Planning for retirement
Retirement Investing for Beginners: How It Works at Every Age
Retirement investing has fewer moving parts than the industry makes it look. A handful of fund types, a mix that suits your age and your nerves, and low costs cover most of it. Here's how each piece works, before retirement and after.
Retirement investing in five lines
- A 401(k) or IRA is a container with tax rules. The funds you pick inside it are the investment.
- Stock funds are for growth, bond funds for steadier income, and cash for money you'll need soon.
- Fees compound against you. In an SEC example, a 1% yearly fee left about $29,000 less after 20 years than a 0.25% fee.
- Target-date funds shift from stocks toward bonds as you age, and each fund company uses its own schedule.
- Once you're withdrawing, the order of good and bad years starts to matter, and so does which account you draw from.
The account is the wrapper. The investment is what's inside.
People say "I have a 401(k)" as if that were the investment. It isn't. A 401(k), an IRA, and a Roth IRA are accounts. Each one sets the tax rules: when you pay tax, how much you can put in, when you can take money out.
What grows or shrinks is whatever you hold inside the account. Two people with the same Roth IRA at the same company can end up with very different balances because one holds a stock fund and the other left everything in cash.
Cash is easy to end up in by accident. Roll an old 401(k) into an IRA and the money can land in a cash or money market holding, where it sits until you pick investments. If you've done a rollover, log in and look.
Choosing accounts and contribution amounts is covered in our step-by-step retirement planning guide. This page is about what goes inside them.
The four building blocks
| Building block | What you own | What it's for | The trade-off |
|---|---|---|---|
| Stock funds | Small pieces of many companies | Long-term growth | Values can fall hard and stay down for years |
| Bond funds | Loans to governments and companies | Interest income and smaller swings | Prices fall when interest rates rise |
| Cash | Savings accounts, CDs, money market funds | Money you'll spend in the next year or two | Can lose ground to rising prices |
| Target-date funds | A ready-made blend of the three above | One fund that adjusts as you age | You accept the fund company's mix and schedule |
Stock funds
A stock fund pools money from many investors and buys shares in dozens or thousands of companies. An index fund is the plainest kind. The SEC's Investor.gov describes it as a fund built to earn about the same return as a particular market index, before fees. It notes that this passive style usually means lower fees and expenses than actively managed funds.
Stocks are where long-run growth has come from, and they're also where the big drops happen. Money you'll need in three years has little time to recover from a drop. Money you won't touch for twenty has a lot.
Bond funds
A bond is a loan. You lend money to the U.S. Treasury, a city, or a company, and it pays you interest. A bond fund holds many of them.
Bond funds swing less than stock funds, but they aren't a savings account. As the SEC puts it in the title of a 2013 investor bulletin, when interest rates go up, prices of fixed-rate bonds fall. Funds holding longer-term bonds feel that more than funds holding short-term ones.
Cash
Cash means bank savings, certificates of deposit, and money market funds. Bank deposits are insured by the FDIC up to $250,000 per depositor, per insured bank, for each ownership category. A money market fund is a mutual fund, not a bank account, and the FDIC lists mutual funds among the products its insurance doesn't cover.
Over decades its weakness is inflation: the balance holds steady while what it buys shrinks.
Target-date funds
A target-date fund is named for a year, such as 2035 or 2050, and you choose the one closest to when you expect to retire. It holds stock and bond funds and changes the blend for you over time. Many 401(k) plans use one as the default.
They aren't all alike, which matters in the section on age below.
What fees cost you
Every fund charges an expense ratio, a yearly percentage taken out of the fund's assets. You never get a bill. The fee comes out before your return is reported, so it's easy to miss.
Say you hold $200,000 in a fund:
| Expense ratio | Cost per year on $200,000 |
|---|---|
| 0.05% | $100 |
| 0.50% | $1,000 |
| 1.00% | $2,000 |
And that's one year. The SEC ran the longer math in its investor bulletin How Fees and Expenses Affect Your Investment Portfolio. It took $100,000 earning 4% a year for 20 years. With a 0.25% yearly fee the portfolio ended at about $208,000. With a 1% fee it ended at about $179,000. Same investments, same return before costs, and roughly $29,000 less.
