Retirement Investments: A Complete Beginners Guide to Success

Written by Meagan DrewUpdated: 1st Sep 2021
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You may have heard the popular Chinese proverb that says, “The best time to plant a tree was 20 years ago. The second-best time is now.”

While the original author of this message was certainly not talking about investing for retirement, the message still applies.

The best time to start investing for retirement was when you got your very first paycheck ever, but that may not have happened, and that’s ok.

The second-best time to start investing for retirement is today.

What is Retirement Investing?

Retirement Investing is the process of setting money aside during working years to provide income to yourself in retirement.

There are lots of ways to achieve these goals. Retirement investments can look like high yield savings accounts, investment portfolios with stocks and mutual funds, annuities, etc.

How you get to the end of the retirement race does not matter as much as that you finished.

Why Do I Need to Invest in My Retirement?

There is something called the 80% rule of thumb in regard to retirement savings. The idea is that people will need 80% of their working income to live comfortably in retirement.

That is a pretty significant amount of money, and it has to come from somewhere. If you are living on $5,000 a month, you will need $4,000 a month in retirement to satisfy the 80% rule.

Social Security income is a benefit that Americans receive at retirement age, but the estimated average benefit for 2021 is $1543 a month.

That will still leave a $2,457 deficit monthly if there are no other sources of income. That is a significant decrease in standard of living unless you take savings into your own hands.

The best way to take control of your retirement is to invest in it. Every bit of money that you can put away from now until you retire will help you close the standard of living gap.

What Individual Retirement Accounts Do I Need for Investing?

Roth IRA

A Roth IRA is a tax-advantaged retirement vehicle where money is taxed before it ever enters the account.

Because it is taxed on the front end, the money you withdraw at retirement is tax-free. A Roth IRA is a good choice for someone who does not need to reduce their taxable income today but would like to avoid tax ramifications in the future.

The main benefit to a Roth is that when it’s time to withdraw your money, what you see is what you get.

Also, tax rates are not concrete, and what may be 23% today could be much higher in the future.

Contributions into Roth IRAs may be withdrawn at any time because they have already been taxed.

However, any earnings may not be withdrawn before 59.5 years of age without a 10% penalty.

Take Note:

  • $6,000 yearly contribution limits

Traditional IRA

Traditional IRAs are also tax-advantaged retirement vehicles, but they are taxed on the back end rather than the front.

Money invested today into a Traditional IRA will reduce your taxable income for tax purposes in your yearly filing but will be taxed when you need to withdraw it at retirement.

These accounts are beneficial for people who are in high tax brackets in their working life and estimate that they will qualify for much lower tax brackets in the future due to a reduction in income.

Take Note:

  • $6,000 yearly contribution limits

Employer-Sponsored Plans

These are tax-advantaged retirement vehicles that are sponsored by employers to help their employees save for retirement. There is 401K, 403(b), 457(b) plans depending on the type of work that an employee is doing.

401K plans can also be classified as Roth or Traditional using the same tax implications as IRAs.

Often in employer-sponsored plan accounts, employers will make matching contributions up to a certain percentage so that they are also contributing to your retirement goals.

Matching contributions are essentially “free money”, and they are a great place to start investing for your future.

Take Note:

  • $19,500 for those under 50 yearly contribution limits
  • $26,000 for those over 50 yearly contribution limits

>> More: 401(k) Plans vs. 403(b) Plans

Self-Employed or Small-Business Plans

Self-Employed persons can use Solo 401Ks, SEP IRAs, or SIMPLE IRAs to save for their retirement needs.

Solo 401Ks are only for people with no employees, SEP IRAs are best for self-employed persons with few or no employees, and SIMPLE IRAs are for businesses with up to 100 employees.

Take Note:

  • SOLO 401K has $19,500 for those under 50 yearly contribution limits and $26,000 for those over 50 yearly contribution limits
  • SEP IRA has 25% of the employer’s compensation or $58,000 yearly contribution limits
  • SIMPLE IRA has $13,500 yearly contribution limits

Which Retirement Account Should I Use?

You can choose one account or a few accounts to hit your retirement goals. Since retirement accounts come with yearly contribution limits, you will likely need a few different types of retirement accounts to meet your goals.

