The first step in choosing investments for your 401(k) is determining when you can realistically retire. Specifically, your investment time horizon impacts how aggressively you can invest. If you’re later in your career with 5-7 years to retirement, it may be prudent to scale down to a more moderate or conservative portfolio. Conversely, if you are in the early stages of your career, with multiple decades of earning ahead, it is recommended you allocate more aggressively. A younger person’s retirement account has significant time to not only recover from recessionary markets, but also has the benefit of investing in opportunistic environments. History has shown that, given several decades to invest, stocks outperform bonds and cash. Therefore, it is more risky for a younger person to be invested conservatively than aggressively because conservative investing, though safe, has a greater probability of limiting long term gains. Put simply, the risk is worth the reward when it comes to a long-term aggressive allocation.
The second step in this process is realizing that the purpose of a 401(k) is to fund your retirement. It is not designed to be withdrawn from or used on discretionary spending throughout your career. This discipline allows for you to maximize on compounding growth no matter where you are in your career, while enhancing your probability of successful investing.
If you take the time to understand the aforesaid steps, it should be easier to peg which investments make the most sense for where you are in your career. To reinforce this concept, a younger professional should predominately be invested in stocks, while an older professional should have a balanced allocation to both equities and fixed income. If investment options are limited on your plan, one should allocate to index funds and vary exposure by their investment time horizon. If there are multiple options on your investment platform it is recommended you reach out to an investment professional to help guide you in the suitability of the investments as well as plan an allocation that is designed to yield beneficial long-term results.
There are many options when it comes to saving for retirement. This is both a benefit and deterrent as you have the resources to be successful but simply don’t know where to start. Fortunately, your advisors at Geier Asset Management can make sense of these investments in a simple strategy you can understand.