When someone asks me “what should I invest my 401k in,” I know they’re looking for specific guidance on how to allocate their retirement savings within their employer’s plan. The good news is that most 401k plans today offer solid investment options that can help you build wealth for retirement when chosen strategically.
For a complete overview, see our complete guide to annuities.
The foundation of any good 401k strategy starts with understanding your investment options and matching them to your timeline and risk tolerance. In my experience helping families plan for retirement, I’ve seen that the most successful 401k participants focus on low-cost, diversified investments and adjust their allocation as they age.
Core 401k Investment Options You Should Know
Target-Date Funds: The Simple Starting Point
Most 401k plans offer target-date funds, which are designed to automatically adjust your investment mix as you approach retirement. These funds typically follow a name format like “Target Date 2055” or “Lifecycle 2045.”
Here’s how they work: If you’re planning to retire around 2050, you’d choose the Target Date 2050 fund. When you’re young, it might hold 90% stocks and 10% bonds. As you get closer to retirement, it gradually shifts to something like 60% stocks and 40% bonds.
The main advantage is simplicity—you pick one fund and it does the rebalancing for you. The downside is that you’re stuck with their allocation strategy, which might not match your specific situation.
Stock Index Funds: The Building Blocks
Most quality 401k plans include several stock index fund options:
Large-Cap U.S. Stock Funds - These track indexes like the S&P 500 and represent the biggest American companies. Look for expense ratios under 0.20% if possible. These should form the core of most people’s stock allocation.
Total Stock Market Funds - These give you exposure to virtually every publicly traded U.S. company, from large to small. They’re more diversified than S&P 500 funds and equally important for long-term growth.
International Stock Funds - These invest in companies outside the U.S. I typically recommend having 20-30% of your stock allocation in international funds for diversification.
Small and Mid-Cap Funds - These focus on smaller companies that historically have provided higher returns over long periods, though with more volatility.
Bond Funds: The Stability Component
Bond funds provide stability and income to your portfolio. In a 401k, you’ll typically see:
Total Bond Market Funds - These invest in a broad mix of government and corporate bonds. They’re good for the bond portion of your allocation.
Treasury Funds - These focus on U.S. government bonds and are considered very safe, though they typically offer lower returns.
Age-Based Allocation Strategies
In Your 20s and 30s
When you have decades until retirement, you can handle more volatility in exchange for higher growth potential. A common allocation might be:
- 70-80% U.S. Stock Funds (mix of large-cap and total market)
- 10-20% International Stock Funds
- 10-20% Bond Funds
In Your 40s and Early 50s
As you get closer to retirement, you might shift to:
- 60-70% Stock Funds (U.S. and international)
- 30-40% Bond Funds
Approaching Retirement (55+)
When retirement is within a decade, many people move to:
- 50-60% Stock Funds
- 40-50% Bond Funds and Stable Value Funds
What to Look For in Your 401k Investment Menu
Expense Ratios Matter
This is the annual fee charged by each fund, expressed as a percentage. A fund with a 1.5% expense ratio will cost you $15 per year for every $1,000 invested. Over decades, these fees compound dramatically.
Look for expense ratios under 0.50% for actively managed funds and under 0.20% for index funds. If your plan only offers expensive options, focus on the cheapest funds available and consider maxing out your employer match before looking at other retirement accounts.
Fund Performance and Consistency
Don’t just chase last year’s best performer. Look at how funds have performed over 5-10 year periods and compare them to their benchmark indexes. Consistency often matters more than having one great year.
Common 401k Investment Mistakes I See
Mistake #1: Not Contributing Enough for the Full Match
If your employer matches 50% of your contributions up to 6% of your salary, and you’re only contributing 3%, you’re leaving free money on the table. Always contribute at least enough to get the full employer match.
Mistake #2: Being Too Conservative Too Early
I’ve met 25-year-olds who put everything in stable value funds because they’re afraid of market volatility. When you have 40+ years until retirement, you need growth to keep pace with inflation and build real wealth.
Mistake #3: Being Too Aggressive Too Late
On the flip side, I’ve seen people nearing retirement with 90% of their 401k in aggressive growth funds. A major market drop right before you need the money can devastate your retirement timeline.
Mistake #4: Never Rebalancing
If you start with 80% stocks and 20% bonds, but the stock market does well, you might end up with 90% stocks without realizing it. Rebalancing once or twice a year helps maintain your target allocation.
Beyond Your 401k: The Bigger Picture
While maximizing your 401k is important, I often help families understand that it’s just one piece of their retirement puzzle. The 4% rule suggests that if you have $1 million in your 401k, you can safely withdraw about $40,000 per year in retirement. After taxes, that might leave you with $36,000 annually—or $3,000 per month.
For many families, that’s not enough to maintain their desired lifestyle in retirement. That’s where additional strategies come into play. Some families explore tax-advantaged alternatives like properly designed life insurance contracts that can provide supplemental retirement income through policy loans, which are generally not treated as taxable income when structured correctly.
Getting Professional Help
Every family’s situation is different, which is why I don’t believe in one-size-fits-all solutions. While your 401k investments form an important foundation, your complete retirement strategy should consider your timeline, risk tolerance, tax situation, and income needs.
Some people are perfectly fine maximizing their 401k and keeping things simple. Others need additional strategies to bridge the gap between what their 401k will provide and what they’ll actually need in retirement.
Let’s evaluate your complete retirement picture together. Schedule a free consultation and I’ll help you determine if your current 401k strategy aligns with your retirement goals—and what additional options might make sense for your situation.
- Focus on low-cost, diversified investments with expense ratios under 0.20% to maximize your long-term growth potential within your 401k plan.
- Consider target-date funds for a simple “set it and forget it” approach that automatically adjusts your investment mix as you approach retirement.
- Build your own portfolio using stock index funds and bond funds if you want more control over your specific allocation strategy.
- Allocate 70-80% to stock funds when you’re younger to maximize growth potential, then gradually shift to more conservative investments as retirement approaches.
- Diversify your stock allocation across large-cap U.S. funds, total market funds, and international funds to spread risk across different markets and company sizes.
