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As a forty-something with a spouse and two children under 10, how risky should I be with my 401(k) investments?


Along with any plan that your wife may have in her own name, your 401(k) represents money that’s intended to fund retirement for the two of you. Your contributions should be invested with that in mind. Your portfolio should be diversified between stocks and bonds, perhaps with other assets sprinkled into the mix, too, in a way that provides sufficient growth to pay for the kind of retirement that you desire. That means taking on risk, but not so much that the odds of severe losses in a bear market reach unacceptable levels. The older you get, the less time and opportunity you have to make back such losses, so financial advisers encourage retirement savers to reduce exposure to stocks, especially more volatile ones in niches like smaller companies or emerging markets, as retirement approaches and to nudge up the portion of their portfolios allocated to high-grade bonds and, with retirement imminent, to cash.

How should your kids factor into your decision making? Well, it’s hard to see that they should at all. By the time you retire, they almost certainly will have started their own independent lives. What you have saved for retirement has nothing to do with them, and vice versa. If your concern is that you won’t have enough to cover anticipated college expenses, then you should consider setting up a 529 plan, which offers some of the tax incentives of a 401(k) but is designed explicitly to finance education. You should not plan on taking a distribution from your 401(k) to meet the same goal.

As for what investments to put in a 529, it sounds as if your children have around a decade, maybe more, before they would head off to college. That could be less time than you have until you retire, but it’s probably long enough that you can afford to take some prudent chances. If indeed you’ve got potentially competing objectives – retirement, education – it would make sense to see a fee-only financial adviser to go over your options and devise retirement and education portfolios with the right mixes of assets based on your ages, needs, goals, financial situation and tolerance and appetite for risk.

-Conrad de Aenlle