How to Invest for Retirement

Planning for retirement is one of the most important financial decisions you’ll ever make. It’s an opportunity to secure your financial future and enjoy life after the workforce. No matter how old you are, it’s never too early—or too late—to plan for your retirement goals and start investing. 

Ultimately, having enough savings to fund your retirement comes down to planning for the future you want to have. 

Let’s review the 9 steps you can take to create a plan to invest for your retirement. 

STEP 1: Decide on your retirement lifestyle and financial goals.

Start by imagining what your ideal retirement looks like. Do you want to travel the world? Volunteer for a cause you’re passionate about? Relax and enjoy more leisure time? 

Next, estimate what your retirement expenses will be. Break them down into categories such as housing, healthcare, daily living expenses, travel and leisure activities. Be as realistic as possible and account for inflation, which can erode the purchasing power of your money over time. 

Beyond day-to-day expenses, consider any financial goals you have for retirement. Are you planning to leave an inheritance for your children or grandchildren? Do you want to support charitable causes? Your retirement savings should last you through the end of your life, so you’ll need a plan if you want to have money left over for others after you’re gone. 

STEP 2: Consider how much time you have until retirement. 

Your current age is a critical factor in determining your retirement strategy. The closer you are to retirement, the less time you have to accumulate savings. 

Money invested when you’re young has more time to grow, thanks to the power of compounding. Compounding means that your investments generate earnings, which generate more earnings, creating a snowball effect that effortlessly grows your wealth. 

If you’re age 50 and over, you can qualify to make catch-up contributions (meaning you can invest more annually than before) to your retirement accounts, which can help boost your savings even more.

STEP 3: Evaluate your tolerance for investment risk.

Risk tolerance refers to your ability (and willingness) to endure the ups and downs of the financial markets—and the potential for investment losses in the short term and long term. 

To determine your own risk tolerance, consider your financial situation. A person with more financial resources may be willing to take higher risks than someone with less to start with. Many financial institutions and advisors have risk tolerance questionnaires to help you gauge your comfort with risk. 

Next, think about how you react to market volatility. Are you comfortable with the idea of seeing the value of your investments fluctuate? Do market downturns make you anxious? If you have a long while left until retirement, you may be more accepting of short-term fluctuations for long-term gains.

Tips for Balancing Risk Vs. Return When Investing for Retirement

STEP 4: Learn about your retirement investment options.

Retirement investment vehicles are the accounts or instruments you use to save or invest for retirement. These vehicles have various tax advantages, contribution limits and investment options. 

Employer-sponsored retirement plans

• 401(k) Plan. With a 401(k), you can contribute a portion of your pre-tax salary to your retirement account—this lowers your taxable income. Many employers also offer matching contributions, which is essentially free money for your retirement.
• 403(b) Plan. These are typically offered by non-profit organizations, such as schools and hospitals. 403(b) plans operate similarly to 401(k) plans. Employees can make pre-tax contributions, and some employers may provide matching contributions or other benefits.
• 457 Plan. Government and certain non-profit employees are eligible for 457 plans. Contributions are often tax-deferred, meaning you don’t pay taxes on them until you withdraw the money in retirement.

Individual Retirement Accounts (IRAs)

• Traditional IRA. Traditional IRAs allow you to make tax-deductible contributions (subject to income limits) and defer taxes on your investment gains until you withdraw the money in retirement. This can result in potential tax savings during your working years.
• Roth IRA. Roth IRAs differ from traditional IRAs in that contributions are made with after-tax dollars. However, qualified withdrawals in retirement are tax-free, including both contributions and earnings. Roth IRAs offer tax-free growth potential.
• Spousal IRA. A spousal IRA allows a working spouse to contribute to an IRA on behalf of a non-working or lower-earning spouse, providing additional retirement savings options for both partners.

Other investment options

• Annuities. Annuities are insurance products that can provide a guaranteed stream of income in retirement. They come in various forms, such as immediate annuities, deferred annuities and variable annuities.
• Real estate. Some people invest in rental properties or real estate investment trusts (REITs) as a way to diversify their retirement portfolio. This can potentially generate rental income or gains from the asset rising in value over time.
• Taxable investment accounts. While not specifically designed for retirement, taxable investment accounts provide flexibility in investment choices with no contribution limits. They can be a supplemental savings option for retirement.

STEP 5: Consider opportunities for diversification and asset allocation.

Diversification and asset allocation work together to create a balanced investment strategy. When it comes to retirement, you’ll need to adjust your approach over time. 

Different asset classes have different risk and return profiles. Generally, stocks have higher potential returns but can be more volatile. On the other hand, bonds offer lower returns but tend to be more stable. Cash equivalents provide stability but typically offer lower returns than stocks and bonds.

Your asset allocation should strike a balance between risk and return that aligns with your goals. Some investors prefer a simplified approach by using lifecycle funds or target-date funds. These funds automatically adjust their asset allocation over time based on your expected retirement date. They start with a more aggressive allocation and gradually become more conservative as you approach retirement.

However, it’s important to remember that while diversification is a smart strategy when markets decline, it can’t guarantee profits or prevent losses. Nothing can—but that’s why we use strategies for loss mitigation like diversification. 

STEP 6: Make a long-term plan for wealth growth. 

