Tips for Successful Retirement Investing

When planning for retirement, one usually identifies financial goals and then decides on the best ways to save and invest to achieve them.

A lot of retirement investing advice involves very specific formulas and strategies. Sometimes, though, it's helpful for your investment decision-making to take a step back and look at the big picture.

Here are six basic tips to make your retirement investing a little easier and potentially more effective at getting you where you hope to be when you retire.

1. Understand Your Retirement Account Options

You can save for retirement in various tax-advantaged and taxable accounts. Some are offered by your employer while others are available through a brokerage firm or bank.

Keep in mind that accounts—including 401(k) plans, individual retirement accounts (IRAs), and brokerage accounts—are not investments themselves. Once you open one or more accounts, you'll buy the investments that each holds on your behalf.

Tax-Advantaged Accounts

Accounts can be tax-advantaged in different ways. 401(k)s and IRAs are tax-deferred accounts. That means you don't have to pay taxes on your contributions or the earnings that accrue from the investments within them each year. Income tax is due only on the money you withdraw during retirement.

In addition, traditional IRAs and traditional 401(k)s are funded with pretax dollars—meaning, you get a tax deduction for your contributions in the year that you make them. In contrast, Roth 401(k)s and Roth IRAs are funded with after-tax dollars. You can't deduct the amount of your contributions. However, you pay no taxes on any withdrawals you make in retirement from these accounts.

Taxable Accounts

Taxable accounts don't offer any sort of tax break. They are funded with after-tax dollars. So, when you make a deposit, you don't get a deduction. Moreover, you pay taxes on any investment income or capital gains (from selling an investment at a profit) the year you receive it.

Most brokerage and bank accounts are taxable accounts. However, you can maintain a tax-deferred account such as an IRA at a brokerage or bank.

Types of Retirement Accounts

Defined-Benefit Plans

These retirement plans, also known as pensions, are funded by employers. They guarantee a specific retirement benefit based on your salary history and duration of employment. They are increasingly uncommon today outside of the public sector.

401(k)s and Company Plans

These are employer-sponsored defined contribution plans that are funded by employees. They provide automatic savings, tax incentives, and, in some cases, matching contributions. For 2023, you can contribute up to $22,500, or $30,000 if you're age 50 or older (due to the $7,500 catch-up contribution allowed). For 2024, you can contribute up to $23,000, or $30,500 if you're age 50 or older (due to the $7,500 catch-up contribution allowed for that year).

Traditional IRAs

An IRA is a retirement account that allows for tax-deferred investing for retirement. You can deduct your traditional IRA contributions if you meet certain requirements. Withdrawals in retirement are taxed at your individual income tax rate. For 2023, you can contribute up to $6,500, or $7,500 if you're age 50 or older (due to the $1,000 catch-up contribution allowed). For 2024, you can contribute up to $7,000, or $8,000 if you're age 50 or older (due to the same $1,000 catch-up contribution).

Roth IRAs

Roth IRA contributions are not tax deductible, but qualified distributions are tax free. Unlike most retirement accounts, Roth IRAs have no required minimum distributions (RMDs). For 2023, you can contribute up to $6,500 annually, or $7,500 if you're age 50 or older. These maximum amounts increase to $7,000 and $8,000 respectively for tax year 2024.

SEP IRAs

These IRAs are established by employers and the self-employed. Employers make tax-deductible contributions on behalf of eligible employees. The annual contribution an employer makes to an employee's SEP IRA can't exceed the lesser of 25% of an employee's compensation or $66,000 for 2023 ($69,000 for 2024).

SIMPLE IRAs

These retirement plans can be used by most small businesses with 100 or fewer employees. Employees can contribute up to $15,500 for 2023 and $16,000 for 2024. The additional catch-up contribution (if you're age 50 or older) is $3,500 for 2023 and $3,500 for 2024. Employers can choose to make a 2% contribution to all employees or an optional matching contribution of up to 3%.