The 4% is the SEC's illustration, not a forecast.
Where do you find yours? In a 401(k), look for the annual fee disclosure your plan sends, which lists each fund's expense ratio. For any fund, the first pages of the prospectus show it. If an adviser manages your money, their fee comes on top of the fund fees.
How the mix shifts with age
Your split between stocks, bonds, and cash is called your asset allocation. There's no official right answer for any age, and we won't give you one. What we can show you is how the people who design retirement funds handle it.
The SEC's investor bulletin on target-date funds describes the pattern: the funds start out heavily in stocks and become more weighted toward bonds as the target date nears. The schedule for that shift is called the glide path.
Here's one published example. Vanguard describes the glide path for its Target Retirement funds this way:
| Investor's age | Vanguard's published stock share |
|---|---|
| Up to about 40 | 90% |
| 40 to 65 | Reduced gradually |
| 65, the target date | About 50% |
| 72 and after | 30%, with 70% in bonds |
That's one company's design for its own funds. Other fund companies publish different numbers, and none of them know your pension, your spouse's savings, or how you sleep when markets fall.
So how do you use this? As a reference point. If your own mix at 58 is far more aggressive or far more cautious than what the fund companies publish for that age, that isn't wrong, but you should be able to say why. Our guide to the 70/30 portfolio looks at one common split in detail.
Earlier decades have their own guides: planning in your 40s and planning in your 50s.
Rebalancing
Markets move your mix without asking. If stocks have a strong few years, a portfolio you set at one split drifts toward holding more stock than you chose. Rebalancing means selling some of what grew and buying what lagged to get back to your target. Inside a 401(k) or IRA, those trades don't trigger tax. Once a year is a common schedule, and target-date funds do it for you.
How to invest for retirement at age 60
At 60 the question changes. You've spent decades asking how to grow the money. Now you're also asking how to avoid a bad loss right before you need it, without giving up growth you'll still want at 80.
Both halves count. Retirement can last 25 or 30 years, so much of your money still has a long time horizon even on your last day of work.
A few things we'd check at 60:
- What you hold today. Add up stocks, bonds, and cash across every account, not one account at a time. After a stretch of rising prices you may be holding more stock than you chose.
- Your target-date fund's real mix. Look up its current stock share and whether it's a "to" or "through" fund.
- Employer stock. A large holding in the company that also pays your salary ties your savings and your job to the same fate.
- The first few years of spending. Work out how much you'll need from savings in years one through three, and where that money sits now.
Our checklist for five years before retirement covers the non-investment side, and the guide to retirement ages shows which rules kick in at 59½, 62, 65, and beyond.
Investing after you retire
You don't stop being an investor on your retirement date. You become one who withdraws, and that changes the risks.
Sequence-of-returns risk, in plain words
While you're saving, a market drop is a sale: your contributions buy more shares. Once you're withdrawing, it's the opposite. To raise the same cash you have to sell more shares at low prices, and those shares aren't there when prices recover.
So the order of returns matters. Two retirees can get the same average return over 25 years and finish with very different balances, because one met the bad years early and the other met them late. Our guide on sequence-of-returns risk shows it with numbers.
The common defenses are simple ones. Hold a year or two of spending in cash so you aren't forced to sell in a slump. Keep some bonds. Be willing to trim spending in a bad year.
Which account to draw from first
If you have taxable, traditional, and Roth money, the order you spend them in affects your tax bill. Fidelity describes two common approaches:
- The traditional order. Spend taxable accounts first, then tax-deferred accounts such as a traditional 401(k) or IRA, and Roth accounts last, so the tax-sheltered money has longer to grow.
- The proportional approach. Take from each type of account in proportion to its share of your savings, which spreads taxable income more evenly across the years.
Neither is right for everyone. The better fit depends on your tax bracket, your Social Security timing, and how large your traditional balances are. This is one of the places where an hour with a tax professional can pay for itself.
