How Much of My 401(k) Should Be in Treasury Inflation Protection?
Many employers offer employees the option to contribute to a 401(k) retirement plan. A 401(k) plan offers tax benefits and flexibility that previous types of retirements plans did not offer. If you have the option to contribute to an employer sponsored 401(k) plan, you might be confused about what investments you should focus on in your plan. If Treasury inflation-protected securities are an option, you should consider adding them to your investment portfolio if you are risk averse or plan to retire soon.
Other People Are Reading
-
401(k)
-
Years ago, the most common retirement option offered to workers was a pension plan. A pension plan is a type of defined benefit plan, meaning you know how much you will receive when you retire. A 401(k), on the other hand, is a defined contribution plan, meaning you know how much will be contributed to the plan, but not how much you will receive when you retire. Contributions made to your 401(k) are then invested. Some plans allow only the employee to contribute; however, many employers offer matching contributions. How much you will receive upon retirement depends on how well the investments in your portfolio perform during the years.
Bonds
-
A bond is a debt instrument issued by local, state or federal governments. U.S. Treasury bonds, for example, are issued by the U.S. Treasury when money needs to be raised to help run the federal government. Treasury bonds are sold at auction and have a fixed date of maturity. A bond is purchased for less than the face value. When the bond matures, the holder is entitled to the face value plus receives periodic interest during the lifetime of the bond. Treasury inflation-protected bonds make some attempt to account for the rate of inflation. Although the interest rate on the investment is determined when the bond is issued, an adjustment on the face value of the bond is made every six months to account for inflation. For example, if you purchase a bond with a face of $100 and the inflation rate is 2 percent, the face value of the bond will increase to $102.
-
Stocks
-
The other common option in a 401(k) investment portfolio is stocks. Stocks operate differently than bonds. A stock represents a share of ownership in a company. When a company needs capital to expand or grow, they often offer stock to the public to raise the capital. How much money you earn, or lose, on a stock depends on how well the company performs.
How to Decide
-
No one can tell you how to allocate your 401(k) contributions, but you should make some basic considerations before deciding. How risk averse you are is a major consideration. Bonds, particularly U.S. Treasury bonds, are considered low risk because they are issued by the government. Treasury inflation-protected bonds are even less risky because you have some additional protection against inflation. Bonds often earn less than their stock counterpart. Stocks, on the other hand, are generally riskier as because they depend on how well a company performs and other factors beyond your control. The riskier an investment though, the more potential gain. Second, consider how long you have before you plan to retire and need the money. Stocks, historically, perform better in the long run than in the short run. In the end, if you are planning to retire in the near future, and are heavily dependent on your 401(k), you might wish to focus on Treasury inflation-protected bonds for you investment portfolio.
-