Smart investment strategies can help your wealth last throughout your retirement years (and beyond). They enable your investments to continue to grow and generate income for as long as you manage them. 

The most important thing to remember is to maintain a long-term perspective. Long-term investing allows your money to benefit from the power of compounding, so that you’re continuing to generate more earnings over time. This can significantly grow your retirement nest egg by the time you retire. It also can reduce the chance that you’ll outlive your retirement savings. 

Here are some helpful strategies to use when thinking long term. 

Dollar-cost averaging and regular contributions

Make regular contributions to your retirement accounts, regardless of market conditions. This strategy, known as dollar-cost averaging, means that you invest a fixed amount of money at regular intervals (monthly or quarterly). When markets are down, you can buy more shares for the same amount, which would lower your average cost per share. 

Dollar-cost averaging helps you avoid the risk that comes with trying to time the market, which can often result in missed opportunities or losses. You should consider, however, your financial ability to continue making purchases at regular intervals through periods of both high and low price levels. 

Rebalancing and adjusting investment allocation

Over time, your investments may overperform or underperform. Regularly review your retirement portfolio, and rebalance your portfolio as needed by selling assets that have gone up in value (appreciated) significantly. Then, take your gains and reinvest them into assets that may have lagged, or look for new investment opportunities. 

STEP 7: Include tax planning in your retirement investing strategy.

Building wealth comes with tax implications. A good retirement investment strategy will help account for them. 

Use tax-advantaged retirement accounts

We talked about how contributions to 401(k) and 403(b) retirement plans are typically made with pre-tax dollars, lowering the income you’re taxed on in the year you contribute. Additionally, the growth in these accounts is tax-deferred, meaning you won’t pay taxes on the gains until you withdraw the money in retirement.

Contributions to traditional IRAs are often tax-deductible, depending on your income. Like employer-sponsored plans, earnings in a traditional IRA grow tax-deferred until you start withdrawing. Contributions to Roth IRAs are made with after-tax dollars, so qualified withdrawals—including both contributions and earnings—are entirely tax-free. 

If you have a high-deductible health insurance plan, consider contributing to an HSA. HSA contributions are tax-deductible, and withdrawals used for qualified medical expenses are tax-free. The HSA is a powerful tool for healthcare expenses in retirement!

Understand required minimum distributions (RMDs)

Once you reach age 72 (or 70½ if you turned 70½ before January 1, 2020), the IRS requires you to start taking your RMD from your traditional IRA and 401(k) accounts. These withdrawals are taxed just like income.

To minimize the impact of RMDs on your taxable income, think about taking withdrawals earlier or doing something known as a Roth conversion, where your traditional IRA becomes a Roth. Coordinate your withdrawals from various accounts for a better tax situation. 

Manage capital gains and losses wisely

Take advantage of good capital gains tax rates. Investments held for more than 1 year qualify for long-term capital gains rates, which are often lower than ordinary income tax rates. Consider your investment portfolio and tax-loss strategies to offset gains with losses.

Understand your tax obligations

Be aware of federal and state income tax rules. For example, some states don’t tax retirement income, while others have specific deductions or exemptions for retirees. Always talk to a financial or tax advisor for expert assistance.

STEP 8: Make a plan for income in retirement.

A lot of planning goes into investing for retirement, but it’s important not to neglect post-retirement budgeting and spending. Consider how you’ll make your wealth last through your golden years—including how you’ll bring in money while balancing investment growth.

Generating income in retirement

Generating a reliable stream of income during retirement is a primary goal for most retirees. Here are several strategies to consider:

• Interest and dividends. Bonds, dividend-paying stocks and certain funds can provide a steady stream of income. Bonds are known for their regular interest payments.
• Systematic withdrawals. Many retirees rely on systematic withdrawals from their investment accounts to cover their expenses. Adjusting for inflation can help your income keep pace with rising costs.
• Annuities. Annuities provide guaranteed income for a specific period or for life. Immediate annuities start payments shortly after purchase, while deferred annuities allow you to accumulate income for a later date. 
• Rental income. If you own rental properties or real estate investments, rental income can be a source of regular cash flow. Properly managed real estate can provide steady income—plus, the property can appreciate over time!
• Part-time work. Some retirees choose to work part-time in retirement. This not only provides additional income but also keeps you engaged and socially active. Just make sure you’re working because you want to, not because you need to!
• Social Security. Social Security benefits can be a good source of retirement income for many individuals. Consider when to start receiving Social Security to maximize your monthly payments.
• Pension income. If you have a pension plan through your employer, this can provide a steady stream of income during retirement. 

Remember that you want to have both growth investments (like stocks and real estate) and income investments (like bonds and dividend-paying stocks) in your portfolio. Some investment products, such as balanced funds or target-date funds, combine both growth and income assets within a single fund. These can help with diversification and simplify portfolio management.

Prioritize your retirement investing with Navy Federal Investment Services.

Investing for retirement is a journey that requires careful planning and commitment. By knowing your goals, understanding your risk tolerance, diversifying your investments and looking at tax-efficient strategies, you can build a solid foundation for a comfortable retirement. 

The key is to start early and stay committed to investing for retirement. We’re here to support you! Meet with a financial advisor today to get started or make sure you’re on track for the retirement you want—and deserve.