If you’re wondering “how do I invest my 401k,” you’re asking one of the most important questions for your financial future. The good news is that investing your 401k doesn’t have to be complicated. I’ll walk you through the essential steps: choosing the right asset allocation for your age, selecting low-cost funds, and setting up a rebalancing strategy that keeps you on track for retirement.
For a complete overview, see learn more about annuities.
Most 401k plans offer a menu of fund options, and knowing how to navigate these choices can make a huge difference in your long-term wealth building. Whether you’re just starting out or have been contributing for years, understanding these fundamentals will help you make confident decisions about your retirement savings.
Start with Asset Allocation Based on Your Age
The foundation of 401k investing is getting your asset allocation right. This means deciding how much of your money goes into stocks versus bonds and other investments.
A common rule of thumb: Subtract your age from 110 to determine your stock percentage. So if you’re 30, you’d put about 80% in stocks and 20% in bonds. If you’re 50, it might be 60% stocks and 40% bonds.
However, I’ve seen this vary based on individual risk tolerance. Some people are comfortable with more aggressive allocations, while others sleep better with a more conservative approach. The key is finding a balance that lets you stay invested for the long haul without panicking during market downturns.
Sample allocations by age:
- 20s-30s: 80-90% stocks, 10-20% bonds
- 40s: 70-80% stocks, 20-30% bonds
- 50s: 60-70% stocks, 30-40% bonds
- 60s and beyond: 50-60% stocks, 40-50% bonds
Choose Between Target-Date, Index, and Actively Managed Funds
Most 401k plans offer three main types of funds, and understanding the differences helps you make better choices.
Target-Date Funds: The “Set It and Forget It” Option
Target-date funds automatically adjust your asset allocation as you get closer to retirement. You pick the fund with the date closest to when you plan to retire (like “Target Date 2055” if you’re planning to retire around 2055).
Pros: Simple, automatic rebalancing, becomes more conservative over time Cons: May be too conservative or aggressive for your personal situation, higher fees than simple index funds
Index Funds: Low-Cost Market Matching
Index funds track market indexes like the S&P 500. They don’t try to beat the market—they just match it, which actually outperforms most actively managed funds over the long term.
What to look for: Total stock market index funds, S&P 500 index funds, international index funds, and bond index funds with expense ratios under 0.20%.
Actively Managed Funds: Professional Management
These funds have managers who actively pick stocks and try to beat the market. While this sounds appealing, most active funds don’t consistently outperform their benchmarks after fees.
My take: If you choose actively managed funds, look for ones with expense ratios under 1% and consistent long-term performance. But honestly, most people do better with low-cost index funds.
Pay Attention to Expense Ratios
This is where many people lose money without realizing it. Expense ratios are the annual fees charged by funds, expressed as a percentage of your investment.
What to look for:
- Index funds: Under 0.20% (some as low as 0.03-0.05%)
- Target-date funds: Under 0.50%
- Actively managed funds: Under 1.00%
A difference of even 0.5% in fees can cost you tens of thousands of dollars over decades. When I review 401k plans with clients, I often find they’re paying 1-2% in fees without knowing it.
Set Up Regular Rebalancing
Your asset allocation will drift over time as different investments perform differently. If stocks do well, you might end up with 90% stocks when you wanted 70%.
Rebalancing options:
- Calendar rebalancing: Review and adjust every 6-12 months
- Threshold rebalancing: Rebalance when any asset class moves more than 5-10% from your target
Many 401k plans offer automatic rebalancing, which I recommend if available. It takes the emotion and guesswork out of the process.
Maximize Your Contribution Strategy
Beyond choosing investments, how much and when you contribute matters enormously.
Contribution priorities:
- Get the full company match first - This is free money
- Increase by 1% annually until you hit the maximum
- Front-load if possible - Contributing early in the year gives your money more time to grow
- Use catch-up contributions if you’re over 50 (additional $7,500 in 2024)
Consider Roth vs Traditional Contributions
If your plan offers a Roth 401k option, you’ll need to decide between traditional (pre-tax) and Roth (after-tax) contributions.
Traditional 401k: Tax deduction now, pay taxes on withdrawals in retirement Roth 401k: No tax deduction now, tax-free withdrawals in retirement
Generally, if you’re in a lower tax bracket now than you expect to be in retirement, Roth makes sense. If you’re in a high tax bracket now, traditional might be better.
Don’t Forget About 401k Limitations
While 401ks are powerful retirement tools, they do have constraints that are worth understanding:
Contribution limits: $23,000 in 2024 ($30,500 if over 50) Limited investment options: You’re stuck with your employer’s fund menu Required distributions: You must start taking money out at age 73 Early withdrawal penalties: 10% penalty plus taxes if you withdraw before 59½
The Bigger Picture: Is Your 401k Enough?
Here’s something I discuss with many of my clients: while maximizing your 401k is important, it may not be sufficient for the retirement lifestyle you want.
Let’s say you accumulate $1 million in your 401k by retirement. Using the commonly recommended 4% withdrawal rule, that gives you $40,000 per year. After taxes, you’re looking at maybe $30,000-$35,000 take-home annually—less than $3,000 per month.
This is why I often help families explore additional strategies that can complement their 401k savings. Some people look into tax-advantaged life insurance strategies, real estate, or other vehicles that can provide supplemental retirement income.
The key is not putting all your eggs in one basket, even if that basket is as solid as a 401k.
Review and Adjust Regularly
Your 401k isn’t something you set up once and forget. I recommend reviewing your strategy at least annually:
- Check your asset allocation - Has it drifted from your target?
- Review fund performance - Are your funds still competitive?
- Increase contributions - Can you boost your savings rate?
- Update beneficiaries - Life changes require beneficiary updates
Getting Help When You Need It
While 401k investing can be straightforward, everyone’s situation is different. Some people benefit from working with a financial professional who can look at their complete financial picture—not just their 401k, but their overall retirement planning strategy.
I work with families to evaluate all their retirement planning options, from maximizing their employer benefits to exploring additional tax-advantaged strategies that can complement their workplace savings.
Need help optimizing your retirement strategy? Reach out for a consultation and let’s review your complete financial picture to make sure you’re on track for the retirement you want.
- Determine your asset allocation by subtracting your age from 110 to find your stock percentage, with younger investors holding more stocks and older investors shifting toward more bonds as retirement approaches.
- Choose target-date funds for automatic rebalancing and age-appropriate adjustments, or select low-cost index funds if you prefer more control over your investment mix.
- Focus on expense ratios when selecting funds, as high fees can significantly reduce your long-term returns even if you don’t notice them immediately.
- Avoid actively managed funds unless they have consistently strong performance and low fees, since most fail to outperform simple index funds over time.
- Rebalance your portfolio regularly to maintain your target allocation, as market movements will naturally shift your stock-to-bond ratio away from your intended mix.
