Other Investment Opportunities
Both saving and investing are important components of financial success. Knowing when to save and when to invest depends a great deal on your personal goals and timeline for completing them. You must also assess your tolerance for risk. Only then can you choose a suitable investment vehicle.
Short- and long-term goals call for short- and long-term investment options
Everyone has financial goals in life, whether it’s saving for a new house or paying off debt. Military members and their families should clearly define their goals, which makes them more attainable.
Most people have both short- and long-term goals. Short-term financial goals, such as setting up an emergency fund or buying a new set of tires, mean that money should go into a federally insured bank account or certificate of deposit. Longer-term goals like retirement and college savings are better in an investment vehicle that will grow over time.
Putting your money in the wrong type of account for the wrong purpose can have negative consequences. Taking money for vacation out of a retirement account, for example, can result in penalties and additional taxes. Conversely, saving for retirement in a simple savings account at a bank may mean that you lose money over time because the rate of interest you are getting does not keep pace with inflation.
Risk versus reward
Once you have categorized your goals and decided to invest, you must assess your risk tolerance. All investments carry some risk. Generally speaking, the higher the risk, the greater the potential reward — but also the increased chance of loss.
Your time horizon for needing the funds should also play into your plans for investing. If you need the funds soon, typically five years or less, you may want to consider a less risky set of investments. On the other hand, if you are investing for a long-term goal like retirement, time can serve as a protection against risk: The market may rise and fall, but over a period of many years, it has tended to rise.
There’s also a personal component to risk assessment: each person has a different tolerance for risk. If an investment option causes you to lose sleep at night, it may not be a good fit for you.
Diversification is key
Diversification, which means owning a mix of different asset categories such as cash, stocks and bonds, is important because it helps minimize risk to your savings. You should also seek to diversify within each category. Although a mutual fund typically invests in many different stocks, bonds or other investments, it may focus on just a single industry or sector. A diversified fund may be a better choice.
Your investment choices should remain in alignment with your needs. Because these may change with important life events, such as marriage, birth, promotion or transition out of the military, it’s important to frequently reassess and rebalance your portfolio. Some investors take a look at their holdings and rebalance their portfolios at certain calendar intervals, such as annually or semiannually while others rebalance only when their needs or the market change.
Employer sponsored, individual — or both?
You can save for retirement in an employer-sponsored type plan, like the Thrift Savings Plan, or TSP, in a self-directed plan, like an Individual Retirement Account, or IRA, or in both at the same time. The main differences between these types of plans are their contribution limits.
For 2019, service members can contribute $19,000 to their TSP accounts. Eligible individuals can contribute $6,000 to an IRA. Non-working spouses can also open an IRA.
Tax deferred versus tax free
Income tax treatment is yet another aspect to consider when choosing investments. When you contribute to a tax-deferred account like the traditional TSP or a traditional IRA, you make contributions before income tax comes out of your pay. This reduces your current tax bill, but you will pay taxes on your contributions and earnings once you withdraw them.
If you contribute to the Roth TSP or a Roth IRA, you make contributions after taxes come out of your pay. You’ll pay income taxes now, but when you take distributions, you won’t pay any tax on contributions or withdrawals.
Investing is a key part of your overall financial well-being. Get no-cost, trusted information and help assessing your personal financial situation. Make an appointment with an accredited personal financial manager or personal financial counselor at your nearest Family Center.
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