How to Invest for Retirement In Your 20s, 30s and 40s

How to Save For Retirement
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In this in-depth guide on how to invest for retirement, you’ll learn:

  • Why retirement investing is different from other types of investing.
  • How to determine the amount of money you need for retirement.
  • How to choose the best retirement plan.
  • The best asset allocation for retirement investing.
  • Tips for building, growing and managing your retirement portfolio.

Investing for Retirement vs. Other Types of Investing

Retirement investing is different.

When investing in individual stocks, your goal is to outperform the market. (Otherwise, you’d just invest in a fund that tracks the market as a whole.) With retirement investing, you have a specific goal in mind — such as accumulating an amount of money that will safely last you the rest of your life.

The stakes are high. Missing your target has severe consequences. Unlike saving for other goals, like paying for your kids’ college or buying a home, there’s no loan program that can bail you out from having an inadequate retirement fund.

In other words, retirement savings should be high on your list of financial priorities. And the key to successful retirement savings is to find an optimal balance between saving enough today while still accomplishing your other short-term financial priorities.

When Should You Start Saving for Retirement?

Of course, the hard question is exactly how to go about striking a good balance between saving for retirement — which may be decades away — and achieving your shorter-term goals, like paying off debt or placing a down payment on a home. And just as hard is figuring out how much you’ll actually need for retirement.

The first thing to know is that there are tremendous advantages to investing for retirement as early as possible.

How significant are those advantages?

Consider this scenario:

  • Investor A: Invests $500 a month from the ages of 20 to 30. After that, does not invest a single dollar more for retirement, instead allowing that money to grow from the ages of 30 to 60.
  • Investor B: Does not invest before age 30, but invests $500 a month from the ages of 30 to 60.

Who has more money?

Start AgeEnd AgeMonthly ContributionTotal ContributionsBalance at 60 w/ 7% Return
Investor A2030$500$60,000$702,421.17
Investor B3060$500$180,000$609,985.50

Believe it or not, the answer is Investor A. 

Even though they made 20 years fewer contributions, they ended up with nearly $100,000 more saved for retirement due to the power of compounding returns.

Now, should you save as much as you possibly can for retirement, sacrificing your quality of life today to leverage the benefits of starting early? Not necessarily. It’s about a balance. And this balance is personal to your specific financial situation and goals.

At The Ways To Wealth, we teach saving at least 15% (and ideally 20%) of gross income for long-term retirement savings and wealth accumulation throughout your 20s and 30s. Like all financial advice, you want to customize this based on your own goals and situation. 

For example, if you’d like to retire earlier, or are in your 40s and getting a later start, you’d want to save more than 20%.

Types of Retirement Accounts to Consider

Something else that’s different about retirement investing is the fact that there are specific types of accounts set up under our tax code that provide valuable tax advantages.

The most popular of these are:

  • Individual Retirement Accounts (IRAs): An account you can set up on your own.
  • 401(k) and 403(b): A retirement account that’s offered by an employer. Some employers even match your contributions up to a certain percentage of your salary; if so, that makes these accounts the ideal place to start saving.

If you’re self-employed, there are good options available as well. These include an SEP IRA or a solo 401(k), which offer similar tax benefits.

For both IRAs and 401(k)s, you can choose to invest in a Roth or traditional account.

  • Roth IRA: You contribute after-tax money, and both your contributions and earnings can be withdrawn tax-free after age 59 ½.
  • Traditional IRA. You contribute pre-tax money and then pay taxes upon withdrawal.

The tax savings provided by these accounts offer some significant advantages. However, they do come at the cost of liquidity. There are penalties (and in most cases, taxes) for withdrawing money from these accounts prior to retirement.

Depending on your situation, one account type will be better than the other. Overall, a Roth makes sense if you believe your tax rate is lower today than it will be at the time of withdrawal. Conversely, a traditional account makes more sense if you believe your tax rate is higher today than it will be at the time of withdrawal.

For a more detailed analysis, see our guide: Roth vs. Traditional IRAs.

Asset Allocation for Retirement Portfolios

Once you’ve chosen a type of retirement account, the next step is determining specifically what to invest in. This step is called asset allocation.

With retirement investing, you want to invest more aggressively when you’re young and taper that aggressiveness as you get older. Since you won’t need the money for decades, you can more easily weather the short-term declines often associated with stocks while still benefiting from their consistent long-term growth.

For reference, when you zoom out and look at the past 20 years, you can see that stocks offer high returns with the occasional dip. 

The market crash of 2008 hardly seems like a blip on the radar when you look at stock returns over time.
The market crash of 2008 hardly seems like a blip on the radar when you look at stock returns over time.

As you get older, your portfolio should become more conservative. Specifically, you want to move away from having a significant percentage of highly volatile investments like stocks, instead favoring stable ones like bonds and safer alternative investments. At this point in your life, you’re closer to needing to withdraw money for living expenses and you want to avoid having to sell assets at a suboptimal price.

The end goal is to find the right mix of investments that are going to optimize the amount you earn for a given level of risk.

Fortunately, this isn’t as daunting as it sounds (even if you have no experience). There are excellent investment options available even if you don’t know a thing about investing.

