The employer-based 401K program is one of the best savings and investment tools available to you. One of its main advantages is that your money is invested prior to being taxed and most often your employer matches the funds you invest up to a certain amount (typically around 3-5%).
There is a great diversity of choices and funds you can opt for. One of the first things you need to consider when choosing an investment fund is your age. If you are in your 20s or 30s, you have a higher risk tolerance, meaning that you have more time for growth-focused investments which typically carry higher risk. If you are in your fifties though and nearing your retirement age, you need to be more cautious and conservative with your investment choices. Here are a few tips that can help you select the best funds for your 401K when you are close to retirement.
Fees can be your enemy when it comes to long-term investments. Even if you are nearing your retirement age, the 401K plan is such an investment. You have to understand the fees you are being charged. Even a small fee of just 1% makes a difference in the long run. If you start investing earlier in life, make sure to choose the fund with a lower fee. Think about fees now and in the future. What happens if you decide to change investments and switch funds? What happens when you withdraw?
If you are closer to your retirement when choosing a fund, the fee still matters. Always compare the fees of funds that have the same objectives and choose one with the lower fee structure.
One of the important investment concepts to keep in mind is that you need to have a diverse portfolio. Even if one of your funds is performing really well, there is no guarantee that it will continue to do so. Diversifying between several funds ensures that your retirement money is safer in case one of them underperforms. If you start investing closer to retirement, you may need to consider less risky investments altogether.
Speak to an investment professional, who can review your financial situation in its entirety by assessing your goals, obligations, risk tolerance and your current investments, and give you professional advice on how to allocate your portfolio and how much you need to save to reach your retirement goals.
Your 401k may offer what’s called “stable value funds”, a.k.a. Stable Value, Principal Protection Fund, Capital Preservation Fund, Fixed Income Fund, GIC (Guaranteed Investment Contract), Fixed Interest Fund, Guaranteed Fund, Stable Interest Fund.
In general, stable value funds are contracts issued by insurance companies and banks. Each investment contract assumes a specific rate of return for a given period of time. The main objective of stable value funds is to generate returns that can be compared to those from short or intermediate-term bonds, but with less volatility. In other words, they preserve your capital and provide liquidity while reducing risk. According to the returns and statistics published by the Stable Value Investment Association, those funds achieve their objective successfully.
This may be a suitable investment option for you if you’re nearing retirement. It guarantees that the money you invest now is secure in a stable value fund even if the market is down between the date of your investment and that of your retirement. The main advantage of stable value over a short or intermediate-term bond fund is lower volatility, which is important for someone who will need to withdraw money soon.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.
Always talk to your financial advisor at Griffin Financial LLC or investment professional before you invest. Please ask how you might be able to obtain individual professional advice. We look forward to hearing from you.