How risky do you go in your 401k?

[Will]

I don't think I've seen this addressed, but I was wondering:

We all know that when you are working you should plow a lot of money into your 401k (I see a lot of people advocating the full $17,500).  If you are planning on retiring early then that would mean that you would be quitting your job and rolling your 401k funds over into your own retirement account(s) held elsewhere.  Since the timeframe is hopefully much shorter than those who aren't retiring early, do you take less risk since you will be "needing" the money earlier? 

[Khan]

I'm full on risk, I have about 90% equities in my 401k, 10% bonds. The equities are split between all classes, small, large, foreign and emerging.

[Joel]

My 401k is just a part of my overall asset allocation.

Bonds = Half my age.
Stocks = Remaining percentage. (70% U.S. / 30% International)

I hold all my bonds in tax-deferred accounts, and all my international stocks in taxable accounts. Additionally, I try to make sure my Roth account includes all stocks, as they are likely to have the largest returns, and I want those to be tax-free.

[sdp]

Like Joel, My 401(K) is part of my total asset allocation.  I pay special attention to what the 401(K) plan offers and try to choose the best quality/lowest cost options within those limited offerings, but in the grand scheme of things I look at it within the whole picture of my asset allocation.  Mymore volatile holdings such as small cap, mid cap, emerging markets that have the potential to get rebalanced more often are in the tax advantaged accounts.

[Frankies Girl]

Same thing as Joel and sdp - I don't consider it a separate part, so it holds some of my overall asset allocation.

If you were to just look at my 401K it is 100% stocks, but bigger picture, I'm something like 80/10/9 (stocks/bonds/REIT). IRA holds the bonds/REIT and stock index in the taxable so they are the most efficient.

And I'm not worried about having too much in retirement type accounts. I plan on doing a Roth pipeline, so getting the money out tax and penalty free is possible. It helps that I have a very well padded taxable account, so I'm maxing all of the tax-deferred accounts that I can.

[wtjbatman]

I don't take into account my 401k when looking at my asset allocation, due to my wonky 401k. I don't get an employer match, so I just started it to collect the various profit sharing/bonuses they occasionally decide to bestow on us. Also, the fund options stink. I put whatever gets contributed to the account into an index fund (VINIX), the only available option with an expensive ratio lower than like .60. VINIX is all large cap stocks, so it's not uber risky, but the balance of my 401k is technically 100% stocks. About risk, my time frame to retirement might be shorter than the average person's, but it's still at least 20 years away. So even outside of my 401k, my AA is 100% equities and 0% Bonds.

Basically my 401k is just there to collect a few bucks until I find a new job and can roll it over into an IRA so I can actually invest the money how I want.

[sdp]

..... I like how you said expensive ratio......

[wtjbatman]

..... I like how you said expensive ratio......

When I have typos in my reports at work, my boss sends them back to me with the offending words highlighted in yellow. You can do the same for me here ;)

[Reepekg]

Max out yearly with 100% S&P 500 index fund. That might sound risky until you realize it's the only option with an ER < 0.5%.

[Dulcimina]

I agree with Joel, Frankies girl and SDP about asset allocation. I have a "slice and dice" portfolio across TSP, Roth, HSA and taxable account that I rebalance once or twice a year.   The "riskiness" of each account varies whenever I rebalance, but overall I maintain an asset allocation that let's me sleep at night.
As to needing the money earlier, that's true.  But I'm also looking at a likely 30-50 year investing timeline after retirement.  To balance the two, I'll probably keep a 2-3 year EF when I retire, enough to ride out any bumps in the stock market while the remainder is fully invested.

[sdp]

wtjbatman, I thought maybe you did it deliberately, I think it is awesome, definitely more descriptive....
Cheers,
Scott

[ShavinItForLater]

I think the premise you're outlining is flawed.  The act of quitting and moving your 401k to an IRA does not alter the timeframe of when you will need or use the funds.  Even if you are going to spend some money earlier due to early retirement, you would still be living off your investments for the rest of your life. 

You might decide to take less risk with the portion of your funds you expect to use within the next 5 years, but for everything else, I think a normal investment asset allocation makes sense.

I think a lot of people assume a much shorter investment time horizon than they should.  For example, we have been saving for my kids college in 529 plans, and their grandparents also started a 529 for each of them.  A year or so back (kids were 11 and 13), my mom asked me if she should go with less risky investment choices.  I told her absolutely not--the oldest has 4+ years until he *starts* college, but will need the money over (hopefully only) 4 years--so the overall time horizon is 6+ years for him, and 9+ for the younger since he is 3 grades behind.

Retirement in my opinion should be viewed the same way.  *Starting* retirement is just the beginning of using those investment funds.  Your average time horizon would be more like the midpoint between now and your life expectancy age.  Retiring early if anything extends your time horizon compared to someone retiring at 65 or 70--they have many less years ahead of them compared to someone retiring in their 30s or 40s.

Personally, we have our retirement money mixed between the total US stock market, international stocks, and REIT funds.  Lately all of our 401k contributions have been going into international, to raise the asset allocation vs. US funds.  We currently have no bonds at all--probably should have some, but I admit to being guilty of some market timing, and I think it's an awful time to invest in bonds.

Full disclosure, we also have way too much of our net worth in a single stock that we could not sell until just recently (IPO lockout).  We had no control over that until now, and the plan is to convert that into the other categories of funds over the next year or so.  That stock is in a taxable account, so in our case, we will most likely have much more outside of our 401k/IRAs than in, and will be maxing our 401k contributions until retirement to get as much tax deferral as we can.

[the fixer]

Traditional retirement advice says those of us within 10 years of retirement should be pretty heavy on bonds, but what's missing is a key piece of the risk assessment. If you're young you have a high ability to take risk. If Sally's target retirement date had been in January 2009 at age 30, using nothing but a high-stock portfolio would have destroyed her chances of meeting that target because of the financial crisis. But there was nothing saying that she needed to retire at that time. By working for an extra two-ish years and saving during that time, the portfolio would recover.

[arebelspy]

Bonds = Half my age.

I like this!

The rule of thumb I usually hear is 100- your age in stocks, or 120-age in stocks if you want to be "aggressive."

Bonds as half your age I like even better!  It's quite aggressive, which I think is best, if you can stomach it.  Thanks for sharing!

[Eric]

I think the premise you're outlining is flawed.  The act of quitting and moving your 401k to an IRA does not alter the timeframe of when you will need or use the funds.  Even if you are going to spend some money earlier due to early retirement, you would still be living off your investments for the rest of your life. 

I agree with this.  The premise was that the timeframe is shorter, but really, it's much longer than your normal retiree.  You'll be living off of your retirement funds for decades longer.  (Hooray!)  So you still need the growth afforded by stocks to make your stash last the duration.