  • Target Date Funds take much of the work out of investing. You simply choose a fund that corresponds with your estimated retirement date — e.g., the Vanguard 2050 — and allow the fund to automatically rebalance based on your chosen retirement goal. Most 401(k)s include target date funds.
  • Robo-Advisors are similar to target-date funds in that they’re designed for hands-off investors who like the idea of automatic rebalancing throughout their life. As robo-advisors are more algorithm-based, they tend to have an allocation that’s a bit more fine-tuned than those of target date funds (which are usually more cookie cutter).
  • Index funds are a type of fund that seeks to match the market’s performance rather than beat it. This is known as passive management. An example would be an S&P 500 index fund, which includes shares of all the companies that comprise the S&P 500 index. Our SPY vs VOO comparison article provides details on the two most popular S&P 500 ETFs.

When it comes to investing in a 401(k), your options are limited to the available investments within your company’s plan. With an IRA and your own investment accounts, you have a lot more freedom.

Our top recommendations include:

  • Betterment: A low-cost robo-advisor that’s ideal for hands-off investors. Fill out a quiz and get a customized portfolio based on your risk tolerance and goals.
  • M1 Finance. Our top choice for target-date funds thanks to their low fees. (Read our M1 Finance review.)
  • SoFi Invest: Their Automated Investing feature has a number of low-fee portfolios to choose from, and comes with the added benefit of free access to a team of CFPs.

Tips for Successful Retirement Investing

#1. Establish an Emergency Fund Before Getting Started

A retirement account comes with penalties for early withdrawal, so you want to have a small emergency fund before getting started. One month of living expenses is a good rule of thumb; from there, you can simultaneously start investing and building out a more fully-funded emergency fund (three months of expenses is our recommendation).

#2. Save As Early As Possible

You don’t need to start by saving 20% of your income. Get started investing with whatever you have today, even if it’s just saving 1% of your income via your 401(k).

One strategy is to increase your savings percentage by 2% every quarter. This would allow you to save 20% of your gross income in just two years.

#3. Know Your Estimated Retirement Date

You don’t need to be obsessed with the exact date you want to retire, but it’s good to know the age you’re on track to retire at based on your current level of savings. 

This is a good barometer for knowing how you’re doing overall with managing your finances, and an even better tool for understanding the long-term consequences of your decisions (e.g., whether you should buy a new car vs. save money for retirement).

Recommended resource: Use Empower’s retirement planner, which automatically calculates your estimated retirement date based on your current level of savings and expenses. (It’s also one of the best portfolio tracking apps.)

Retirement Investing FAQ

Are annuities a good investment for retirement?

Annuities are not an ideal investment for retirement when retirement is still decades off. While it may make sense to purchase an annuity as you get closer to retirement (or after your retirement), they rarely make sense as a long-term investment option.

The problem is that annuities often carry high fees that subtract from your return over time. A smarter approach is to invest in low-cost index funds, which are the same investments annuities use. Then, as you approach or hit retirement, explore purchasing an annuity.

If you’re currently maxing out all of your retirement accounts, such as your 401(k) and/or IRA, and are looking to save even more tax-free and don’t mind the lack of liquidity associated with annuities, then an annuity becomes an option. 

In this case, we recommend speaking to a fiduciary who isn’t compensated based on whether you purchase an annuity, such as a fee-only CERTIFIED FINANCIAL PLANNER™.

Should you invest in individual stocks in retirement accounts like a 401(k) or IRA?

When it comes to investing for retirement, the goal is to save enough to comfortably last the rest of your life. Relying on individual stocks to help you achieve this goal is very risky because the price of any given stock can fluctuate widely. Compared to a properly diversified portfolio, all it would take is one unexpected surprise to potentially wipe out 50%+ of your retirement portfolio.

Are dividend-paying stocks good for retirement?

While you may want to consider dividend stocks or funds as a source of income after reaching retirement, they’re not optimal when you’re saving for retirement. 

When you’re saving for retirement, the goal isn’t income but appreciation. Overall, dividend stocks tend to have less price appreciation because companies that pay dividends are not in a growth mode. 

Should you invest in cryptocurrencies for retirement?

Similar to individual stocks, the unpredictability of cryptocurrencies like Bitcoin makes them a very risky investment for retirement. That said, there has been research on the benefits of Bitcoin in portfolio construction (1% to 6% is optimal).

The big question is whether you’re relying on cryptocurrencies to reach your retirement goals, or are on track to reach your retirement goals with your current savings via a more traditional retirement portfolio composed of stocks and bonds. 

If the latter is true and you’re looking to invest in cryptocurrency in a tax-efficient way, then doing so via a retirement account may be a reasonable option.

In other words, it’s important to not view crypto as a shortcut or superior alternative to investing in stocks and bonds. There are severe consequences — e.g., running out of money at the end of your life — for being wrong.

As noted, the research supports the idea that a small percentage of crypto can benefit you. Anything more and you’re taking on unnecessary risk. You can read our reviews of two self-directed IRA providers to learn more about how to invest your retirement portfolio in crypto: Choice IRA review and Alto IRA review.

This guide is written for those with a decade or more before they wish to retire. Those closer to retirement or in retirement will find more helpful information for their situation here: How Long Will My Money Last In Retirement?

R.J. Weiss
R.J. Weiss, founder of The Ways To Wealth, has been a CERTIFIED FINANCIAL PLANNER™ since 2010. Holding a B.A. in finance and having completed the CFP® certification curriculum at The American College, R.J. combines formal education with a deep commitment to providing unbiased financial insights. Recognized as a trusted authority in the financial realm, his expertise is highlighted in major publications like Business Insider, New York Times, and Forbes.

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