Would you like to increase your odds of enjoying a comfortable retirement? If you already set aside money from every paycheck for long-term savings, you’re off to a good start. But to really turn the money you save into a sizable nest egg, you need to invest wisely.
In this article, we’ll review 5 simple steps to create a personalized investing plan that can generate the savings you need to enjoy your golden years.
Why You Should Begin Investing for Your Retirement Today
If you’re ever planning to retire, you may find these statistics sobering, not to mention a bit frightening. Here are the top 10:
- The expected amount needed for a comfortable retirement was $1.04 million (as of 2021)
- 15% of Americans have $0 saved for retirement
- 22% have under $5000 saved for retirement
- Just 25% of American workers ever used a retirement calculator to see how much they’re likely to need; 43% just guess (the rest estimate based on current spending)
- 48% of workers think their income doesn’t let them save enough for retirement
- The median household retirement savings level is $93,000
- 43% of millennials fear being unable to cover their family’s basic needs in retirement; 70% are stressed and anxious about retirement finances
- Social Security retirement benefits were about $19,884/year in January 2022, according to US News & World Report
- Over 19% of workers expect to continue working in retirement because their retirement savings aren’t enough; 14% plan on working as their primary “retirement” income source
- On average, retirees spend 80% of their pre-retirement spending ($49,780/year vs. $61,960/year)
Concerned yet?
If you’re not saving for retirement, or even if you’ve started but haven’t made a plan yet, remember the famous saying, “Failing to plan is planning to fail.”
How Much Money Will You Need to Retire?
Giving an accurate answer to this is impossible, even knowing every detail of your current personal finances. The good news is that you don’t need accuracy. You need a plausible estimate.
Here’s one simple formula to estimate how much money you will need to retire: P ≥ (B – F)/R where:
- P is the portfolio size you need (that’s what we’re solving for)
- B is your estimated retirement budget (if you haven’t used a retirement calculator, do that, or you can use 80% of current spending estimate)
- F is your fixed income in retirement (think Social Security benefits, defined benefit pension, annuities, rental income, etc.)
- R is your expected investment inflation-adjusted return during retirement (this depends on many things, but for estimation many experts suggest using 4% for a 50/50 stock/bond portfolio, and some suggest dropping that to 3.5% or even 4%)
For example, say your current spending is $80,000/year so you expect to spend $64,000 in retirement (80% of $80,000), you expect $20,000 from Social Security and no other fixed income in retirement, and you’re comfortable using the somewhat aggressive 4% assumed return. Here’s your calculation:
P ≥ (64,000 – $20,000)/0.04 = $1.1 million
Seems a bit frightening, doesn’t it? How do you get to over a million dollars?
What to Weigh Before Buying an Annuity
If the idea of having the basics covered by a guaranteed income stream helps you sleep better at night, annuities might look appealing. But before you rush out to buy one, take a moment to consider a few key factors.
Ask yourself:
How reliable is the insurer? The main appeal of an annuity is the steady, lifelong payments it promises—but only if the insurance company stays in business. Always check the credit rating of the insurer (look for ratings from agencies like A.M. Best, Moody’s, or Standard & Poor’s).
Do you actually need all those features? Annuities can get expensive fast, especially if you pile on riders you may never use. Stick to the benefits that truly matter to you to keep costs under control.
How does this fit with your overall strategy? Some people choose to fund their essential fixed expenses with the predictable income from an annuity, allowing their remaining investments to pursue higher potential returns (and ride out market ups and downs with less stress).
What type suits your goals? For instance, variable annuities allow your income to grow if markets do well, but their fees can be higher and results less predictable. Decide whether you’d rather keep things ultra-conservative or take a bit more investment risk in hopes of greater upside.
Every investor’s needs are unique. Treat annuities as one possible tool in your retirement toolkit—and shop around before making a decision.
Five Simple Investing Steps to Save For Your Retirement
Here are five simple steps to help you get started investing with a plan to achieve the savings you need to retire comfortably.
