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What Is The Safest 401k Investment

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How To Sort Through Your 401 Options

What is the Safest 401k Investment? Why You Should Invest in Gold?

Still, it’s tempting to want to move to assets that are not generally correlated to stocks when the market falls.

That’s when investors reach for bond, stable value or money market funds.

Bond funds invest in debt securities, in contrast to stocks, which let investors take a stake in public companies. Bond investments are generally considered less volatile, and therefore safer.

The downside: returns are less. For example, the S& P 500’s return was more than 13% since 2010, while the Bloomberg Barclays U.S. Aggregate Bond Index came in with 3.5% over that period, according to Morningstar.

Certain allocations such as 60% stocks and 40% bonds, or 70% stocks and 30% bonds, for example are often used to hedge risk. Experts generally recommend that you base your overall mix on a number of criteria, such as your age, anticipated retirement date and the income you will need in retirement.

Still other investments, particularly stable value or money market funds, let you take on even less risk.

Stable value funds are backed by insurance to help guarantee the investments’ value.

“If I put $1 in, I’m guaranteed to at least pull $1 out,” said Aaron Pottichen, senior vice president at Alliant Retirement Consulting.

In exchange for that promise, you generally will receive a lower return on your money compared to an equity fund.

Investment Options For 401ks

When you are deciding which 401k investment options will suit your needs, you will need to consider the long-term impact of your decisions. Particularly because 401k accounts are tax deferred, the tax implications of your investments should weigh heavily on your decision. Ultimately, the goal is to have as much money as possible in your 401k at the time you aim to retire. The short-term benefits are important only in terms of following the law and keeping your taxes low.

Company Stock and Stock Funds

You may elect to invest directly in company stock. If your 401k is administered by a public company, you likely receive stock as part of your benefits package. This can go directly into your 401k, and you will not be taxed on dividends or growth until you take the funds out of your account. If you wish to diversify but still hold company stock, consider a stock mutual fund. This can help you own equity in various companies at once without streamlining your holdings so much as to narrow your portfolio.

Bonds and Bond Funds

Growth Mutual Funds

Growth mutual funds aim to purchase low dividend, under valued equity that will grow over time. These funds target securities that have been under traded in the past, leaving them to have a relatively low price tag when compared to their potential value. In the short run, since the securities have a low value, dividends may be low. However, since you do not earn income from your 401k, a dividend is not as important with these investments.

Tips On Saving For Retirement

  • Planning for retirement can be quite an undertaking. Many of us arent equipped to handle it alone. The good news is that you dont have to, as a financial advisor can guide you through the process. Finding a qualified financial advisor doesnt have to be hard. SmartAssets free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If youre ready to find an advisor who can help you achieve your financial goals, get started now.
  • Having a retirement age in mind can help you plan out your savings. But that might also be extra financial pressure. You want to make sure youre saving at the right rate to support yourself in the future. That might require taking advantage of your employers 401 matching program. Its essentially money already owed to you that can make a difference in your long-term savings.

Also Check: Can I Use My 401k To Buy Investment Property

How Can A Stock Market Crash Affect Your 401

One of the best things about 401 is that it gives employees the freedom to invest on their terms. But even with such an advantage, a crash can affect savings. Thus, it helps to understand where to put 401 before the market crashes and why.

Many investment options for the 401 retirement plan include stocks, bonds, and cash.

Often, in earlier stages of employment, stocks account for most of the 401 investments. With proper asset allocation, the stock-bond ratio should change over the years to mitigate risks.

However, stocks remain a popular investment choice thanks to their high returns. While thats a tremendous advantage when prices follow an upward trajectory, an unexpected stock market crash can do a lot of damage.

The 2008 financial collapse is one of the cleanest examples of the markets devastating impact on corresponding 401 retirement plan assets. More than 21 million participants endured changes in average 401 balances from January 1, 2008, to January 20, 2009. And the only distinction, depending on the participants account balance, was the amount lost.

The best-case scenario is suffering losses that the employee can recover from in the following years. The worst-case scenario is wiping out years, even decades worth of savings. So, its crucial to keep a close eye on the different investment options to avoid or cut down potential losses over a stock market crash.

A Good Pick For Those Near Retirement

A Safe Harbor 401(k): What Is It?

Suppose you are three years away from retiring. You have put together a retirement income plan that shows you that you will need to withdraw $30,000 in the first year after you retire.

If you invest that $30,000 in stable value now, you know it will be there when you need it. If the market is down between now and retirement time, it might not matter to you. You know that the amount you need to withdraw is secure in a stable investment choice. You will be a lot less worried about the chance that you’ll lose your money before you need to access it.

