How To Change 401k Investments

Take Your 401 In Context

401s are important retirement planning accounts, but they may represent only one piece of your financial plan. When considering how to invest your 401, make sure you do it in the context of your entire financial picture.

Someone who has a hefty stock portfolio outside of their workplace plan may choose to invest their 401 more conservatively. However, for someone whose entire savings is contained within their 401, a more aggressive approach might make sense.

The idea here is to not view your 401 in isolation and instead take it as a piece of a greater whole.

I’m In My Early 50s And Plan To Retire A Little Before I Hit Age 60 My Savings Are Now Invested In A Combination Of Stock Mutual Funds And Company Stock When And How Should I Start Allocating To A Safer Portfoliora

Whether you’re simply being prudent by doing some advance planning or you’re concerned that the recent market volatility is a prelude to an imminent crash, you’re right to start thinking about how to transition your portfolio to a more conservative stance well before you actually retire.

After all, investing heavily in stocks may be okay when you’re younger and more willing to take more risk for higher returns since you have plenty of time to rebound from market setbacks. But an overly aggressive investing strategy that leaves you vulnerable to severe market downturns as you near the end of your career can be dangerous.

A big drop in the value of your nest egg just prior to or soon after retiring can dramatically reduce the chances that your savings will be able to support you throughout a long retirement. The reason is that the combination of outsize investment losses plus withdrawals from your savings for retirement income can so deplete your portfolio’s value that it may not be able to recover sufficiently even after stock prices begin rising again.

So how can you get adequate protection against market setbacks while also providing enough long-term growth potential so your savings will be able to sustain you throughout a retirement that, given today’s long lifespans, could last 30 or more years ?

Invest Your Newly Deposited Funds

You’ll have to choose investments in your new IRA so your money can grow. Make sure to maintain an appropriate asset allocation given your age, and consider your risk tolerance.

Finally, when your new IRA has been opened, be sure to read up on common IRA mistakes to avoid, such as forgetting required minimum distributions, not designating beneficiaries, and trading too often in the account.

Read Also: What Happens To Your 401k When You Die

Roll Your Money To An Ira

Transfer your money into an Individual Retirement Account .

• Your savings stay invested, with similar tax advantages
• You have access to a wide range of investment options
• You can roll in retirement savings from other jobs
• You can keep contributing money to the account
• Loans aren’t allowed, but you may be able to withdraw money before you retire under certain circumstances

Pros And Cons: 401 Vs Ira

Recommended Reading: How Do I Cash Out My 401k Early

Scale Up Contributions Over Time

Once you’ve picked your investments, the best thing you can do is leave your account alone and let the contributions build.

In addition to low costs and diversity, consistently investing over time i.e., every paycheck will make the biggest difference in the size of your savings. Low-cost funds are only effective if you continuously invest in them and don’t try to time the market, or pull money out when it starts to drop, a recent report from Morningstar says.

Experts also advise increasing your contributions each time you get a raise or bonus by a percentage point or two, helping you reach your goals faster.

Finally, remember that while the stock market has historically increased around 10% per year, that’s not guaranteed, and there will be periods when it falls. Experts also expect returns to be lower, around 4%, over the next decade than they have been the previous 10 years.

Still, no one knows what will happen, except that the best course of action is typically to invest in low-cost index funds consistently, over many decades. Do that, and you’ll be on the path to building real wealth.

Option : Keep Your Savings With Your Previous Employers Plan

If your previous employers 401 allows you to maintain your account and you are happy with the plans investment options, you can leave it. This might be the most convenient choice, but you should still evaluate your options. Each year, American workers manage to lose track of billions of dollars in old retirement savings accounts, so you should make sure to track your account regularly, review your investments as part of your overall portfolio and keep the beneficiaries up to date.

Some things to think about if youre considering keeping your money in your previous employers plan:

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How To Invest Your 401

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Nothing is more central to your retirement plan than your 401. It represents the largest chunk of most retirement nest eggs.

Finding the money to save in the account is just step one. Step two is investing it, and thats one place where people get tripped up: According to a 2014 Charles Schwab survey, more than half of 401 plan owners wish it were easier to choose the right investments.

Heres what you need to know about investing your 401.

Learning About Your Investment Possibilities

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Defining Terms: What’s A 401

A 401 plan is a tax-advantaged retirement account typically sponsored by an employer.

The traditional form of the 401 works much like a traditional IRA: Your contributions in a given year reduce taxable income for that year. In a simplified example, if you earn $75,000 and contribute $10,000, your earnings fall to $65,000, saving you tax dollars up front. Your withdrawals will eventually be taxed, though.

401s differ in a few meaningful ways from IRAs:

• Contribution limits: 401s have much higher contribution limits. These typically change annually, but generally you can contribute about three times as much money to a 401 as an IRA.
• Investment options: 401s typically provide limited investment options, with most offering a dozen or fewer mutual funds. In IRAs opened at brokerages, you can invest in virtually any stock exchange-traded fund , or mutual funds.
• Matching funds: Many employers match employee 401 contributions up to a certain percentage of pay.

The Best Investments For Your 50s

Now its time to examine your future goals and explore your current and desired future lifestyle. Investigate your current income, projected income, and tax situation. The results of your analysis will influence the best investments in your 50s.

If youre on track for retirement, then keep on doing what you began in earlier decades. As you edge closer to your retirement date, youll probably dial back your stock fund exposure and increase the allocation of your portfolio to bonds and cash.

