Many people want to take full advantage of the 401(k) returns they can earn in their retirement plan. The money you put into your 401(k) fund is put into the investment instrument of your choice, such as stocks, bonds, or money markets. However, the average 401(k) returns you can expect from your plan–the profits your money makes you–will depend on the choices you make regarding where and how that money is invested.
401(k) Investment Strategy
Most people with 401(k)s play it safe and spread their money across different kinds of investment instruments. It’s considered somewhat risky to place all your money into the stock market, for example, because if they stock market takes a dive,which it’s known to do periodically–then you’ll see the value of your portfolio shrink along with it. So it;s wise to put some of your 401(k) savings into stocks, some into bonds and some into money markets and other low-risk investments. As with so much else in life, the rewards are bigger when you risk more and lower when you play it safe.
Low Risk Investments
For bonds, the rate of return averages 4-8 percent per year. Some kinds of bonds, such as U.S. Treasury bonds, are considered to be quite safe and will generate slow but steady returns. Other, riskier bonds, sometimes referred to as junk bonds, can get your more of a return, but you are also in greater danger of losing your money if the bond issuer collapses.
Money markets are probably the most stable, and the least lucrative, with returns averaging about 4 percent per year. The stock market is where you get the most bang for your buck, with returns averaging 10.7 percent per year. It’s also the most volatile area in which to invest the money in your 401(k), because some years losses can be quite high.
Given all this uncertainty, it’s imperative that you consult with a financial advisor before you commit the money in your 401(k) to anything. You need to know what you’re doing and understand the risks and rewards in as much detail as possible.