I've been searching for articles or postings that can help me with this--but haven't found any. I'm trying to decide if I should redirect my future 401(k) contributions to something other than an S&P 500 Index fund...I'm concerned that I may not be "diversified" enough, but whenever I read about other mutual funds (my 401(k) has a hefty list of options), I'm not sure that "diversification" into med-cap funds, bond funds, international funds, or even small cap funds makes sense, given expense ratios, etc. (All the reasons I went to an index fund in the first place.) However, the 401(k) does offer some other Index funds (Russell 2000, S&P mid-cap 400 Index, MSCI Europe, Australia and Far East Index, and Bond Index and a "split" 60% S&P 500 and 40% LB Aggregate Bond Index).Here's my situation:I'm about 7 years away (possibly as much as 10 years) from retirement. I am trying to put away the max ($11,000) per year in my 401(k). Currently, my retirement accounts (rollover IRAs, 401(k)) are all in the S&P index fund, totalling $117,448. I have about $8,000 in some individual stock picks (Walmart, Microsoft, EBay--companies I've researched on the Fool) in a Roth IRA, and will also try to maximize my Roth each year by continuing to pick individual stocks (it's fun for me). I have $15,000 in a no-load, tax free Bond Mutual Fund from a way back, and about $40,000 in cash that I need to keep at that level for a while because my husband is currently out of work due to heart surgery, daughter going to college in a year--etc.So, are there any resources around on Fool or from your experience that would suggest I should change my future 401(k) contributions in some way? Otherwise, I'd continue to contribute to the S&P 500 Index for another 3-4 years before reassessing again. Your help would be greatly appreciated!
"Money" magazine just put out a special retirement issue that addresses allocations for different time frames.Also this month's "Kiplinger" issue, the mutual fund special issue, has an article that addresses that topic also.
Meg, the traditional Foolish approach to this problem is that you should work out what your expenses will be in retirement and then where the funds to cover those expenses will come from. The funds that come from investments should be no more than about 4% of your total invested funds. (This is called your burn rate.) You should put 5 years expenses in a laddered maturity bond portfolio. Then you live off the interest and the maturing bonds and replace that bond selling enough stocks to cover another years expenses and buy a 5 yr bond with those funds.By this method, you will need 20% or less of your retirement funds in bonds (depending on your personal burn rate). These funds could be in your 401K plan, but that assumes you are over 59-1/2 and can take unrestricted distributions without penalty. Otherwise, you need a 72t or other distribution plan or you will want them in a taxable account (quite likely tax free munibonds).Diversification within stocks is a personal decision. 100% S&P 500 Index funds is diversification enough for many. Other combinations can be used. The closer your needs are to that full 4%, the more you need to diversify. If you can get by on far less than 4%, then you have an additional cushion for a market downturn. Diversification is less of a problem.Otherwise, you will not find much consensus on this subject. Some will suggest relatively large bond positions. Fools believe you are likely to be retired 30-40 years. Inflation is the major risk. Therefore, you need most of your funds in stocks to avoid outliving your funds.You'll find various sources in Fooldom on how to do all of this. There is an online retirement seminar. There's also the Retire Early Homeboard. The Bond and Fixed Income board can help you with the bond ladder.Best of luck to you.
I plan on having a hefty bond position that close to retirement...BUT, I also plan on having a multi-million-dollar portfolio by that point. :-)Thanks!Joe
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