You should always start with your employer. If your employer is offering matching contributions, Step 1 in your retirement savings goals is to ensure you are taking full advantage of the match. Otherwise, you are leaving free money on the table.

Next, you will want to look into personal accounts. Individual retirement accounts, both Traditional and Roth, offer you tax-advantaged retirement opportunities.

You can have both a Traditional and a Roth IRA, but the $6,000 TOTAL contribution limit applies whether you invest $3,000 in either account or $5,950 in one and $50 in the other.

It might seem appealing to have both a Traditional and Roth IRA, but don’t forget that compounding interest is a thing!

The more money you have in each account, the more interest your money earns and the more it can grow.

When considering an IRA, you need to decide if you want the money taxed now or later and use that to decide.

Most people do not need the reduction in taxable income today that comes with a Traditional IRA and would be further ahead to explore Roth IRA options.

>> More: Differences Between Roth IRA and Traditional IRA

How Much Should I Save for Retirement?

Experts suggest that you want to save 15% of your pre-tax income, assuming that you save from the ages of 27 to 67.

That 15% does include employee-match contributions. If you are starting later in life, you will want to try to save a bit more within the contribution limits established by the government.

If 15% of your pre-tax income seems out of reach, start somewhere. Even brand-new investors can take a hard look at their budget and carve out some portion of income.

$50 invested monthly for 30 years at a modest 5% earned interest will turn into almost $40,000.

The same $50 in an account averaging 8% will become nearly $68,000. It does not take a lot of money to make a big impact.

Start somewhere. Start today.

Types of Retirement Investments:

#1. Stocks

Buying stocks is buying a share in a publicly traded company through the stock market. When the company’s value goes up, your portfolio goes up, in turn.

When the company is devalued, your portfolio is devalued. Some stocks will also pay dividends to their shareholders.

The only way to access the stock market is by opening a brokerage account at a registered brokerage firm.

#2. Exchange-Traded Funds (ETFs)

Exchange-Traded Funds are funds that track indexes, commodities, or sectors.

Unlike a stock where you are buying an actual share of a company with ETFs, you are buying into a basket of securities that mirrors stocks.

#3. Mutual Funds

Mutual Funds are professionally managed accounts that allow for the fund manager to invest in a variety of stocks, bonds, and other securities as a way to immediately diversify a portfolio and provide active management.

Mutual funds are a basket of securities that aim for maximum growth without stepping outside the investors’ risk tolerance as outlined in the fund’s prospectus.

>> More: ETFs vs. Mutual Funds

#4. Index Funds

These are funds that are designed to mimic the performance of a particular market index like the S&P 500.

Index funds are far preferable to individual stocks for inexperienced investors because you earn an “average” of the index performance rather than riding the highs and lows of one single stock.

#5. Target Date Funds

Target Date Funds are a basket of funds structured with a target date that the money is needed.

The composition of these funds is designed to align with the risk tolerance of investors as they move towards retirement.

The target-date funds are riskier in the beginning and become less risky as the target date approaches.

These types of funds are commonly seen in employer-sponsored plans and are a great way to structure your retirement savings without having to know a lot about the market ebb and flow.

#6. Real Estate Investment Trusts

REITs are publicly traded investment funds that finance real estate investments. REITs allow all investors to participate in the real estate market without having to be directly involved in the day-to-day management.

#7. Classic Buy and Hold Real Estate

This is buying a property and holding on to it for years to take advantage of the growth in property values.

These houses can either be bought and lived in by the owner or bought and rented. The idea is that the longer the investment is held, the higher the payout when it is time to sell.

#8. Annuities

Annuities are types of long-term investments in which there is a defined benefit at a later date. They are designed to keep people from outliving their income in retirement.

#9. Bonds

Bonds are issued by corporations and governments as a fundraising activity. The bonds are considered debts by the issuer, and you are loaning them money in exchange for a return on investment at the end of some specified period of time.

#10. Certificate of Deposits (CDs)

Certificate of Deposits (CDs) work very similarly to bonds but instead of loaning a government or corporation money, CDs loan money to a financial institution.

The money you loan to them comes with a guaranteed return rate, but you cannot access your money until the end of the specified time frame.

These investments are considered very safe, but what they lack in risk, they also lack in the potential for return.

