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The Most Important Factor in Retirement Saving

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Photo courtesy of André Freitas via

We’ve all been there: making decisions about the ol’ retirement savings account. It doesn’t matter if it is a Roth IRA, a traditional IRA, a 401(k), or a deferred comp plan, there are many different decisions that you need to make.

It can be overwhelming, until you step back and realize that there are actually only three primary decisions to make about retirement savings:

  1. How much to contribute
  2. How to allocate between asset classes (stocks and bonds; as well as within the sub-classes like large-cap, mid-cap & small-cap stocks; corporate bonds, government bonds, etc.)
  3. Which funds/investments to choose

Once you embrace the above, it becomes much easier to start the decision-making process for your retirement savings. But here’s something about that process that I’ll wager you didn’t realize – one of those three decisions is significantly more important to the overall success in your plans. There is also fourth factor* that we’ll get to later that you may not have considered.

The most important decision you can make with regard to your retirement saving activity is the first one in the list – How much to contribute.

This one factor makes a much greater difference in the outcome of a retirement savings plan than the other two possibly can, even in the best of circumstances. By choosing to save as much as possible, we are laying the groundwork for the other items, allocation and fund choice, to optimize upon the greatest possible foundation.
Fund choice can make the largest difference in the later years of a plan (that is, if you keep your costs down). Aggressive allocation makes a smaller difference since your funds will likely need to weather some significant volatility in an aggressive profile.

The rule of thumb generally is that you should set aside at least enough retirement savings to get the maximum from your employer’s match, assuming that a match is available to you. Above and beyond that, it is important to ensure that you’re salting away as much savings as you can, so that compounding can begin on as large an amount as possible.

This doesn’t mean that you should not pay careful attention to allocation and fund choices – but experience tells us that you can make a mistake here and there with allocation or fund choice, and it won’t sink the boat.

* The other factor that I alluded to earlier is having a plan, and the discipline to stick to it. That means developing goals, mapping out how (incrementally) you will achieve those goals, and then putting the plan into action – sticking to it, through thick and thin, and continuously monitoring your progress. I know, I know, you’re saying to yourself, “what a shock, the planner-guy is advocating that we have a plan”. Touché. Okay – so I believe in what I do. I recommend that you develop a sound financial plan regardless of whether you hire me to do it. I sincerely believe it is one of the primary factors in determining success in reaching your lifelong goals.

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