Overwhelmed by 401(k) Investment Options? Try This Tip to Keep Things Simple

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  • When you invest in a 401(k), you need to select a good mix of investments.
  • A target date fund can make asset allocation easier.
  • Be sure the expense ratio is low (ideally under 1.00%) on the fund you choose and the return is 5% to 8%, depending on your retirement date.

Whether you're investing for retirement in a 401(k) or an IRA at a brokerage firm of your choosing, you have to pick investments. And this can be an overwhelming process.

The good news is, there's a simple shortcut that you can try out to make the process very easy. Here's all you need to do.

This can make 401(k) investing easier

If you want to make investing in your 401(k) as easy as possible, you can do so by choosing to put all of your retirement money in your employer's plan into a target date fund.

When you put your money in a target date fund, you don't invest in just one company or even one mutual fund or one ETF. Instead, what happens is your money is pooled, becomes part of the fund, and is used to buy a big mix of different assets. The specific nature of that mix is what makes target date funds so attractive.

See, a target date fund is a fund designed to expose you to a particular mix of assets that's appropriate for your risk level given your retirement timeline. For example, you'd pick a target date fund based on when you'd ideally like to retire.

This target date fund would have a mix of stocks and bonds that is appropriate for someone with your goals. You'd make one purchase -- buying the fund -- and you'd get a very small ownership share in a whole bunch of different investments tailored to you.

Why does a target date fund simplify things?

The reason buying a target date fund can simplify your life so much is that it gives you the right asset allocation. This way, you don't risk losing too much money or earning returns that are too low.

Investing in stocks is riskier than other investments like bonds, but has more potential upside. So only a percentage of your portfolio should be in the market. If you were figuring this out yourself, you could subtract your age from 110 to figure out what percentage of your portfolio should be in stocks. So, if you were 50, you'd want 60% of your money to be in stocks.

If you took this approach, you'd need to pick a fund in your 401(k), such as an S&P 500 index fund, that's invested in stocks. Then, you'd need to find a different fund -- like a bond fund -- for the other 40% of your money. And you'd need to change your asset allocation every year which would mean buying and selling different investments.

If you buy a target date fund, you don't need to worry about any of that. The fund you buy will make changes to your asset mix each year as you get closer to your retirement date and can afford to take on less risk. You just hold that fund year after year and ideally will end up with plenty of money so you can retire comfortably and not worry about your checking account balance.

Here's how to pick a target date fund

Your 401(k) likely has a pretty limited selection of target date funds. You can sign into your online account or ask for your plan documents to see what is available.

When you check out the available offerings, you'll see they have names like 2025 fund or 2040 fund. Pick the ones that are closest to the date you want to retire. If you have multiple choices, compare the fees charged by each fund and the past performance of each and pick the most affordable one that provided the best returns.

If you have just one option, then just make sure the expense ratio (cost of investing) isn't too high (it should be below 1.00% ideally) and the returns are reasonable (which varies depending on timeline, but which could be anywhere from around 5.00% for those retiring soon to about 8% for those with a longer timeline). Then, buy it.

That's all you'll have to do, other than continuing to make regular 401(k) contributions over time so your money can grow and make you a rich retiree.

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