How to Start Investing for Retirement:

#1. Choose a Brokerage Account

Brokerage accounts are accounts that can be opened with an investment firm that allows the owner to order trades of stocks, bonds, mutual funds, and other securities.

Brokerage accounts can be at brick-and-mortar buildings as well as completely online.

In these accounts, there is not a person to advise you on your choices, there is only someone to make the trades for you, at your order, out of money that you have deposited.

To do any securities trading, you will have to have a brokerage account.

>> More: Best Online Stock Brokers

#2. Consider a Robo-Advisor

Robo-Advisorsare management firms that use computers to assess algorithms and make adjustments to your portfolio.

These Robo-advisors require little to no human interaction and are, therefore, a very affordable choice for investors who are just getting started or do not want to pay high management fees.

>> More:Best Robo-Advisors

#3. Hire a Financial Planner

If you feel like you are out of your league, finding a Financial Planner to work with will help put your mind at ease.

Financial Planners specialize in helping you see the whole picture and taking you from point a to point z in the most seamless way possible.

>> More:Best Financial Advisors

#4. Watch Out for Fees

According to a TDAmeritrade study, 73% of Americans have no idea how much they are paying for fees inside their retirement accounts. Retirement Investments are charged fees in several ways.

There are commissions on invested money, commissions on assets under management, and administrative fees, to name a few.

Savvy investors will consider fees of any investments and accounts that pique their interest.

Fees can greatly affect your overall investment success and how much money you will get back in your pocket when it is time to retire.

Tips for Retirement Investing

The very first thing you need to do when you begin to think about retirement investing is to determine your time horizon for retirement, risk tolerance, and goals.

Risk tolerance is essentially the appetite that you have for risk in your investment portfolio.

Some securities may have the most growth potential, but you will feel like you are on a rollercoaster, and some securities may take a slow and steady approach but take a lot longer to achieve your goals.

Generally speaking, investors have a higher risk tolerance when they are further out from retirement, and there is an opportunity to make up for lost ground.

As investors close the gap in age between them and the golden years, their risk tolerance typically becomes more and more conservative.

Time horizon and goals go hand-in-hand as they are the way that you can quantify your goals. If you know that you want to have $3000 a month in retirement and retirement is in 35 years, you can calculate what you need to invest to reach that goal.

These calculations can account for money invested through employer retirement accounts as well as personal ones.

If you are struggling to determine the amount of money you need to retire comfortably or don’t know where to start, consult a financial advisor.

They will be able to walk you through the calculations and guide you in the right direction. The most important thing about picking a financial advisor is that you pick someone you are comfortable talking with about your financial picture.

Don’t be afraid to interview a few until you find a good fit.

Experts recommend that you have your investment money directly deposited into your investment accounts so that you always pay yourself first.

It will help you make sure that you always keep your goals a priority.

Always take advantage of any matching contributions that your employer is providing if it is at all possible.

There is no such thing as free money unless we are talking about matching retirement contributions.

Remember that you are entitled to participate in both an employer-sponsored plan and an individual plan.

>> More: How to Research Stocks

Bottom Line: Retirement Investments

Below are some quick facts highlighting the sheer power of retirement investments and why you need to start investing in your retirement right now and not tomorrow.

  • Retirement investments provide tax-advantaged savings for retirement
  • Employers often offer retirement savings plans
  • Individual Retirement Accounts IRAs are available as Traditional or Roth and can be combined with employer retirement plans to help reach your goals
  • All retirement accounts cap the amount of money invested per year
  • Retirement accounts have restrictions on when money can be withdrawn
  • There are many types of retirement investments, and any variety/combination of retirement investments may be used to meet goals
  • Roth IRAs exclude some people from investing if their income is too high

Even if you cannot fully fund your goals today, start with what you can afford. It’s not too late to make an impact on your future.

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Meagan Drew
Meagan Drew

Meagan Drew is a Senior Personal Finance Writer & Product Analyst with 7 years experience in wealth management. As a former Series 7 and 63 certified advisor, Meagan specializes in making financial topics relatable and consumable, no matter the reader’s experience level. She attended the United States Military Academy at West Point where she studied Nuclear Engineering. Meagan is a veteran, military spouse, and mom of 4 currently living in Colorado Springs. Her areas of expertise are military personal finance, credit cards, personal loans, investing, and wealth management.