Retirement Investing for Beginners: How to Start Retirement Savings

5 Types of Retirement Plans  

Retirement investing is really just investing without thinking you will be forever young. If you decide to have a family, kids, and all those nice things, it's important to learn as much as you can about the best investment strategies for retirement so that you can make the most of your money. Whether you're just starting out or you've been saving for a while, these tips will help you make the most of your money. Let's get started and jump straight into retirement investing 101.

401(k) Plans

A 401(k) plan is a retirement savings plan offered by employers. Employees may contribute a portion of their pre-tax income to the plan, and employers often match employee contributions on a certain percentage of their salary. There are two main types of 401(k) plans: traditional and Roth. With a traditional 401(k) plan, the money contributed to it grows tax-free until it is withdrawn in retirement. Because it is tax-free, the contributions also bring down your tax bill within the set allowance.

With a Roth 401(k) plan, the contributions are after tax and don’t bring down your bill, but you won’t have to pay any tax once you start making withdrawals in retirement.

401(k) plans are a very popular investment strategy for retirement, but they have some significant disadvantages. You won’t be able to have much control over the investments you make to this account. You will usually have a choice between a handful of different mutual funds ranging from very conservative to more aggressive. 

Like with other retirement accounts, you will have to pay considerable fines and taxes if you withdraw your funds early. But you can roll over your 401(k) fund to a more flexible plan like IRA.

403(b) Plans

Even though 401(k) plans are very common, they are not available to people who work in education, religious or other tax-exempt organizations. So schools, colleges, and universities, as well as churches and non-profits offer their employees 403(b) plans instead.

Assets in 403(b) plans can be placed in an annuity contract provided by an insurance company, a custodial account invested in mutual funds or a retirement income account for employees of churches or other religious organizations.

Fun fact: the names 401(k) and 403(b) come from the respective sections of the IRS Tax Code.

Traditional IRA

A traditional IRA is a tax-advantaged retirement account that allows you to save money for retirement while enjoying certain tax benefits. Contributions to a traditional IRA are tax deductible up to a certain limit, and earnings on the account grow tax-deferred. With a traditional IRA, you will start paying taxes when you start making withdrawals in retirement.

Roth IRA

A Roth IRA is an individual retirement account that offers tax-free withdrawals in retirement. Unlike with a traditional IRA, contributions to a Roth IRA are not tax deductible, but earnings are tax-free as long as the account has been open for at least five years and you are 59 1/2 or older. 

This makes it a good option for people who expect to be in a higher tax bracket when they retire. Roth IRAs are also exempt from required minimum distributions, which means you can keep the money in the account and let it grow tax-free until you need it.

SEP and SIMPLE IRA

SEP (Simplified Employee Pension) is a type of retirement account that is available to self-employed people and small business owners. It allows you to contribute a percentage of your income up to a certain limit, and the contributions are tax deductible. The money in the SEP can be used for any purpose once you retire, including withdrawing it as cash or rolling it over into an IRA or other qualified plan.

SIMPLE IRA (Savings Incentive Match Plan for Employees) is very similar to the 401(k). It is available to employees of small businesses and allows them to save for retirement on a pre-tax basis. It is available to any small business that employs under 100 people.

When to Start Retirement Investments?

The best time to start saving for retirement is yesterday. However, if you’ve just started thinking about it, it is never too late to start. Try to contribute as much as you can each month to your retirement savings account so that you can take advantage of compounding interest. That will help your funds grow over time.

If you’re asking yourself, “how should I invest for retirement?” It is important to have a retirement investment strategy in place. Think about how aggressively or conservatively you want to invest and determine the types of retirement investments that would be best for your retirement goals. If you’re wondering how to start retirement savings, a good place to start is a retirement plan like 401(k) because it provides tax benefits and free money in the form of employer contributions. Once you have that foundation, you can consider investing in individual ETFs or index funds, then into individual stocks.

It's great to have a mix of different assets in your portfolio, and the younger you are, the more risk you can afford to take.

How Much Should I Invest in Retirement? 

Any investing is investing for retirement. Or at least that’s a good way to think of it. Most young people are sensible enough not to pour all their savings into Shiba and prefer more reliable and long-term assets like the S&P 500.

