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401(k) Fact |
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Many 401(k) plans are streamlining their offerings, to an average of 15 funds. Most people choose three or four funds. |
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Your 401(k) plan might offer anywhere from 3 to 100 or more investment choices. Choosing the right combination of investments is essential to setting your 401(k) portfolio on the right track. But before you begin evaluating your choices, you’ll want to consider several factors:
Your age. Generally, the younger you are, the more risk you can afford to take—and the less you can afford not to. The closer you are to retirement, the more of your portfolio you may want to shift into investments that are designed to preserve your capital and provide regular income.
Risk tolerance. Your risk tolerance may depend on your own preferences or the number of years until you plan to retire. The more willing you are to take the risk that your portfolio value will rise and fall with the markets, the more you may invest in equities, such as stock mutual funds. The less willing you are to take that risk, the more you may emphasize investments that are designed to provide regular return.
Other retirement assets. If you have other assets, such as individual retirement accounts (IRAs), taxable investments, pensions, or deferred annuities, you’ll want to consider the bigger picture before deciding how to invest your 401(k). If the bulk of those assets are allocated to more aggressive investments, for example, you might want to invest your 401(k) more conservatively to balance your risk.
Tax bracket. Your tax bracket may influence how you allocate investments among your taxable and tax-deferred savings plans. Investing retirement accounts in interest-paying investments will allow you to defer tax on this income until you withdraw it from your account. Remember that withdrawals from tax-deferred plans are taxed at your regular rate.
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