How to invest for retirement: Account types & strategic moves

Whether you're just getting started with retirement savings or you're well on your way, it's critical to know the ins and outs of how to invest for retirement. This includes understanding your individual investment style and preferences as well as the different strategies and tax-advantaged accounts you can choose.

To shape your strategy and build your investments for retirement—or to give your current portfolio a check-up—try these steps for developing a solid long-term investing plan.

Before you jump into choosing investments, take time to identify what it is you're looking to get from investing. Ask yourself some key questions to help you determine your financial goals and personal preferences:

Now is the time to think about the lifestyle you want in retirement and the things that are most important to you. Aim high—an inspiring, personally meaningful vision for your future can motivate you to set and reach your goals.

• What kind of lifestyle do you hope to have?
• Will you work part-time or prefer to be fully retired?
• Do you plan to travel? Where and how often?
• What kind of legacy do you want to leave for heirs?
  

This helps to set your time horizon for investing.

• At what age do you plan to begin making withdrawals in retirement?
• How many years is that from now?
• How many years do you expect to live after you start making withdrawals?
  

How comfortable are you with market fluctuations? Age is usually a factor in your risk tolerance. Younger investors can typically take more aggressive strategies because they'll have time to try to make up for losses, but those nearing retirement often prefer conservative approaches.

Active investors frequently monitor and adjust their portfolios, while passive investors tend to "set-it-and-forget-it" by relying on diversified index funds or managed accounts.

These questions can help you develop an investment plan that aligns with your retirement objectives, timeline, risk tolerance and involvement preference.

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Within each asset class, you can choose specific investment types that suit your retirement planning goals. When making these selections, it's wise to incorporate diversification, the practice of reducing market risk by spreading your assets among numerous investments.

Also called equities, stocks represent ownership in a company. Stocks can be a great way to build long-term wealth, but they also can be volatile and subject to market fluctuations. This tends to make them more fitting for long-term investors with a higher risk tolerance.

When you buy a bond, you're lending money to a government or corporation. In exchange, they agree to pay you back with interest over a period of time. Bonds are often considered stable investments and offer more diversification, making them a strong fit for conservative investors. However, bonds are not guaranteed and can lose value, especially when interest rates are rising.

Mutual funds consist of pooled money from many different investors and spread your money across a variety of investment types together in one basket. That makes them versatile securities that can provide diversification and flexibility to suit your risk tolerance.

Like mutual funds, ETFs enable investors to purchase an interest in a diversified portfolio of securities. This might include stocks, bonds or other assets. Unlike mutual funds, ETFs trade like stocks on an exchange, meaning they can be bought and sold throughout the day. ETFs typically track the performance of an index like the S&P 500 and often have lower fees than mutual funds.

Investing in real estate can take many forms, from converting your own home into a rental property to investing in a real estate investment trust. One of the biggest advantages of real estate investing is that it is a physical asset that usually appreciates in value over time, but it can also be a valuable source of income in retirement.

Some retirement accounts, such as IRAs and 401(k) plans, offer tax advantages to help your money grow faster. These accounts let you take advantage of compounding interest and returns, which is the effect of earning interest on top of interest or reinvesting returns to possibly earn more returns.

The key advantage is that retirement accounts can grow tax-deferred or may not have earnings taxed at all. That means you keep more money and earnings to compound.

The main types of tax-advantaged retirement accounts are:

• Traditional IRAs. Contributions are pretax, which means they may reduce your taxable income in the year the contribution is made.¹ Money grows tax-deferred while in the account, but you'll pay income tax when you make withdrawals.

• Roth IRAs. Contributions are after-tax, but your money grows tax-deferred. A unique benefit of a Roth IRA is that if you make a qualified withdrawal, the earnings are never taxed.²

• Traditional or Roth 401(k)s. Offered through an employer, a 401(k) is a type of defined contribution plan that you put money into via payroll deductions. Many employers make matching contributions, which can help your money grow faster. A 401(k) can be either traditional or Roth, and the tax advantage changes based on the type you choose.

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Creating a Roth IRA can make a big difference in your retirement savings. All future earnings are sheltered from taxes under current tax laws. If you meet a qualifying distribution event, the Roth IRA can provide truly tax-free growth potential.

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There's no one-size-fits-all approach to investing. As you build an investment strategy, it's wise to consider different approaches and find a method that suits your comfort level.

With this approach, younger investors hold more stocks for potential growth, and investors closer to retirement shift to bonds for stability. Some follow the "100 minus your age" rule to arrive at an asset allocation. For example, a 35-year-old would allocate 65% (100-35 = 65) to stocks and 35% to bonds.

Look for mutual funds or ETFs that passively track broad market indices like the S&P 500. Index funds provide diversified exposure to a wide array of large U.S. companies and broad bond market indexes for bonds. Be sure to pay attention to the expense ratios, aiming to minimize fees.

Mutual funds or ETFs that are actively managed rely on professional fund managers who aim to outperform market averages by carefully selecting investments. This strategy often involves higher fees and possibly higher market risk, but potentially offers greater returns.

Dive deeper into active vs. passive management

Target date funds automatically adjust your asset allocation over time, becoming more conservative as you approach your retirement date. Choose a fund with a target year closest to your desired retirement age and invest regularly.

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In addition to traditional market investments, annuities and life insurance can serve as complementary components in a comprehensive retirement plan.

Annuities offer a guaranteed income stream, transforming a lump-sum investment into regular payments. They can be particularly beneficial for retirees seeking financial security.

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While primarily a protection tool, a permanent life insurance contract can also generate cash value over time, providing an additional source of retirement income through cash value components. By combining these with traditional investments like stocks and bonds, retirees can create a diversified income strategy.

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