Having goals is a good place to start. Try our investing calculator to work out how much you can expect to make with regular contributions. Just put in the number of years left until your retirement into the “Years of Investing” field.

Ideally, you should put 10-15% of your earnings into your financial future aka retirement, but this doesn’t mean you should build your whole portfolio out of retirement accounts.

How to Build Your Retirement Portfolio? 

Determine your retirement goals

Work out how much retirement income you need to meet your desired lifestyle. This will help you determine how much money you should be investing each month and the types of retirement investments that would be best for you.

Choose a retirement plan

If you're employed, it's a good idea to use a 401(k). This is one of the most popular retirement accounts and can provide great tax benefits. It comes with an employer match, which means your employer will double your contributions up to a certain percentage of your salary (for example, 50% match on the first 6%. This is like free money! However, anything above the amount that gets you an employer match might not be worth it. 401(k) is not very flexible in terms of withdrawals and types of investments.

It might be wise to diversify your retirement investments by using other accounts such as an IRA. If you're self-employed, consider investing in a retirement account such as an IRA or SEP IRA. These retirement plans offer tax benefits and can help you save for retirement more quickly.

Build a diversified retirement portfolio

Once you've decided how much to invest each month and what type of retirement investments are best for your retirement goals, it is important to build a diversified retirement portfolio. It's also important to diversify your retirement portfolio by investing in different categories, such as stocks, bonds, mutual funds, and ETFs. A diversified retirement portfolio will help you spread risk across different asset classes. That way, if one investment performs poorly, the other investments should still be able to cushion the losses.

How Gainy Can Help

The best retirement plan is a healthy diversified investment portfolio that gives you the mix of security and growth or risk vs. return that you’re comfortable with.

As you learn to become a better investor you may find retirement accounts too restrictive. Experienced investors know how and when to rebalance their portfolios, if you know nothing about this it’s great to make it your financial goal to learn to do it over time.

New tools like thematic trading fractionals or TTFs help you do this automatically. These are model portfolios of 10-20 stocks each based around a specific goal or investment strategy.

Conclusion

We hope this beginner’s guide to retirement accounts has been useful. Retirement planning can seem daunting, but it doesn't have to be. By starting early and investing regularly, you can build a retirement portfolio that will help you achieve your retirement goals. 

Using tax-advantaged accounts like the 401(k) and IRA is a good place to start. But the ROI of a 401(k) goes down dramatically after you stop getting matching contributions from your employer. While the IRA provides more flexibility in terms of assets rather than just a menu of a bunch of mutual funds like in a 401(k), the annual contribution limits are much lower: $6,500 or $7,500 for over-50s versus $22,500 for the 401(k).

You don't need to invest in stocks, bonds, mutual funds or ETFs to achieve a solid retirement future — though these are all good options. First and foremost, work out your retirement investment strategy. It's important to diversify your retirement investments by choosing different types of assets and accounts. And remember to rebalance your portfolio as you get closer to retirement so that you maintain the right of risk vs. return for your comfort level.

If you’ve been wondering how to start retirement savings and want to have more control than something like a 401(k) without having to pick individual stocks, an investment instrument like thematic trading fractional may be just what you need.

Let Gainy help you automate this process so that you can focus on what's really important — enjoying your golden years!

And don’t forget to check out our blog for other articles on the topic of retirement investing for dummies.

FAQ 

How Do I Start a Retirement Fund?

The best way to start a retirement fund is by contributing regularly, regardless of how small the contributions are. Many employers offer retirement accounts like 401(k)s and IRAs that allow you to save for retirement with tax advantages. Before you start, it’s a great idea to have a strategy to figure out what type of account will work best for you.

How Much Do I Need to Save for Retirement?

The amount you should save for retirement depends on your retirement strategy, goals, and lifestyle. You can use retirement calculators to get an estimate of how much you need to save each month in order to work out how to invest for retirement and reach your retirement goals. Generally speaking, it's recommended that you have saved 10 times your current annual salary by the time you retire.

What to Invest in for Retirement?

There are different types of investments for retirement. Tax-advantaged accounts like 401(k) and IRA are a good step forward, but ideally, your whole investment portfolio should take retirement into account.