Decisions regarding 401(k) asset allocation can significantly affect how well you live during retirement. The right asset mix is essential because it drives about 94 percent of the total return on your investments, says certified public accountant Kevin Brosious, also president of Wealth Management Inc., in a 2009 Bankrate article. Because of the fact that an average 401(k) can have about close to a dozen options, each being more or less appropriate depending on your age and risk tolerance threshold, asset allocation can sometimes be easier said than done.
401(k) Asset Allocation
Set a target retirement date. This allows you to establish a time frame for investing and is in part what you will base asset allocation decisions upon.
Address your tolerance for risk or how far you are willing to go to achieve high investment returns. Understanding that most often the higher the risk the greater the potential return, use a risk tolerance calculator available on most any investment or financial information website to set your comfort range or risk tolerance threshold.
Choose whether to employ an aggressive, moderate or conservative investment strategy according to how much you ultimately want to save for retirement, your timeline for investing and risk tolerance threshold. This will determine not only how you will allocate assets but also what you can expect as far as a rate of return. In general, the longer the timeline for investing the more aggressive an investment strategy can be.
Review 401(k) investment options. Most require you to choose from preset plan alternatives according to whether they have an aggressive, moderate or conservative investment strategy or from an option called target date investing.
Select and allocate 401(k) assets according to the investment strategy you chose. Asset allocation following an aggressive strategy, for example, typically includes about 80 percent of investments in stocks or stock mutual funds with the remainder divided evenly between fixed income asset and cash equivalent investments. A moderate investment strategy includes about 40 percent to 60 percent of investments in stock or stock mutual funds. A conservative strategy includes an even allocation of stocks or stock mutual funds, fixed income assets and cash equivalent investments.
Review and adjust 401(k) asset allocations annually so your portfolio becomes increasingly more conservative and focused on capital preservation the closer you get to retirement age. At the time you retire, asset allocations should feature the bulk of investments in cash equivalents and fixed income assets and the smallest percentage in stocks or stock mutual funds.
Items you will need
- 401(k) plan information
- risk tolerance calculator
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