Retirement Investment Strategy
Developing a strong investment portfolio is key to modern retirement planning. Funding retirement accounts, such as 401(k) plans, is important but you should also consider investment strategies that include real estate, annuities and retirement income funds.
- Written by Rachel Christian
Financial Writer and Certified Educator in Personal Finance
Rachel Christian is a writer and researcher for RetireGuide. She covers annuities, Medicare, life insurance and other important retirement topics. Rachel is a member of the Association for Financial Counseling & Planning Education.Read More
- Edited ByMatt Mauney
Matt Mauney is an award-winning journalist, editor, writer and content strategist with more than 15 years of professional experience working for nationally recognized newspapers and digital brands. He has contributed content for ChicagoTribune.com, LATimes.com, The Hill and the American Cancer Society, and he was part of the Orlando Sentinel digital staff that was named a Pulitzer Prize finalist in 2017.Read More
- Financially Reviewed ByEbony J. Howard, CPA
Ebony J. Howard, CPA
Credentialed Tax Expert at Intuit
Ebony J. Howard is a certified public accountant and freelance consultant with a background in accounting, personal finance, and income tax planning and preparation. She specializes in analyzing financial information in the health care, banking and real estate sectors.Read More
- Published: April 19, 2021
- Updated: August 23, 2022
- 13 min read time
- This page features 12 Cited Research Articles
- Edited By
What Is the Best Investment Strategy for Retirement?
There is no one-size-fits-all approach to investing for retirement.
Some degree of risk is inherent in any investment decision, but people accept these risks to achieve higher returns and grow their money over time.
While certain principles and strategies can guide you, it’s important that advice is tailored to your specific risk tolerance, time horizon and financial goals.
Speaking with a licensed financial professional is the best way to avoid costly mistakes and develop a personalized retirement investing strategy that works for you.
Build an Investment Portfolio
Most Americans don’t invest to get rich quick. They invest to grow money for their retirement.
Creating a strong and diversified portfolio for retirement takes careful consideration and planning.
Ideally, your portfolio should grow with you and provide the income you need to live out your retirement in comfort.
An investment portfolio encompasses all the money and assets you hold in various accounts.
Common Accounts in a Retirement Portfolio
Your investment accounts can hold different kinds of assets, including stocks, bonds, exchange-traded funds (ETFs), mutual funds, futures, options, real estate and more.
A well-balanced portfolio is diversified across several asset types and classes.
Owning a variety of stocks or mutual funds is important because it keeps your portfolio from becoming too heavily weighted toward one company or sector.
Diversity also generates better returns, even when certain asset classes are underperforming.
Total-Return vs. Income-Based Investing
Total-return investing is an accepted approach to building retirement portfolios. It focuses on diversifying stock and bond holdings to attain greater long-term growth.
The goal is to achieve a 10- to 20-year average annual return that meets or exceeds your yearly withdrawal rate in retirement.
This strategy is an alternative to income-based portfolios, which focus on owning higher-yielding dividend stocks or purchasing bond holdings with either increased credit risk or greater maturity.
But an income-based approach comes with risks. Chasing high-dividend stocks can make your portfolio less diversified relative to the overall market.
To take a total-return investing approach, first select a desired withdrawal rate. Common practice is withdrawing between 4 and 7 percent of your funds each year in retirement.
Next, incorporate an asset allocation of 40 percent short-term, high-quality bonds, and 60 percent diversified stocks and mutual funds spread across 10 to 12 asset classes.
The goal of total-return investing is to generate cash for distributions dynamically as needed in retirement.
Take Advantage of Retirement Accounts
It may seem obvious, but the best way to save for retirement is in a retirement account, such as a 401(k) plan or IRA.
Unlike standard brokerage accounts, retirement accounts offer several appealing tax breaks, either now or in the future.
Plus, your money is shielded from the IRS and grows tax-free within the account.
