You’ve made the decision to contribute to your 401K plan to invest in your future and your retirement. Now, the next step is to choosing the allocation of your investments. What do you do?
One of the most common mistakes that I have seen in 401K plans is when the investment choice is to invest in a Target Retirement Date fund. This may seem a logical choice because you wanted to retire in 25 years, at the time of investment, and it should return good long-term gains based on your long-term investment horizon. Logical choices are not always the right choice. This decision could significantly impact your future and should be seriously considered. The investment performance could be half of what you may have expected, thus turning your 401K into a 201K.
While past performance may not be an indicator of future performance, take a look at this. If you had invested $10,000 in the Vanguard Target Retirement 2040 fund (Ticker: VFORX) five years ago near July 31, 2014, it could have grown to approximately $14,109 by July 30, 2019. Comparatively, an investment that would have generated returns closer to the S&P 500 Index at the same time, it may have grown to $17,107. Which return would you have preferred? It is staggering that the fund may have returned almost half of the returns of the S&P 500 over five years. When considering future compounding on those returns, the difference can be more noteworthy. It is almost the same if you had made the same investment five years ago with the Fidelity Freedom 2040 Fund (Ticker: FFFFX). The value by July 31, 2019, could be about $14,198 from the fund versus $17,108 for a fund that generated returns closer to the S&P 500 index. NOTE: The difference is similar when looking at 10 year returns.
Investment decisions in your 401K are critical as they play a vital role in how much you will have in your future years. It is always wise to talk with a financial professional who knows your specific situation to provide the guidance that you need.
If you would like to obtain guidance on your 401K and other investments, we would be glad to start with a conversation to help you. Your future is riding on it!