How much to take
The best-known rule of thumb is the 4% rule, from William Bengen's 1994 study in the Journal of Financial Planning: withdraw about 4% in year one, then adjust that dollar amount for inflation. It's a finding about past U.S. markets over 30-year periods, and it's a starting point. If you've seen much higher numbers quoted, read our look at the 7 percent rule first. You can test your own figures in the retirement calculator.
Required withdrawals
The IRS sets a floor. From age 73 (born 1951 through 1958) or 75 (born 1960 or later), you have to take a required minimum distribution from traditional IRAs and workplace plans each year. For people born in 1959, age 73 comes from an IRS proposal that isn't final yet; see RMD age by birth year. The amount is last year's ending balance divided by an IRS life-expectancy factor. At 73 the factor is 26.5, so a $400,000 traditional IRA means a first withdrawal of about $15,100.
A required withdrawal is a tax event. It doesn't force you to spend the money or leave the market. You can reinvest what you don't need in a regular taxable account. Roth IRAs have no required withdrawals during the owner's lifetime. More in our RMD guide.
For a closer look at what retirees hold and why, see investments people use during retirement.
Six common retirement investing mistakes
- Leaving rollover money in cash. The transfer worked, but nobody picked investments.
- Not knowing what you pay. If you can't name your funds' expense ratios, look them up this week.
- Selling after a drop. It turns a paper loss into a real one. A mix you can live with in a bad year is the fix, and it has to be chosen before the bad year.
- Holding several target-date funds at once. Each is built to be a whole portfolio. Stacking them, or adding them to other funds, changes the mix in ways you may not intend.
- Too much in one company, above all your employer.
- Moving everything to cash at retirement. It feels safe. Over a 25-year retirement, rising prices do the damage instead.
When to pay for an adviser, and how to check one
Plenty of people manage with a target-date fund or a few index funds and never hire anyone. Paying for advice makes more sense at the hard junctions: the year you retire, a large rollover, an inheritance, a pension lump-sum offer, or a plan for which accounts to draw from.
Know who you're talking to. A registered investment adviser owes you a fiduciary duty, which the SEC says means serving your best interest at all times, across the entire relationship. A broker has to act in your best interest when making a recommendation, under an SEC rule called Regulation Best Interest. Many professionals are registered as both, so ask which hat they're wearing with you, and ask for it in writing.
Then check them. It's free and takes ten minutes:
- Search the person's name at Investor.gov, which pulls from the SEC's Investment Adviser Public Disclosure database.
- Search FINRA BrokerCheck for licenses, employment history, customer complaints, and disciplinary actions.
- Read the firm's Form CRS, a short relationship summary that every broker and adviser has to give retail clients. It lists services, fees, and conflicts of interest.
Ask how they're paid: a percentage of your assets, an hourly or flat fee, commissions on products, or a mix. "Fee-only" means the client's fee is the only pay. "Fee-based" can include commissions. Get the total yearly cost in dollars, fund fees included.
This page is general education. It can't account for your income, taxes, or health, and it isn't a recommendation to buy or sell anything. Terms you don't know are in our glossary.
Common questions
What is the best way to invest for retirement?
There's no single best investment. The pieces that matter are a mix of stock funds, bond funds, and cash that fits your time horizon, low fees, and sticking with it through bad years. A target-date fund packages all three for people who'd rather not manage it.
How should a beginner start investing for retirement?
Start with your workplace plan and contribute enough to get any employer match. Check what your money is invested in, since many plans default to a target-date fund, and look up that fund's expense ratio.
How should I invest for retirement at age 60?
It depends on your other income and how you handle risk. As one reference point, Vanguard's published glide path for its Target Retirement funds holds about 50% in stocks at 65 and 30% from age 72. Other fund companies use different mixes.
How do I know if a financial adviser is a fiduciary?
Ask directly and get the answer in writing. Then look the person up on Investor.gov and FINRA BrokerCheck, and read the firm's Form CRS for how it's paid and what conflicts it has.
We base our guides on primary sources such as the IRS, the Department of Labor, and federal regulators. Read our editorial policy. Spot an error? Tell us.
