The nature of the money in your retirement account
Where to invest your money
What's the right mixture of stocks and bonds?
Aren't stocks risky?
Investment options offered by good 401(k) and other plans
Assets that should not be placed in retirement accounts
Unless you're already near retirement, the money in retirement accounts should be invested for long-term appreciation
Because of compounding, by increasing your return on investment slightly, you can greatly improve your chances to retire comfortably
For many employer-provided plans, like the 401(k), the plan administrator determines your investment choices
Many employers offer guaranteed investment contracts (GICs) offered by insurance companies
- GICs are similar to bond investments
- Relatively safe but offer lower returns
Long-term returns from various asset classes
Asset class Average annual return Inflation 3.0% Money market funds 3.5 Long-term bonds 5.5 Stocks 10 Ask your employer to improve investment choices if you can only invest in GICs or your company's own stock
Ask to be able to invest in a variety of stock mutual funds
It's in the employer's best interest to offer good investment choices
If the 401(k) plan offers a variety of asset classes to invest in (money market, bond, stock mutual funds) the plan administrator is off the hook with respect to liability for plan losses
If true choices are available to worker, the worker is responsible for any gains or losses
Remember retirement plans must meet broad IRS rules, but plans vary from company to company
The best companies offer four or more low-cost well managed mutual funds and the ability to switch funds on a monthly or even daily basis
Be careful and don't put more than 10 percent of your retirement money into your employer's stock -- even if your employer allows you to buy the stock at a discount
A middle-of-the-road investor saving for retirement should have the following percentages invested in stocks and bonds
Age Percentage in stocks Percentage in bonds 30 70% 30% 40 60 40 50 50 50 60 40 60 70 30 70 Note that a typical investor saving for retirement should have the following percentages invested in stocks and bonds
(100 - her age) in stocks
Her age in bonds
Example for a 40 year old with $100,000 in a 401(k) account
Place $60,000 in stocks and stock mutual funds
Place $40,000 in bonds, GICs and bond mutual funds
In the short run, stocks prices are more volatile than most other investments
But over the long run, investors are compensated for the risks with higher returns
Many people have too little money invested in stocks
Various studies show that most people invest their retirement money too conservatively
One study showed that only about 30 percent of 401(k) money is invested in stocks
Unless younger people invest a fairly large amount of money in stocks, it is unlikely they will be able to retire comfortably
Stocks involve short-term price risk, but not investing in stocks invites the risk that you won't have a comfortable retirement
Limited partnerships or other tax shelters
Municipal bonds
See also "Mutual Fund Investing for Everyone" for more information on managing retirement account money