Allocating Your 401k: Choosing the Right Investments

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Home Page > Finance > Investing > Allocating Your 401k: Choosing the Right Investments

Allocating Your 401k: Choosing the Right Investments

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Posted: Oct 20, 2009 |Comments: 0
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When it comes time to sign up for your company sponsored retirement plan, usually a 401k, it can be extremely confusing trying to translate the enrollment packet. You are being asked a million questions in the foreign language of finance that may as well be Chinese! So how do you determine how much you should be contributing? How do you determine which investments are right for you?

Lets first tackle the first question:
How much should you be contributing to your retirement account? I typically recommend that in order to reach your retirement goals, you should contribute a minimum of 10% and 15% of your income to a retirement account. While this may be ideal, most individuals I meet with are not ready to part with 10-15% of their income. I can tell you “You must think about your future”, or “If you don’t save now you will never retire”, but the truth is, we live in a society that lives for the moment rather than looking into the future.

So…to be more realistic, I recommend you do the following:

Review your monthly expenses and earnings to determine how much “extra” money you have at the end of the month. (To download a budgeting worksheet CLICK HERE) Multiply this number by 25%. (If you have $400 left over after your fixed expenses, you will take $400 x .25 = $100) This dollar amount is the amount you should start saving towards your retirement.

This is just a starting point. Every 3-6 months, you should increase this amount slowly. You may be asking, “Why don’t I put the full $400 a month away?”. Well, I have found that when people over-commit to their retirement savings, they end up pulling money out of these accounts prematurely resulting in taxes and penalties. By starting small and ramping up slowly, you will adjust to the decrease in “extra” funds and will save more effectively. (Of course if you can afford to save 10-15% of your salary, you should. The more money you save for your retirement, the better chance you have of reaching your retirement goal in a shorter time period.)

So now, Which investments should you choose. This is a hard question to answer because every person is different. While that is the case, I will give you a few good pointers when it comes to choosing.

Don’t chase returns! Very often individuals choose their investments by looking at which fund performed the best in the past. This is not a good strategy. For one, funds with higher returns often carry higher risk. In addition, when a funds performs well in one year, it wont necessarily perform well in the following year. Understand your options. Rather than guessing, talk to your 401k professional, do some research, or contact a licensed professional like me. It is important to understand where your money is going and what degree of risk your portfolio is exposed to. Take Advantage of Your Plans Investment Options:If you are not interested in researching your fund options, your plan may offer some options that are based on risk tolerance or a target retirement date. The options are comprised of a variety of investments making them well diversified. Based on your risk tolerance or time horizon, you can choose a suitable diversified investment!

*Please remember each investor’s portfolio must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investing time horizon, tax situation and other relevant factors. Please discuss with your investment advisor before implementing an investment plan. This is not a recommendation to by or sell securities or of any particular asset allocation strategy. These investment guidelines are not intended to represent investment advice that is appropriate for all investors.

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Jaclyn Weitzberg -
About the Author:

(Securities offered through Securities America, Inc., A Registered Broker/Dealer, Member FINRA/SIPC, and advisory services offered through Securities America Advisors, Inc. an SEC Registered Investment Advisory Firm. CA Insurance License #0E49845. Securities America and it’s representatives do not provide legal or tax advice. Please consult an appropriate advisor regarding your personal situation prior to acting on any information. Licensed to offer securities, insurance, and advisory services in the state of California. The forgoing information and opinions are for general informational purposes only and are not intended as an offer or solicitation with respect to the purchase or sale of any security or offering of individual investment advice. The Registered Representative does not guarantee the accuracy and completeness, or resume liability if such events do not come to pass. Such information or opinions is subject to change without notice.)

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Article Tags:
retirement, 401k, company sponsored plan, financial planning, finance, investment, investing, mutual funds

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