If you are going to use this option, your 401 plan provider must allow you to choose from which investments to take withdrawals. Some 401 plans make you take withdrawals pro-rata, which means that they must come proportionately from your various investment funds. That won’t work for this method. To match your investments to your withdrawal needs, you must be able to pick what to sell when it comes time to take money out.

Even if your plan does not allow that choice, stable value funds can still add stability to your portfolio, which makes them a solid choice for those approaching the end of their working life. The closer you get to retirement, the more stability you will want.

Also Check: Can You Move Money From Your 401k To An Ira

Why It Pays To File For Social Security At Fra

When you claim Social Security ahead of FRA, your benefits get reduced. And filing at age 62 means slashing your benefits by 25% to 30%, depending on your FRA. That’s a risky thing, because if you end up depleting your nest egg faster than expected, or your retirement living costs end up being higher than expected, you might need more income from Social Security to help compensate.

Similarly, there’s a risk in delaying your filing beyond FRA — that you won’t end up living a long enough life for that to be your best financial move. See, delaying your claim will result in a higher monthly benefit. It won’t necessarily score you a higher lifetime benefit, though. To get that, you’ll generally need to live a pretty long life, and if you pass away in your 70s, delaying your filing will generally mean ending up with less Social Security income all in.

That’s why filing for benefits at FRA may be your safest bet. That way, your benefits aren’t reduced, but you also don’t have to wait too long to collect them. If you end up with health issues that shorten your life expectancy, you can at least take comfort in the fact that you didn’t wait too long to first start receiving your benefits.

Why Is My 401 Not Growing

If you’re contributing money steadily to your 401 but you’re not seeing any growth, the problem may be that you’re investing too conservatively or that you’re handing back a chunk of your returns in the form of high fees. Reviewing the performanceand costsfor each of your investments in the plan can help you to decide whether they’re worth keeping or whether you should move your money into a different fund.

Read Also: What Happens To Your 401k If You Quit Your Job

Tips For Protecting Your 401

  • Consider talking to a financial advisor about investment strategies and protecting your 401. Finding a qualified financial advisor doesnt have to be hard. SmartAssets free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If youre ready to find an advisor who can help you achieve your financial goals, get started now.
  • A target-date fund will automatically rebalance over time. This will ensure you remain primarily invested in stocks early in your career. Then, as you near retirement, itll shift to safer, more conservative investments.

Should I Move My 401k To A Stable Value Fund

Traditional vs Safe Harbor 401(k) Ubiquity Retirement Savings

Stable value funds are an excellent choice for conservative investors and those with relatively short time horizons, such as workers nearing retirement. These funds will provide income with minimal risk and can serve to stabilize the rest of the investors portfolio to some extent.

What is a stable investment?

A stable investment is an investment that is seen to be lacking excessive volatility. For instance, an example of a stable investment might be owning a bond offering from a AAA-rated sovereign nation, or perhaps owning the common stock of a publicly traded bank in Canada.

Where is the safest place to put your 401k money?

Bond Funds Federal bonds are regarded as the safest investments in the market, while municipal bonds and corporate debt offer varying degrees of risk. Low-yield bonds expose you to inflation risk, which is the danger that inflation will cause prices to rise at a rate that out-paces the returns on your investments.

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Reinvest Extra Money In An Indexed Fund

You can provide an additional layer of protection by automatically reinvesting extra cash in an indexed fund.

For instance, you can invest dividends or bank account interest in an S& P 500 indexed fund. Thus, you could lock in a 10% growth rate for at least part of your money.

Therefore, you can make compound interest part of your 401K and ensure that some of your money is growing. Moreover, you can enhance compound interest by combining it with the S& P 500, which has a long history of growth.

How To Protect Your 401 From A Stock Market Crash

Stock market crashes are impossible to predict. However, you can protect your 401 from losing money if the market does crash.

Making sure you have enough money for retirement is the primary goal of contributing to a 401. Your 401 will inevitably go through a series of ebbs and flows throughout your working years. Some years youâll see tremendous growth, others you may even lose money. However, as you near retirement, youâll want to protect your 401 from down years, even a stock market crash.

To protect your 401 from stock market crash, invest more in bond, which has a lower rate of return but also much lower risk. To gain as much value as you can, investments heavier in stocks give you the best chance of multiplying your money. However, with stocks comes increased risk. Shifting the percentage of your investments to a more bond-heavy allocation can help shield you if the stock market crashes as you get closer to retirement.

