Which is Worth More Money, Your Home or Your 401(k)?

House | 401(k)It’s an interesting question isn’t it? Which is currently worth more money, your home or your 401(k)?

It’s sort of a trick question. Sort of. The point is, if you had to tell someone what your two largest financial assets were, there’s a good chance you would list your home and your 401(k) in some order.

Now here’s another, more probing question: How much time have you spent searching for, cleaning, painting and organizing your home over the last few years compared to the amount of time you’ve spent reviewing, rebalancing and understanding your 401(k)?

And I’m not talking about those weeks earlier this year when the stock market was gyrating and you were checking your balance daily. That sort of reactive worrying doesn’t count for this question. No, I’m talking about time spent proactively ensuring that your 401(k) is set up properly, giving you the best chance of accomplishing the things that are important to you, keeping risk only if it’s necessary and acceptable and saving only what’s required.

Now, I want to pause and say that I realize our homes are full of what economists call “utility.” That is, there can be all kinds of intangible benefits built into homes that would be impossible and even insulting to account for monetarily.

But that being said, there is still a startling disconnect in how we care for those two assets, spending countless hours on our homes while often effectively ignoring our 401(k)s.  This phenomenon is captured well in this television commercial you may have seen. This is not an endorsement for that company, but their marketing department certainly nailed the current reality for many folks.

And while a blog about the importance of minding your 401(k) could go in several different directions, today I want to focus on just one:  The amount of stock you own in your 401(k) portfolio.

The amount of stock you own in your 401(k) portfolio plays a big role in your retirement saving outcome, especially when that amount is often set when you start working somewhere and never looked at again. Sure, whether you have 60% or 70% of your 401(k) portfolio invested in stock might sound a bit trivial, and even the fact that an investment portfolio with 60% stock has an expected return of 7.28%* vs 8.15%** for a 70% stock portfolio might not turn any heads either.

But what happens when we use those rates of return to do a simple future value calculation to figure out how much we might expect to have in our 401(k)s when we retire.  If we contributed $1000 a month to our 401(k) for 30 years and earned a 7.28% rate of return, we might expect to have about $1,297,386 in our account at the end of our career.  On the other hand, if we contributed the same $1000 a month to our 401(k) for 30 years and earned an 8.15% rate of return, our end value might be around $1,546,971.  That’s a difference of $249k or 20%.  Or, stated another way, using the 4% safe withdrawal rate rule (which is a whole other brief), we might expect an extra $10k a year in income for our retirement years if we invested in a portfolio that consisted of 10% more stock.

To be clear, I’m not necessarily advocating for more stock in your 401(k) portfolio. In fact, you might find that you are able to plan confidently with less, in which case you absolutely should. The lesson here is that a 10% difference in stock allocation can have a significant impact over a long period of time, and yet it’s a decision often made with little consideration and very rarely any reconsideration.

Of course, there are other factors that need to be considered when selecting the appropriate amount of stock for your portfolio.  Things like proximity to retirement and risk tolerance.  You wouldn’t want to invest 70% of your portfolio in stock if it caused you to lose sleep at night when the stock market takes a tumble.  But on the other hand, what if you were perfectly comfortable with the risk associated with a 70% stock portfolio and maybe even needed the growth of such a portfolio to accomplish your important goals? Wouldn’t you want to take the time to understand the importance of that decision?

Spend a few minutes ensuring that you own the appropriate amount of stock for your 401(k) (and any other account that plays an important role in your future.) And then make sure you stay at that level by setting up your account to rebalance automatically or doing so manually.

Need help figuring out how much stock you should own, or which investments to select?  Click here, we can help.

*60% Stock Portfolio – 53% Total Stock Market Index, 7% Total International Stock Market Index, 37% 7-10 Year US Treasury Bonds, 3% cash
*70% Stock Portfolio – 62% Total Stock Market Index, 8% Total International Stock Market Index, 27.5% 7-10 Year US Treasury Bonds, 2.5% cash
Geoff Hall
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My wife, Crystal, and I have been married for eight years and have two kids, Cooper (6) and Rhodes (4.) When I’m not spending time with them you might find me downtown serving at our church, pushing my limits during a mountain bike ride or having coffee with a friend in the Five Points area. I've been practicing wealth management for 24 years and I'm thankful for the privilege of shepherding my family of clients through the ups and down of the markets and of life for that matter.