What to Invest In With My 401k

Even though there are limitless choices to invest your money in, allow me to simplify it.  Short answer is invest in a Vanguard Target Retirement Fund or a comparative low cost target retirement fund! Let’s work backwards to see why you should invest in a retirement fund and when maybe that’s not the best choice for you.

We’re Talking Retirement

By retirement age, what we want is a steady withdrawable amount every month until we croak.  We don’t want crazy volatility in our retirement investments at an old age.  When you’re 90 years old you don’t want to lose half of your retirement fund on a wild stock market swing.  This means as we get older, we want to be in less volatile investments.

The 2 Important Types of Assets

There is only 2 types of assets you should concern yourself with.  That’s stocks (also called equities) and bonds (also called fixed income).  Stocks average higher returns with more volatility and bonds have lower returns but with much less volatility.  Owning both stocks and bonds at different ratios can control the volatility and the average return.  The more stocks you own, the higher the average return and more up and down swings in your balance.  So as we get older, we want to switch to a higher percentage of bonds as we may not have the time to recover from a bad down swing at an older age.

Asset Allocation

Asset Allocation is the ratio of stocks to bonds you own.  The younger you are, the more stocks you should own.  Here’s a table of Vanguard target retirement funds and their asset allocation depending on how far you are from retirement.


Asset Allocations in December 2015
Holding Stocks Bonds
2060 90.1 9.9
2055 89.9 10.1
2050 90.1 9.9
2045 90.0 10.0
2040 89.3 10.7
2035 81.9 18.1
2030 74.4 25.6
2025 66.8 33.2
2020 59.4 40.6
2015 48.7 51.3
2010 34.5 65.5
Income 29.8 71.2

Here’s how to read the chart.  In the year 2015, if you’re planning to retirement in 2060 (45 years from retirement), then you should have 90.1% stocks and 9.9% bonds.  As you can see, up until 2040 (25 years from retirement) you should have about 90% stock and 10% bonds. As you get close to retirement the amount of bonds goes up and the stocks go down.  By 10+ years into retirement, you basically keep a flat 30%/70% split in stocks/bonds.


When you buy funds, you have to pay fees!  These fees though seemingly small and insignificant is the biggest detail of all!  I recommend Vanguard funds because they are generally the cheapest and always good value.  Maybe there is an equivalent fund with lower fees outside of Vanguard and you’re free to look for them, but by default you should compare fees with Vanguard.  For the Vanguard 2045 Target Retirement Fund, they charge 0.15%.  Other similar retirement funds charge 1% or more for essentially the same service.  Paying 1% vs 0.15% over 30 years is a HUGE difference!

If you invest $100k for 30 years, that 0.85% difference is equal to $128,000!  That’s $128,000 in EXTRA fees.

So if your 401k account allows you to pick anything you want, then just go with a Vanguard retirement fund.  Often times, you will not be able to buy what you want or you will incur a fee to self-manage.  Compare the fees on retirement funds your 401k offers and if they are not 0.2% or less, then choose the self manage and buy Vanguard funds!

How to Select a Fund for a 401k

Generally, you’re be given a form in paper or online with a list of funds.

  1. First you have to select a percentage of your salary to put into the 401k.  I recommend put as much as you can.  There is an upper limit of $18,500 a year (2018 limit). If you try to put more than this amount, your payroll company will just not allow it and you’re get your money in your paycheck.
  2. By each fund you’re supposed to put a percentage of your contribution. There is going to be a shit ton of offerings with a lot of those funds trying to rip your off.  Just look at the Retirement Target Funds they offer and see if they are fairly low cost. If you find one, put 100% of your money there.  If there is no good low cost fund available, see if there is a option to self manage.  If that’s available then do that.  It’s going to be an extra step, but I think it’s well worth it.
  3. If you’re self managing, you will probably have to open another account online where you can self manage this money generally with a reputable broker.  I self-manage my 401k with schwab.  The difference is now instead of your money going directly into a fund, it will be placed in a self-managed account where you can buy what you want.  Buy Vanguard funds!

When You Don’t Want a Target Retirement Fund

So the above advice is what I would tell anyone getting into retirement investing to do.  It’s simple, the retirement fund auto rebalances as you get older, it’s fairly low cost, and once setup, you really don’t have to do anything!  But, for the record, it’s not what I do.  So why do i not just buy the retirement fund?

  1. Rather than buy the retirement fund for 0.15% fee, I can basically self-manage a similar stock/bond portfolio for less.  I can do it myself for about 0.05% but it requires some research and periodical rebalancing of the asset allocation percentages.
  2. The Vanguard Target Retirement fund is a bit conservative for my tastes.  I am more about 100% equities when young.  So by self-managing, I can control my exactly asset allocation.  It’s definitely a waste of time, unless you like doing it though.
  3. I do it cuz it’s fun for me.  I like micro managing a bit and maximizing value.  It’s not for everyone, but if you like doing this, as well, then you can save a little bit more by DIYing it.  Read about my breakdown of the Vanguard Retirement Fund for better understanding.



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