Capturing as much of the good times as possible while avoiding significant losses isnât an exact science there are strategies to help shift the odds in your favor. Letâs take a look at the basics of investing your 401, so you can protect your retirement nest egg.

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Gold May Not Protect Your Money

Specifically, $2,128.42 invested in the S& P 500 in 1980 would have grown to $6,517.82. Also, the inflation-adjusted return on that money with dividend reinvestment was 11.353%.

In the final analysis, a gold investor will lose money and miss out on stock market gains. Hence, gold is not a good hedge against stock market crashes.

Notably, there were three major stock-market crashes 1987, the 2000-2002 Dot.com bust, and the 2008 meltdown during the years between 1980 and 2019. Yet, the S& P investor still received an 11.353% return on his investment.

Thus, precious metals do not belong in your 401K if you want to make money.

Rebalance Your Portfolio Frequently

401(k) Plan Types Archives

Rebalancing is the act of restoring an asset class to its original percentage after it has changed due to investment transactions. So, for example, if you own 25% in US stocks and they increased in value, you would sell some of those stocks and invest the proceeds in other asset classes until you have 25% in US stocks once again.

Rebalancing your 401 portfolio is important because when one asset class increases in value while others remain constant or decrease, your original mix of asset classes changes. This affects your portfolios asset allocation and therefore alters the risk associated with it.

Consider the example at the beginning of this section. If US stocks go up and you dont rebalance, youll end up with a portfolio that has a higher proportion of US stocks compared to your original mix. But, conversely, if theres a market crash afterward and US stocks suddenly go down, your 401 will suffer more simply because it had too many stocks.

But if you rebalance before the crash, then the effects wont be as bad thanks to the other assets you bought when rebalancing your portfolio, which could even counter the loss.

Read Also: Should You Use 401k To Pay Off Debt

What Are The Safest Investments With The Greatest Return

Typically, the highest returns are also associated with the riskiest investments. AAA-rated bonds are considered to be among the safest investments, but they also have the lowest yields. On the opposite end, stocks have higher risks and higher returns. However, you can reduce your risk exposure by investing in stock exchange-traded funds .

Let The Government Protect Your Money As Warren Buffett Does

Another strategy Buffett uses is to let the government protect his money. For example, two of the five most significant investments Buffett lists in his 2019 Berkshire Hathaway shareholder letters are giant banks.

Those banks are Wells Fargo and Bank of America . Interestingly, Wells Fargo and Bank of America are two of the infamous too big to fail financial institutions. That means the U.S. federal government must bail those banks out in a crisis because their collapse could trigger a depression.

The federal government bailed Wells Fargo out with $25 billion during the 2008 financial crisis. Moreover, Wells Fargo paid a dividend of 45 on March 1, 2019. Therefore, Wells Fargo is a dividend stock that adds another layer of protection.

Hence, Buffett protects his money by investing in institutions the government is likely to rescue during a crisis. Therefore, Buffett lets the taxpayers protect his funds by investing in big banks.

Buffetts thinking is that banks can run to Washington for help during a major crisis. Furthermore, the politicians will have to bail the bankers out to keep the crisis from getting worse.

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Gold Bullion Has A Low Risk

If you are wondering what is the safest 401k investment, then you might want to take a look at gold bullions. You will be able to invest in gold in so many different ways. One of the simplest ways for you to be able to invest in gold is by getting gold bullions.

The gold bullion market is pretty straightforward. You do not need to do anything complicated if you want to invest in gold bullions. Other than that, gold bullions are quite a low-risk investment. That is why it is the perfect type of investment for you.

How To Protect And Grow Your 401 And Ira After A Stock Market Crash

What Are the Safest Investments for Savers?

Shawn Plummer

CEO, The Annuity Expert

Is the market about to crash? In this guide, learn how to prepare, protect, and grow a 401k, IRA, and investments before, during, and after a stock market crash. The guide will go over the difference between a bear market and a bull market, a brief stock market crash history over the past 20 years, and a solution to combat the losses to retirement plans and avoid long recovery times.

Americans like to talk generally about either the stock market rising or the market falling or how much money their 401k has earned or lost. However, what seems not to be a part of the conversation is the recovery time between a stock market crash and the amount of time before the stock market fully recovers to its previous high point.

The recovery time is critical because this is the amount of time before investors break-even on their retirement plans . Unfortunately, not all Americans have the time to wait to break even, specifically someone planning to retire soon.

So lets dive in and figure out how to eliminate some recovery time.

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