Step 1: If you haven’t already, start now!
The first and most important is to start as soon as possible, if not earlier! Starting 10 years later can double the amount you need to invest each year!
If you start at age 22, $4178/year is enough to reach $1.1 million by age 67 (assuming 6.5% inflation-adjusted returns) if you increase it each year to account for inflation).
Wait 10 years, and you’ll need $8266/year, almost exactly double!
Wait another 10 years to age 42, and you need $17,267/year, more than double again!
Step 2: Take Advantage of Your 401(k) Matching Benefits
If available, sign up for your employer’s 401(k) and contribute at least enough to get the full match (if any), and preferably as close as possible to the maximum allowed by the IRS
According to the Bureau of Labor Statistics (BLS), 67% of private industry workers have access to employer retirement plans, almost all defined contribution plans like a 401(k).
According to the Society for Human Resource Management (SHRM), 1 in 4 workers miss out on the full match offered by their employer, missing out on an average of $1336/year in free money.
To put that in perspective, investing $1336 a year at 6.5% inflation-adjusted return from age 22 to 67 would come to over $350,000!
That’s over a third of the $1.04 million needed for a comfortable retirement!
If you can’t afford to invest enough to get the full match, invest whatever you can, even 1% is better than nothing. Then, try to increase your investment each year until you maximize the match.
If you don’t have access to a 401(k), or even if you do, use all other possible tax-advantaged funds. These include Roth and traditional IRAs; SEP IRAs, SIMPLE IRAs, etc. if you’re self-employed; and/or Health Savings Accounts (HSAs) if your health insurance is HSA compatible.
Especially HSAs invested in mutual funds are a great option, as contributions are in pre-tax dollars, money grows untaxed, and withdrawals for qualified health-related expenses are tax-free.
Understanding Your Retirement Account Options
With so many different types of retirement accounts out there, it’s worth knowing how they stack up in terms of flexibility, contribution limits, and long-term perks. Here’s a quick overview to help you match the best fit for your situation:
Employer-Sponsored Plans (like 401(k), 403(b), and 457(b))
These are favorites for a reason. They often come with employer matching (free money, if you remember from above), and you can contribute pre-tax dollars, reducing your taxable income now. Contribution limits are the highest among most account types, and automated payroll deductions make saving easy. Some options, like 403(b) and 457(b), are specifically for public sector or nonprofit jobs, but work in similar ways.Traditional and Roth IRAs
IRAs are available to anyone with earned income, giving you more control over your investments. Traditional IRAs let you contribute pre-tax, lowering tax bills up front, while Roth IRAs involve post-tax contributions but offer completely tax-free growth and withdrawals in retirement (as long as you follow the rules). Both have lower contribution limits compared to employer-sponsored plans but are extremely flexible and easy to set up—often taking just a few minutes online.Self-Employed/Small Business Plans (SEP, SIMPLE, Solo 401(k), Profit-Sharing)
If you’re self-employed or run a small business, you have special options. SEP IRAs and Solo 401(k)s allow for very high contribution limits, giving you the chance to sock away a big chunk of income (especially handy for catching up later in your career). SIMPLE IRAs suit businesses with fewer than 100 employees. These plans can also offer the same tax advantages as their larger cousins and let you tailor benefits for yourself and your employees.
Each type of account brings something to the table—max out employer matching if you can, supplement with an IRA for extra flexibility, and if you’re your own boss, take advantage of the higher limits on self-employed plans. Mixing and matching can help you craft a retirement savings strategy that grows faster and stretches farther.
Understanding Dollar-Cost Averaging in Your Retirement Accounts
One of the powerful advantages of investing through retirement accounts—like your 401(k)—is that you’re automatically practicing a smart strategy called dollar-cost averaging. But what does that mean in plain English?
