How Do I Invest My Work Retirement Contributions?
Ready to explore investments in your 401k plan at work, you log into your retirement benefits portal, but here’s the issue… (perhaps) you are not comfortable picking investments.
You are not alone.
In fact, according to a national poll from bankrate.com, more than half of American workers report they are behind on their savings goals.
They list myriad reasons why, but limited knowledge about investments and a lack of clarity in how a 401k plan works could also be the culprits.
Say you are contributing, though. And in the back of your mind, you can hear someone (maybe your parents) saying, “Be sure to save X%,” or “At least take advantage of the employer match.”
You march forward, still uncertain, but:
You ask a friend, family member, or co-worker for their opinion, or;
You toss it in the target-dated fund that matches your retirement year.
Neither is the wrong move. Doing something is better than nothing (to a certain extent).
But you want to feel more confident about your investment decisions. You want to know how 401k investments (or other retirement plans) impact future income streams.
Let’s review some basics to make investing at work a little easier.
First, what is a 401k?
A 401(k) is one of the more common retirement savings benefits. In 2021, you can contribute up to $19,500 per year, or $26,000 if you are 50 or older. You may also enjoy matching employer contributions, special loan options from your plan provider, and hardship withdrawals if needed.
Advantages of 401k Plans
Simplicity. Employee contributions are made through payroll deductions, provided you are eligible to participate in the plan.
Lower taxable income. If you expect to earn $85k this year, contributing 10% ($8,500) of your wages to your 401k plan lowers your taxable income to $76,500. Deferring this income could save you $1,870 in income taxes.¹
Range of investments. Your employer offers a basic mix of investment choices that lets you construct a diversified portfolio and meet your retirement objectives.
Hardship withdrawals. While they are taxable and subject to penalties, some 401k plans let you take out money for an “immediate and heavy financial need.”
Plan loans. Some plans let you borrow anywhere from $1,000 to $50,000 (some restrictions do apply).
Disadvantages of 401k Plans
There are not many disadvantages. But many financial professionals agree on the following:
Possibility of not saving enough. Unlike a pension plan, which sets money aside for an employee, offering a pre-determined retirement benefit, employees with 401k plans are responsible for funding most (if not all) of their retirement. So, if you’re not saving enough, your future account balances may not meet your retirement spending needs.
Other risks of 401k investing. The risk of loss is discussed a lot regarding investing, but other risks are often overlooked. For instance, those who lack experience in choosing investments risk incorporating improper investment strategies. In addition, without a proper plan, how can you know what may perform poorly or is not right for the goals you seek to achieve?
Investment Options
Another advantage of workplace retirement plans like your 401k is that they simplify things for you regarding investment choices.
In a typical retirement plan, you typically have a choice of target-date funds and mutual funds. Thus, a 401k will roughly average between 8 and 12 choices of investment options.
Compared to the 9,599 mutual funds in the US between 1997 and 2018, this “lack of choice” (8 to 12 funds) is a drawback for some investors. Many wish they had more options.
Choosing Investments
If you are investing within your employer-sponsored retirement plan framework, even this narrowed-down list can be challenging to manage.
Again, if you have limited experience researching funds and understanding analysis reports, you risk (1) choosing an investment that’s not right for you or (2) not investing at all.
Simple Strategy for Allocating Investments
Subtract your age from 100. So, if you are 35, 100 minus 35 equals 65. This calculation may mean that you allocate 65% of your investments to stock funds, and the rest goes to bonds and cash.
From there, you would continue implementing this process, rebalancing your portfolio every year or so based on this (again) simple formula.
What If You Don’t Want a “Cookie-Cutter” Portfolio?
The strategy above is one of several simple ways to start investing in your retirement account. However, for those looking for more tailored investment advice, simple may be inappropriate.
With our premier planning package, we help select and track 401(k) investment decisions by:
Analyzing all plan investment options
Discussing your investment risk tolerance
Examining your return objectives
Evaluating your contribution ability
Designing a portfolio that aligns with your savings goals
Reviewing your account quarterly and rebalancing as needed
Note: Our services are not limited to 401(k) plans. We help with any employer-sponsored retirement plan, including 403(b)s, 457s, SEPs, SIMPLEs, and Traditional and Roth 401(k) plans.
Whether you are a new or an experienced investor, you owe it to yourself to have an experienced investment advisor in your corner.
Book a Portfolio Review Review Today!
Please schedule an appointment to discuss our planning options or send a message with any burning questions.