This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Thursday, July 10, 2008

The Dark Side of the "Set and Forget" 401k

Posted By Paul

Yesterday I was checking my various investment accounts, and (no surprise) everything had fallen in the last month.

It was annoying, but it also made me realize how important it was to be careful with your major investments. I realized that if I were near retirement age then to have my investments drop like this would drastically change my plans for retirement (and by change I mean postpone).

So this was a good hypothetical lesson into the idea that as you get closer to retirement age you need to move away from the higher risk/higher potential return funds into the less lucrative but safer investments.

This doesn't mean you have to reevulaute your fund choices every month, or even every year, but I think that every 5 years it's worthwhile to look at your funds and make sure that you are comfortable with the level or risk that you are experiencing. The classic wisdom is that as you get closer to retirement you start putting more and more of your money into the less lucrative but less risky funds to protect your nest egg.

How horrible would it be to be a month from retirement when the stock market crashes and suddenly you have 10% less money than you did a week ago? If you are young enough then this is no big deal because you have time to ride out the crash, but if you plan on needing that money really soon, you should take steps to make sure it's there when you need it.

So even though 401k's have the advantage of being able to set them up and leave them alone, it is important to periodically check your account to make sure that your money is going into investments that match your needs. If I'm still invested in the same aggressive funds 25 years from now it means that I've taken the 'hands off' approach to my 401k too far.

1 comment:

Matt said...

This post is yet another argument for target date funds.