Every time you contribute to your 401(k) (often every paycheck), you’re buying investments at a variety of prices through good markets and bad. This takes the stress out of trying to “time the market” (spoiler: even the pros get that wrong). Instead, your regular contributions buy more shares when prices are low and fewer when prices are high, helping to smooth out the ups and downs.
Why is this a big deal? Because nobody has a crystal ball. By sticking to a consistent investment schedule, you dodge the very real temptation to buy high and sell low—a pitfall even Wall Street can’t always avoid.
Dollar-cost averaging is especially handy in retirement accounts, since you typically won’t need to touch the money for decades. That long horizon means short-term drops are just speedbumps, not showstoppers. Over time, this steady approach helps your portfolio grow, harnessing the magic of compounding without all the drama of market swings.
Step 3: Invest for Growth!
Historic inflation-adjusted returns for stocks since 1928 were over 6.5%. Bonds? Just 1.9%.
The stock market has a positive return on average in 3 out of every 4 years, and the market hasn’t had a negative return over any rolling 20-year period since the 20s including with the Great Depression!
Here’s a comparison of a 6.6% annual inflation-adjusted growth of 100% stocks to the 4.72% growth of a 60/40 stock/bond portfolio, and to the 1.9% return of a 100% bond portfolio.
All three assume the same $4178 annual investment (adjusted each year for inflation).
As a caveat, note that the graph shows results of having the same exact return each year. In reality, each year returns will be higher or lower, and sometimes negative.
However, over the very long haul, it’s hard to beat stock market returns (unless you, e.g., invest in your own successful business, rental real estate, etc.).
Diversification: The Retirement Investor’s Safety Net
We’ve all heard the classic wisdom: don’t put all your eggs in one basket. That’s especially true when it comes to building your retirement portfolio.
Diversification is the simple—yet powerful—strategy of spreading your investments across a wide range of assets. Why does this matter? Because the financial markets love to play favorites. Some years, stocks soar while bonds nap. Other years, it’s the reverse. By holding a mix, you shield your portfolio from the risk of one group tumbling and taking your whole nest egg with it.
Here are a few flavors of diversification you should consider when piecing together your retirement investments:
- Active and Passive Strategies: Blend actively managed mutual funds with passively managed options, like index funds or ETFs. Active managers aim to outsmart the market; index funds stay the market’s course.
- Industry Mix: Own shares in companies from different sectors—tech, healthcare, industrials, you name it—to reduce the impact if one area of the economy falters.
- Company Size: Balance between large established giants (large-cap), mid-sized firms, and smaller, zippier companies (small-cap). Each has its own risk and growth profile.
- Investment Style: Combine growth stocks (the ambitious overachievers) and value stocks (the “on-sale” bargains). In the bond world, vary your mix of credit quality and maturity.
- Global Reach: Don’t bet everything on the U.S.—international stocks and bonds can play an important supporting role, as different economies shine at different times.
What’s the bottom line? Diversifying your retirement investments helps smooth the ride, reducing the odds that one bad year or unlucky pick will throw your entire plan off course. That’s true peace of mind as you plan for your future.
ETFs: Flexible, Accessible, and Cost-Effective
Exchange-traded funds (ETFs) have quickly become a popular choice for retirement investors—and with good reason. First, they offer flexibility you won’t get with traditional mutual funds: you can buy and sell ETF shares at any point during the trading day, just like you would with stocks from companies like Apple or Microsoft.
This means you have more control over the timing of your trades—a handy feature if you like to keep an eye on the market or want to respond to changes quickly.
Another advantage is accessibility. ETFs typically come with much lower minimum investment amounts compared to many mutual funds. Instead of saving up a hefty sum, you can often get broad market exposure for the price of a single share—sometimes less than $100, depending on the fund. This makes it easier for new or budget-conscious investors to diversify across a range of assets (like the S&P 500 or international markets) without breaking the bank.
