Q: You were the BOMB speaking at the “State of the Black Union.” You made me laugh. You are a great speaker. I’m eligible for a 401(k) at work. Is the 401(k) money invested in stocks? Where should my 401(k) be placed?
A: First, thank you for your lovely compliment. I loved participating in Tavis Smiley’s “State of the Black Union” event. It’s amazing to be around such great thinkers.
So, let’s talk about your 401(k). You really need to talk to the company managing your plan and take a tutorial on investing. I’m afraid your question indicates you really don’t understand enough about investing to make the right choices on how to allocate your contributions. That’s not an insult because, after all, you are asking the most important question—what to do with the money for your 401(k). Many people don’t ask and have no idea what they are doing.
Just so you know, a 401(k) retirement plan is a special type of account funded through your pre-tax payroll deductions. That means your earnings aren’t taxed until you withdraw them.
Basically, your 401(k) is like a pot. It’s going to hold your money which you will invest in various assets, which may include stocks, bonds or cash and cash equivalents—such as savings deposits, certificates of deposit, treasury bills, money market deposit accounts and money market funds.
Typically, 401(k) plans offer a number of investment options. Your plan may have six or eight or more ways to invest your retirement funds. You can choose to divide your 401(k) among several options that range from high risk to low risk. In doing so, you build a portfolio that is diversified. Now, I must warn you, diversification doesn’t guarantee you won’t lose money, but it certainly can help spread your risk.
Unfortunately, I can’t tell you in which funds or assets to put your money. How you invest the money in your 401(k) will depend on your age and risk tolerance. So, for example, the younger you are, the more risk you may take by investing in equities (stocks). Because you have more time before you retire, you have more time to weather the ups and downs of the stock market. But, you don’t have to invest in stocks if the risk keeps you up at night. As you get closer to retirement and need to use the money, you may want to move the majority of your money into lower-risk investments, such as a bond fund.
On this Road to Wealth site, you will find some useful information on the basics of investing. I urge you to read through this information. For example, click on this link for “Investment 101.”
I also encourage you to visit the Securities and Exchange Commission site section, “Get the Facts: The SEC’s Roadmap to Saving and Investing,” which has a tip sheet on investing basics. Pay particular attention to the information listed under “Determine Your Risk Tolerance” and “Investment Products: Your Choice.
While you are on the SEC site, check out the agency’s “Beginner’s Guide to Asset Allocation, Diversification and Rebalancing.”
Look, I know I’m giving you a lot of homework. And you are probably thinking, “Please, I’ll just ask the guy (or woman) who sits next to me at work.”
But, this is your money. It’s your future retirement plan. Don’t put this off. Take the time to learn the basics so that you invest your hard-earned money in a way that will maximize what you might be able to accumulate by the time you retire.
You have one more assignment. Please also call the firm managing the 401(k) for your company. Many, if not most, plan administrators have tools to help you figure out how to allocate your contributions.
Finally, keep asking questions.