Many for-profit employers offer 401(k) plans to their employees. If you work for the government or a nonprofit institution, such as a school, you’ll likely have different options, such as a 403(b) or 457 plan.
You can add money to your workplace defined contribution plan through automatic withholdings.
You’ll be responsible for choosing specific investments within your account. You’ll typically have access to various mutual funds and target-date funds, which provide a mix of stocks and bonds designed to achieve a specified rate of growth by the time you plan to retire.
Some employers will match what you contribute to your 401(k) plan, up to a certain percentage. This free money can grow your savings even more quickly.
Not all workplaces offer 401(k) plans. In this case, financial experts recommend opening an individual retirement account, or IRA.
IRAs enjoy similar tax benefits, but you need to set up the account yourself at a financial institution or brokerage company.
Another difference between 401(k) plans and IRAs is contribution limits. In 2021, the annual IRA contribution limit is $6,000, compared with $19,500 for 401(k) plans.
However, both 401(k) plans and IRAs allow you to save extra money when you’re older, thanks to something known as “catch-up contributions.”
In 2021, people aged 50 and over can contribute an extra $1,000 a year to a traditional or Roth IRA and an additional $6,500 a year to a 401(k) plan.
You don’t need to be behind on your retirement savings goal to take advantage of these catch-up contributions. And doing so can significantly boost your long-term savings.
According to Fidelity, if you turn 50 this year and put an extra $1,000 into your IRA for the next two decades, you could earn almost $48,000 more than someone who didn’t take advantage of catch-up contribution (assuming your account earns an average 7 percent return each year).
This savings boost can be even greater for a 401(k) plan, where catch-up contributions are higher.
Consider Buying an Annuity
Similar to a pension, annuities can guarantee a steady stream of income in retirement.
You can purchase an annuity with either a single payment or a series of payments, known as premiums.
There are several types of annuities, and the contracts can be customized to suit your specific financial goals.
For example, you can determine whether your annuity payouts are distributed as a single lump sum or as a series of payments over time.
- Immediate annuity
- You pay a lump-sum premium, which is then converted to a stream of payments you receive for a specific number of years. Immediate annuity payouts can last for as few as five years or for a lifetime. Withdrawals can begin within a year.
- Fixed annuity
- With a fixed annuity, the insurance company guarantees a minimum rate of interest for a specific term.
- Variable annuity with a lifetime income rider
- Variable annuity premiums are invested directly in the market. Your payouts can vary depending on premium amounts, contract fees and the performance of your underlying investments. A lifetime income rider is a contract add-on that entitles you to receive payments for the rest of your life, even if your contract value falls to zero.
Annuities are designed for long-term financial goals, such as retirement. They are not intended for short-term gains because they carry substantial fees and other penalties if you withdraw money early.
Annuities can be complex. Make sure you carefully read and understand your contract and any fees before signing.
Use Retirement Income Funds
Retirement income funds are a special type of mutual fund designed to provide conservative, moderate growth.
They are usually well diversified in large and mid-cap stocks and bonds. They also offer exposure to non-U.S. stocks and Treasury Inflation-Protected Securities.
The typical retirement income fund invests about two thirds of its assets in fixed-income securities, with the rest in equities.
The fund’s portfolio managers periodically adjust the asset allocation to sustain monthly payouts, keep pace with inflation and preserve capital.
Some retirement income funds pay out regular distributions — similar to an annuity — on a monthly or quarterly basis. A minimum investment is usually required.
But unlike most annuities, your returns from retirement income funds aren’t guaranteed.
Retirement income funds also differ from annuities in that that allow you to retain control of your principal and access your money at any time.
There is no special tax treatment for retirement income funds. They are treated like other mutual fund investments.
Major brokerage companies, such as Vanguard, Charles Schwab, Fidelity and John Hancock, offer these actively managed funds.
Use Real Estate as Retirement Income
Investing in real estate is a way to both diversify your portfolio and continue earning money in retirement.
