Navigating Your 401(K) Portfolio: Strategies For Asset Allocation

When it comes to splitting your 401k investments, it's important to consider your risk tolerance and what the money is for. Retirement money should be in retirement accounts, while non-retirement money can go in taxable accounts. You should also maximize all your retirement plan opportunities and contribute enough to get the maximum match in your 401k.

Consider your risk tolerance

When it comes to splitting your 401k investments, your risk tolerance is a key factor to consider. Only you can decide how much risk you are willing to take, and this will determine how you allocate your investments.

Risk tolerance is highly personal and depends on your financial goals, time horizon, and personal preferences. If you are comfortable with taking risks and are willing to accept potential losses in exchange for higher returns, you may want to allocate a larger portion of your 401k to more aggressive investments. On the other hand, if you prefer a more conservative approach and are willing to give up some potential returns for stability, you may want to invest a larger portion in more stable assets.

One way to determine your risk tolerance is to consider your investment goals. If you are saving for retirement, you may want to allocate a larger portion of your 401k to investments that are expected to grow over the long term. On the other hand, if you are saving for a specific goal, such as a down payment on a house, you may want to allocate a larger portion to more conservative investments that are less likely to lose value in the short term.

Another way to determine your risk tolerance is to consider your time horizon. If you are saving for retirement, you may want to allocate a larger portion of your 401k to investments that are expected to grow over the long term. On the other hand, if you are saving for a specific goal, such as a down payment on a house, you may want to allocate a larger portion to more conservative investments that are less likely to lose value in the short term.

It's also important to consider your personal preferences. If you are comfortable with taking risks and are willing to accept potential losses in exchange for higher returns, you may want to allocate a larger portion of your 401k to more aggressive investments. On the other hand, if you prefer a more conservative approach and are willing to give up some potential returns for stability, you may want to invest a larger portion in more stable assets.

Max out Roth IRA

Maxing out your Roth IRA is a good idea as long as your income qualifies. You can split your contributions between a traditional 401(k) and a Roth 401(k), but it's important to elect where your contributions are invested. You should also review your plan documents to see what investment options are available.

When it comes to splitting your money, you should consider your risk tolerance. This is a highly personal factor, and only you can decide whether you want to take a flier or play it safe. You should also max out your 401(k) to get the maximum match from your employer.

You should also keep at least 6 months' worth of your expenses in a high-yield savings account for emergencies and unexpected bills. This will give you liquidity in case of an emergency.

When it comes to splitting your savings, there is no general rule of thumb or specific order for which account should be prioritized. However, you should max out your Roth IRA each year as it is a taxable and long-term investment.

Keep 6 months of expenses in a HYSA

Keeping 6 months of expenses in a high-yield savings account (HYSA) is a prudent financial strategy. This approach ensures that you have a liquid emergency fund to cover unexpected bills or expenses. Here's a detailed guide on how to implement this strategy:

• Evaluate your monthly expenses: Start by calculating your average monthly expenses over the past year. This includes fixed costs like rent, utilities, and insurance, as well as variable expenses such as groceries, transportation, and entertainment. The goal is to determine how much you typically spend in a month.
• Determine the amount needed: Multiply your average monthly expenses by 6. This will give you the target amount you should aim to keep in your HYSA. For example, if your monthly expenses average $2,000, you should keep $12,000 in your HYSA as a safety net.
• Choose a suitable HYSA: Research and select a high-yield savings account that offers a competitive interest rate. Look for accounts with low or no fees and easy access to your funds when needed. Popular options include Ally, Discover Bank, and Citizens Bank, but you can explore other financial institutions to find the best fit for your needs.
• Automate your savings: Set up automatic transfers from your primary bank account to the HYSA. By automating this process, you ensure consistent contributions and make it easier to reach your savings goal. You can typically set up recurring transfers on a monthly or bi-weekly basis, depending on your preferences and income schedule.
• Consider tax advantages: When choosing a HYSA, be aware of any tax implications. Traditional HSAs may offer tax-free growth, allowing your savings to grow faster. On the other hand, Roth HSAs enable tax-free withdrawals for qualified medical expenses. Consider your tax situation and long-term financial goals when selecting the right HSA for you.
• Regularly review and adjust: Periodically assess your HYSA balance and adjust your contributions as needed. Life circumstances change, and so should your financial plan. Review your expenses and savings goals annually or whenever significant life events occur, such as a job change or a new family member. This ensures that your emergency fund remains adequate and aligned with your evolving financial situation.

Contribute to traditional or Roth 401(k)

Both traditional and Roth 401(k)s have benefits, so it's important to understand the differences before deciding how to split your contributions.

Traditional 401(k)s are taxable, but they are meant for longer-term investments rather than liquid cash. Roth 401(k)s are not taxable, but they are meant for longer-term investments rather than liquid cash.

Retirement money should be in retirement accounts, and non-retirement money can go in taxable accounts. Maximize all your retirement plan opportunities by contributing enough to get the maximum match in your 401(k).

Consider using an HSA if you are enrolled in an HSA-eligible health plan. With an HSA, you can often split your contributions into invested money (which can be used for long-term savings for healthcare costs in retirement) and cash (so you can pay for your qualified medical expenses directly from your account).

Keep at least about 6 months' worth of your expenses in a high-yield savings account for emergencies/unexpected bills. Then, max out your Roth IRA (7k per year) as long as your income qualifies.

Split contributions into invested money and cash

You can split your contributions into invested money and cash to maximize your 401(k) and retirement savings. Invested money can be used for long-term savings for health care costs in retirement, while cash can be used to pay for qualified medical expenses directly from your account.

To do this, you can elect where your contributions are invested and review your plan documents to see what options are available to invest your savings. You can also split your contributions between a traditional 401(k) and a Roth 401(k), as both have benefits.

It is also recommended to keep at least 6 months' worth of your expenses in a high-yield savings account for emergencies and unexpected bills. Additionally, you can maximize your Roth IRA by contributing up to $7,000 per year, as long as your income qualifies.

When deciding how to split your 401(k) investments, it's important to consider your risk tolerance and personal financial goals. You can spread your money over several funds and divvy up your money based on your asset allocation.

Frequently asked questions