Should I invest in 401k or index funds?
A 401(k) account's major edge over an index fund is the tax advantage. Contributions to 401(k) accounts are pre-tax. Owners don't pay taxes on dollars they put in or the earnings from their investment portfolio until they start withdrawing funds.
The Bottom Line. For most people, the 401(k) is the better choice, even if the available investment options are less than ideal. For best results, you might stick with index funds that have low management fees.
Individual Retirement Accounts
With an IRA, you can invest in various securities or financial instruments. "The IRA is a great investment vehicle. However, more than 85% of investors aren't aware of all the benefits that an IRA provides.
Index funds typically offer lower costs, broad market exposure, and simplicity, while target-date funds are a hands-off, all-in-one investment vehicle. Factors to consider when choosing between target-date and index funds include your investment goals, risk tolerance, and time horizon.
It is a fairly safe plan If you don't want to have to manage it much and are fine with the returns. The S&P 500 in an index fund averages 8% a year and needs no management.
The best index funds for retirement offer growth potential and solid risk management that aligns with your time to retirement and risk tolerance. For long-term growth, consider broad-market equity index funds like the Vanguard Total Stock Market Index Fund (VTSAX) or the Fidelity 500 Index Fund (FXAIX).
While you shouldn't stop investing in your 401(k) during a market downturn, there are some things you can do to help protect your saved cash. Set retirement goals: Without a plan, going into any extensive life choice isn't a promising idea. The same goes for investing.
According to Fidelity, there were 378,000 millionaires with 401(k) accounts in the second quarter of 2023, up 10% from the year-earlier period. (Fidelity also reported nearly 350,000 millionaires with IRA accounts, up 13%.)
If you don't have enough money to max out contributions to both accounts, experts recommend maxing out the Roth 401(k) first to receive the benefit of a full employer match.
In many cases, a Roth IRA can be a better choice than a 401(k) retirement plan, as it offers more investment options and greater tax benefits. It may be especially useful if you think you'll be in a higher tax bracket later on.
Is Fidelity 500 Index Fund good?
Our recommendation for the best overall S&P 500 index fund is the Fidelity 500 Index Fund. With a 0.015% expense ratio, it's the cheapest on our list. And it doesn't have a minimum initial investment requirement, sales loads or trading fees.
About FXAIX
The S&P 500 has been widely touted by many experts as a good addition to retirement portfolios because it is broadly diversified across all sectors. It can also withstand volatility because it is not focused on one industry.
| FUND | CATEGORY |
|---|---|
| Fidelity 500 Index (FXAIX) | U.S. large-cap blend |
| Vanguard Mid Cap Index Institutional (VMCIX) | U.S. mid-cap blend |
| Vanguard S&P Small-Cap 600 Index (VSMSX) | U.S. small-cap blend |
| TIAA-CREF International Equity Index Institutional (TCIEX) | Foreign large blend |
The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and remove that dollar amount, adjusted for inflation, every year after. The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.
To be sure, if you have the time, knowledge, and desire to create a portfolio of individual stocks, by all means, go for it. But even if you do own individual stocks, index funds can form a solid base for your portfolio. Index funds offer investors of all skill levels a simple, successful way to invest.
Lower-risk investment types can help maintain the value of your 401(k), but it is important to consider that lower risk usually means lower returns. Bond funds, money market funds, index funds, stable value funds, and target-date funds are lower-risk options for your 401(k).
While indexes may be low cost and diversified, they prevent seizing opportunities elsewhere. Moreover, indexes do not provide protection from market corrections and crashes when an investor has a lot of exposure to stock index funds.
Disadvantages include the lack of downside protection, no choice in index composition, and it cannot beat the market (by definition).
A 401(k) plan typically also offers a limited selection of investments. Generally, the choices consist of a handful of the index and target-date funds. Most don't let employees invest in individual stocks and bonds.
The worst thing you can do to your 401(k) is to cash out if the market crashes. Market downturns are generally short and minimal compared to the rebounds that follow. As long as you hold on to your investments during a bear market, you haven't lost anything.
Where should I put my 401k during a recession?
Bonds, on the other hand, are safer investments but usually produce lesser returns. Having a diversified 401(k) of mutual funds or exchange-traded funds (ETFs) that invest in stocks, bonds and even cash can help protect your retirement savings in the event of an economic downturn.
- Key retirement planning statistics.
- Long-term investing.
- Match your retirement plan with your time horizon.
- Make sure your portfolio is set up for success.
- Additional retirement investing strategies and planning resources.
One of those tools is known as the Rule 72. For example, let's say you have saved $50,000 and your 401(k) holdings historically has a rate of return of 8%. 72 divided by 8 equals 9 years until your investment is estimated to double to $100,000.
If you plan to rely on your 401(k) during retirement, you might consider contributing the maximum annual amount, which is $23,000 or $30,500 (aged 50 and over) in 2024. Not only would this build your retirement fund more quickly, but you could also benefit from tax perks and employer matches.
The average age of a retirement account millionaire is 59. "The key to saving for retirement is playing the long game and maintaining consistent contributions over time," Shamrell said.
