Managing your 401(k): Make a plan and stick to it

Jun 14, 2011

Sixty percent or more of American families have 401(k) or 403(b) retirement plans. If you're under the age of 50, you can invest up to $16,500 in tax sheltered dollars each year in your retirement fund (and your employer can put in even more). If you're 50 or older, you can invest $22,000. But how many of us know how to manage these investments? You need to have a plan and stick to it. On this week's Money Matters, financial commentator Greg Heberlein tells you how to do it.

Retirement investing strategies depend on your age. Greg breaks this down into three groups:


Those in their early years of work are able to take more risks. A lot of risk never is advisable, but some risk is tolerable. Invest as much as 85% in stocks, the remainder in CDs, cash or otherwise liquid assets. The best stock positions are in stock funds investing in a broad array of issues. Beating the market is virtually impossible. Buying the market is the key to riches. Stock index funds are a great way to go.

Cash of 15 percent is recommended for all 401(k) holders, so money is available for personal emergencies or new investments. Of the stock money, perhaps a quarter can be allocated for riskier stocks – those with great prospects but little or no profits, higher debt and high price-to-earnings ratios. Foreign stocks fall in the risky category and should be no more than 7% of the portfolio.


Those around 40 years of age should consider some risk aversion by edging away from stocks and allocating more to bonds. A goal of 75% in stocks and 25% in bonds or other savings forms over the next 5-10 years makes sense. The bonds may be riskier corporates or  municipals. But avoid chancier bets, such as high-yields or bonds not considered investment grade.

55 and over

At age 55, 401(k) holders should shift their thinking almost completely to risk aversion. Stocks should be conservative, dividend-payers. Higher-risk issues should be limited to 5%. Gradually increase the bond/cash portion to 50 percent. A bond fund is not the same as owning bonds outright – owning bonds is favored over bond funds. As age 65 approaches, continue to increase bonds. At retirement age, 75 percent in bonds to 25 percent in stocks is strongly encouraged.

For full details on 401(k) rules, go to the IRS website.