I assume you’re young, since this is your first opportunity to invest in a 401K.
The younger you are, the more sense it makes to take risks with your investments. The closer you are to retirement age, the more sense it makes to put your money in low-risk investments or accounts, even though it will lower your average return.
There has never been a 30-year period when the stock market lost value as a whole. Not even during the Great Depression. A broad-based stock portfolio that was left untouched would have had a substantially higher value in 1959 than in 1929, just before the crash.
The greatest value of a 401K is that the gains in it are untaxed until they are withdrawn. This effectively increases the rate of growth of your investments by quite a bit. It’s possible to invest your 401K in low-risk, low-return investments like money market funds or savings accounts, but if you do this, you’ll be walking away from a lot of money.
I suggest you ask yourself why you’re so averse to short-term risk. A 401K should be treated as a long-term investment. Over time it’s almost certain to grow in value even through the economic downturns that always happen. I wouldn’t invest a 401K in individual stocks, but investing it in mutual funds or ETFs involves very little long-term risk. Your 401K would probably lose value in some years, but overall it will almost certainly gain value.
May I suggest talking to an investment counselor about how to manage your money for retirement?
I agree, first, that, you should contribute to the 401(k) at least enough to get the employer match. If, for instance, they match dollar-for-dollar up to three percent of your income, that three percent contribution by you is making a guaranteed 100% return on investment. Where else can you get that? (Though I think you should consider investing more than that amount; the tax deferral can be a good thing.)
And second, how old are you that you want to minimize risk? If you’re 25 years old, you might have forty years to retirement. If you’re 45 years old, you might have twenty years to retirement. In either case, money just sitting in a risk-free savings account is going to be eaten by inflation over time. You want to take some prudent risks by investing in equities and bonds so the money grows above the rate of inflation.
And even if you’re 60 years old and looking at retirement not too far off, you might be alive for twenty, thirty or forty years, so you still need the money to grow above the inflation rate.
In other words, don’t minimize risk at the expense of reasonable investment return.
I’m afraid that the OP has a narrow view of risk. Putting money into a savings account is risky in the sense that you lose value due to inflation. That’s not how you minimize risk. You minimize risk with a spread of investments some of which may go up, some may go down. It’s called diversification.
You also don’t really lose money until you have to take it out. 401Ks are an example of dollar cost averaging. If the market tanks, and you still have a job, then putting money in at a low point offers excellent returns. I kept investing during the 2008 crash and did very well.
Sure there is a possibility that everything will go to hell, but if that happens your 401K is the least of your worries. Ever read a dystopian novel where the protagonists care about 401Ks? Didn’t think so. I grew up during a time when it seemed likely that the entire world would get bombed back to the stone age. I’m glad I didn’t invest that way.
It is true that the world is run for the elite. If you qualify for a 401K, you kind of fall into this category. Take advantage of it.
I am now retired, have been so for 8 years, and am quite glad I used my 401K while working.
Devil’s advocate: sure, but if that does happen, it means that the best thing he could do with his money now is to spend it to prep, not lock it away as meaningless digits.
Of course, if any kind of normalcy persists, doing that would screw him over pretty badly.
You also should see if the plan administrator that your company has chosen charges minimal overhead fees. One percent or less would be ideal, and a large corporation can negotiate that fee down. The less that fee is off of the top, the more will be left to grow. You’re unlikely to find lower fees on your own.
I agree that the administrator should charge minimal fees, but as a mere employee, you can do nothing if they don’t. Either way, you should still take advantage of the employer match.
It absolutely is a retirement plan and the salient fact that makes it so is that a employer-sponsored 401k is protected by the Employment Retirement Income Security Act (ERISA). This means that it is sheltered from most lawsuits (Federal tax garnishment and alimony excepted). Which means if someone sues you they cannot go after your retirement plan. It is also protected from bankruptcy. Investing retirement money given to you by your employer with your own scheme is not protected - it’s just another asset to loot in a lawsuit/bankruptcy.
That’s a protection worth its weight in gold and throwing away matching money would be extremely foolish. Yes a 401k is potentially volatile - IMHO a defined benefit pension is far safer for any given individual (but based on the same general scheme of earning investment income, just for a larger pool of people with a professional management firm overseeing it). But those are becoming more and more rare. Absent a pension a 401k is absolutely your best option for retirement, even if it takes a little bit of self-education and work to get it to function best for you.
Even in today’s economic turmoil, the strength and stability of the US economy is peerless. If we’re strictly talking about idle money in a money market account, there really isn’t anything safer. If you put that same money on a local bank or credit union, it’s subject to the exact same “risks” as your 401k money market account.
“Slightly” is a major understatement. A national bank run would mean a total collapse of the economy, at which point any individual stock or bond is likely worthless, and you should be more concerned about running a self-sufficient subsistence farming operation so you can live through the next winter.
We should all be concerned about the economy. But this is beyond an over-reaction based on a lack of a basic understanding of any part of the puzzle.
Over time, stocks return an average of 8% a year. That’s equivalent to saying that your investment will double every 9 years. It will be even faster, on average, because your employer is contributing funds into the 401K. My credit union is offering 2.65% for long-term - over 4 year - CDs, meaning that money will double over 27 years. That’s an effective rate of 0% given any normal amount of inflation.
