401k Asset Allocation Strategy

401k plans are the best when it comes to retirement planning but you don’t know how much to invest when you are at a particular age of your life. The best 401k investment strategy by age can be calculated as per the fact you should have atleast have at least 30 times the money you will spend annually as you might not be able to work at the time of the retirement due to various factors such as your age, health and the economic changes going around in the world. Therefore let’s find out the best 401k strategy by age, 401k asset allocation by age and also know about what is the aggressive 401k strategy.

Table of Content

What is the Best 401k Investment Strategy by Age?

The best 401k investment strategy by age is to follow a 4% rule. You should have at least 25 times of your annual expenditure minus retirement income which is being saved in your 401k. Let’s clear that by taking an example. If you have $50,000 as your annual expenditure, you will get $20,000 as a social security and then you will need at least 25 times of $30,000 when you retire which will correspond to $7,50,000. Therefore we should consider the following factors while investing in 401k considering the age:

  • At what age will you retire.
  • Returns on the 401k investment from the current day till the age of your retirement.
  • How much you will earn and save in the coming years.
  • What amount of money will be enough for retirement.
  • You are investing in other retirement schemes along with 401k.

If we considered the age factor we can follow the following strategy which can be a best 401k strategy by age, considering your minimum age in 30’s

The Best 401k Investment Strategy By Age

Age Income Saved For your Retirement from Salary
30 1x
35 2x
40 3x
50 4x
55 5x

If we follow the norm of investing considering the age of a person one should start early and plan for a long term investment. It is also important to increase your contribution by 1% every year.

What is the Best Strategy for 401k Asset Allocation by Age?

Assets are the most important part of 401k investment. When you are investing in 401k you have the option to invest your returns in bonds, mutual funds, target date funds (TDF’s) and bonds. You should make your portfolio based on your age with the help of 100rule. You should subtract your age from the 100 and invest accordingly. Let’s see what’s the best asset allocation by age in the table given below:

401k Asset Allocation by Age

Age Assets to Keep in 401k
25 Stocks – 86%, Bonds – 6%, Cash – 8%
30 Stocks – 80%, Bonds – 9%, Cash – 11%
35 Stocks – 76%, Bonds – 10%, Cash – 14%
40 Stocks – 71%, Bonds – 12%, Cash – 17%
45 Stocks – 65%, Bonds – 15%, Cash – 20%
50 Stocks – 61%, Bonds – 16%, Cash – 23%
55 Stocks – 56%, Bonds – 19%, Cash – 25%
60 Stocks – 51%, Bonds – 21%, Cash – 28%

The calculations in the table are based on the fact that you have current assets of the value $1,00,000 and your savings per year are $5,000. The marginal tax-rate during the time of calculation is kept at 28%, risk tolerance and economic outlook is kept at the rate of 5. It is the best thing while investing in 401k that you have diversified portfolios so that you have limited long time risk portfolios.

You can check the graph below for 401k Asset Allocation by Age:

Target-Date Funds

Target-Date Funds (TDF) are the best way to manage your accounts in which you can invest through major fund companies. They are the best as they automatically adjust your assets in a low volatile that is less risky securities as you will near your retirement age. They will automatically rebalance your 401k portfolio with the time. Most of the 401k plans are offering target-date funds and you can check out with your provider for the same. TDF’s managed by different firms have different asset allocation rules, so choose wisely according to the risk tolerance value you can afford. So we can say that if you are not aware of your financial portfolios you can keep target-date funds which will be the best method for 401k asset allocation by age.

What is an Aggressive 401k Strategy?

When you start investing in 401k as early as your 20’s you should invest more in stocks rather than bonds. Stocks are highly volatile and can give you more returns than cash deposits and bonds. Therefore the people who are going to retire with their 401k would want higher returns from their investments. Therefore investing in stocks for your retirement is one of the methods for Aggressive 401k Strategy. Many people take risks by following an aggressive 401k investment strategy, though if you choose target-date funds, they will automatically convert your aggressive assets into the safer ones when you are approaching your retirement age.