Saving for retirement can be complicated. How much should you save? Which accounts should you invest in? How can you make the most of your savings? They’re all difficult questions to answer. The best retirement savings plan will consider your unique needs and a variety of different factors. And yet, there are still a few common mistakes that everyone should avoid when planning for retirement.
1. Not Saving
One-third of Americans haven't started saving for retirement, according to a recent survey by GoBankingRates. If you’re part of that demographic, there’s no time like the present to start, so you can maximize compounding returns.
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 (such as saving for a new house) 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.
2. Not Maxing Out Your Contributions
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.
Let’s look at an example: If your employer offers to match your first 2% contribution at 100% and your second 2% contribution at 50%, this means that when you contribute 2% of your pay, your employer will contribute 2% as well. Then if you contribute another 2%, or 4% total, your employer will add another 1% or 50% of that second 2%. So in this instance, you should contribute 4% to receive the maximum employer match contribution of 3%.
3. Investing in the Wrong Account
Not all retirement savings accounts are created equal, and making the most out of your money requires some strategy. Finding the right account for you can help make the most of your savings.
The two main types of retirement savings accounts are IRA accounts and 401(k) or TSP accounts. Both have traditional and Roth options. 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.
4. Lacking Diversification
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.
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.
The best way to diversify your portfolio is by working with a professional who can provide advice and insight into your unique scenario. Fortunately, you can assess your investments with a complimentary portfolio review from AAFMAA Wealth Management & Trust LLC (AWM&T). Begin yours today.
5. Inappropriate 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.
Get on Track for a Successful Retirement Today
An AWM&T Relationship Manager will work with you to create a financial plan tailored specifically to your needs. Contact AWM&T today to review your complimentary portfolio review and get on the path to financial success.