Howard Pressman, CFP®, Featured in CNBC Article, "Here’s exactly how to pick investments for your 401(k)
January 9, 2020, CNBC - Investing in a 401(k) is one of the main ways many U.S. workers build up savings for retirement. Its tax-advantaged status and automated contributions make it a particularly valuable financial instrument, and those who are able to start investing early are more likely to end up a millionaire.
Yet while opting into your company’s 401(k) plan is a relatively easy process, only about a third of Americans understand how the account actually works, according to a recent poll from ValuePenguin. That can cause people to put off investing all together.
If you don’t know how to invest through your 401(k), here are six tips to get you started.
Alternatively, you can opt for a target-date fund, which takes most of the guesswork out of the equation. With these funds, you select a “target” retirement year and risk tolerance, and the fund is automatically set to an appropriate asset allocation for you. These are great options for beginner investors.
“Most people aren’t interested in researching [and] selecting funds for their 401(k),” Charles C. Weeks, a Philadelphia-based CFP, tells CNBC Make It. “Target date funds will help people avoid blowing up their portfolios by making avoidable mistakes like putting too much in one asset class, chasing returns by investing based on past performance and/or letting greed and fear dictate their investment strategy.”
Over time, the fund will automatically rebalance, becoming more conservative as you near retirement. If you choose a target-date fund, you only need to choose the one fund — otherwise you’re essentially canceling out its benefits. Another mistake to avoid with target-date funds is choosing a year without researching how it will change its mix of stocks and bonds over time, Howard Pressman, a Virginia-based CFP, tells CNBC Make It.
“Someone may find that they would like a more or less risky mix of investments than what’s in the target-date fund they are considering,” says Pressman. “In that case, they can select a date farther into the future for more risk, or sooner for less. Don’t get too bogged down on the date, but consider the general mix of stocks and bonds.”
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