You probably remember that you should rebalance your individual investments but do you remember to rebalance your 401(k) as well?
It can be easy to forget about your company’s 401(k) because you aren’t depositing the money yourself, your pre-tax contributions are deducted from your paycheck and are electronically deposited by your employer. The good news is that this saving is “automatic,” making it easier to continue contributing because the contributions are taken out before you have a chance to spend that money on something else.
The bad news is that you need to remind yourself to log in and make sure the money you’re stashing away for retirement is being invested appropriately.
Some companies will take your age and your approximate year of retirement and start you in a target-date retirement fund that looks at your time until retirement and creates a stock-bond mix considered appropriate. While it might not be a bad place to start, you should consider your options and make a deliberate choice about your investments instead of falling into the default.
Let’s say you are 40, and using one of our gone-fishing portfolios for your investments. The calculator suggests 14.6% in bonds, 85.4% in stocks. We suggest trying to mirror your overall asset allocation in your 401(k), though you may have to make some compromises based on what is available.
The calculator suggests these percentages:
|8.30%||Pimco Total Return (PTTDX/PTTRX)||US Bonds|
|6.30%||Vanguard Emerging Markets Government Bond ETF (VWOB)||Foreign Bonds|
|19.00%||Vanguard S&P 500 ETF (VOO) US Stock||US Stocks|
|6.30%||Vanguard Mid Cap Value ETF (VOE)||US Stocks|
|6.30%||Vanguard Small Cap Value ETF (VBR)||US Stocks|
|5.40%||iShares Hong Kong (EWH)||Foreign Stocks|
|5.40%||iShares Singapore (EWS)||Foreign Stocks|
|5.40%||SPDR MSCI Australia Quality Mix ETF (QAUS)||Foreign Stocks|
|5.40%||iShares Switzerland (EWL)||Foreign Stocks|
|3.60%||SPDR MSCI Canada Quality Mix ETF (QCAN)||Foreign Stocks|
|10.60%||Vanguard Emerging Markets (VWO)||Foreign Stocks|
|10.80%||iShares N.Amer Nat. Resources (IGE)||Resource Stocks|
|7.20%||Vanguard REIT (VNQ)||Resource Stocks|
This boils down to 8.3% in US bonds, 6.3% in Foreign bonds, 31.6% in US stocks, 35.8% in Foreign stocks, and 18% in Resource stocks.
Many employer-sponsored retirement plans have limited investment choices, so likely you will end up with a pared-down version of your overall asset allocation.
The categories that may be more difficult to match are foreign bonds (which might not appear at all or might have such high fees that it isn’t worth putting them in your asset allocation) and resource stocks. If that is the case, I recommend putting all the bonds in the US bond category, and splitting the resource stock allocation between the US stock and Foreign stock categories.
If that is the case, your asset allocation now looks like this: 14.6% in US Bonds, 40.6% in US Stocks, and 44.8% in Foreign Stocks.
Often 401(k)s will only accept round numbers, so your asset allocation will actually be:
15% in US Bonds
40% in US Stocks
45% in Foreign Stocks
Aim for funds with as low a gross expense ratio as possible. Fees eat into your returns over time, so paying attention can pay off over the long run. Once you have selected your asset allocation, make yourself a reminder to check in every 6 months. Some plans only let you rebalance once a year (sometimes on your birthday), so make sure you pay attention to your allowed rebalancing schedule. You might also be able to choose to put new money into the asset allocation you select, instead of having it sit in cash or a target fund. Adding new money in the correct percentages helps rebalance your account gradually.
Many people keep a large portion of their retirement assets in a company 401(k), so it pays to pay attention to what’s happening to that money. You may not need it for many years, but you can’t afford to ignore it.
Photo used under Flickr Creative Commons license.