How to Invest In Your 401k [Based on Your Needs]

how to invest 401k

When it comes to investing, your 401k is one of the most important accounts you'll ever have. This is because it's one of the best ways to save for retirement. However, many people don't know how to invest their 401k properly. In this blog post, we will discuss how to customize your investments in order to achieve your specific financial goals!

Table of Contents

  1. What is a 401k?
  2. What are the benefits of a 401k?
  3. What Types of 401k plans are there?
  4. How to choose between a Roth or Traditional 401k plan?
  5. How much should you invest in your 401k each month/year based on your age and income level?
  6. How to invest your 401k money?
  7. What are the best stocks, mutual funds, and ETFs to invest in?
  8. What are the best investment options for someone just starting out their career?
  9. How to rebalance your portfolio as your life changes and your needs evolve?
  10. How to automate your 401k investing?
  11. Conclusion

What is a 401k?

A 401k is a retirement savings account that is offered by many employers. This account allows you to set aside money for retirement on a tax-deferred basis. This means that you will not pay taxes on the money you contribute until you withdraw it in retirement.

What are the benefits of a 401k?

401ks are a great way to save for retirement because they offer many benefits, such as:

  • The ability to contribute pre-tax dollars, which can lower your taxable income.
  • The potential to grow your money (tax-deferred), which means you won't have to pay taxes on any investment gains until you withdraw the money in retirement.
  • Many employer 401k plans offer matching contributions, which can help you save even more money for retirement!

Now that we've discussed what a 401k is and how it works let's talk about how to invest in your 401k based on your needs.

What Types of 401k plans are there?

There are two main types of 401k plans: traditional and Roth.

Traditional 401k

With a traditional 401k, you contribute pre-tax dollars to your account. This means that your contributions lower your taxable income for the year. However, when you retire and start withdrawing from your account, you will pay taxes on the money you withdraw.

Roth 401k

With a Roth 401k, you contribute after-tax dollars to your account. This means that your contributions do not lower your taxable income for the year. When you retire and start withdrawing from your account, you will not pay taxes on the money you withdraw.

How to choose between a Roth or Traditional 401k plan?

The type of 401k you choose to invest in should be based on your specific financial goals. For example, if you want to lower your taxable income for the year, then a traditional 401k is a good choice. On the other hand, if you want to have tax-free withdrawals in retirement, then a Roth 401k is a good choice.

The way to make this choice is simple:

  • If you make a high income and thus pay a lot in taxes, it is best to choose a traditional 401k
  • On the other hand, if your income is not very high but is likely to increase in the future, a Roth 401k is a better choice.

How much should you invest in your 401k each month/year based on your age and income level?

Here is a general guideline based on the current contribution limits:

-If you're 50 or older, you can contribute up to $26,000 annually.

-If you're under age 50, you can contribute up to $19,500 annually.

-When your income is low, and you cannot afford to contribute the maximum amount each year, you can still benefit from investing as much as you can afford.

Keep in mind these contribution limits change year by year. In addition, these numbers are based on the 2022 published limits, which are constantly updated here.

You should aim to maximize your 401k contribution because the sooner you start investing and the higher investment capital you have, the more time your money has to grow. This is due to the power of compound investing, which allows you to multiply your money over time.

How to invest your 401k money?

Now that we've discussed choosing the right type of 401k plan and how much to contribute each year, let's talk about how to invest your 401k money.

When it comes to investing, there are two main asset classes: stocks and bonds.

Stocks

Stocks are a type of investment that represents ownership in a company. When you buy shares of stock, you become a part-owner of the company.

Bonds

Bonds are a type of investment that represents a loan to an organization or government entity. Therefore, when you invest in bonds, you lend money to the organization or government.

Should you invest in stocks, bonds, or mutual funds?

Should you invest in stocks, bonds, or mutual funds?

The decision of how to allocate your 401k investments between stocks and bonds is a personal one that should be based on your investment goals, risk tolerance, and time horizon.

For example, if you're young and have a long time until retirement, you may want to invest more heavily in stocks since they have the potential to generate higher returns over time.

On the other hand, if you're closer to retirement and are more risk-averse, you may want to invest more heavily in bonds since they tend to be less volatile than stocks.

The important thing is that you allocate your investments in a way that aligns with your financial goals and risk tolerance.

A good rule of thumb is to subtract your age from 100 to determine the percentage of your portfolio that should be in stocks. For example, if you're 30 years old, you should have 70% of your portfolio in stocks and 30% in bonds.

This is just a general guideline, though, and you may want to adjust your asset allocation based on your specific goals and risk tolerance.

Once you've decided how to allocate your investments between stocks and bonds, you can begin to invest in specific securities within each asset class.