Lastly, ETFs are known for their relatively low expenses. Because most are passively managed (tracking indexes like the Vanguard Total Stock Market ETF or the iShares MSCI EAFE ETF), their management fees tend to be much smaller than actively managed mutual funds. Over decades of retirement saving and investing, those lower costs mean more money stays working for you and less disappears to fees.
So, if you’re looking for a way to build a cost-conscious, flexible retirement portfolio, ETFs can be an excellent building block.
A Quick Look at Exchange-Traded Funds (ETFs)
You’ve probably heard the term ETF tossed around, but what exactly are they, and how do they stack up against mutual funds?
Think of exchange-traded funds, or ETFs, as a kind of investment basket—like mutual funds, they pool together money from many investors to buy a variety of assets (stocks, bonds, and more). The biggest twist? ETFs trade on stock exchanges just like individual stocks. This means you can buy or sell shares of an ETF at any time during market hours, with prices that fluctuate throughout the day.
Mutual funds, on the other hand, only trade once per day after the market closes, at a set price. Another bonus for ETFs: they often have lower minimum investment amounts compared to traditional mutual funds, letting you get broad market exposure—think S&P 500, international stocks, or sectors like technology or green energy—without needing a big chunk of cash to start.
So, if you want flexibility, ease of trading, and low entry costs, ETFs can be a solid option for new and experienced investors alike.
Why Retirement Accounts Can Handle More Risk
So, why do financial gurus often recommend a more aggressive approach with your retirement accounts compared to your regular taxable investment accounts? It all comes down to time and taxes.
Retirement accounts—like your 401(k), Roth or traditional IRA, or even a SEP IRA—usually won’t be tapped for decades. That long time horizon means they can ride out market ups and downs and take advantage of the higher growth that stocks tend to deliver over time. If you’re not planning to withdraw from these accounts until you’re well into your retirement years, you can afford to weather the storm during occasional downturns, knowing you’ve got years (or decades) for the market to recover and grow.
It gets better—thanks to their special tax treatment, these accounts are tailor-made for growth. Gains inside 401(k)s and IRAs aren’t taxed year-to-year, so you don’t lose a chunk of your returns to Uncle Sam every time a fund manager makes a smart trade. Instead, taxes are deferred until you take money out in retirement, when you might even be in a lower tax bracket.
By comparison, your taxable brokerage account is often used for shorter-term goals or as an emergency fund reserve. Because you might need to access this money sooner—say for a down payment on a house, unexpected expenses, or bridging the gap in early retirement—it makes sense to take less risk and opt for a more conservative mix of investments there, like more bonds and cash.
Big takeaways?
- Retirement accounts = growth engines thanks to long time horizons and tax advantages.
- Taxable accounts = keep it steadier for flexibility and near-term needs.
This strategic split means you can dial up the “gas pedal” in your retirement portfolio and let compound growth do its thing, all while maintaining stability and liquidity in your regular taxable account.
How Dividend Stocks and Bond Ladders Can Boost Your Retirement Income
Once you’re ready to start using your retirement savings, it’s important to find ways to create a predictable stream of income. Here’s where dividend-paying stocks and bond ladders can really shine.
Dividend Stocks:
When you invest in companies that regularly pay dividends—like Johnson & Johnson, Procter & Gamble, or utilities such as Duke Energy—you’re essentially setting yourself up to receive a recurring “paycheck.” These companies typically share a portion of their profits with stockholders, paying out dividends whether the market is up or down. This can make budgeting in retirement a lot more manageable, while also letting your investments potentially grow over time.
Bond Ladders:
A bond ladder means buying bonds that mature at different times, like one in a year, another in three, and another in five. Each time a bond matures, you get your original investment back (assuming no defaults), plus the interest you earned along the way. This steady sequence of maturity dates gives you regular cash flows and reduces the risk of having to reinvest all your money at once—especially helpful if interest rates change unexpectedly.
Combining dividend stocks and a well-constructed bond ladder can help you build a retirement portfolio that not only grows, but also keeps the income coming when you need it most.
