Did You Forget About Your 401k?

Did You Forget About Your 401k?
By Stuart Simpson

Remember in the 1990’s when we got our 401k plans, we could invest and forget. Some of us could even self-direct funds and buy the stocks we wanted. The problem with this over the years is that 60% never adjust their funds. At age 22, your risk aversion is different than at age 62. What I’m saying is if you lost it all at 22, you still have time until retirement. At age 62, you’ll be a greeter at Wal-Mart.

A new type of fund has emerged. It’s called a life-cycle fund. This fund adjusts as you age. It will move money for you, as you grow older from stocks into bonds. This reduces your risk and you don’t have to worry about your retirement. You have to put your 401k money into a mutual fund or bond fund, or leave it as cash. The older you get, the less risk you can afford to stand if you chance losing your nest egg.

Sounds good, but don’t switch your 401k yet. Most of these funds are too conservative for the average 60 year-old who may live an additional 25 years. Also, your retirement financial needs may differ from another investor, so you may not fit the mold.

But there are some clear advantages. Life cycle funds are better than investing entirely on your own without financial advice. They typically offer better results than individual investors. 1 percentage point makes a big difference. Albert Einstein once said the most powerful force in the universe was compounding interest. Same as Ben Franklin. If you invest now and can get a meager 1 percentage point higher than normal, then you can retire earlier, or have thousands more at retirement.

Retirement and 401k’s are never a set it and forget it type of investment. Always keep track of your money. But if you feel you may not be as dedicated as you should, pick a life-cycle fund that will hedge your bets.