Generally speaking, you’ll have very limited control over how your 401K is managed. This is because a 401K retirement plan is employer-sponsored, which means that the company you work for selects the plan (although the fund is managed by a third party). So your only real choices are whether you want to contribute and how much. However, depending on the company you work for you may be offered choices between different portfolio options. And you may gain some measure of control over your money down the road when you work elsewhere, at which point you can either choose to roll your original 401K into the fund offered by your new employer, or opt to move it into a different sort of tax-deferred retirement plan. In any case, you’ll want to make sure that the funds you contribute now have the best chance for growth so that you have the money you need when you’re no longer working. Here are just a few tips to help you make the best choice.
- Consider the age of retirement. The youngest you can retire is generally 59.5 years of age. And the oldest you can be before your 401K starts forcing you to withdraw is 70.5. That leaves you with an 11-year spread to determine if you want to keep earning and contributing or start withdrawing from your retirement fund. And the age at which you plan to retire could help to determine what type of fund you want to invest in. For example, you could select a target-date fund (if you have the option) that bases your investments on the impending date of retirement you’ve chosen, switching to a safer portfolio (albeit one that is less likely to earn) as your retirement nears. The more your investment earns early on, the more you stand to gain through compound interest. Later you’d probably rather keep your money safe than push it into risky ventures.
- Consider how much you want to contribute. Many people need the lion’s share of their earnings to pay bills in the here and now. For this reason, low-cost funds can be very attractive. The only caveat here is to keep an eye on the stocks that populate such funds. It is possible to realize excellent earnings on a low-cost fund, but only if it features valuable stocks.
- Consider how quickly you want to earn. Seeing more money in your account more quickly is obviously tantalizing, but you have to remember that high-earning stocks also carry a high risk of loss in most cases. For this reason you might want to go with something like an index fund instead. It’s likely to earn fairly steadily and show greater overall returns in the long run.
- Consider employer contributions. Some companies offer matching programs by which they donate the same amount of money to your 401K as you do (up to a set percentage of your income, perhaps 3-6%). However, most also specify that their portion of contributions is vested, meaning you only receive the full value if you stay with the company for, say, five years. So perhaps only 20% vests the first year, 40% the second year, and so on. If you aren’t planning to stay with the company that long, you may want to choose the most aggressive plan so that you can earn as much interest as possible on the money while it’s in your account.
- Consider talking to a pro. If you’re having a hard time reading the fine print and understanding your options when it comes to your 401K it might be time to get a stock trading expert on your side who can explain the pros and cons of the options available to you and perhaps even help you to invest in other retirement options (like Roth IRAs) to supplement your 401K.