There are few things that’ll contribute to the quality of your retirement as a 401(k) account can, and it’s why it’s so important to start working on your savings as early into your career as possible.
For most people, this account represents the majority of their nest egg, and it’s what they’ll rely on for the entirety of their retirement years as a source of funding for all their expenses.
Of course, you’ll first need to find the money to set aside in the account to begin this process, and this can take you your entire career.
This is exactly why starting early is so important, and as your wealth grows with time, the years you’ve dedicated to the account will finally pay off, allowing you to lead a stress-free life in your retirement years.
Unfortunately, as simple as it may sound, a lot of people mess up when investing in their 401(k), and we’ll try to educate you on the many strategies you can employ to make your money work for you.
Accept that there will be a risk
Investing in and of itself is a risky business, and if you haven’t got any money you’re ready to lose, you’re probably not ready to begin investing in the market.
However, holding your cash can pose an even greater risk, as all money is bound to depreciate over time due to inflation, and the retirement savings you’ve been setting aside in a mattress may not last you as long as you’d thought when you started saving all those years ago.
$10k that you chose not to invest could essentially be worth half that amount in just under 30 years, whereas investing it in a savings account like a 401(k) with a 7% return could net you more than $75k by the time you choose to retire.
This does imply that you’ve made a good call on investment when you put this money in the account, and with proper asset allocation, you can make sure every dollar is put to good use.
Weigh the amount of risk you’re comfortable with
Even though the risk is a common thing when investing, this doesn’t mean that you should constantly be making risky moves just to make a quick buck.
It all boils down to timing, and while you may be more inclined to make a risky investment during your career, you’ll want to dial this down a bit as you approach your retirement years.
The last thing you need is to lose a large chunk of the money you’ve saved right before you were planning to retire, setting you back tens of thousands of dollars, which can amount to multiple years in retirement.
A general rule of thumb is to subtract your age from 100 or 110, and you’ll get the percentage of your portfolio that you should dedicate to equities, whereas the rest is commonly invested in bonds, which are commonly considered to be safer assets.
Decide on your 401(k) investments
Oftentimes, a 401(k) account will provide you with a small assortment of assets you can invest your money in, usually curated by your employer or retirement plan provider.
However, instead of choosing between stocks and bonds, which can be incredibly stressful, this time you’re making your pick among different funds, usually something like an ETF or an index fund, which allow you to invest in a number of different securities at the same time.
By doing this, you’re automatically diversifying your portfolio and hedging yourself against losses, something you should’ve been doing from the very start.
Usually, your plan provider will allow you to choose a minimum of one fund from the US large cap, referring to companies within the US, as well as one or more funds from the US small cap, which are assets tied to international and emerging markets.
If you spread the amount you’ve allocated to equities between these two types of funds, you’ll be doing yourself and your portfolio a huge favor, and in due time, you will have saved up enough money to put yourself through at least 35 years of retirement.
Overall, the bond selection most 401(k) accounts have to offer is even more narrow, with one benefit being that you’ll be given access to a total bond market fund, further strengthening your portfolio.
Final word
Your retirement years are coming, and if you’re like the majority of other Americans, you’re probably looking to retire as soon as possible.
However, this requires a lot of work and dedication on your part, and if you haven’t been working on your 401(k) contributions for many consecutive years, you’re bound to have a hard time retiring before 65.
Dedicate a certain amount from your paycheck to your savings account, and sometimes your employer may even do it for you as part of their retirement program.
Just remember that the sooner you start, the better off you’ll be.