I’m confused about how to invest the $750,000 in my 401(k). I am 67 years old, retired and have not started taking Social Security yet. What is the best way to keep this money safe for life without incurring high fees?
As you know, the major challenge in your situation is choosing from the many investment options available to you given your 401(k) asset base and willingness to be mindful of fees. Of course, the optimal solution ultimately depends on your individual situation and goals for retirement and possibly beyond. We’ll begin by outlining a framework you can follow to evaluate your current situation and then share some ideas to inform your actions. (And if you need more help with your finances in retirement, consider talking to a financial advisor.)
Assess your personal situation and goals
Before choosing an investment strategy, it is important that you have a complete understanding of your personal situation and retirement goals. Knowing where you want to protect assets for the rest of your life is a useful start. But go a step further by asking yourself these questions:
There are many other questions you can ask yourself. Importantly, however, in answering questions like these, you should be able to gain a better understanding of how best to invest capital to support your needs and goals while preserving wealth during your retirement. should go. (And if you need help assessing your personal situation or setting goals, a financial advisor can help.)
Consider asset location, not just asset allocation
In evaluating the cost of investing, you may find that asset location is just as important as asset allocation. “Asset location” refers to the account in which your money is actually deposited. Since the $750,000 you’re asking about is currently in a 401(k), you’ll want to review the details of your plan first. Does your plan give you the option of partial withdrawals, allowing you to access your savings as needed, or does it limit your withdrawal options to required minimum distributions (RMDs) and lump sum amounts? If you’re not sure, check your plan’s summary plan description or contact the plan administrator.
If your plan allows you to make partial withdrawals, you may want to evaluate whether you should leave your assets there.
The positive side of leaving assets in a 401(k) after retirement can be that you have lower cost investment options than are typically available to retail investors. Some of these options may include target date funds, annuity contracts with pre-negotiated fees, and institutional pricing on mutual funds. In addition, if your former employer worked with a competent investment advisor who was specifically hired to advise the company on the plan’s investment lineup, the menu of options expands to a few closely monitored options. will be limited, which are considered best in class. Based on factors such as fund manager tenure, returns, risk and investment expenses.
The advantages of taking your assets out of a 401(k) can be that you can consolidate your funds with other retirement savings, access a wider range of investment options than the plan offers, and have less administrative costs. Avoid account fees that may or may not apply to you. (And if you need help with your planning for retirement, consider contacting a financial advisor.)
Consider the risks you face
A prudent approach to investing for and after retirement is to make proper risk management a priority. Your stated desire to safeguard your money for the rest of your life has succinctly identified the most common broad risks that retirees like you will need to balance: longevity risk and investment risk.
Longevity risk is the risk that you will outlive your money. As Americans live longer and inflation is an ever-present threat to the purchasing power of the dollar, this is an unfortunate reality that many will have to face. Allocating some portion of your portfolio to equities will be your best hedge against long-term risk. Many retirement-age investors shy away from equities in fear of short-term market volatility. However, the truth is that retirement is a long time (think 19 to 30+ years). Your equity allocation has a long-term exposure to short-term market volatility in favor of long-term growth.
Investment risk is the risk that your investment will lose value. As we just mentioned, you’ll want to have some allocation toward equities, but you’ll also want to include fixed-income investments, which include bonds and cash equivalents that have the characteristics of price stability and relative safety of principal. Today’s high-interest rate environment has made even modest investment income realistic from some of the safest fixed-income vehicles, such as Treasuries, money market funds and certificates of deposit (CDs). (And if you need help choosing the right mix of investments, let a financial advisor guide you through the process.)
how to manage risk
To further reduce disproportionate exposure to other types of risk, such as interest rate risk, credit risk, exchange rate risk, market risk and business risk, you will want to diversify your equity and fixed income allocation.
My suggestion here would be to use pooled investment vehicles like mutual funds or exchange-traded funds (ETFs) that give you the ability to hold a large basket of underlying investments. Mutual funds and ETFs are generally available as index (passive) strategies or active strategies.
Index options will give you exposure to a broad spectrum of financial markets at a low cost. For example, the S&P 500 index fund is a popular type of equity index fund. Active funds attempt to outperform their respective indices by achieving superior investment returns and/or by better managing downside risk. Of course, active funds typically have higher expenses than index options, and you as the investor must decide whether the extra expense justifies the active approach.
Ultimately, you will need to adjust your asset allocation to suit the risk/return profile that you consider most appropriate given your individual situation and goals. Remember, more equity generally means more risk of investment loss, but without at least some, you are exposed to more long-term risk. (A financial advisor can help you sort through the different risks you potentially face in retirement.)
ground level
Unfortunately there is no one-size-fits-all approach to investing towards conserving capital and reducing costs. However, there are many options to consider. The optimal solution will depend on your specific situation and retirement goals, as these inform your risk tolerance and return requirements. Once you understand these factors, it becomes easier to decide where and how to invest your hard earned money.
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Lorraine Montaigne, CFP®, AIF® is a SmartAsset financial planning columnist and answers reader questions on personal finance topics. Have a question you’d like answered? Email [email protected] and your question may be answered in a future column.
Lorraine is a Senior Retirement Planning Advisor at DBR & Company. He has been compensated for this article. Additional resources from the author can be found at dbroot.com.
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