How to Invest Your 401(k) Money if You're 40 Years Old

If you're 40 years old, you're perhaps entering a happy, prosperous stage of your career and your life as an investor. Ideally, you might be making more money, you might have gotten promoted, and you might have seen some big growth in your stock portfolio.

The good news as a 40-year-old is that your career, and your growth potential as an investor, is still far from over. You are hopefully still approaching your peak earning years, and you still have 25 years (or more) until retirement age. Being 40 years old is kind of a perfect sweet spot as an investor: You ideally have more cash coming in each month that you can invest, and you also have enough time left to invest aggressively for retirement.

Turning 40 could be a good occasion to revisit your 401(k) investments. How is your money allocated into stocks, bonds, and other investment options? Do you have an appropriate mix of stocks and bonds for your age, or are you invested in a way that's too risky (or too risk averse)?

Let's take a look at a few simple frameworks for thinking about your 401(k) asset allocation as a 40-year-old 401(k) investor.

1. Don't ignore target date retirement funds

If your 401(k) provider offers them, one of the easiest ways to invest at any age is to use a target date retirement fund. This is a kind of mutual fund that automatically invests your money in a diversified mix of stock and bond funds, in a way that's appropriate for your age and time horizon. A good target date retirement fund can give you an optimal blend of investments, while managing risks.

Here's how this might look for a 40-year-old with a 401(k). Your Social Security retirement age is 67; so let's say you have 27 years left until retirement. That means you should consider a target date fund with a "target" of 2050 (or so). As an example, the Fidelity 2050 Freedom Fund is a target date retirement fund that a 40-year-old might choose. As of April 21, 2024, this fund is invested in a mix of 56% U.S. stocks, 34% international stocks (for a total of 90% stocks), and only 10% bonds.

With a target date fund, as the years go by and you get closer to retirement age, the fund will be automatically rebalanced by the fund manager. For example, instead of 90% stocks and 10% bonds, over the years, the Fidelity 2050 Freedom Fund will gradually sell some stocks and buy some bonds, to give you a mix at retirement that's closer to 55% stocks and 45% bonds.

With target date retirement funds, you get professional help to allocate your investments, with hands-off investing that does the hard work for you. As you get closer to retirement, your 401(k) will be getting less risk of losses from the short-term volatility of the stock market, and more guaranteed income from bonds. And even people who are retired still often need some stocks in their portfolio. Target date funds don't stop when you retire -- they can help provide that ongoing upside potential, while managing your risks.

2. Stick with (mostly) stocks

As a 40-year-old with a 401(k), your investments should still mostly be held in stocks. You still have twenty-five (or more) years for your money to grow, and you can afford to recover from short-term downturns (or even a bad years-long downturn) in the stock market. As shown from the example of the 2050 target date retirement fund, 90% stocks is still an appropriate allocation for 40-year-olds.

But in case your 401(k) does not offer a target date retirement fund, or you don't want to pay the slightly higher fees that target date funds might charge, you can build your own fund. Use low-cost stock market ETFs, like a simple S&P 500 index fund or the Vanguard Total Stock Market ETF. As a 40-year-old, if you're comfortable with this level of volatility and short-term investment risk, you could put 90% of every dollar in your 401(k) into stocks. And put the remaining 10% into a low-cost, diversified bond index ETF, like the Vanguard Total Bond Market ETF.

The exact investment options available in your 401(k) will depend on your employer and on the 401(k) plan provider that manages your funds. But if you don't have a target date retirement fund, look for low-cost index funds and ETFs that let you buy hundreds (or thousands) of stocks and bonds all at once.

3. Try the classic 60/40 portfolio

If a 90% stock/10% bond portfolio feels too risky, if you worry about downturns in the stock market, if you struggle to sleep at night knowing that "too much" of your retirement cash is tied up in volatile stocks…that's OK. You don't have to invest more aggressively than your comfort level. Instead, consider a classic strategy called the "60/40 portfolio" -- 60% stocks and 40% bonds.

Owning 40% bonds and 60% stocks might not make your money grow as fast as a portfolio based on 90% stocks, but it can help prevent you from experiencing some of the short-term downsides and stresses of the stock market. Investing in bonds is also not risk free, and their prices can go down, but bonds tend to deliver steady income and can sometimes outperform stocks.

Bottom line

Choosing the right asset allocation as a 40-year-old depends on your risk tolerance. But you have plenty of time ahead of you and can afford to accept some short-term risks by buying stocks in your 401(k).