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Financial Planning

5 Mistakes You May Be Making in Retirement Planning

2019-12-12

How Do I Start Saving for Retirement? 

The best way to start is to set a contribution goal so you know how much of each paycheck to put towards savings. However, while setting contribution goals is relatively easy, sticking to them is often more difficult. A common retirement savings mistake people make is prioritizing more immediate goals over retirement. But don’t let having less to save keep you from saving whatever you can. The key is to create a plan that helps you balance your saving habits across all your important goals.

Why Should I Max Out My Contributions for Retirement? 

Two of the most straightforward retirement savings vehicles are a Thrift Savings Plan (TSP) and a 401(k). These plans often offer employer matching, which means your employer contributes to your TSP or 401(k) when you contribute. You can think of this as free money going into your account. If you’re eligible for employee matching, we recommend you contribute at least as much as your employer will match. It’s important to find out the parameters of your employer’s particular TSP or 401(k) program and get the maximum benefit available to you.

Which Account Should I Invest in for Retirement?

The two main types of retirement savings accounts are IRA accounts and 401(k) or TSP accounts. Both have traditional and Roth options.

What Is the Difference Between an IRA and a 401(k)? 

The main difference is the contribution limit. In 2019, an IRA has a $6,000 contribution limit for those under 50 and a $7,000 contribution limit for those over 50. 401(k) and TSP accounts have a contribution limit of $19,000. Another key difference is that an IRA is self-driven while a 401(k) or TSP is employer-sponsored. Besides potentially offering contribution matching, employer-sponsored plans make retirement saving more automatic by directly diverting a portion of your paycheck to the account each pay period.

Why Is Diversifying My Investments Important?

Diversifying your investments is crucial for mitigating unnecessary market risks and exposing you to the greatest potential for returns — and it can be easy to start.

Why Are Mutual Funds Important?

Mutual funds allow investors to pool their investing dollars together, eliminating the need for investors to purchase individual stocks. Mutual funds also eliminate the temptation to invest large sums of money in individual stocks — a strategy that rarely works out well.

How Should I Calculate My Risk Tolerance?

Risk tolerance depends on a few factors, including your time horizon, which is when you'll need the funds you're currently saving. For instance, if you plan to retire in three years, you will need to ensure that your money is ready for you in the short term, so you’ll have a lower risk tolerance. But if you plan to retire in 30 years, you can afford to have a higher risk tolerance because you have more time to grow your money and can withstand greater market volatility in your portfolio. Calculate your own risk tolerance now at aafmaa.com/risk.