How to Invest Your 401(k)

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We’ve covered the ABCs of 401(k)s and given you a glossary of some of the most frequent terms related to retirement. Now it’s time to put it all together, and take your first steps and learn how to invest in your 401(k)!

Step 1: Plan.

401(k) contributions are long-term investments. Make sure you have all of your short-term needs taken care of, such as:

  • Payment plan for high-interest debt – not all debt is created equal. We’re talking about things like credit card debt, not low-interest student loans.
  • Emergency fund in place.
  • Appropriate insurance coverage depending on your lifestyle and needs.

Step 2: Decide how much money you want to put into your 401(k) for the year.

Keep in mind that the federal maximum for 2020 is $19,500. Some employers match a certain percentage (this is typically outlined in your offer letter or benefits package).

Since the match is essentially free money – always try and contribute up to at least the match percentage. When you’re trying to calculate how much you want to contribute, don’t forget to include the employer match amount.

Step 3: Determine your risk profile and retirement goals.

Your risk profile is the answer to the question: how much investment risk can you stomach? Do you freak out when the markets are going crazy (like they have been recently), or can you weather economic storms without too much panic? There is no “right” or “wrong” risk appetite. Depending upon your risk profile, however, there are right or wrong strategies.

Questions to consider when thinking about your retirement goals include, but are not limited to, the following:

  • At what age do you plan to stop working?
  • What kind of lifestyle do you hope to lead in retirement? Will you work part-time?
  • How many vacations will you plan on taking?

As you can already see, these questions are hard to answer, let alone plan for. Don’t worry – there’s so many resources out there to help you plan.

Vanguard has a nifty retirement calculator that helps you have an idea of how much you should be saving now, to have the money you need when you retire.

Step 4: Select products according to your risk profile, retirement goals, and age.


The younger you are, the more time you have to save, and weather any ups and downs in the economy. This is one of the reasons why it is recommended that younger individuals weigh a larger percentage of their investments towards stocks.

As you age, your need for liquidity or “cash” becomes more pressing. As a result, more conservative investments, like bonds, make more sense. Your portfolios over the course of your life should reflect this shift – from stock-heavy allocation when you are younger, to bond-heavy as you get older.

Risk Profile

As described earlier, generally-speaking, bonds offer a more conservative, steady stream of investing, whereas stocks are higher risk. However, as Fat Joe famously sang,“Scared money don’t make money”and stockholders are typically compensated for holding on to more risk with more returns aka money.

Your personal risk profile, like your age, will again play a factor in considering what your 401(k) allocation looks like.

What about the products? The things you are going to invest in?

A lot of my friends get freaked out when they have to select which funds to invest in. Most 401(k) plans have their own unique lineup consisting of funds – an oversimplified explanation of this is a collection of various stocks and bonds. Your fund selection may consist of different mutual funds, like ETFs and index funds. We’ll cover these in-depth in a later series, but for now, just think of these as buckets that pool your money, along with other investors, and invest it in lots of different securities (stocks and bonds).

When it comes to investing, don’t panic – it’s hard to screw up a mutual fund investment. Because of how they’re designed, mutual funds are relatively safe and stable.

Some plans help you out and offer target date funds – you tell a program at what age you want to retire and other characteristics about yourself, and boom, a target date fund is designed for you. If you’re a hands-off investor who just wants to put away money and forget about it, this might be a great choice for you.

When it comes to choosing funds, try to focus on keeping your expense ratios low. These are fees charged by mutual funds, and while they vary, know that the expense ratios have decreased significantly over the years, to near 0 rates. This is a huge win for you, the investor.

However, don’t just go for cheapest funds! Make sure your asset allocation strategy (basically, what percentage you have in different types of investments – stocks, bonds, real estate, etc.) is consistent with Step 3 – the risk profile and retirement goals you have identified for yourself.

Confused? Don’t worry – you’re not alone in this, and don’t have to feel like you can’t turn to resources for help. Here’s a few we recommend:

Your plan administrator – make them earn their money’s worth! Call them with any questions you have, more often than not, they have the best resources available since they are customized to your particular 401(k) plan.

NerdWallet 401(k) Investing Guide

Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing

Were these resources helpful? Comment below on other retirement-related topics you’d like to know about!

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