For example, suppose you've decided to allocate 70% of your portfolio to stocks. In that case, you can further break down that allocation into different percentages for different types of stocks, ETFs, and mutual funds.

You might decide to invest 50% in ETFs, 20% in high-quality value stocks, and 30% in international stocks. Or you might decide to invest 60% in growth stocks and 40% in value stocks.

The important thing is that you allocate your investments according to your goals and risk tolerance.

Once you decide how to allocate your investments, you can begin investing in specific securities. More on that below.

What are the best stocks, mutual funds, and ETFs to invest in?

The best stocks, mutual funds, and ETFs to invest in depend on your goals and risk tolerance.

For example, suppose you're looking for growth stocks that have the potential to generate high returns. In that case, you might want to consider investing in companies in industries such as technology, healthcare, or biotechnology.

If you're looking for more stable investments that offer lower returns, you might want to consider investing in blue chip stocks or mutual funds that invest in high-quality companies.

The important thing is to find investments that align with your goals and risk tolerance.

Once you've found some potential investments, you can research them further to determine if they're right for you.

You can read company reports, listen to earnings calls, and read analyst research to better understand the investment.

You can also use an online broker to buy and sell stocks, mutual funds, and ETFs.

Typically the most common ETFs in 401k portfolios include VOO, VTI, ACG, EEM, VTV, HGY, and IWM. The main factors to look for are the annual fees, the type of assets the ETF holds, and the long-term track record. This will ensure you invest in industries and asset classes that align with your specific goals and provide the best risk-adjusted returns.

When it comes to investing in your 401k, there's no one-size-fits-all approach. Instead, the important thing is to tailor your investments to your specific goals and risk tolerance.

Doing so can ensure that your 401k is working hard for you and helping you reach your financial goals.

What are the best investment options for someone just starting out their career?

Target date fund

If you're just starting out your career, you may want to consider investing in a target date fund.

A target date fund is a mutual fund that automatically rebalances itself and becomes more conservative as you get closer to retirement.

For example, if you're 30 years old and plan to retire at age 65, you would invest in a target date fund geared towards people retiring in 35 years.

Target date funds are an excellent option for people who don't have the time or knowledge to manage their own investments.

Robo-advisor

Another option for people just starting out their careers is to invest in a Robo-advisor.

A Robo-advisor is an online platform that provides automated, goal-based investing.

Robo-advisors are an excellent option for people who want to invest but don't have the time or knowledge to manage their own investments.

One last option, which is very powerful, is to set up automated investing every so often, like every month.

In this way, you can automatically invest in ETFs, and mutual funds automatically and therefore enjoy the compounded gains of the market over time. All this without worrying about market fluctuations or trying to time the market (more on that below).

The important thing is to find an investment option that fits your needs and goals.

How to rebalance your portfolio as your life changes and your needs evolve?

As your life changes and your needs evolve, you may need to rebalance your portfolio.

For example, if you get married or have children, you may need to adjust your investments to reflect your new priorities.

If you're getting closer to retirement, you may want to start shifting your investments into more conservative options.

To rebalance your portfolio, you'll need to sell some of your investments and buy others.

You can do this yourself or hire a financial advisor to help you.

The important thing is to make sure that your portfolio aligns with your goals and risk tolerance.

How to automate your 401k investing?

One of the best ways to invest in your 401k is to automate your investing. There are two key steps to help you:

  1. Set up automatic contributions from your paycheck so you don't have to think about it.
  2. Set up automatic investments in specific ETFs or mutual funds.

This is a great way to ensure that you're always investing, even when you're busy or distracted.

It's also a great way to take advantage of dollar-cost averaging, a technique that can help you reduce your overall risk and increase your returns over time.

To automate your 401k investing, you'll need to set up an account with a broker or financial advisor.

Once you have an account set up, you can start contributing and investing automatically.

Automating your financial analysis is the other option if you want to take a more active approach and have more control over your investments.

This enables you to look at hundreds of companies at once so you can quickly find the best investment options for you. For this, the best option is to use Wisesheets, which provides you with all the stock data you need to make good investment decisions right on your spreadsheet, covering stock and ETF data across 50+ global exchanges.

Wisesheets screener
Example custom screener built on Excel using Wisesheets

You can test it out by signing up for a free trial account here.

Conclusion

Investing in your 401k is a great way to save for retirement. There are many different ways to invest in your 401k, and the best method depends on your needs and goals.

If you're just starting out, you may want to invest in a target date fund or Robo-advisor. If you're closer to retirement, you may want to rebalance your portfolio and invest in more conservative options.

You can also automate your 401k investing by setting up automatic contributions and investments.

The important thing is to find an investment strategy that meets your needs and helps you reach your goals.

To your investment success!

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