401k’s are powerful retirement savings tools. However, there are ways that you can maximize your 401k portfolio. In this article, we will go over the basic information you need to know to maximize your 401k. This includes the type of funds you can invest in, how to choose them, and how much to invest.
There are many different types of mutual funds that you can choose to invest your 401k portfolio into. They usually are referred to by generalized terms. Here you will find a list of the common types of funds you can pick from and what they mean.
- Conservative: A conservative fund helps you to minimize risks. Typically, these funds invest in high-quality bonds and other safe investments. Their growth is slow and predictable. Their main goal is to prevent loss.
- Value: Value funds invest in solid, stable, but undervalued companies that pay regular dividends. These funds are to expect modest growth.
- Balanced: Balanced funds are made up of mostly value stocks or quality bonds. But they also mix in a few riskier equities to help balance the fund out.
- Aggressive Growth: Aggressive growth funds are always looking for the next big company. These funds swing largely between big gains and big losses. You can make a lot of money or lose a lot with these funds.
- Specialized: These types of funds will invest solely in emerging markets, new technologies, utilities, or pharmaceuticals.
- Target Date: Target-date funds are usually the default option for 401k’s. These funds are based on your expected retirement date. The fund should maximize your investments in the period before your target date. These usually start very aggressive and risky and get more conservative the closer you get to retirement.
Choosing Your Funds
To maximize your 401k it is important to choose your funds correctly. The best strategy is to spread your money among several different funds, this is known as asset allocation. What you choose will depend on your risk tolerance. Your choice for asset allocation should also be based on how close you are to retirement. You should also follow the Rule of 100. This means that you take 100 and subtract your age, the number that is left over is the percentage of your portfolio you should have invested in riskier equities. For example, if you are 65 you would subtract 100-65 to get 35. This means you should have 35% of your portfolio in riskier equities.
How Much to Invest
Once you decide what to invest in, you need to determine how much to invest. If you are just starting out, you may want to start by putting in the minimum amount necessary to receive your employer match. If you are under 50 you can put in up to $18,500 a year and if you are over 50 you can put in up to $24,600 a year. You want to invest the maximum you can to take advantage of the employer match and tax benefits.
If you are not sure how to allocate your funds or how much to invest, you should meet with a qualified financial planner. They will be able to help you plan to maximize your 401k and implement other strategies you can use. Do not put off planning, the sooner you do it, the more successful you will be.
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