You'll often hear about the importance of saving for retirement. But saving is only part of the picture. You'll also need to invest your savings appropriately to ensure that your money grows into a substantial enough sum to sustain you as a senior.
In order to do that, you must strike a balance between adequate growth and reasonable risk. Here are three tips for investing your 401(k) or IRA so it serves you well once your time in the workforce comes to an end.
1. Have the right asset allocation
The money in your 401(k) or IRA needs to be invested in an age-appropriate manner. When you're younger, that generally means loading up on stocks for maximum growth. As retirement nears, it means shifting toward safer investments, like bonds, which are far less volatile than stocks.
But that's not all. You should also, as retirement gets closer, make sure to keep a chunk of your savings in actual cash. That way, if your investments decline in value, you'll still have the option to take retirement plan withdrawals without locking in serious losses. Pay attention to the way your 401(k) or IRA investments are distributed at different stages of life to ensure that your savings really work for you.
A diverse retirement portfolio is a strong one. When you diversify, you limit your exposure to risk and increase your opportunity for growth.
Aim to assemble a diverse mix of stocks and bonds in your 401(k) or IRA. For example, rather than invest 40% of your portfolio in tech stocks, you may want to limit yourself to 15% or 20% in that regard, and then add healthcare stocks, energy stocks, and bank stocks to your investment mix so you have your money in a number of different sectors of the market.
3. Keep your fees to a minimum
Investment fees in your retirement plan can eat away at your returns and leave you with less money as a senior, so it's important to pay attention to the fees you're being charged and minimize them to the greatest extent possible. One good way to do so is to choose index funds over actively managed mutual funds, whose fees tend to be substantially higher because you're getting the expertise of a fund manager who's compensated for hand-picking investments.
Index funds, unlike actively managed mutual funds, simply track different indexes, like the S&P 500, so you're not paying an expert to select your investments for you. As such, you'll pay a lot less. Index funds are also a great way to diversify. For example, buying S&P 500 index funds will effectively put the 500 largest publicly trading companies into your portfolio.
Paying attention to how your retirement savings are invested could help you maximize growth while avoiding mistakes that hurt your long-term goals. If you focus on asset allocation, aim for a wide range of investments in your 401(k) or IRA, and work to pay as little in fees as possible, you'll increase your chances of retiring with enough money to enjoy your senior years the way you deserve to.