How to Tell If Your 401(k) Is Invested Right for Your Retirement Timeline

There is no single way to invest. Each person is different. However, every investor still needs to figure out how well they are achieving their financial goals. If you are looking at your 401(k) and wondering whether it is invested property, here are some things to consider before making big changes.

1. What is your goal, and how close are you?

Before you can assess where you are with retirement planning, you need to know where you are going. It doesn’t need to be a perfectly laid out goal, but you need a target of some kind. One way to create that target is to look at what others have done and at least aim to hit the average savings for your age group, which you can find online. The average savings for those just shy of retirement is a solid end goal, though targeting something higher would clearly put you in a better financial position. An alternative is to use some broad income-based guides, such as 1x your income at 30, 3x at 40, 6x at 50, and 8x at 60.

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If your savings are growing as expected, you may not need to do anything different with your 401(k) or other investment accounts. That is to say, just because you can change things doesn’t mean you should. For example, maybe you own Vanguard S&P 500 Index ETF (NYSEMKT: VOO) and worry that you are missing out on the AI boom. Only tech makes up nearly 40% of the S&P 500 index right now, so you may have more exposure than you realize, and your overall performance may not be lagging as you fear based on the news headlines about this hot tech sector.

2. Risk versus reward is the big story

The AI boom is headline-grabbing right now, and it helps to highlight how often investors fear they are missing out (FOMO) on big gains. If you find that you aren’t tracking with at least the average savings rates, your FOMO may kick in. This is where you need to fully examine your risk tolerance as an investor. Stocks go up and down over time, with the best-performing stocks during bull markets often turning into the worst performers during bear markets. Following the crowd can easily lead you astray on a personal level.

So not only do you have to assess your financial situation, but you also need to figure out where you stand emotionally. The only way to truly know your risk tolerance is to live through a deep bear market. However, think carefully about how you would feel if your portfolio lost 20% of its value in a year. If that sounds emotionally difficult to deal with, you need to be more thoughtful about the risks you take. In truth, a 20% drawdown is a pretty common occurrence; some bear markets are much worse.

Once again, sticking to a diversified index fund like Vanguard S&P 500 Index ETF is a solid middle-ground approach. If you are risk-averse, adding notable bond exposure to your portfolio could be the right choice. For some, the best fit is a balanced fund, outsourceing the entire investment process to a third party. That lets you focus on saving money rather than worrying about investing.

The “right” investment structure is entirely subjective

If you know where you are on your savings journey and carefully consider your risk tolerance, you can better assess if your portfolio is structured “right” for you. It is important to remember that, if you are behind where you want to be, the answer may not be to take on more risk. The proper solution for you could be to try to save more and keep your portfolio structured as it is now. And if you are well ahead of your goal, the right answer for you might actually be to reduce your risk even more (perhaps adding more bonds) because you don’t have to be as aggressive anymore.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.