Investing in real estate offers notable benefits. According to Forbes, real estate can be less volatile and more resilient to fluctuations in the market, compared with other investments.
Rental properties can generate cash flow and add thousands of dollars in passive income to your budget. Owning real estate also offers significant tax benefits.
If you own property long enough, you’re likely to net a sizeable profit when you sell it because real estate generally appreciates in value over time.
Experts recommend buying property in desirable, growing locations where housing prices are on the rise or expected to rise.
To net the best profit, it’s also important to buy at a low price and ride out any market downturns until your property’s value increases.
Real estate investing isn’t for everyone. It can be time consuming and often requires a large up-front investment. Being successful at it will depend on your lifestyle, current assets, financial goals and interests.
Rentals can sit empty on the market for months, which can strain your budget if you’re not financially prepared. Expenses can quickly add up if you need to hire a lawyer to evict a tenant who’s causing trouble or not paying rent.
You’ll also be responsible for the maintenance, repairs and insurance for the property.
Hiring a property manager can allow you to take a more hands-off approach, but doing so will cut into your profits.
If you plan to sell or liquidate your real estate investment during retirement, be aware that the selling process may be different from what you expect.
You can’t predict the future of the housing market. This can result in waiting longer than you’d planned to sell the property or netting a smaller profit than you anticipated.
If you don’t want to manage these risks and responsibilities, you may consider alternatives, such as renting out a spare room in your home or a family vacation property through Airbnb or Vrbo.
Doing so can give you an idea of what it’s like to own a rental. It’s also a good idea to talk to other real estate investors and ask them what they wish they’d done differently before getting started.
Real Estate Investment Trusts (REITs)
If you don’t want to play the role of landlord, there are other ways to integrate real estate into your retirement portfolio.
Publicly traded real estate investment trusts, or REITs, are like mutual funds that own commercial, residential or industrial property instead of stocks and bonds.
Some REITs specialize in a particular real estate sector, whereas others feature more generalized holdings.
Simply put, REITs offer a way to earn a share of the income produced through real estate ownership without requiring that you actually buy real estate on your own.
You can purchase shares of a publicly traded REIT — which is listed on a major stock exchange — through your brokerage account.
Alternatively, you can invest in REIT mutual funds and ETFs to attain diversification at an affordable price.
Additionally, some REITs offer higher dividend yields than other investments — which can make them an appealing way to generate cash flow for retirement.
But REITs have a couple drawbacks.
One of the biggest risks to REITs is rising interest rates. This can reduce demand for REITs as other investors typically opt for safer income streams, such as bonds.
You will also owe taxes on any dividends you receive, unless you own REITs in a tax-advantaged retirement account.
Retirement Investment Strategies by Age
As retirement approaches, your investment goals and strategies can evolve.
That’s partly because your time horizon is shorter. There’s less room for error with risky investments because you need to access your money sooner, rather than decades in the future.
Your age can also affect your portfolio asset allocation. It’s often recommended to shift money to safer investments, such as bonds and certificates of deposit (CDs), as you get older to protect your nest egg from stock market volatility.
For example, the Rule of 100 suggests subtracting your age from 100. The result is the percentage of stocks you should own. The rest of your assets should be allocated to bonds and other low-risk investments.
The idea is to be more conservative with your money as you age and reduce your risk exposure.
However, these generic suggestions fail to consider key variables, including your risk tolerance, pension or annuity payments and Social Security benefits.
Don’t be afraid to deviate from the Rule of 100 — or similar strategies — if it doesn’t meet your personal goals.
Minimizing your tax burden in retirement is another vital investment strategy you should consider.
For example, Roth IRAs and Roth 401(k)s levy tax on contributions but allow you to withdraw those funds tax-free in retirement. Meanwhile, traditional retirement accounts defer your tax bite at first, but you’ll eventually need to pay it when you take withdrawals.
The age you retire is another important element. You may dream of leaving the workforce by 50, but the numbers in your portfolio may impose a different reality.
