opinion Companies with 401K benefits typically have a financial company administ

ID: 2726449 • Letter: O

Question

opinion

Companies with 401K benefits typically have a financial company administrating the funds for the participants. These companies are all different and have different offerings and options to select your investments. Must companies offer a lot of data for participants to make the best possible decision.

What's been your approach to select your mix of portfolio of investments? What insights can you share with this group? What has worked well? What hasn't? What would you do different next time?

Explanation / Answer

Answer

A 401(k) portfolio is a collection of investments you assemble by selecting among the choices your plan offers. The best portfolio is one that produces the strongest possible long-term growth at the level of risk you’re comfortable taking. You can make portfolio changes as investment alternatives are added, as you get closer to retirement, and also as market conditions change.

To calculate the income you’ll need for retirement, you’ll need to account for:

There are three hypothetical combinations designed to show a level of risk-taking that might be appropriate at a particular stage in your career. Unless you invest your 401(k) using a brokerage account, and purchase individual securities, these allocations apply to various funds available through your plan.

Particulars

Large company stocks

Small company stocks

International stocks

Balanced Funds

Long term bonds

Money market

20 or more years to retirement

35%

30%

15%

10%

10 to 20 years to retirement

30%

20%

10%

20%

5 years or less to retirement

25%

20%

30%

15%

Following key factors must be considered will building 401K Portfolio.

Other retirement assets: It’s important to know what portion of your long-term retirement planning your 401(k) account represents. If it’s just one part of a total portfolio that includes an individual retirement account (IRA), taxable investments, and perhaps a pension or deferred annuity, you may be comfortable concentrating your 401(k) contributions in just one or two of the best-performing alternatives your plan offers.

But if your 401(k) is the only money you’re putting away for retirement, you may want to balance your portfolio, seeking the greatest possible growth while diversifying to reduce risk.

Age: If you have many years of work ahead of you, you can afford to take greater risks with your 401(k) account. If an investment doesn’t perform well for a period — because the manager’s investment style is out of favor or the stock market overall is in a slump — you’ll have time to recoup the loss.

On the other hand, if you’re planning to retire fairly soon, you may want to gradually shift at least some of your assets into less volatile investments to preserve capital.

Future income needs: Projecting your future income needs can tell you how aggressively or conservatively you should invest and how much you can afford to withdraw each year. You’re likely to need at least 70% to 85% of your final preretirement income to live comfortably after you stop working.

Tolerance for risk: The risk-return trade-off you’re willing to make is a key element in your investment decisions. There’s historical evidence that investments posing a greater risk to your principal offer potentially greater returns. But if you’re not comfortable assuming risk to principal, it’s best to recognize the consequences of inflation risk on your long-term buying power.

Current tax bracket: The extent to which you can minimize current and potential future income taxes should be a factor in deciding what types of investments are best suited for your different accounts.