Tips for Successful Retirement Investing

Retirement might feel far away depending on where you are in life, but successfully investing for it starts now—even if it feels early. Without a clear long-term strategy, you might sacrifice some potential investment gains to fees, taxes, and market volatility.

It’s crucial to build a resilient investment plan that can weather both time and turbulence through your working years and beyond.

Understanding Retirement Accounts

The are only two types of retirement accounts for most Americans, broadly speaking, and each offers distinct benefits.

Tax-Advantaged Accounts

Tax-advantaged accounts are the backbone of retirement savings. If you work for a company, then you may have access to a company-sponsored 401(k) plan or 403(b). Anyone with earned income can invest in an individual retirement account (IRA), too.

There are two types of 401(k) plans and IRAs, each with distinct tax implications: the traditional and the Roth. Many employers also offer matching contributions to your 401(k), which is essentially free money added to your retirement savings. Employers may match each dollar you contribute to your 401(k) up to a certain limit, or they may use partial matching, in which they match a percentage of your contributions up to a certain limit. It’s important to contribute at least enough to receive the match, as the match is essentially free money.

Traditional vs. Roth

The various types of retirement accounts—401(k)s, traditional IRAs, and Roth IRAs—and they all offer tax benefits:

• Traditional 401(k)s and IRAs: You contribute pretax dollars to these accounts. The amount you contribute is deducted from your gross income for the year, giving you an immediate tax break for the year. You’ll pay taxes when you take distributions.
• Roth IRAs and 401(k)s: You contribute post-tax dollars to a Roth account. You won’t get a tax break that year, but your distributions will be tax-free after age 59½

Roth accounts are a favorite of financial planners because distributions from these accounts are tax-free. (Note that only some employers offer a Roth 401(k) option, so it’s worth checking your plan.) However, if you have a traditional IRA or 401(k), you not only owe taxes on your withdrawals, you’re also typically required to take withdrawals, which are known as required minimum distributions (RMDs), starting at age 73.

“In my experience working with retirees, many overlook tax planning opportunities early on,” says Avanti Shetye, certified financial planner (CFP) and founder of Maryland-based Wealthwyzr. “While they focus on building wealth, they often underestimate the impact of RMDs in later years.”

Roth IRAs, however, do not have RMDs, which means that money can grow tax-free over the account owner’s lifetime.

Shetye notes that large RMDs can push retirees into higher tax brackets—potentially increasing their tax burden “significantly.” She recommends strategic Roth conversions in early retirement to minimize lifetime taxes.

Taxable Accounts

Taxable accounts—such as brokerage investment accounts—don’t come with tax deferral perks, but they do offer a great deal more flexibility.

You can invest in stocks, bonds, mutual funds, and exchange-traded funds (ETFs) of your choice. The proceeds are taxable at the (usually lower) capital gains tax rate rather than your income tax rate as long as you hold the assets for a year or more.

A key difference between these accounts and tax-advantaged accounts is that withdrawing money from a retirement account before age 59½ usually triggers a 10% early withdrawal penalty on top of any taxes owed. Taxable brokerage accounts are not subject to these withdrawal penalties.

Investment Options for Retirement

Stocks and Bonds

In general, equities provide growth while bonds offer stability. Striking the right balance between the two depends on your timeline and risk tolerance.

Advisor Eric Maldonado, the founder of Aquila Wealth Advisors, says that one of the most common mistakes people make when investing for retirement is not giving themselves a chance to keep up with inflation. “If you have years to invest before retirement, positioning yourself too conservatively with too many fixed-income investments, bonds, or money market funds might not be enough to keep up with rising costs throughout retirement,” he said.

The traditional portfolio allocation has long been thought of as 60% to equities and 40% to bonds. Yet some have argued that this allocation may not be right for everyone. As a result, many advisors suggest adjusting the balance based on market conditions, risk tolerance, and individual goals rather than following a fixed rule.

Ultimately, Maldonado stresses the importance of knowing your overall risk appetite and working with an advisor to help manage emotions and investments, particularly during times of market distress.

Mutual Funds and ETFs

Mutual funds and exchange-traded funds (ETFs) are popular tools for retirement investors because they offer instant diversification, professional management, and a way to invest in broad market segments without picking individual stocks or bonds.

While both pool money from multiple investors to purchase a range of securities, they operate a bit differently.

Mutual funds are typically bought and sold at the end of the trading day at the fund’s net asset value (NAV). They’re often used in 401(k)s and other retirement plans, especially target-date funds, which automatically adjusts your asset allocation over time—by making your portfolio more conservative as you get older—based on your expected retirement year.

ETFs trade throughout the day like individual stocks, offering more flexibility and lower fees than most actively managed mutual funds.

“Low-cost target-date funds may be a better choice for many investors for their retirement portfolios,” says Shetye. These funds can serve as a one-stop shop for retirement investing as they rebalance automatically, effectively reducing the need for hands-on management.

Annuities and Other Income-Producing Investments

For retirees seeking guaranteed income, annuities can be a useful retirement tool. They’re worth considering in the distribution phase of retirement alongside dividend-paying stocks and bonds.

