401k options for an amateur

[Original Mountaineer1]

In a rising rate environment that we are likely to see in the near term, bonds will decline in value. I believe equities are running hot now and are in for a correction. My 401k does not have a money market option. So what is a common person to do in this environment?

 

[WhiteTailEER]

If you're young, stay the course

I think Warren Buffet said that for the novice, just buying index funds will pay better in the long run than other funds becuase of the low management fees on them. Short of that, you'll obviously want a blend of small cap, mid cap, large cap and international funds.

I would say to also look into a RothIRA. You can only put in $5500/year, and it's post-tax dollars, but the good thing is that you aren't taxed on it when you take it out in retirement. So, it can grow free from capital gains taxes until you take distributions.

Just for round numbers, if you wanted $100k in retirement but took $25k of that from a Roth IRA distribution, you would only get taxed on $75k. Where if you take it all from 401k you get taxed on the full $100k.

I am absolutely not a finance major or financial planner, btw.

 

[oceantide83]

The best option is to dollar cost average into low cost stock index funds. I have all of mine invested in an S&P 500 fund because nearly all of the other funds in my 401K have load fees and higher expense ratios and I am more than willing to take the risk since I believe the greater risk is for your money to be devalued through inflation (i.e. government stealing your money by printing more of it) if you keep in under a mattress. The annual inflation rate is around 3% so you need to make more than that or else you will be losing money. You're not going to find that kind of return in money market funds (at least I haven't). Nobody can predict precisely when the market will go up or down and if you take your money out you won't know exactly when to get back in or you will run the risk of getting back in too late as the biggest gains typically occur only a few days out of the year (good luck predicting which days those will be). Most people prefer to buy their groceries or clothing when it goes on sale but neglect to do the same thing when stocks go on sale. Remember, just because stocks drop for a while doesn't mean you lost any money. You only lose it when you sell.

 

[mneilmont]

Roth is a better option


Retired and 401k withdrawals impact two income lines on 1040. Turns into a bummer for taxes. Have not looked at it giving consideration to compounding and time value.

 

[Op2]

I agree

Buy index funds because they're cheap and be more in stocks (more risky) when you're young and over the decades gradually move to less in stocks (less risky) so that a big drop in the market when you're close to retirement doesn't kick you in the butt.

It's really that simple if you want a good strategy without putting lots of effort into it. You can study stuff like crazy and then try to time the market but you have to put in the effort and even then lots of smart people that try to time the market end up failing.

If you enjoy playing the market then do it for enjoyment but if you're trying to max your retirement then just put it in index funds and then spend your time on other things you enjoy.

 

[WVUBRU]

Re: good advice here

Diversify, invest w/ long term goals which is what a 401k is all about, and pay attention the the rate of returns of your decisions inside the 401k in relation to the index it is associated with. Do not move your money just because the market has taken a down turn. When the market is down, that is the best time to purchase the funds that have also taken a downturn. Stay the course and if you don't understand financial planning, hire a fee based CFP with good references.

 

[Fingon]

Ride it out**

.

 

[WhiteTailEER]

Re: I agree

Originally posted by Op2:
Buy index funds because they're cheap and be more in stocks (more risky) when you're young and over the decades gradually move to less in stocks (less risky) so that a big drop in the market when you're close to retirement doesn't kick you in the butt.

Even with this, you can invest in growth funds, value funds or blend funds. The growth funds will be a little more risky and the value funds will be more safe, so you can stay in stocks but gradually move towards safer funds. Or, as has already been stated, just stick with the index funds. Even with that, there are index funds for international, big cap, small cap, mid cap stocks, etc. so you can still diversify

 

[COOL MAN]

I won't argue with ANY of that

And just because market momentum is currently going the wrong way doesn't mean one's equity investment choices are necessarily bad, especially.....as you said quite correctly....since such investments should be made with the long-term in mind (which is what 401K's are theoretically all about).

And BTW, with the segment having been battered so badly.....take it from me, I know.....this might not be a bad time to get back into Oil/Energy-related stocks at the current low levels.

 

[Original Mountaineer1]

I would like to retire in 10 years


common sense would say that the market would rebound by then. Fortunately with all my financial projections, I have been very conservative. I only expect 2.5% returns on my 401k to reach my goal. Anything above that is gravy.

 

[mneilmont]

Re: I would like to retire in 10 years


You sound like you are on pretty solid footing to reach your retirement objective. Now, you are unsure that you are maximizing your investment. How conservative should you be at this time? Probably a little too conservative at your age. If things go to hell, you have time to recover before you retire. You are probably losing 10% neighborhood by being too conservative now.

As you get closer to retirement age, you must weigh greed or security. The market is still a risk/return option. At the time, do you need to be invested 100% in money that returns 2.5% to meet your objective. If you only need 75% or 90% invested to meet your objective, you can play risk/return if you still enjoy the thrill of the gamble. When making your evaluation, keep in mind that if you put 25% into the market, and it goes to hell, you will not lose the full amount that you have at risk.

My best advice is to listen to yourself. Don't be greedy when you are comfortable with your position as you approach the age. Go ahead and make the move. If you have surplus, that can be put at risk and still live the life style you have planned.