A 401k account through your employer is one of the best tools to use for retirement savings. It’s an investment account that allows your money to grow tax-deferred or, in the case of a Roth 401k, tax-free. It can help you win the retirement race.
These retirement savings accounts make it very simple to put your saving and investing on auto pilot. It even gives you options to rebalance your investment portfolio on a regular basis.
If you’re just starting out and have less than $50,000 in your 401k, a target date retirement fund is a simple option. These funds “target” your retirement year based on your age and invest accordingly; the investment vehicle provides a diversified portfolio all-in-one fund using a variety of stocks and bonds. They’re professionally managed and therefore require very little monitoring.
As your account balance grows, you may consider adding more funds to the mix.
How many years before retirement?
Your time horizon calculates how long you will be investing and when you want to retire and begin withdrawing money from your account. It’s a key factor in how and where you invest. In general, the longer amount of time you have, the more aggressive you can afford to be and the more stock market volatility you can withstand.
Many young people believe they need to be “safe and conservative” with their retirement accounts. Really, the opposite is true. Investors in their 20s and 30s can afford to take some risk with an account they will not use for 30 or 40 years.
How comfortable are you with risk and stock market volatility?
Even if you’re young and have a long time-horizon, you may find watching your retirement account bounce up and down to be unnerving. In that case, a more conservative strategy makes sense. You can add bonds to your investment mix to help bring income and stability to your portfolio.
Either way, staying invested in the market – rather than jumping in and out, and trying to time the markets – is a key to long-term success. Think of investing is a marathon, not a sprint, if you want to win the retirement race. Even after you retire, keeping investments in the stock market will help your money continue to grow and outpace inflation.