Companies offer an average of 19 choices in their 401(k)s. But the number can go as high as 70 or even 100 – a selection that you might find overwhelming.
Take a deep breath. Whatever the menu, you’ll likely see actively managed domestic and international stock funds and bond funds as well as at least one index fund and a money market fund. Most plans also offer a series of target-date funds, which start with mostly stocks and ease into bonds and cash as they get closer to the target date.
The general rule is to load up on stocks while you’re young and have time to weather a few market downturns, and move to less-risky investments over the ensuing decades. “If you’re in your twenties and have a relatively high risk tolerance, you could be 90 percent in stocks, with a 10-percent bond weighting,” says Gil Armour, a certified financial planner in San Diego. “Someone who is very close to retirement should have a portfolio of about 50 percent stocks and 50 percent bonds.”
Still can’t put together your own portfolio? Go with a target-date fund. Target-date funds have become the investment of choice not only for employers, as a default, but also for experienced investors who like the convenience. “It’s a no-brainer type of investment,” says Armour. “You can stick with it into and through retirement – as long as you understand the mix.”
That’s a major caveat. Target-date funds generally allocate 85 percent to 90 percent of their assets to stocks in the early years but vary widely in their stock allocation as they approach the target. For instance, Morningstar reports that funds with a 2015 target date range from 20 percent in stocks to as much as 78 percent. Don’t find out too late, as many investors did in 2008, that your fund leaves you more exposed than you care to be.
Funds also differ in how they define target date. Some set the end point at or near your actual retirement; others continue to adjust the allocation for several more decades, keeping the balance more heavily weighted in stocks over a longer period. If you prefer an aggressive approach, pick the fund with an end point that extends past your retirement date. For a more conservative mix, go with one that stops the clock at your retirement or before.
Jane Bennett Clark is a senior editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com. And for more on this and similar money topics, visit Kiplinger.com. Kiplinger’s has a new service to pinpoint the ideal time to claim Social Security to maximize benefits. Visit kiplinger.socialsecuritysolutions.com.
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