Here's some advice you don't hear everyday: Invest conservatively in case you need to dip into your 401(k). That's straight from Scott Burns, a former Dallas Morning News columnist, cofounder of online investment advisory AssetBuilder and creator of the "Couch Potato Portfolio."
His reasoning hinges on job security. "At this age, you're urged to take risk, but in fact your career is vulnerable, so you should invest more conservatively when you're in your 20s or 30s than you might otherwise," says Burns, who is also an investment strategist. "At this point, your human capital vastly exceeds your financial capital. You need to be a flexible tool to help you maximize your human capital."
The tool he's talking about is your investments—specifically, your 401(k) plan. "It's kind of a rollercoaster when you're in your 20s. Life is full of pitfalls and disasters; it's conceivable that you'll have to access some of your 401(k) savings," he says.
But what about the often-dispensed advice that you should (a) invest aggressively when you're young, and (b) not touch your 401(k) until retirement?
Says Burns: "The trouble with the financial service industry is that it focuses on the top 5 percent to 10 percent of the population, but for the 95 percent of people who earn less than the Social Security wage base [the amount of income that is subject to Social Security tax]—which was $102,000 this year—there are things more important than what fund to pick." How conservative to invest depends on your assessment of the security of your job, says Burns: "You want to line up your liquid financial resources with your risk in your life."
But that's where an emergency fund comes in, right? In this Morningstar column, analyst Christopher Davis says a lot of folks disagree that it's always a bad idea to borrow from your 401(k). Davis points out that although taking a 401(k) loan is better than taking a permanent withdrawal, borrowing will set you back because you'll miss out on gains you would have had otherwise. The bottom line: 401(k) loans are a last resort.