Retirement Investments: A Beginner’s Guide
Choosing the right investments and retirement account are critical to getting the most for your retirement savings.
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Updated · 4 min read
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Advancements in medicine and technology are helping us live longer than ever before. The prospect of living in retirement for up to 40 years — often the same time frame an individual spends working — makes saving and planning all the more important.
Yet saving is only one piece of the retirement puzzle. Choosing the right underlying investments and retirement account is critical to getting the most from your savings. Here’s how to manage that process.
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How much should I save?
Many advisors recommend saving 10% to 15% of your income, but this is a starting point. Depending on your retirement goals, financial responsibilities, current budget, and many other factors, the actual amount you set aside for retirement may be higher or lower than this figure. Check out our handy guide on how to save for retirement for more information.
» Not sure about your trajectory? Pressure-test your approach with our retirement calculator
Types of retirement investments
Part of retirement is figuring out how to save for retirement, but the next crucial step is selecting investments too. If it’s skipped, the money won’t be invested.
There's a lot to consider when building a retirement portfolio, but starting with understanding what common products are available and how they work can help you decide how to choose your investments.
While most of the investments below are broadly available, it’s worth noting that some might not be if you’re saving for retirement in your company’s 401(k) or a similar employer plan. But you can gain access to the other types of investments you desire by using different retirement accounts — more on those near the bottom of this page .
Target-date funds
An effective and low-maintenance way to maintain an appropriate asset allocation is through a target-date fund. Just pick the right “target date” (the year closest to when you’d like to retire) and the fund company will automatically adjust the allocation over time on your behalf.
Other funds
Diversification helps investors by decreasing overall investment risk while increasing potential for overall return. Mutual funds, index funds and ETFs all pool investor money into a collection of securities, allowing investors to diversify without having to purchase and manage individual securities.
- Mutual funds: For years, most mutual funds have been actively managed by professional fund managers. This means that teams of analysts and portfolio managers research, analyze and select certain stocks that they expect will outperform to be part of their mutual fund.
- Index funds: Index funds are a type of mutual fund, but there’s no fund manager picking stocks — these funds buy and hold shares of the securities in an index, such as the S&P 500 — which keeps investors’ costs down. Iconic investors such as Warren Buffett have famously praised index funds, which have helped increase their popularity in recent years.
- Exchange-traded funds: ETFs are like mutual funds, but with a key difference: they trade throughout the day like individual stocks and bonds. ETF share prices are often lower than the minimums required for comparable mutual funds, which allows investors to attain broad exposure for less money.
Individual stocks and bonds
Some investors prefer researching and purchasing shares of individual stocks and bonds. It can take significant investment and know-how to build a diversified portfolio of individual securities, but a case can be made for including individual stocks and bonds as part of your investment strategy. (Curious about the DIY approach? Here's how to invest in stocks.)
For example, producing a steady stream of income can be compelling as you begin to withdraw money from your investments in retirement. Dividend stocks can provide a regular income stream, and constructing a bond ladder (buying numerous bonds maturing across a number of years) helps to manage interest rate risk while generating steady cash flow.
Annuities
Some people sleep better at night knowing that all of their base expenses are covered by income streams they cannot outlive. This is where using a portion of your assets to acquire an investment product such as an annuity can make sense.
Purchasing an annuity shifts the risk of outliving your assets away from you to the insurance company that guarantees to pay you an income stream for life (make sure to review the credit rating of the insurance company). However, annuities can be costly, so be sure you understand which features you need. Since variable annuities provide a guaranteed income that can increase with market returns, an investor might want to be more aggressive with the investments inside the annuity and more conservative with those outside the annuity.
Hire an advisor
If you’re wary of handling investment choices on your own, there are many different types of financial advisors to lend you a hand. If you'd like to go the automated route, a robo-advisor is a low-cost way to access investment help with low or no minimums. Robo-advisors use computer models and algorithms to help customize investments for your portfolio.
» Learn about our picks for the best robo-advisors and best financial advisors.
How do all these investments fit into my retirement portfolio?
When choosing investments, focus on the big picture: your goals, risk tolerance, and time horizon. Together, these determine the right asset allocation for your entire portfolio. If you have multiple investment accounts, consider them all when evaluating your asset allocation.
Retirement accounts can be the most aggressive part of your overall investment portfolio because these accounts usually have the longest time horizon. Additionally, in some accounts, like a 401(k), you smooth your entry point into the markets over time through dollar-cost averaging. Retirement accounts are also tax-advantaged, which makes them a better place for more frequent trading. Though we don’t advocate active trading in retirement accounts, these accounts don’t have capital gains tax consequences (taxes aren’t paid in traditional IRAs and 401(k)s until withdrawals are made).
To balance that more aggressive allocation, you can be more conservative within taxable brokerage accounts. These accounts are more likely used to satisfy short-term goals or expenses, a more conservative allocation helps to reduce volatility, avoiding the possibility of the market being down when you need to withdraw funds.
The asset allocation and underlying investments of your retirement account don't need to be static. They can gradually change and adjust over time, becoming more conservative as you near the transition into retirement. Diversification in investment portfolios can look like:
- Active vs. passive. Incorporating mutual funds, which are actively managed, with index funds and ETFs, which are passively managed.
- Industry. Mixing companies operating in all kinds of industries because the economic cycle affects each business differently.
- Size. Combining holdings of large-cap, mid-cap and small-cap companies (big, medium-size and small companies).
- Style. Blending growth and value stocks. Growth stocks are companies characterized by rapidly growing sales and profits. Value stocks are companies whose stocks are “on sale” or seem underpriced and undervalued. With bonds, mix credit quality and maturity dates.
- Geography. Sometimes U.S. stocks and bonds outperform, but other times international will prevail, so have exposure to both.
If you’d like more background on how to get started, our Investing 101 guide may help. Again, if this sounds like more upkeep than you’d like to handle, a target-date fund or robo-advisor might be a good option.
» MORE: What to do with an inheritance
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Which retirement account should I use?
Now that you’re familiar with some of the most popular types of retirement investments, which retirement accounts should you use? Our handy guide to the best retirement plans can help. It covers accounts such as:
- Employer-sponsored plans, such as 401(k)/403(b)/457(b) and pension plans.
- IRAs, traditional or Roth.
- Self-employed or small-business plans, such as SEP, SIMPLE, solo 401(k) and profit-sharing plans.
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