What is the best choice to make when starting a retirement plan?

I am 23 years old and just landed my first full-time position. I certainly will contribute the maximum amount to my 401(k) to receive the company match. Having said that, what would be your most crucial piece of advice to someone who is just beginning to save for retirement? Is there anything specific you would recommend I know? Moving forward, what choices should I make in terms of the type of account I should be contributing to and the types of investments I should be applying?

Financial Planning, Retirement Savings, Investing
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April 2017

A successful retirement plan will always be a work in progress, keep that in mind.  Your success or failure can come from any number of factors: a change in your personal life, the ability to contribute and save, market forces, etc., all will have some effect. Your odds of achieving your goals requires that you participate, set realistic expectations, and follow a 'best practice' approach.

The general pecking order of retirement savings options is to contribute to a Traditional IRA or a Roth IRA. The longer the time horizon until you need access to the funds generally dictates which to use.

For individuals, whose income and tax bracket would drop significantly after retirement, a Traditional IRA may make more sense.

The longer you can wait to access the funds, the better the Roth IRA becomes. The Roth IRA is a great vehicle for those whose tax bracket will remain high after retirement.

Traditional IRA contributions are tax deductible on both state and federal tax returns for the year you make the contribution, while withdrawals in retirement are taxed at ordinary income tax rates. Roth IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free.

401(k), IRAs, and other retirement plan annual contribution limits are adjusted each year for inflation. Stay aware of what that number is and if possible, max out your contributions to them yearly.

Regarding specific investments, Know Your Level of Sustainable Risk. With a 401(k) Plan, you will more than likely select from an asset allocation to best meet your investment goals and, generally, a risk assessment is part of your on-boarding for the 401(k) Plan. I recommended that you check annually to see that your allocations to stocks, bonds, international investments, and other asset classes still are in line with the asset allocation you initially selected.  Also, keep on top of your plan. Most change yearly, adding or removing investment options. Review the new options (if any) to determine whether you should reallocate all or a portion of your contributions or if a fund you were using has been replaced, and if its replacement makes sense for your strategy going forward.

Within an IRA, you will have more control over what you own versus a 401(k). Whether using Mutual Funds, ETFs, Bonds or Stocks, clarity and discernment should be the core of your investment philosophy. Invest in quality, undervalued companies, stay vigilant, and adhere to your investment plan. Diversification is essential, but over-diversification can equally dilute a portfolio’s ability to grow over time.

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