Retirement investing basics: A beginner’s guide

Ever feel overwhelmed by the thought of how to invest for your retirement? You’re not alone. Investing is filled with unfamiliar terms and complex strategies, so it’s no wonder many people feel intimidated when starting out.  

But here’s the truth: Investing can unlock a lifetime of financial freedom and peace of mind. It’s a powerful tool for building wealth and ensuring a comfortable retirement.

Whether you’re fresh out of college or established in your career, it’s easier than ever to start investing for retirement. 

In this article, we’ll break down retirement investing basics, including how much to save, where to invest and different investment options.

Here’s how to get started. 

Figure out how much money you need to save for retirement

Many financial advisors recommend saving 10-15 percent of your income for retirement. However, everyone’s financial situation is unique. 

To gauge whether you’re saving enough for retirement, Fidelity Investments suggests specific savings benchmarks based on age:

• Age 30: Have at least one year’s salary saved.
• Age 40: Have three times your annual salary saved.
• Age 50: Have six times your annual salary saved.
• Age 60: Have eight times your annual salary saved.
• Age 67: Have 10 times your annual salary saved.

Don’t get discouraged if you’re getting a late start and those numbers seem impossible. It’s better to start investing — even if you’re behind — than to not invest at all. 

You can use Bankrate’s retirement calculator to determine how much money you’ll need so you can adjust your savings accordingly. Set realistic investing goals and don’t underestimate the potential costs you’ll face in retirement, especially health care.

Contribute to your workplace retirement account

A great starting place for retirement investing is your employer’s 401(k) plan. With a 401(k), your contributions grow tax-deferred until you withdraw the money in retirement. Plus, depending on the type of 401(k), you may enjoy additional benefits:

• A traditional 401(k) allows you to deduct your contributions at tax time. You pay income taxes when you withdraw the money later.
• A Roth 401(k) allows you to withdraw your contributions tax-free — after years of gains — but you don’t get a deduction up front. 

Regardless of which one you choose, here are all the details on 401(k) plans. 

In addition to 401(k) plans, there are also 403(b) plans for employees of public schools and certain tax-exempt organizations, and 457(b) plans for state and local government employees.

Navigating a 401(k) can be tricky, especially if you’ve never contributed before. The plan’s administrator — often a large brokerage like Fidelity, Charles Schwab or Vanguard — usually offers educational resources and planning tools to help you understand investing and make informed decisions about your 401(k) options. Your employer’s human resources department may also be able to provide some guidance. 

Bankrate’s 401(k) calculator can also show you how your contributions can grow throughout your career.

Get the company match 

Many employers offer matching contributions to their employees’ retirement plans, but surprisingly, a lot of people miss out on this free money. 

An employer match is when your company adds money to your retirement account based on your contributions, usually up to a certain percentage. For example, if you contribute 6 percent of your salary to a 401(k), your employer might match half of that, giving you a total of 9 percent. 

Only 1 percent of the nearly five million workers covered by a Vanguard retirement plan in 2023 had no access to employer contributions of any kind, according to Vanguard’s “How America Saves” survey. So, odds are if your employer offers a retirement plan, they offer some sort of match, too. 

Even if you can’t contribute much, make sure to take full advantage of the employer match.

No workplace retirement account? Open an IRA

In March 2023, retirement benefit plans were available to 73 percent of civilian workers, according to the Bureau of Labor Statistics, leaving at least a quarter of the workforce on their own to save for retirement. 

If your employer doesn’t offer a 401(k), or you simply want to invest more, consider a traditional or Roth IRA.

• A traditional IRA is similar to a 401(k): You put money in pre-tax, let it grow over time and pay taxes when you withdraw it in retirement.
• A Roth IRA lets you invest after-tax income and then the money grows tax-free and isn’t taxed when you take qualified withdrawals in retirement.

Online brokerages like Fidelity, Charles Schwab and Merrill Edge make it easy to open an IRA with no fees or minimums. 

Plus, investing in stocks or funds is more affordable than ever, with many brokers offering zero-commission trades and fund companies continuing to slash fees.

You can even use a robo-advisor, like Betterment or Wealthfront, to manage your investments. Robo-advisors use algorithms to build personalized portfolios, making it easy to invest with minimal effort and fees.

Pick your investments

Funds are a tried-and-true way to build wealth for retirement. Funds are a collection of securities that let you diversify your portfolio with a single purchase. 

By owning a wide mix of companies via a fund, you avoid the risk of investing in just one or two individual stocks. You’ll also save yourself a lot of time otherwise spent picking and researching specific stocks.  

There are two main types of funds: mutual funds and exchange-traded funds. Both can track indexes like the S&P 500, and there are also specialized target-date funds that automatically rebalance their holdings to become more conservative as you near retirement age.

If you’re investing through a 401(k), you’ll likely have a handful of mutual funds and target-date funds to choose from. If you’re using an IRA (or even a solo 401(k)), your investment options expand significantly. 

Here’s a rundown on the different types of funds and what makes each unique. 

Mutual funds

A mutual fund is a collection of stocks, bonds and/or other assets owned by multiple investors. You buy shares in the fund, which diversifies your investments and can reduce risk while potentially boosting returns. There are plenty of no-load, no-fee mutual funds out there — literally thousands — but there are also many with hefty fees and loads, which can eat into your returns over time. 

