Retirement planning is a must from the moment you enter the workforce. How can you plan to live after you are done working if you have not saved enough money since your first day on the job. One of the best ways to save for retirement is by finding a 401K plan.
And before you start to think about what stocks and funds to choose for your 401K plan, you need to do one thing. Take the 401K match from your company if they offer it. The 401K match is free money. It builds up your investment account and allows your money to grow faster because there is a higher balance to take advantage of good old compound interest.
Pick a Target Date Fund
Unless you cannot choose one due to your company’s 401K rules or you really want to have control over your investments, you want to find a target date fund. What is a target date fund? That is a plan that takes into account your planned date to retire and then automatically follows the market and picks stocks and rebalances your portfolio annually to reach that date with as much money as possible.
If you are not picking a target date fund, you need to determine the level of risk that you are comfortable with. The general rule of thumb is the farther away your need for the money, the more risk you can handle. For example, if you are investing in your 20s and you are going to retire at 65, you can afford to be more risky in your investments. Because you have more time to make up for lost money if you take a hit one year.
Look For Index Funds
Index funds allow you to spread out your risk in your 401K portfolio. The lowest fees and the most diversified mix of stocks is what you want to look for in a plan. Index funds represent a way to thread the needle between wanting control of your investments and losing money because you don’t have the expertise to make real sound financial decisions.
Index funds can offer novice investors a way to participate in many sectors of the stock market at once, which allows you to get the gains from emerging tech stocks while enjoying the stability of stocks from more established industries.
If you already have a target-date fund that rebalances on its own, you can ignore this tip. But if you are in more control of your money, you want to check in on your portfolio every quarter or so, to make sure that your risk balance and mix of investments is on the same timeline as your retirement age. It helps to check in and see what your money is doing.
Just don’t do it every day. You are never going to see the exciting gains that you want if you are riding the wave of every hiccup and stock market misstep.