Personal Finance Essentials
Investing Your Retirement Savings
The Three Investing Mistakes That Could Cost You
Hundreds of Thousands in Retirement
The Right Investment Mix
The best way to invest your retirement plan money is through an appropriate mix of funds that balances your desire for growth with your tolerance for risk. For most investors with decades until retirement, that mix should lean heavily toward stocks. Many younger investors make the mistake of being too conservative – investing in money market or bond funds out of fear while the real risk, inflation, steadily erodes their purchasing power.
Research on thousands of successful ordinary investors found a consistent pattern: they tend to focus their new retirement plan contributions entirely on stock funds, not because they ignore risk, but because they understand that for money decades away from use, stocks are the lower-risk choice relative to inflation over long periods.
Target-Date Funds: What They Are and What They Are Not
Target-date funds have become extremely popular. In 2006, 10% of retirement plan participants had at least some money in them; by 2024, that figure was 60%. These funds provide diversified portfolios based on your anticipated retirement year – a 2040 fund, for instance, holds an asset allocation designed for someone retiring around 2040. As the target date approaches, the fund gradually shifts toward lower-risk bonds and cash.
However, a 2012 SEC survey found that 65% of investors believed some or all target-date funds guarantee income in retirement. They do not. Target-date funds are not free, can lose money, do not promise profits and do not provide a guaranteed income stream.
The Glide Path: To vs. Through
The “glide path” describes how a target-date fund shifts its allocation over time. Some use a gradual glide path, reducing stock holdings by a small percentage each year. Others use a cliff approach – holding stocks for decades and then cutting them sharply near the target date.
Funds also differ on whether they glide “to” or “through” the target date. A “to” fund reaches its most conservative allocation at the target date. A “through” fund recognizes that a 65-year-old still has 20 more years ahead and keeps a higher stock allocation even after retirement begins. This distinction matters: in 2008, many investors in 2010 target-date funds – just two years from retirement – lost as much as 41% because those funds still held 70% of assets in stocks.
Dollar-Cost Averaging
Dollar-cost averaging acknowledges a simple truth: none of us can reliably predict the stock market. By investing a fixed amount at regular intervals – say, $500 per quarter or $5,000 into an IRA each year – you automatically buy more shares when prices are lower and fewer when prices are higher, reducing your average cost over time.
The most important rule of dollar-cost averaging is consistency: invest at each interval regardless of what the market is doing. Do not stop contributing during a downturn. That is precisely when your fixed investment buys the most shares.
Avoiding Emotional Investing
One of the most expensive mistakes a retirement investor can make is letting short-term market volatility drive long-term decisions. From January 1, 2007 through December 31, 2012, investors withdrew $613 billion from stock mutual funds. It was not until 2013 – after the Dow had reached a new all-time high – that net inflows to stock funds resumed. Those who sold at the bottom locked in permanent losses. Those who stayed invested recovered fully and then some.
Mutual Fund Fees
Many large mutual fund companies have engaged in practices that directly harm retirement savers in 401(k) plans – including excessive charges and hidden fees. This matters because you pay these fees every year for decades. The compounding effect of high fees can cost you hundreds of thousands of dollars by retirement. Most 401(k) participants do not know what they are paying. Find out.