Exchange-traded funds (ETFs)

ETFs are similar to mutual funds but often have lower management fees, making them more affordable. They invest in stocks, bonds or other assets and can provide significant returns, even for beginners. Unlike mutual funds, ETFs are traded like stocks throughout the day, while mutual funds only trade once at the market’s close.

How to evaluate a good fund and build your portfolio

When choosing your retirement investments — particularly stocks, ETFs and mutual funds — there are two important factors to consider:

• Long-term returns: Check the returns over the past five and 10 years, as well as since inception.
• Expense ratio: This measures how much you’ll pay over the course of a year to own a fund, and it’s expressed as a percentage. Many low-cost ETFs have expense ratios of less than 0.2 percent, or $2 for every $1,000 invested. 

Aim for funds with the best returns at the lowest cost, but be prepared to balance performance and expenses. Sometimes, a higher fee might be worth it for potentially better long-term returns.

Your asset allocation, or the percentage of each fund or asset in your portfolio, should reflect your goals, risk tolerance and time horizon, or the time left before you retire. These factors help determine the ideal mix for your overall investments, especially if you have multiple accounts.

Generally, you can be more aggressive with stocks and stock funds — such as an index fund that tracks the S&P 500 — when you’re young and far from retirement. As you get closer to your goal, experts generally recommend shifting your portfolio toward more bonds and fixed income investments to reduce risk.

Here’s a guide on how to build a simple three-fund portfolio. 

Keep contributing — but don’t exceed the limits

One of the most powerful tools for building a strong nest egg is consistently adding money to your accounts. Even small, regular contributions grow over time thanks to the magic of compounding.

By adding a fixed amount to your accounts consistently, you’re automatically buying more shares when prices are low and fewer shares when prices are high, a practice known as dollar-cost averaging. 

You’re already dollar-cost averaging through your paycheck if you have a 401(k) or similar workplace plan. The same amount goes in each pay period, regardless of what’s happening on Wall Street. This automated process helps you average down the cost of your investments.

But don’t get too carried away with contributions. The IRS caps the amount you can add to each of these accounts annually, so be sure to stay within the limits:

• For 2024, the contribution limit is set at $23,000 for 401(k) accounts (before employer match) and $7,000 for an IRA.
• Workers over age 50 can add an additional $7,500 to a 401(k) as a catch-up contribution, while an IRA allows an extra $1,000 contribution.

Adjust your allocation over time

If you’re investing for retirement through a target-date fund, shifting from riskier investments like stocks to more conservative investments like bonds over time happens automatically. 

Similarly, if you’re using a robo-advisor, you can change the asset allocation in your portfolio with a couple clicks, or the algorithm might adjust it for you automatically. 

However, if you’re managing your own retirement account, it’s important to understand the process of gradually shifting your investments and rebalancing over time.

Don’t treat it like a regular savings account

Your retirement account is intended for retirement savings. So if you’re using it for something else, you’re potentially robbing your future self. 

Retirement accounts like 401(k)s and IRAs offer tax advantages but are designed for retirement. Using them for other purposes often leads to taxes and penalties.

Here’s how withdrawals can cost you: 

• Traditional 401(k)s and IRAs: You’ll face a 10 percent penalty from the IRS for withdrawals made prior to age 59 ½. You’ll also owe income tax on the amount you withdraw. 
• Roth 401(k)s and IRAs: While you can withdraw contributions at any time tax- and penalty-free, you’ll owe a 10 percent penalty for withdrawing earnings prior to age 59 ½. 

While you might be able to take out a loan from your 401(k), you’ll miss out on potential investment gains and must repay the loan within five years (unless it’s for a home purchase for first-time buyers). Failure to do so may result in a 10 percent penalty on the outstanding balance, though there are some exceptions.

To avoid draining your retirement nest egg, work to create a separate emergency fund. Allocating every spare dollar to your retirement account can backfire if you’re cash-strapped when an emergency hits. 

Check in with a financial advisor

If you’re still feeling uncertain about investing for retirement, or perhaps you simply want a professional’s opinion on how you’ve structured your portfolio, checking in with a financial advisor can be a good idea. 

Retirement is a one-time event and simple mistakes can cost you thousands of dollars over time. An experienced advisor can assess your situation and offer tailored advice on how to improve your portfolio and reach your retirement goals. 

Financial advisors may charge hourly rates around $200-$250, and many offer comprehensive retirement planning packages as well. These packages often come with a fixed fee, which can be a worthwhile investment if it helps you achieve your retirement ambitions.

Need expert guidance when it comes to managing your investments or planning for retirement?

Bankrate’s AdvisorMatch can connect you to a CFP® professional to help you achieve your financial goals.

Bottom line 

Investing can be a game changer for your financial health, especially once you reach retirement. While it may seem daunting, you don’t need to be a Wall Street wiz to get started. The best online brokers make it easier and cheaper than ever to open an IRA. And your employer will likely give you free money if you start chipping in to your 401(k) plan. 

Remember, investing for retirement is a long game. Start early and stay consistent with an investment strategy that works for you, and your future self will thank you.