Retirement Investments For Beginners

Starting to save for retirement is one of the smartest financial steps you can take – no matter your age.

Save early and saving often are the two main keys to building up a nest egg big enough to meet your lifestyle expectations in your golden years. Beyond that, you’ll probably want to grow your money to more than just the cash you set aside.

The way to grow your retirement funds is to invest it in assets like stocks or bonds. That way, you can enjoy more financial security in your golden years. Learning exactly how to invest for retirement in a way that matches your goals will go a long way in helping you achieve them.

Here, we’ll review some of the key points about retirement investments for beginners, including which type of assets are typically best for gains and which are better for security – and why. But first, let’s go over the basics of a retirement investment strategy like choosing a retirement account and determining how much to save.

Retirement Accounts for Investments

When you buy assets like stocks or bonds, you’ll need a trading account because you can’t just purchase, for example, shares in a company through a traditional savings account.

One way to do that is to establish an account online through a platform like TD Ameritrade, Fidelity Investment or Charles Schwab. A growing number of free-trade platforms like Robinhood also allow investors to purchase stocks directly. The downside to using these platforms for retirement investments is that you don’t get the tax advantages that other accounts may offer.

For retirement investing, consider accounts that allow you to deduct your deposits from you total taxable income each year or ones that don’t tax your investment gains. These include:

Traditional 401(k)

If your employer offers a 401(k) plan with a matching contribution, try to take advantage of it. Otherwise, you would be leaving “free money” on the table. With a traditional 401(k), your deposits are not included in your taxable income, however you eventually pay taxes on the money you withdraw from the account in your retirement years.

Roth 401(k)

A Roth 401(k) is similar to a traditional 401(k). However, instead of allowing deposits with tax-free income, the deposits are made with after-tax funds. The tax advantage here is you can withdraw the money, including any gains, tax-free in retirement.

Traditional IRA

IRAs, or Individual Retirement Accounts, offer similar tax advantages for retirement investing, although you don’t set them up through an employer. Instead, you can open an IRA yourself through your bank or another financial institution. You can deduct your traditional IRA contributions (up to $6,000 for 2021 for individuals under 50) from your taxable income.

Roth IRA

You can also open a Roth IRA through a financial institution. Like with a Roth 401(k), the tax advantage comes in retirement when you can withdraw your funds, including any gains, tax-free.

How Much Should I Save for Retirement?

Everyone has a different financial situation, lifestyle and income, so each person’s ideal savings amount will vary.

As a rule of thumb, financial advisors often recommend you try to save between 10% and 15% of your income. However, what you actually save will depend on your financial priorities. You might put paying off your debt or paying for necessities above saving for retirement for the time being. Of course, the more you can save for retirement investing, the better.

Ways to Invest for Retirement

When it comes to putting your hard-earned money to work, you have several things to consider. Everyone wants to invest in a way that earns a lot of money with no risk. Unfortunately, there is no sure-fire asset that will bring you massive gains without the tradeoff of at least some risk.

Each investor needs to find the right mix of assets for their personal situation. Here are some pros and cons of several retirement investment choices:

Stocks

Pros:Stocks are a popular choice for retirement investments for beginners. Financial advisors often recommend stocks as good long-term investments because they tend to increase in value over time. Historically, the S&P 500 has returned an average of about 10%annually.

Cons: Stocks are notoriously volatile and carry the risk of losses. Just because stocks have increased historically, doesn’t guarantee that they will continue to rise in the future. In fact, the S&P 500 has had many down years where investors have suffered significant losses.

Retirees who depend on their investments to live may want to avoid investing too much of their savings in the stock market.

Bonds

Pros: For retirement investing, bonds can provide stability to a portfolio because they are considered low risk assets. When you buy bonds, you are essentially buying debt, either from a company or a government. That debt is then repaid to you through regular payments that include interest.

Cons:While investors may be less likely to lose money with bonds, they are also unlikely to see the kinds of gains we can see in the stock market.

Mutual Funds

Pros:Mutual funds are a way to invest in several securities at once. Instead of buying shares of multiple companies, you can buy shares in a mutual fund that holds them.

Cons: Like stocks, mutual funds do carry the risk of losses. Mutual funds can lose value for a number of reasons, including suffering along with overall market declines when the broader economy takes a hit.

Savings Accounts

Pros:Savings accounts are among the safest places for your retirement funds. Even in the very unlikely even that your bank fails, the FDIC insures up to $250,000 for each account, so it’s nearly impossible to lose money.

Cons: The interest you can get on savings accounts is extremely low compared to other investment types like stocks or bonds. Keeping your retirement funds in a traditional savings accounts is almost the same as keeping cash under your mattress, profit-wise.

Allocating Your Assets in Your Retirement Portfolio

Most investors choose to invest in more than one type of asset to minimize risk. Diversifying your portfolio spreads risk out so that, say, if one of your stocks takes a dive, your overall portfolio doesn’t suffer as much.

You can allocate your assets for more diversity in several ways. First, you can vary your investment types by including a mix of stocks, bonds, etc. You can also vary the assets within a particular asset class – such as by investing in stocks in different industries or of different sizes.

You’ll want to revisit your portfolio’s asset allocation regularly and adjust it as you need. For example, you might want to veer toward a more conservative, lower-risk approach as you age.

The Bottom Line

Our average life expectancy is on the rise, with people living longer thanks to innovations in health care. We’re increasingly enjoying longer period of time in retirement as a result. That means we need to be more mindful of how to save and invest successfully for retirement.

Finally, if you’re a beginner investor, you might benefit tremendously from the help of a financial professional. A personal investment advisor can guide you through the process of developing your own retirement investing strategy. They can weigh the pros and cons of specific investment choices to help you shape your own retirement portfolio to reach your golden years goals.

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