I got a question recently that I want to share. It’s rare to find someone that has such a unique question that nobody else can learn from it.
I was speaking to someone about retirement accounts and the options for investing for someone in their 20s. Of course, the first thing I suggested was the mandatory 401(k) match, followed closely by the Roth IRA. In this specific case, there was no match available, just a traditional 401(k). So he wanted to know how much he could make investing with Lending Club, and IRA, and a 401(k).
We talked a little bit about how the Lending Club returns can be great, but is a little more involved as you have to choose the specific loans you want to invest in.
Then came the big question:
“So how much does a 401(k) make?”
Time for a quick refresher: You should always have control over your investment accounts. Whether you want to take risks with the hopes of earning higher investment returns is up to you, but almost all investment options come with variable returns.
You can’t simply say “I want to earn 7% each year, so I’ll invest in an index fund that tracks the S&P 500.” In some years it will work out, but in others it won’t.
Within a 401(k), there are many investment options. My options include some very conservative options, some benchmark index funds, and even some more risky funds that track emerging markets. I chose a nice mix, but people in different stages of their life will make different choices.
So the answer to the question?
There is no set return for a 401(k) (or IRA or other investment account), and the risk/reward is completely up to you.
The other lesson to be learned here is that investment options shouldn’t affect the type of account where you invest your money. Instead, the tax advantage and flexibility should be the major factors that affect your decision.
For example, a Roth IRA is great both for the tax benefits AND the flexibility of being able to withdraw contributions (and only contributions) at any time. And in my situation, the investments options are the same, so these two factors are the only ones that affect my decision.
Readers, what affects your decisions on how to invest? Which investment vehicle is your favorite?