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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 time horizon. Generally, the further away you are from an investing goal, the more time you have to compound earnings if the value of your investments rises and to recover from losses if the value drops. 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 will depend on a variety of factors that go beyond your own comfort level with taking risk or desire to achieve a particular return. You’ll want to consider your goals, the time horizon for each goal, other financial assets you own, current (and projected) income from your job, the stability of your job and any other sources of income. The more willing you are to take the risk that your portfolio value will rise and fall with the markets, the more you might consider investing in equities, such as stock mutual funds. The less willing you are to take that risk, the more you might want to 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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