Have you ever found yourself starting a new job, being eligible for a 401(K) and having no idea what to choose?
There are so many options!
How do you decide how much to invest in your 401(K)?
How do you decide which investment option to choose?
Is the “invest based on age” option the best?
Here is a little cheat sheet:
If your company offers a match, consider investing an amount equal to the maximum match. This gives you an immediate return on your investment. (note to employers: this is a great perk and does not cost a lot)
Your company will usually have around a dozen funds for you to choose from. While past performance does not promise future results, it can give you an idea of how the fund performs. Generally you want to choose something that at least matches the performance of the market standard it is most closely related to. Bonus points if it outperforms the market standard. (note to employers: choose options for your employees that will give them the best chances for good performance. You do not want their retirement funds to be decreasing compared to what they could do on their own)
One of these options is almost always an investment portfolio based on your age. This will be a combination of stocks, bonds, and other investments that are more aggressive when you are younger and become more conservative as you approach retirement.
Which option you choose will depend, in large part, on your personal risk tolerance. Do you like to take risks? You may want to choose something that may offer your a greater return, but also risks losing more money. If you do not like risk you may want to chose something that is lower risk, like bonds. These are less likely to suffer a large loss, but may also not keep up with inflation.
Your 401(K) will have an assigned financial adviser who can discuss with you what your best options are. Please take advantage of his or her knowledge, but remember no one is going to care as much about your financial future as you do. (note to employers: you have the right to change financial advisers if yours is not giving your employers the options and information they need)
Ask lots of questions.
Do your research.
Revisit your options annually. You can make changes.
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