Note that annuities, which are purchased through insurance companies, often have higher fees than other investments. It’s essential to read the fine print on the contract.

Strategies for Successful Retirement Investing

Start Early and Leverage Compounding

Even small contributions snowball if given enough time. “One of the biggest mistakes people make is they think they will work forever,” says Shetye. “Be prepared for retirement by investing early in your career.” As the chart below shows, time can make a really big and potentially life-changing difference in overall returns.

Diversification and Risk Management

A well-diversified portfolio can reduce risk without sacrificing return. Kristy Jiayi Xu, the founder of Global Wealth Harbor, recommends a time asset pool strategy (also known as the bucket strategy): allocating assets based on when distributions will be needed, with more volatile assets reserved for the long term and safer ones set aside for near-term needs.

Regular Portfolio Rebalancing

Market fluctuations can throw your asset allocation out of whack, so it’s important to reassess your portfolio periodically.

Rebalancing your portfolio at least every six to 12 months or after major market moves can help you maintain your intended risk level, says Xu.

Managing Emotions and Behavioral Biases

Avoiding Emotional Investing

To help clients stay calm and avoid emotional decisions during market downturns, Xu recommends formula investing, which follows a structured investment plan to avoid emotional investing. “Because there is a quantitative rule of how much the investor is investing in each period of time, this helps prevent investors from taking spontaneous reactive actions,” she says.

Noah Damsky, the founder of Los Angeles-based Marina Wealth Advisors, is similarly cautious. “If you have a strategy in place that is ready for the inevitable downturn, then throw away the keys (your online login) and ignore your account balances,” he says. “Checking your account balances during volatility is like going on an epic vacation and opening your work email—it doesn’t do you any good.”

Staying the Course During Market Volatility

Market corrections are inevitable, but panic selling locks in losses, which can be especially harmful for your portfolio at the beginning of retirement.

“You have to have handrails in place before the next big world calamity happens,” says Maldonado. “Know your numbers and have a buffer of cash-equivalent holdings so you’re not forced to sell growth investments during a downturn.”

He suggests asking yourself questions like:

• How much can you cut back on in monthly spending if there is a recession?
• Do you have a buffer of cash-equivalent holdings to draw from in a down market so you don’t have to sell your ETFs or mutual funds at the bottom?
• How many months’ or years’ worth of expenses do you have in liquid, stable holdings to help keep your growth-focused assets invested while you wait for markets to recover?

Minimizing Fees and Expenses

Understanding Investment Fees

One of the most overlooked yet critical components of successful retirement investing is managing investment fees. The reality is that higher fees don’t necessarily translate into better performance.

There is a critical difference between managed mutual funds and index funds. Managed mutual funds set a goal of exceeding the performance of a benchmark index such as the S&P 500. Index funds are designed to duplicate the performance of the index.

Managed mutual funds usually have higher fees than index funds (whether they are index mutual funds or ETFs) because managed funds are staffed by active managers who buy and sell stocks to maximize fund performance. Those costs are passed on to fund investors.

Maldonado cautions that fees can make a big difference.

Fees for funds are usually expressed by an expense ratio, which represents the percentage of your investment that goes toward fund operating costs each year. For example, a fund with a 0.50% expense ratio will charge $5 annually for every $1,000 you invest.

Even small differences in expense ratios can add up to big differences in long-term returns.

Shetye stresses just how pronounced the differences can be. “Investing in a low-cost fund versus a fund with an expense ratio of 1% could mean a difference of 12% in your portfolio value over 20 years,” she says. “Over 30 years, this differential could increase to 18%, and over 40 years, it could mean almost one-fourth of your total portfolio [is] lost to fees.”

As a result, Shetye says low-cost target-date funds may be a better choice for many investors’ retirement portfolios.

Choosing Low-Cost Investment Options

Pay close attention to fund fees when selecting mutual funds or ETFs. Look beyond the ticker and assess the fund’s expense ratio, trading costs (if any), and whether you’re being charged front-end loads, back-end loads, or annual account maintenance fees.

“Be ready to pay for good service,” says Damsky, “but don’t settle for subpar value.”

When to Consult a Financial Advisor

If you’re unsure about which options are best for you or have questions about taxes, financial strategies, or managing fees efficiently, it’s good to consult a professional.

“Tax planning can be complicated for people who don’t do it on a regular basis,” Shetye says. “For example, Roth conversions are taxable events…”

A good financial advisor can help you align your investment, tax, and income strategies and avoid costly mistakes.

“Don’t cut off your nose to spite your face,” Damsky says. “Be realistic and seek help unless you’re going to do all of the work yourself.”

Shetye offers some advice for choosing a financial planner, including interviewing several people before making your decision and asking them about their experience working with people in similar financial or life circumstances.

She also recommends looking for qualifications such as the chartered financial analyst (CFA) and CFP designations.

The Bottom Line

A successful retirement doesn’t happen by accident. It requires early planning, ongoing discipline, and smart strategies. That means choosing the right accounts, diversifying your portfolio, keeping fees in check, managing your emotions, and staying the course through market cycles.

Whether you’re decades from retirement or nearing the finish line, the best time to start planning—or refining your plan—is now.