Types of Investments

Annuities 

Annuities are insurance products that provide a source of monthly, quarterly, annual, or lump-sum income during retirement. Some annuities are tax-deferred investments themselves, so investors may be better off buying them within taxable accounts.

Mutual Funds

Mutual funds are professionally managed pools of stocks, bonds, and other instruments that are divided into shares and sold to investors.

Stocks

Stocks, or equities as they're also called, are securities that represent ownership in the corporation that issued the stock.

Bonds

Bonds are securities that represent money loaned to an issuer (such as a government or corporation) in exchange for interest payments and the future repayment of the bond’s face value.

Exchange-Traded Funds (ETFs)

ETFs are investment funds that trade like stocks on regulated exchanges. They track broad-based or sector indexes, commodities, and baskets of assets.

Cash Investments 

You can put cash in low-risk, short-term obligations that provide returns in the form of interest payments. Examples include certificates of deposit (CDs) and money market deposit accounts.

Dividend Reinvestment Plans (DRIPs) 

DRIPs allow you to reinvest cash dividends by buying additional shares or fractional shares on the dividend payment date. DRIPs are an effective way to build wealth with the help of compound interest.

2. Start Saving and Investing Early

No matter what types of accounts and investments you choose, one piece of advice stays the same: start early. There are lots of reasons why it makes sense to start saving and investing early:

• You'll have years to take advantage of the power of compounding—reinvesting your earnings continuously to build your account value. 
• You'll make saving and investing a lifelong habit, which improves your odds of a comfortable retirement.
• You'll have more time to recover from losses, so you can try higher-risk/higher-reward investments.
• Barring a major loss, you'll have more years to save, which means more money by the time you retire. 
• You'll gain more experience and develop expertise in a wider variety of investment options.

Compounding

Remember that compounding is most successful over longer periods of time. Assume you make a single $10,000 investment when you're 20 years old and it grows at 5% each year until you retire at age 65. If you reinvest—or compound—your gains, your investment would be worth almost $90,000.

Now imagine you didn’t invest the $10,000 until you were 40. With only 25 years to compound, your investment would be worth only about $34,000. Wait until you’re 50 to start, and your investment would grow to less than $21,000.

This is, of course, an oversimplified example that assumes a constant 5% rate without taking taxes or inflation into consideration. Still, it's easy to see that the longer your money has to work for you, the better the outcome. Starting early is one of the easiest ways to ensure a comfortable retirement.

3. Calculate Your Net Worth

You make money, you spend money. For some people, that's about as deep as the money conversation gets. Instead of guessing how much money you have and where it goes, you can calculate your net worth, which is the difference between what you own (your assets) and what you owe (your liabilities). 

Assets typically include:

• Cash and cash equivalents—things like savings accounts, Treasury bills, and CDs
• Securities—for example, stocks, mutual funds, and ETFs
• Real property—your home and any rental properties or a second home
• Personal property—boats, collectibles, jewelry, vehicles, and household furnishings

Liabilities, on the other hand, include debts such as:

• Mortgages
• Car loans
• Credit card outstanding balances
• Medical bills
• Student loans

To calculate your net worth, subtract the value of your liabilities from the value of your assets. This number can give you a good idea of where you stand (right now) for retirement. Of course, net worth is most useful when you track it over time—say, once a year. That way, you'll know if you're heading in the right direction toward a well-funded retirement, or if you need to make some changes.

Add Net Worth to Your Retirement Goals

It’s been said that you can’t reach a goal you never set, and this holds true for retirement planning. If you don't establish specific goals, it’s hard to find the incentive to save, invest, and put in the time and effort to ensure that you're making the best decisions. Specific and written goals can provide the motivation you need. Here are some examples of written retirement goals.

• I want to retire when I’m 65.
• I want to travel internationally for 12 weeks each year.
• I want a $1 million nest egg to fund the retirement I envision.

