If you are employed, you may have the opportunity to invest in an employer-sponsored retirement fund, or a 401(k). Started back in 1982, 401(k) plans were designed to help people save for retirement, with the added benefit of lowering their state and federal taxes. Employees can really benefit from investing in a 401(k), but so many different investment options these retirement funds can be quite overwhelming. Here is a look at the different investment options and the best ways to approach your 401(k) so you can make an informed decision on which approach is best for you.
Investment Options
Stock mutual funds
Do you like the excitement of the ups and downs of the stock market? Do you know the difference between a bear market and a bull market? If you answered yes, then this option may suit you best. You can invest your retirement earnings in various stocks at that are traded in a public forum. The value of each stock mutual fund can fluctuate greatly, and while you can lose more money, you can also stand to gain much more over other types of investments. However, to make things a bit more complicated, there are numerous types of mutual funds.
- Index mutual funds allow you to invest in companies in the stock market index. There is relatively low risk associated with index mutual funds, but they also yield lower returns.
- Growth mutual funds let you invest in over-average companies. There are often big fluctuations in these stock prices, and they come with higher risks.
- Income mutual funds are funds that invest in those stocks that pay off regular dividends. The benefit to income mutual funds is that they pay a monthly income for their investors.
- Growth and income mutual funds are those that have growth potential. They are considered middle risk and usually have good dividend payments.
- Aggressive growth mutual funds are just as the name implies – aggressive. They are very high risk, but can yield high returns.
- International mutual funds are the stocks and bonds that are from outside countries. They can possibly be affected by outside politics such as war. They are considered to be high risk, but also have very high returns.
Money market funds
These funds are short-term investments that have lower returns. The main types of money market funds are US Treasury Bills and Certificates of Deposits.
Bond mutual funds
Offered by the US government and larger corporations, bond mutual funds can have longer or shorter maturity periods. Those with longer periods can yield higher returns than those with shorter periods.
Stable value funds
Also called Fixed Funds or Guarantee Funds, stable funds provide you with consistent growth over a longer stretch of time. These are also backed up by contracts from insurance firms. These types of funds are relatively safe, but increasing inflation can make them lose value over time.
Ways to Approach Your Investment
Do-it-yourself
If you have a decent knowledge of how investments work and what type is best for you, then a DIY approach can be effective. The key to a successful DIY avenue is creating a plan that has an asset allocation suitable for your age and wanted risk factor. The younger you are, the more opportunity you have to focus on stocks that may be more volatile. Over time, these may gain you more money than other investments and since you have time on your hands, you have the privilege of being able to play around with your money more.
Target-date funds
If you don’t have the time, or the investment chops, to figure it all out on your own, then target-date funds can be a good choice for you. This type of plan is offered by over 60% of 401(k) plans, and with good reason – they are simple to understand and easy to maintain. With a target-date fund, you simply choose a fund that offers a target date that corresponds to the year you plan on retiring, and the plan will provide you with a mix of stocks and bonds that are suitable for you, depending on your age. As you get older, the blend of high risk and low risk accounts and stocks and bonds, will gravitate toward a more conservative approach.
Managed account
A managed account is just that, it is managed by an investment firm. With this type of account, you are essentially handing over the reins to an advisory firm to handle everything. The firm will build your portfolio and manage it on a continual basis. Not all businesses offer managed accounts as an option for their company 401(k) plans, but many do, and more are looking to add them. The cost for the investment firm will vary from plan to plan, but you should expect to pay anywhere from 30% to 75% of your assets each year. This will be in addition to any other expenses that are charged by the funds in your chosen portfolio.
Investing in your 401(k) can help set you up for retirement. There are usually a plethora of options that are presented with a 401(k) and they can be overwhelming. Hopefully this guide will give you a better idea of which type of investment and which approach is best for you.