What Sets Variable Annuities Apart from Other Investments?
While there are many ways to invest for retirement, including stocks, bonds, mutual funds, and target-date funds, variable annuities bring something unique to the table: guaranteed lifetime income. Here’s how they differ from more traditional options:
- Guarantee of Income: Unlike most investment accounts, variable annuities can offer a steady paycheck for life. Think of it as setting up your own pension by exchanging a portion of your savings for a contract with an insurance company. They take on the risk of you outliving your assets—provided the insurer remains financially sound (so yes, check those credit ratings).
- Flexibility Inside the Account: With a variable annuity, you can still invest in underlying funds that may grow over time. If the investments perform well, your payouts could even increase—unlike fixed annuities, which lock you into a set payment.
- Costs and Trade-offs: The catch? Variable annuities tend to come with higher fees and more complexity than traditional investment accounts. You’re paying for insurance-like guarantees and optional features, so be sure to opt only for those you actually need.
- Risk Allocation: Some investors choose to be more aggressive inside the annuity, knowing the income is somewhat protected, and keep their outside investments more conservative.
In summary, variable annuities stand apart primarily because they’re designed to provide lifetime, guaranteed income, while traditional retirement investments focus on long-term growth and require you to manage withdrawals and market risks on your own.
Step 4: Choose your Investments Based on Your Level of Knowledge and Confidence
In a 401(k), plan investment choices are limited to what the plan administrator picked.
In an IRA (or a solo 401(k) if you’re self-employed and have an official payroll), you have much more control over your investment options. Depending on what’s available and on your confidence, here’s what you should do.
If you have no knowledge or confidence in being able to learn how to allocate your investments between stocks and bonds, between US and international, etc. (let alone picking specific funds), and you have access to them, you could do worse than looking at so-called target-date funds.
If this is your choice, find a target-date fund that has in its name a year that’s close to when you plan to retire (these funds usually target in 5-year increments – e.g., 2030, 2035, 2040, 2045, etc.).
These funds invest in a variety of underlying funds that specialize in US stocks, US bonds, international stocks, international bonds, etc. They change their allocation over time, reducing their stock allocation as they approach their target year.
Some “glide” down more sharply, getting to a low stock allocation at their target year, and then stay at that level through your retirement. Others, glide less steeply down, but then continue gliding down more slowly as you go through retirement.
Note that some target-date funds invest in index funds, lowering the underlying fees and staying close to the overall market’s return, while others invest in active funds, that have higher fees and may under- or over-perform the market indexes.
If you’re somewhat confident you can figure out the allocation you want, and how that should change as you get closer to retirement (and then live through retirement), but don’t think you can pick winning actively managed mutual funds (or ETFs), Warren Buffet has some advice for you:
“A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth.”
No matter you’re level of confidence, consider the potential benefits of hiring a financial advisor who can work with you to develop a personalized plan to achieve your financial goals. Many financial advisors offer affordable financial planning services and don’t require a minimum level of assets to serve clients who are just getting started on their investing journey.
Should You Consider a Robo-Advisor?
If the thought of choosing and managing investments on your own makes you break out in a cold sweat, you’re not alone. Fortunately, robo-advisors have emerged as a popular, low-cost option for those who’d rather let technology do the heavy lifting.
So, how does this work in practice? Robo-advisors use algorithms and models to build and regularly adjust a diversified investment portfolio that matches your retirement timeline and risk tolerance. You typically fill out a short questionnaire about your goals and comfort with risk, and the robo-advisor takes it from there—handling everything from buying a mix of stocks and bonds to automatic rebalancing as markets fluctuate.
Many of the big players—like Vanguard or Betterment—have low or no account minimums, making this an accessible route for beginners or those just starting their retirement journey. Plus, they’ll keep an eye on your allocated percentages, shifting the mix as you get closer to retirement.