The specific percentages will be determined by when you anticipate dipping into your investments and how much. If you expect to retire at age 67, you might delay spending your investments. In that case, you can be a bit more aggressive with your investing in your 50s. If not, 60% stock investments and 40% bonds may be a good mix for most investors.

Read Also: Can You Rollover A 401k Into A Traditional Ira

Why You Can Trust Bankrate

Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.

Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.

Our reporters and editors focus on the points consumers care about most how to save for retirement, understanding the types of accounts, how to choose investments and more so you can feel confident when planning for your future.

Can You Be Required To Roll Over Your 401

Sometimes you have no choice in the matter. You might be required to roll over your 401 if:

You dont meet a minimum balance requirement. For example, if you have less than $5,000 in your 401, your employer can require you to roll your 401 into a different account.

Your old employer changes 401 providers. Depending on your company, your account may not be rolled over and your existing provider may not continue service. If your account is rolled over, the new provider might have requirements you cant meet, or they might not provide the services you want.

Recommended Reading: How To Find Old 401k Money

Fund Types Offered In 401s

Mutual funds are the most common investment options offered in 401 plans, though some are starting to offer exchange-traded funds . Mutual funds range from conservative to aggressive, with plenty of grades in between. Funds may be described as balanced, value, or moderate. All of the major financial firms use similar wording.

Why Switch 401 Providers

Are you unsure whether your businesss 401 plan should change? We have resources designed to help business owners and benefits managers understand their current 401 plan. Use one of our 401 tools below to see how competitive your current plan is, and whether or not you are getting the full benefits of offering a retirement plan.

• 401 Plan Review Tool Answering these nine questions will help you determine if your current plan is meeting the needs of your business.
• Benchmark Report We can support your decision to change providers by conducting a detailed analysis of your plan. View a sample of a 401 benchmark report.
• Understanding and Analyzing Fees How much should a plan cost? It depends on what you and your employees value but you should understand the federal laws around fees being reasonable.

Any review should include a Fee Analysis. Ask your current 401 recordkeeper, adviser and third party administrator for clarity on their fee disclosure. Plan sponsors and business owners can mistakenly think their total fees are shown on their statement. But fees can be hidden in withdrawals and costing you and your employees more than you realize.

Also Check: What’s My 401k Balance

Move Your Money Into An Individual Retirement Account

This choice gives you maximum control and flexibility. With a 401 plan, the employer chooses the investments and makes the rulesand the rules vary from plan to plan. With an IRA, youre in charge.

Advantages

• Unlimited investment choices instead of a small menu. Every 401 plan has limited investment options by contrast, you have total freedom of choice in an IRA, which can be invested in as many mutual funds, stocks and bonds as you want.
• Greater control over your investment expenses. 401 plan fees are rarely disclosed, and in many cases they’re higher than what you’d pay for comparable investments outside the plan. Picking low-cost funds for your IRA can save you tens of thousands of dollars over time.
• Greater freedom to name beneficiaries. The beneficiary of your 401 plan, by law, must be your spouse you have to obtain a signed release from him or her if you want to name anyone else. With an IRA, you can name any beneficiary you wish.

Potential Disadvantage

• Taxes will be withheld unless you move the money from your 401 to an IRA via a trustee-to-trustee transfer. To avoid this issue, first set up a new IRA then ask your old employer to transfer your money directly from the 401 plan into the new account.

Why Is Diversification Important For Investment Strategies

Diversification is essentially the investment strategy version of “don’t put all your eggs in one basket.” The idea is that, by diversifying your funds across many different types of investments, there is a higher chance of something doing well in a given day, month, or year. One or two stocks you own might be down one day, but others may be up. This makes it less jarring to look at your account because the price fluctuations won’t be as volatile.

Read Also: How To Set Up A 401k Account

Why Invest In The International Market

Many International stocks are down yet since the coronavirus variant is still running rampant. Its unfortunate for the health of all those folks and their economy, but it also means an opportunity for a 401k investor such as myself.

Analysts have likely already reduced the outlook in various countries , which means the market is almost certainly down in those regions as well. Ultimately, this means that theres likely nowhere to go but up in those markets .

And as an investor, the goal is to buy low, sell high, right?? Thats why Id like to make the asset allocation to International, and soon.

Vanguard 401k Allocation Change

Alright. So Ive decided to change my 401k allocation to include more International stocks, but how do I actually do it? How do I choose a new asset allocation?

My employers 401k is invested through Vanguard . The interface isnt always the most intuitive, but the investment funds are solid and the fees are super low. So, if you can fight your way through a bit of the clunky user interface, youre going to love the results that Vanguard displays proudly.

Below is a look at my current 401k allocation by fund type:

As weve already established, the majority of my investments are in the U.S. stock market. The best option for me to invest in the International market is through the first fund shown there .

Why do I like the EuroPacific Growth Fund?

• Its a growth fund, which is riskier, but has more potential to increase in value
• The fund has a great mix of many International stocks, so its not too risky, but Im also getting a ton of benefit by being fully invested in the EuroPacific regions.
• And, the expense ratio is just 0.46%, which is pretty low for an International mutual fund

How to choose asset allocation

Again, Im no investment professional, but heres what I do when Im reviewing a mutual fund within my 401k offering.

First, take a look at the expense ratio.

This is usually in the overview of the fund.

Second, review the historic returns.

On average, the S& P 500 has produced a 10% annual return.

Third, review whats actually in the mutual fund

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