Although your 401(k) is better than not saving for retirement, your investment options there are limited to the offering of your particular plan. You likely have a dozen or less funds to choose from. The likelihood of those offerings being the ones you would have chosen given choice over all investment options is basically zero.
So my retirement investment allocation goes along these lines: Make getting the company match on your 401(k) retirement investment priority number one. Even with poor choices in your 401(k), the company match is free money. If your company match gives you fifty cents on the dollar, that’s a 50% gain on your investment regardless of the performance. Better matching means even better gains. So contributing enough to get the full company match is a no-brainer.
Once you’ve hit the company match, move on to priority number two, maxing out your IRAs. IRAs offer a much larger set of investment choices while still having tax advantages similar to a 401(k).
After you’ve hit the contribution limits on IRAs, then you can move to retirement savings priority number three, which is to increase your 401(k) until you hit the maximum contribution limit there as well.
Of course, you may not get all the way to priority number three (or two for that matter) as the total you plan to invest for retirement may be exhausted first. If you do reach priority three, be careful to not limit your company matching by contributing too much. In any event, also remember the importance of non-retirement investing as well.
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February 14th, 2008 at 2:21 pm
Mike,
These are very sound advices. I typically include these advices in my simple retirement planning for my clients. I might like to add though, value investing is probably the best retirement investment. If one sticks with your advices and adopts value investing, he/she will retire wealthy.