In short: If you want to “set it and forget it,” but still want your investments to adjust intelligently over time, robo-advisors are worth a look.
Managing Asset Allocation Across Multiple Accounts
So, what if you’re juggling more than one account—say a 401(k) at work, an IRA on the side, and maybe even a taxable brokerage account? The key is to think like a conductor overseeing a full orchestra: it’s the harmony of your entire portfolio that matters, not the solo each instrument plays.
Start by considering your overarching goals, your appetite for risk (are you a sturdy oak or a trembling aspen?), and, of course, how long you’ve got until retirement. These guideposts should dictate your target asset allocation—the split between stocks, bonds, and other investments—across all your accounts combined, not just in isolation.
Here’s where it gets interesting (and yes, a little strategic):
- Retirement Accounts: These, such as your 401(k) or IRA, often get to be the “wild child” of the portfolio because you won’t tap them for years. With their long runway and tax-deferral perks, you can be more aggressive here by favoring stocks or growth-oriented funds.
- Taxable Accounts: Since you might need to withdraw from these sooner, or use this money for near-term goals, consider keeping things steadier. A mix that leans more on bonds or stable value funds can protect you from the heartburn of having to sell when the market is having a temper tantrum.
As you approach retirement, don’t be afraid to slowly rebalance—ratcheting down risk in all accounts. Many folks use a “glide path,” easing out of stocks little by little over time, so you don’t end up parachuting into retirement with all your eggs still in the growth basket.
Finally, remember: Your investment accounts can each pull their weight differently, but together they’re all working toward your retirement encore. Periodically check that, together, they line up with your intended asset allocation, and adjust as needed to stay in tune.
Balancing Risk: Retirement vs. Taxable Accounts
So you’ve got both retirement accounts (like a 401(k) or IRA) and a regular ol’ taxable brokerage account, but you’re wondering how to strike the right balance between risk and safety across them. Here’s a simple way to think about it:
Retirement accounts typically have the longest runway—meaning, if you’re decades out from retirement, these dollars can ride out the bumps and dips of the market. Because of this, it often makes sense to take on more risk here with a higher allocation to stocks and stock funds. Your money has time to recover from downturns, and you won’t face taxes on trades or rebalancing until you start making withdrawals.
On the flip side, taxable brokerage accounts are where you might want to be a bit more cautious. Why? These funds are usually more accessible, and you might tap them for things like buying a home, funding college, or emergencies—possibly before you retire. Having a greater proportion in bonds, cash, or lower-volatility investments here can help shelter you from needing to sell during a downturn.
Here’s a practical way to approach this:
- Be aggressive in retirement accounts: Lean toward equity-heavy, growth-oriented allocations since you won’t need this money for a long time, and you defer taxes until withdrawal.
- Dial back risk in taxable accounts: Use a mix that’s less volatile and easier to access without worrying about selling at the wrong time. Think more bonds, high-yield savings, or even CDs for short-term needs.
And don’t forget—your overall risk depends on the sum total of your investments, not just one account. So, when you review your portfolio, treat all your accounts as one big pie. Slice it according to your goals and how soon you’ll need each slice.
If you ever feel overwhelmed by all this, a trusted financial advisor can help you craft an allocation plan that fits your unique situation—no fancy jargon required.
Step 5: Leave Your Investments Alone
An interesting study by Fidelity came out a while back, looking at who among their investors did best. Can you guess?
It was those investors who had forgotten they had the investment. As a result, they didn’t try to move in and out of the market, didn’t borrow from their 401(k) plans, and didn’t sell (paying extra taxes and penalties).
Your retirement investment’s best friend is time in the market!
The Bottom Line
Investing for retirement now is crucial for your future self’s well-being. This article provides you with the 5 critical, yet simple steps to do exactly that with tips to help you chart your path to success.
Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. Before making major financial decisions, please speak with us or another qualified professional for guidance. The original version of this article first appeared on Wealthtender written by Opher Ganel.