Should I make more conservative investments in my company 401(K) if I'm going to leave the job in a couple of years?
I'm about to start a new job and the company offers a Roth 401(K) with a 10% employer match. I plan to only work this job for two years before leaving to go back to school. Should I be conservative in my asset allocations in this account because realistically my investment horizon is pretty short (again, only talking about this account). Conservative is relative here obviously but I mean conservative based on whatever my risk level is?
My rationale is because my time horizon for this account really is pretty short, only a couple of years. When I leave the company in a couple of years I want to roll my 401(K) into a IRA, also roth. Example: If I put most/all my 401(K) funds into riskier investments like the stock market, small caps, whatever, and the stock market drops 30% right before I do the roll over I basically have to sell my 401(K) at a low point. My horizon in my IRA is a lot longer so the drop doesn't bother me, but in my 401(K) I basically want to have this money available in a short time span (a couple of years) to put it into my IRA.
Yes if the stock market or whatever risky investments I could choose keep climbing over the next couple of years I would miss out on those gains, but I don't know what they'l do in the future.
More info: Ryan said in the comments that I should think about if two years turns into a lot more. My employer's match is 20% vested after 1 year, 40% after 2 years, up to 100% at 5 years, so I guess one thing I could do is invest my employer's match in riskier investments and my personal contributions in something less risky. Then if the riskier assets bomb and I leave after two years I still have all of my contributions and some free money from my employer, but if the market keeps rising and I stay for longer, I still have all of that growth once I'm more vested.
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It doesn't make a difference if you will be keeping it in the 401K or transferring it to an IRA, it is still retirement money that you plan on investing for decades.
Pre-Enron many employees invested significant amounts of their retirement funds with the employer. One of the risks was that if a single stock was down at the wrong time, you were hurt if you needed to sell.
If you are going from an S&P 500 in the 401K to an S&P 500 in the IRA, it doesn't matter if the the market is up or down, the two funds will be pretty much in synch.
My advice would be to invest in the 401k with the same type of funds you'd purchase when you rollover to your IRA. They are both retirement accounts. If the stock market tanks, your 401k balance will be low but you'll also be purchasing stocks at a much cheaper price when you establish your roth.
You should create an asset allocation based on your age, not on the type of retirement account you have.
One question to consider: When you do become a student, you'll likely be a in lower tax bracket. Can you contribute pre-tax dollars and then rollover to a ROTH in the year that you're a student?
Your retirement PLAN is a lifelong plan and shouldn't be tied to your employer status. Max out your 401(k) contribution to the maximum that your employer matches (that's a 100% ROI!) and as much as you can afford.
When you leave the work force rollover your 401(k) to an IRA account (e.g.: you can create an IRA account with any of the online brokerage firms Schwab, E-Trade, Sharebuilder, or go with a brick-and-mortar firm like JP Morgan, Stifel Nicolaus, etc.).
You should have a plan:
How much money do you need/month for your expenses?
Accounting for inflation, how much is that going to be at retirement (whatever age you plan to retire)?
How much money do you need to have so that 4.5% of that money will provide for your annual living expenses?
That's your target retirement amount of savings.
Now figure out how to get to that target.
Rule #1 Invest early and invest often! The more money you can sock away early in your career the more time that money has to grow.
If you aren't comfortable allocating your investments yourself then you could go with a Targeted Retirement Fund. These funds have a general "date" for retirement and the assets are allocated as appropriate for the amount of risk appropriate for the time to retirement.
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