Regular net worth check-ups are an effective way to track your progress as you work toward these goals.

4. Keep Your Emotions in Check

Investments can be influenced by your emotions far more easily than you might realize. Here’s the typical pattern of emotional investment behavior.

When investments perform well:

• Overconfidence takes over.
• You underestimate risk.
• You make bad decisions and lose money.

When investments perform badly:

• Fear takes over.
• You sell investments at a loss and put all your money into low-risk cash and bonds.
• You can't benefit from a market recovery and don’t make any money.

Emotional investing makes it difficult to build wealth over time. Potential gains are sabotaged by overconfidence, and fear makes you sell (or not buy) investments that could turn around and continue growing. As such, it is important to:

• Be realistic: Not every investment will be a winner and not every stock will grow as your grandparents’ blue-chip stocks did.
• Keep emotions in check: Be mindful of your wins and losses, both realized and unrealized. Rather than reacting, take the time to evaluate your choices and learn from your mistakes and successes. You’ll make better decisions in the future.
• Maintain a balanced portfolio: Diversify in a way that makes sense for your age, risk tolerance, and goals. Rebalance your portfolio periodically as your risk tolerance and goals change. Most younger investors have decades to recover from any market declines. That means they can focus on higher-risk/higher-reward investments like individual stocks. Those at or near retirement, however, have less time to recover from any losses. As a result, older adults typically shift their portfolios toward a higher proportion of lower-risk/lower-reward investments, such as bonds.

5. Pay Attention to Investment Fees

While you're likely to focus on returns and taxes, your gains can be drastically eroded by fees. Investment fees include:

• Transaction fees
• Expense ratios
• Administrative fees
• Loads

Depending on the types of accounts you have and the investments you select, these fees can really add up. The first step is to figure out what you’re spending on fees. Your brokerage statement should indicate how much you’re paying to execute a stock trade, for example, and your fund’s prospectus or website (or research sites such as Morningstar) will show expense ratio information.

If you're paying too much, you can shop for investments such as a comparable lower-fee mutual fund or switch to a broker that offers reduced transaction costs. Many brokers, for example, offer commission-free ETF and mutual fund trading for select groups of funds.

To illustrate the difference that a small change in expense ratio can make over the course of an investment, consider the following (hypothetical) table:

As the table shows, if you invest $10,000 in a fund with a 2.5% expense ratio, your investment would be worth $42,479 after 20 years, assuming a 10% annualized return. At the other end of the spectrum, your investment would be worth $61,416 if the fund had a lower, 0.5% expense ratio—an increase of almost $19,000 over the 2.5% fund’s return.

6. Get Help When You Need It

“I don't know anything about investing” is a common excuse for postponing retirement planning. Like ignorantia juris non excusat (loosely translated as ignorance of the law is no excuse), a lack of investing prowess is not a convincing excuse for failing to save and invest for retirement.

There are plenty of ways to get a basic, intermediate, or even an advanced education in investing and retirement planning that fits every budget. Even a little time spent learning goes a long way, whether through your own research or with the help of a qualified financial professional.

The Bottom Line

You can improve your chances of enjoying a comfortable future if you learn about your investment choices, seek investments that create income inflows, start planning early, keep your emotions in check, and find help when you need it.

Of course, there are many issues to consider when you plan for retirement. How much you need to save depends on numerous factors, including:

• When you want to retire, the number of years you have to save, and the number of years you'll spend in retirement
• Where you want to live—the cost of living varies greatly among cities, states, and countries
• What you want to do in retirement—traveling is more expensive than, say, catching up on decades of reading
• Your lifestyle now and the lifestyle you envision later
• Your healthcare needs

Investing rule of thumb guidelines—such as “you need 20 times your gross annual income to retire” or “save and invest 10% of your pretax income”—may help you fine-tune your retirement strategy.

Still, by understanding your retirement investing big picture, you can move forward with greater confidence toward a more secure financial future.