Personal Finance

The bulk of my wealth is tied up in my 401(k) and IRAs - how I can diversify my portfolio?

Rich Duprey

Published: November 20, 2024 9:40 am

Last Updated: January 30, 2025 1:53 pm

24/7 Wall St. Key Points:

• Most people will have their retirement savings locked away in 401(k) and IRA accounts because of their tax-advantaged nature.
• Yet some individuals also have a lot of their wealth tied up in company stock through ESOPs and RSUs.
• Having a large amount of your retirement finances hitched to the long-term health of your company is risky, so diversifying away from it is an essential first step.
• Also: Take this quiz to see if you’re on track to retire ^(Sponsored)

Saving for retirement is critical to your long-term financial security, but it is essential to not have the majority of your wealth concentrated in any specific account or asset. Having all your eggs in a basket such as a 401(k), IRA, restricted stock units (RSUs), or an employee stock ownership plan (ESOP), poses a potential risk. 

That’s the issue facing this Redditor on r/ChubbyFIRE where he has the vast bulk of his retirement savings in a 401(k), IRAs, and real estate. Yet he also has a smaller, though not inconsequential amount in RSUs, and an even smaller amount in an ESOP. He’s wondering what an optimal diversification strategy might look like.

While any strategy depends on individual goals and constraints, a generalized approach would seek to minimize any concentration risk, while increasing exposure to more diverse asset classes. You would also want to ensure liquidity while minimizing the bite the tax man will take.

I’m not a financial planner or a tax professional, so these are just my opinions, and a professional advisor can provide tailored guidance, but I’d approach the situation as follows.

Diversify your investments

Although most people have a large chunk of their retirement savings in a 401(k) or IRA because of the tax-advantaged nature of the plans, the Redditor has the added wrinkle of a substantial amount of wealth tied to his employer. Despite his belief in the long-term prospects of the company and the direction of the stock price, he should begin selling the RSUs as soon as they vest.

There are several reasons for this:

• It avoids over-concentration in a single stock as selling RSUs lets you diversify your portfolio’s holdings.
• Because RSUs are taxed at vesting as ordinary income, selling after vesting may incur capital gains taxes on any appreciation.
• If the stock price falls, you may pay taxes on the higher vesting price than what you realized.
• It gives you immediate access to cash while avoiding having your wealth simply tied to a stock certificate.

These are just some reasons why planners will suggest you sell RSUs as soon as they vest. However, your decision should align with your overall financial plan and risk tolerance. That’s why consulting a financial advisor can help you weigh the pros and cons based on your circumstances.

The Redditor should then address his ESOP holdings and sell when possible. Many of the same reasons for selling RSUs apply here. It avoids the concentration risk of owning too much company stock. You want to avoid having your retirement finances dependent on your employer’s health.

Rebalance your retirement accounts

By buying a mix of stocks, bonds, and index funds through your 401(k) and IRAs, you can better align your assets with your risk tolerance and the horizon for your retirement. Being more aggressive early on is okay, but as you near retirement age you may want to become more conservative in your investment choices to preserve capital.

An annual rebalancing of your accounts can ensure that no one investment grows too large and puts your portfolio as risk of a collapse. 

It would also be a good time to incorporate international stocks and funds into your portfolio as well. This gives you geographic diversification along with asset diversity.

Reassess your real estate portfolio

Real estate is often an illiquid asset, and it could put any property out of sync with your retirement needs. It might be more appropriate to see the physical real estate and direct the proceeds to real estate investment trusts (REITs). It gives you both exposure to the asset class but also the liquidity you might need.

Key takeaways

There is no optimal, one-size-fits-all diversification strategy. It all depends on individual goals and needs. Yet the idea remains to reduce any concentrated risks such as being too closely tied to employer-specific investments, while increasing your exposure to diverse asset classes.

Again, a financial advisor and tax professional can offer guidance and advice that will minimize your tax obligations while achieving long-term financial stability.