By Jack Naudi, Communications Analyst and Blog Contributor
As the consummate long-term investor, I really like 401(k) plans. But in one big way they’ve always fallen short for me: They didn’t provide the range of investment choices that are right for the level of investment risk I’m willing to take. I haven’t been able to use a 401(k) to build a portfolio that completely fits my needs.
So one of the first things I’ve always done after getting a new job is rollover my old 401(k) into an IRA.
Why Your Old 401(k) May Not Fit Your Needs?
Most 401(k) plans are limited to a small package of mutual funds. There certainly is nothing wrong with mutual funds, but the mix of funds offered might not mesh with your overall investment strategy.
Your 401(k) may offer funds in broad assets categories. But let’s say you want to take more risk and add international small company stocks. Does your 401(k) have a fund for that? Does your old 401(k) offer a way to invest in Treasury Inflation-Protected Securities (TIPS)? Can you invest in a broad bucket of commodities through your old 401(k)?
What I’m talking about is building a portfolio in an IRA utilizing an asset allocation method. That means figuring out what asset classes – like stocks and bonds – you want to invest for the long-term, and in what percentage.
Does Your Retirement Portfolio Match Your Risk Tolerance?
Transferring your 401(k) funds into a Scottrade Rollover IRA gives you access to stocks, low-cost exchange-traded funds, bonds and thousands of commission-free mutual funds.
The specific mix that’s right for you depends on the risk you’re willing to take. In general, stocks are riskier than bonds, while bonds are riskier than cash. But also in general, the higher the risk, the greater the potential return. Most importantly, your retirement portfolio needs to match up to your risk tolerance. If you’re uncertain how to assess your risk level and asset mix, you may want to consider using a tool to help you manage your portfolio.
If Your Risk Changes, Is Your 401(k) Adequate?
Even if your old 401(k) adequately meets your retirement goals and your risk tolerance today, what if things change? When I was in my 20s, I thought I would retire when I was 48. But life tossed in a few unexpected variables, and I’m in my 50s, happily working away. (I never figured out how I would spend eight-plus hours a day if I wasn’t working.) Are you confident that if your goals and risk-tolerance change that your 401(k) has the best investment options to accommodate you?
Investment goals vary among all of us, which means where you hold your retirement accounts can matter. You could benefit from having access to a wide variety of investment options that allow you to build a portfolio that matches your risk tolerance.
How do you determine the right asset allocation mix?
Also of Interest:
- How to Determine How Much You Can Save For Retirement
- IRA Calculator: Determine Whether a Traditional or Roth IRA is Right For You
Jack N. is a communications analyst at Scottrade. He works to demystify the markets and the economy for all types of investors and traders.
The information presented in this blog is for education purposes only and should not be considered an endorsement of a particular product(s), investment(s) or account(s)
Commodities involve unique risks and are subject sudden price fluctuations. Please research each investment carefully before investing.