If you read our article on benefits of a 401k plan, we said:
“You have full control over your retirement savings. You can choose to invest in stocks, bonds, short term money market instruments, etc. This is unlike a pension plan where you are limited in choosing what type of investments best suit you.”
In general, there are 8 investment options available to most 401k plan retirees. You can diversify your portfolio into high risk and low risk investments and this will determine your total nest egg upon retirement. If you want a safe secured income upon retirement, we suggest investing in low risk securities.
1) Stock Mutual Funds: Stock mutual funds are invested in various stocks traded in the public. The value of stock mutual funds fluctuates highly from day to day but over a longer term, they are known to have better returns than some of the other above investments example US Treasury Bills, Government Bonds, etc.
| Type of Mutual Fund | Characteristics |
| 1) Index mutual funds | – Invest in sample of companies in a stock market index such as Dow Jones Industrial Average or the Standard & Poor’s 500 Composite Stock Price Index (S&P 500) – Relatively Low risk – Average Performance, Low Returns |
| 2) Growth mutual funds | – Invest in over-average firms – High risk, big fluctuations in stock prices – Various different industries of companies – Some companies pay out dividends, some do not |
| 3) Income Mutual Funds | – Invest in stocks that pay regular dividends – Provide “monthly income” for investors |
| 4) Growth & Income Mutual Funds | – Invest in companies with growth potential – Good dividend payments – Middle risk stocks |
| 5) Aggressive Growth Mutual Funds | – Aggressive investing – Venture capitalists, small start-up businesses – Very high risk |
| 6) International Mutual Funds | – Invest in international stocks/bonds – Affected by politics in offshore countries, e.g wars, corruption, etc – Very high risk – Very high potential returns |
2) Company’s Stocks: You can purchase the stock offered by your employer. We suggest keeping this to a minimum because stocks are always volatile, no matter what type of stock it is.
3) Money Market Funds: Money Market Funds are the lowest short-term investments that you can buy. They consist of:
– US Treasury Bills
– Certificates of Deposit
Since they are very low risk investments, they can sometimes not keep up with inflation that erodes your buying power (and the power of your $$).
4) Bond Mutual Funds: These bond investments are offered by the government and corporations. Those funds with longer maturity periods carry higher risk than those with shorter maturity periods. If you want to see the rating of specific bonds, use Standard & Poor’s and Moody’s bond rating services.
5) Stable Value Funds: These funds are sometimes called the Fixed Fund or Guarantee Fund because they are expected to provide consistent growth over a long period of time. They are also backed by contracts from insurance firms, example the GIC (Guaranteed Investment Certificate). Providing a fixed interest rate over long term, these funds are known to be safe. Note however that increases in inflation can make it less valuable over the longer term as well.