage. It is called asset allocation and you might want
to ensure how the process works and what kind of profit returns has been
in the past history. Also make sure any potential risks that you would
have by choosing a particular option.
If the plan offers you only mutual funds, then you may want to choose 3
stock funds and a bond fund. Then divide your contribution evenly among
them for example. You can also choose to put 35% of the total in each
stock fund and 15% in the bond fund.
But if the plan offers you the target date funds which would be
associated to specific future retirement years like 2030 or 2040, then
typically you would want to put your total contribution into whichever
date is closest to the date you would expect to retire. It is normal
that the target date fund's allocation is being gradually adjusted to
the more conservative as the date becomes nearer.
Your company will deposit your contribution into a specific fund when you are enrolled in the plan automatically. Those funds are such as target date fund or other qualified default investment alternative. You will have the right to change the allocation and redirect your money into other plan choices at your own will.
Company stock in your 401k
Generally company stock is a difficult choice when it comes to allocation
decision. One advantage is that your account balance will grow as the stock
price rises. But the risky part is that both your retirement and employment
income are dependent on the same source. In case your company falters and thus
stock price drops, then you will face financial suffering.
It would become more complicated if your company
offers contribution match with company stock, or a larger match should you
decide to invest more money into the stock.
Always be careful that any one investment option is heavily
concentrated, otherwise you would have increasing risk of major losses
when things are not going where you expected.
To prevent this, you can set a certain percentage of your account value
that you feel comfortable in a company stock - for example 10 or 15% -
and do don't allow it to grow larger. Another alternative is to create a
separate and more diversified account such as Roth IRA, to offset your
401k option which might have been a single point focus.