Make sure to speak with a financial planner or advisor as you approach retirement. A licensed professional can provide unbiased, third-party insight on how to tweak your portfolio and offer guidance on how to achieve your goals.
Retirement Investment Strategies to Avoid
Not all investment advice is good advice.
Two investment mistakes to avoid include failing to diversify your portfolio and not keeping enough liquid cash on hand.
Diversification is key if you want to minimize risk within your portfolio. Like a well-balanced diet comprised of different food groups, your portfolio should include a healthy mix of asset types — such as stocks, bonds, retirement accounts and mutual funds — spread across different industry sectors — such as energy, health care, consumer goods and technology.
Investing in just one or two companies, or focusing solely on high-paying dividend stocks, increases your risk of losing money.
If you put all your eggs in one basket, so to speak, you are more vulnerable when a particular company underperforms or the market crashes.
It’s also vital to have liquid cash available for emergencies and large purchases.
Liquid cash is simply money you can access quickly and easily without incurring fees. The most common example is the money in your checking and savings accounts.
It may be tempting to flood your 401(k) or IRA with any extra income, especially as retirement nears.
But doing so without maintaining an adequate cash reserve can be a costly mistake.
The IRS levies a 10 percent tax penalty if you withdraw money from a retirement account before the age of 59.5.
The penalty is meant to deter people from dipping into these accounts and depleting money earmarked for retirement.
You can avoid the penalty in a few situations, such as withdrawing money to pay for a new home or to cover health insurance premiums while you’re unemployed.
But if you don’t qualify for an exception and an emergency arises while most of your money is tied up in a 401(k) or IRA, paying this penalty may be unavoidable.
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12 Cited Research Articles
- DaveRamsey.com. (2021, March 11). How to Invest in Real Estate. Retrieved from https://www.daveramsey.com/blog/how-to-invest-in-real-estate
- Internal Revenue Service. (2020, November 10). Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
- Internal Revenue Service. (2020, November 10). Retirement Topics - Catch-Up Contributions. Retrieved from https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions
- Miller, N. (2020, May 4). Working Real Estate Investing Into Your Retirement Strategy. Retrieved from https://www.forbes.com/sites/forbesrealestatecouncil/2020/05/04/working-real-estate-investing-into-your-retirement-strategy/?sh=46caca254b01
- U.S. Federal Reserve. (2020, January 27). Report on the Economic Well-Being of U.S. Households in 2018 - May 2019. Retrieved from https://www.federalreserve.gov/publications/2019-economic-well-being-of-us-households-in-2018-retirement.htm
- Arnott, A. (2019, December 10). What Are Retirement Income Funds? Do You Need One? Retrieved from https://www.morningstar.com/articles/958275/what-are-retirement-income-funds-do-you-need-one
- Brown, J. (2018, August 14). 4 ways real estate can turbocharge your retirement income. Retrieved from https://www.cnbc.com/2018/08/08/4-ways-real-estate-can-boost-your-retirement-income.html
- Pfau, W. (2017, April 18). Should Retirees Use A Total-Return Or Income Portfolio? Retrieved from https://www.forbes.com/sites/wadepfau/2017/04/18/should-retirees-use-a-total-return-or-income-portfolio/?sh=69ea12ba5e96
- Lieber, R. and St. John, T. (n.d.). How to Win at Retirement Savings. Retrieved from https://www.nytimes.com/guides/business/saving-money-for-retirement
- Nareit. (n.d.) Frequently Asked Questions About REITs. Retrieved from https://www.reit.com/what-reit/frequently-asked-questions-about-reits
- U.S. Securities and Exchange Commission. (n.d.). Annuities. Retrieved from https://www.investor.gov/introduction-investing/investing-basics/investment-products/insurance-products/annuities
- U.S. Securities and Exchange Commission. (n.d.). Real Estate Investment Trusts (REITs). Retrieved from https://www.investor.gov/introduction-investing/investing-basics/investment-products/real-estate-investment-trusts-reits