How to Easily Manage Your 401K

Managing your 401k doesn’t have to be labour-intensive. Sure, some portfolios require maintaining tasks like rebalancing. But there’s one 401(k) investment that functions as a portfolio on its own and manages your risk over time. It’s called a Target-date fund or TDF.

What Are TDFs?

They are funds that invest in a strategic blend of stocks and bonds.

The strategy is designed to suit your retirement timeline. This is accomplished by targeting a specific retirement year. Meaning that if you invest in a 2050 TDF, you are expecting to retire in 2050.  

Changing Investment Needs

As the date of your retirement comes closer, your needs change.

When you are younger, you may invest aggressively because you have time to ride out any volatility. But if retirement is within five years, you’re wise to be more conservative to protect your wealth.

You could do this transition manually by changing your investment setting and rebalancing your own portfolio every year. But if you own a TDF, the shift is done automatically as the target year approaches.

Choosing The Right Roadmap

TDFs reduce risk over time by gradually lowering the portfolio’s exposure to stocks and increasing exposure to bonds.

You can change your target date and invest for another year if you feel it’s becoming riskier. Remember, an earlier year would be more conservative, while a later year would be more aggressive, but a delayed approach offers more growth potential.

The Downside to TDFs

They are easy to own, but the main disadvantage is that a TDF doesn’t address your individual needs.

You might have low-risk tolerance but think that you must carter your risk aversion while generating enough wealth to remain solvent for 40 years without a paycheck. That’s a tricky balance that probably isn’t solved by a one-size-fits-all glide path.

Hands-free Retirement Saving

If you want to manage your 401(k) without lifting a finger, then investing in a TDF might be your answer. The bulk of your effort will be upfront. Review the glide path and focus on choosing the right target year. After that, there’s not much to do except wait for your wealth to blossom.