401Ks are a great benefit offered by employers as a way to help you plan for retirement. But what happens with the money you have in your 401K account? Are 401Ks invested in stocks and the stock market?
While 401k’s are invested in the stock market, only part of your balance is invested. The amount of your 401k invested in the stock market depends on your age and estimated year of retirement. The closer you get to retirement age, the less money is invested in stocks and more in bonds.
This article will explain how the money in a 401k is invested, how you should allocate the money in your 401k between different types of securities, and why having your 401k invested in stocks is beneficial. There are also resources you can use to learn more about 401k’s, so let’s get started.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
How 401K Funds Are Invested?
401k funds are a retirement savings plan offered by most employers as a benefit of your job. You can make contributions using pre-tax dollars, and your employer may match some or all of your contributions. Let’s take a look at this process.
What Happens With the Money Contributed To a 401k?
Once you’ve contributed money to your 401k, your employer will designate an outside investment brokerage to manage your 401k. The brokerage, or someone from the brokerage, will then act as your plan administrator, who will keep you updated on any changes to your 401k.
They will help you view and manage your portfolio, and will allocate your money for you if you so choose.
The money is then put into a mutual fund specific to your year of retirement, which is made up of stocks, bonds, and sometimes cash if the plan is for retiring in the next ten years.
Most people choose their estimated retirement year and put their 401k money in a mutual fund specific to that year. For example, if you think you will retire in 2045, you will designate that when you enroll in your 401k.
Your plan administrator will automatically put your money into the fund every time you contribute.
Having an automatically managed fund is easy if you are an inexperienced investor or do not want to spend time working on your investments.
On the other hand, you have the option to manage your own 401k fund, which is done through your plan administrator. You will be able to choose what stocks, bonds, and other securities you invest your money in.
If you manage your own investments, make sure that you know how to trade stocks and bonds to make smart investments.
How Should You Allocate Your 401k?
You should allocate your 401k based on your age and estimated date of retirement. As you get closer to retirement, you will want to have more of your money in safer investments like bonds and cash. Safer investments will ensure that you have enough money in your retirement account when you retire.
If you have too many risky investments that lose money, your retirement account will be lower than expected, and you will need to adjust your retirement plan.
For younger people, stocks are a significant part of retirement accounts. While stocks are riskier, they offer higher returns. Even if there is a loss, younger people have plenty of time to make up for the loss and even see a return in their account before they retire.
As you approach retirement, your plan administrator will adjust your mutual fund with safer investments, so you do not lose any of your retirement money. If you manage your investments, you will need to make adjustments as you get closer to retirement.
When determining your allocation of stocks and bonds, you can deduct your age from one hundred to determine how much you should have in stocks. The remaining amount will be invested in bonds.
For example, if you are 40, you should invest 60% of your 401k in stocks. The remaining 40% will go to bonds.
That is the general rule of thumb, but you can use one hundred and ten or one hundred and twenty if you plan to retire early or have a long life expectancy. You will have more money in stocks, which will give you a higher return on your investments and more money for retirement.
The Benefit of Having Your 401k In Stocks When You’re Young
Compared to bonds, stocks are a riskier investment, so you will not put all of your money into the stock market. But, stocks do provide higher returns, especially over time, which is a major benefit when you’re younger.
When you are young, or if you want to aggressively invest your 401k, you may want to invest more than half of your money in stocks. While there is a chance that you can lose money from the stock market, there is also a chance that you will see higher returns.
High returns on your investment mean more money for your retirement. You can then retire on time with more money than you planned, or retire early thanks to the extra money.
Having a lot of your 401k invested in stocks is best for younger people who have time to make up for any losses in their retirement fund, which is possible when investing in the stock market.
Just remember that there is a risk involved with having too much money in stocks versus safer investments if you are close to retirement. If there is a big loss, you need time to make up for it, but you will not have time if you need the money soon.
Learn More About 401k’s
You need to understand 401k’s if you want to have a successful retirement. The resources in this section will teach you how to make the most of your 401K and create a retirement plan that is best for your retirement goals.
This video from Chris Invests will teach you how to avoid seven common mistakes that people make when it comes to their 401Ks:
Check out 401(k)s For Dummies (available on Amazon.com), which will teach you all about a 401k and how you can make the most out of your money.
There are sample 401k portfolios for all stages of life, so you can find one similar to you and your life and use it to help plan your retirement. There are also tips and a cheat sheet so you can remember the most important information.
Or you can read Smartest 401(k) Book You’ll Ever Read (available on Amazon.com), which will teach you how to make the best retirement decisions for you and your financial future. You need to have a plan for your retirement and know how your 401k fits into that plan, and this book will help you make a plan and pick the best retirement funds.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
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- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
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Conclusion
Money in 401k accounts is invested in the stock market, but the amount invested in stocks will vary depending on your expected retirement age. If you are older and closer to retirement, less of your money will be invested in stocks, and more of it will be invested in bonds.
If you are younger and have more time before retirement, you will have most of your 401k in stocks. As you get closer to retirement, your plan administrator will adjust the ratio of stocks and bonds that your 401k is invested in.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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