This post is part of a series where retirement expert Dan Solin offers simple answers to the ten toughest retirement questions. See all 10.
Q: What investments should I select for my 401(k) plan?
A: For most employees with a 401(k) plan, the best investment option is a Target Retirement Fund. These funds allocate assets between stocks and bonds in amounts that are generally appropriate for most investors. Best of all, they automatically rebalance to become more conservative as retirement nears.
I like them because of their simplicity: You invest in one fund and have no other choices to make.
However, these funds are not for everyone. If you determine the asset allocation in a Target Retirement Fund is not right for you, you can customize your fund choices using index funds in your plan.
First, determine the right asset allocation (the percent stock and percent bonds you want in your portfolio). If your plan has a broad "domestic stock" index fund, invest 70% of the amount you have allocated to stocks in that fund. Invest the remaining 30% of your stock allocation in a broad "international stock" index fund. Invest 100% of the bonds allocation in broad, "domestic bond" index fund.
If your plan does not have these categories of index funds, you will need to determine which of the available options is closest to them. The unfortunate reality is that, with few exceptions, fund options in 401(k) plans make it difficult for employees to achieve market returns.
Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, June 24, 2008)
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Reader Comments (Page 1 of 1)
7-14-2008 @ 11:44AM
scholastica8 said...
I love that it is assumed that everyone has a 401K & that employers match funds.
Recently I had a financial advisor say to me, "Well, if you'd begun saving $450/mo. when you were in your 20s, you'd be in good shape now. ROFLOL. He was about 35. I told him that when I was in my 20s, I was lucky if I saw $450 per month in salary. Back then, minimum wage was less than $3.50/hr & there were no corporate head-hunters visiting campuses & no job fairs. It was basically, here's your hat, what's your hurry? Lot'sa luck out there. There were no cheap stock brokers, no 401Ks, no IRAs. If you were lucky enough to get into a government job or a factory job, you might get a pension plan. Otherwise, it was just socking away into a savings account $20 out of a $90/wk paycheck. They need to teach financial advisors a little history along with their scripted advice.
7-14-2008 @ 7:29PM
Warren said...
Dude, the first line of the answer is:
"For most employees with a 401(k) plan,"
That doesn't seem like anyone is assuming anything. Don't let me get in the way of your whining though.