How to Allocate Your 401K Investments
Trying to figure out how to allocate your 401K investments can be a challenge if your not familiar with the options your plan offers. From Large Cap funds to Target Date Retirement funds, the choices can be overwhelming for most. Here are some tips to help you decide which investment options are right for you.
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As you decide on how to allocate your 401k investments, the first thing to determine is what your risk tolerance is. Probably the easiest way to gauge this is to know how many years you have until retirement. If you're 30 plus years away then your risk tolerance is most likely greater than that of someone who has just a few years remaining.
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A higher risk portfolio usually consists of a mix of Large Cap, Mid Cap, Small Cap and Foreign Funds. The percentage ratio I like to use to allocate 401k investments is 40% Large, 25% Mid, 15% Small and 20% Foreign. If your plan happens to offer several funds for each category then I suggest checking the Morningstar ratings to determine your best investment choice.
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If you're within say 5 years or so of retiring then consider to allocate a majority of your 401k investments into bonds and money market funds leaving no more than 30% in stocks. Many people make the mistake of maintaining a high risk tolerance too close to retirement only to lose a substantial amount of money.
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Tips & Warnings
If you're leery of making your own investment choices, most plans offer Target Date Retirement Funds which are designated by the year closest to your retirement date. Your portfolio mix is adjusted accordingly as you near retirement removing the guesswork on your part. Check out the links below to assist you in making wise investment choices for your retirement savings. Learn how to allocate your 401k investments today.