The U.S. is the richest country in the history of the world. Its GDP is $27.7 trillion. That’s more than Germany, Japan, India, UK, France, Italy, Brazil, Canada, and Mexico combined. In addition, its economy is doing better than any other western nation. If the American economy totally tanks, what do you think would happen to international stocks and bonds? Or to inflation? What would a credit union have to offer?
Obviously, the stock market, like individual stocks, has good years and bad. Many people thought that the market was due for a correction because stocks were priced too high. Maybe waiting for a few years would, in hindsight, give a better return because that would mean buying at a low. The adage that the market cannot be timed in this way is a good one, however. Giving up the free money from an employer would almost certainly wipe out those gains. Somebody who is putting aside money when young needs to plan in terms of decades, not yesterday’s market change. (The Dow Jones went up 500 points yesterday, however.) Betting that the country will fall apart tomorrow would seem like the larger gamble.
I think the question has been answered, but I also think piling on might help emphasize the point.
First, a 401k is an “employer” sponsored vehicle to save for retirement. The employer goes out and hires a specific financial company to handle it. So is medical insurance offered by your employer. If your employer goes out and makes a deal with Aetna for a few plans to offer, you don’t get to tell your employer I want BCBS. Tough luck. It doesn’t, nor could it really, work that way. The employer has to go out and make deals to set all this up. Not saying it’s right, just is.
Second, don’t pass up free money. I saw a money market account option, or I’m sure there are international/emerging market only “funds” to choose from if you don’t want to invest in the US markets. Never pass up free money. It’s the least risky thing you could do.
Lastly, if you don’t want to participate at all in the employer sponsored 401k w/matching, just invest your money elsewhere. While you’ll lose the great 401k advantages, it’s better than not investing at all. Don’t let this hang up be a reason to not invest for your retirement. If you want to go save it in a savings account at a bank, go do that. Savings rate is more important than investment returns.
I think these were your “risk” issues you wanted to minimize (i.e., how to get around the company 401k plan altogether, and not actually which funds to buy or the allocation or anything like that). If not, let me know.
First off, there’s no point attempting to “minimize” the risk of total economic collapse.
The company is offering to give you money, it’s generally a good idea to take it. Note, though, that this money may come with a Vesting Term, which means it only becomes your money if you stay with the company for long enough, usually a couple of years. Still it’s generally a good idea to take money companies are offering to give to you.
Once the extra money becomes yours you can take it out of your 401k, you will have to pay taxes as if it’s income (because it is) and pay a 10% penalty before stuffing it into your mattress. Me, I’m a long term guy, put it in something and walk away.
I’m just saying given @Reply 's lack of financial knowledge and penchant to catastrophize the future, he might want to find impartial, political neutral financial advice that doesn’t amplify his concerns about civilization coming to an end.
I don’t think people grasp just how huge a company match is a far as a return on investment. If your company is matching 50 cents for every dollar you contribute it is exactly as advertised. An instant 50% rate of return. Compare that to a savings account at 1%, an average year for an S&P 500 mutual fund at 8%, or a good year for an S&P 500 mutual fund at 20%. A 50% return on investment is unheard of and here your employer is handing it to you.
It is really as they say “turning away free money”.
A federal money market fund invests in government debt securities. It is probably the most secure investment you will find. Why do you think a bank is safer? If the Federal government goes belly up, do you think private banks will survive? And for that matter, who do you think bails out banks when they fail and guarantees your investments in banks? That’s right, the FDIC, a federal agency.
Climate change is real.
Capitalism’s dark side is rearing its ugly head at the moment.
Greedy capitalists are indeed running the show.
Now that we’ve covered that nasty well poisoning, you should seek financial advice from a pro. If, instead, you want to listen to a liberal retiree who is highly unlikely to run into money problems, do not even think about skipping out on a company matched 401K.
Put in at the very minimum the max amount that your employer will consider in the matching equation, typically something in the 6% range. Do more if you can afford it.
Look for dirt cheap expense ratios.
If I were under 45 or so, I’d either put all of it in VTSAX, or split it between VIGAX and VLCAX, and call it a day, just to keep things simple.
If it were me, I’d increase my contribution by, at least, 1% every year if it is at all possible.
Aside from that, I’d ignore it for decades unless I wanted to further increase my contributions or roll it over due to a change in jobs.
Maybe some basic books on personal finance might help. Suze Orman used to be widely regarded as an author. Millionaire Next Door is pretty good IIRC. I’d stay away from the Rich Dad, Poor Dad books. It’s been awhile since I read them, but I don’t like the tone of “smart people who work for a living instead of leveraging themselves to build wealth are idiots”.
Investopedia and Motley Fool sometimes have good advice.
Not reading every response here but I will offer this anyway.
You are saving for retirement. You should be focusing on having enough money several decades now, at 65 or whenever, that you can do so comfortably.
What are your choices?
Hold it in cash. The risk of failing to reach your goal is extremely high. The volatility along the way will be low. It will fairly consistently lose ground in real dollar terms. Year in year out.
Invest. If you maximize your contribution and take advantage of the employer match even putting it all into an S&P index your risk of failing to meet your goal will be low. Not zero but low. The volatility along the way may be high. It could lose half its value one year then double two years in row. The volatility can be decreased by spreading among several classes of funds, but often less volatility increases the risk of not meeting that retirement goal. Many people move to less volatility as they get closer to goal dates. A life time date fund does that for you.