How to Invest for Retirement: A Comprehensive Overview
By Michelle Clardie on 08/30/2025.
Reviewed by Josefin Gatsby
Planning for retirement is one of the most important financial goals of your life. Whether you’re just starting your career or nearing retirement age, understanding how to invest wisely can make the difference between financial freedom and financial stress in your golden years
This guide covers the essentials of retirement investing in a simple seven-step plan. We’ll explore general strategies and specific account options, as well as different investment vehicles and tips for maximizing tax advantages and managing market risk.
Here is your guide to investing for retirement.
Step 1. Set Your Retirement Goals
In the most basic terms, this step of planning your retirement is about estimating how much you’ll need to live on during retirement so you can determine how much of a nest egg you need to build before retiring.
For example, if you plan to retire at 65 with sufficient funds to last around 30 years, you can use the 4% rule, withdrawing 4% of your retirement savings in your first year of retirement and adjusting for inflation each year after. However, if you plan to retire early, you need a different strategy, such as building an investment portfolio that generates enough income to cover your living expenses.
When estimating your expenses in retirement, consider the activities you want to add to your lifestyle, such as travel, gym memberships, and dining out. You can also consider ways in which your current expenses may change, such as spending more on healthcare and less on clothing and monthly transportation costs. If your primary residence will be paid off during retirement, you may also save a substantial amount on housing expenses.
The earlier you can start investing for retirement, the better. Investing early gives you more time to compound your returns for exponential growth.
Step 2. Choose the Right Retirement Accounts
Retirement accounts offer tax advantages that general investment accounts do not. In exchange for tax breaks, you generally must wait until you’re at least 59.5 years old to withdraw funds (although some exceptions apply).
Your options largely depend on your employment status and include the following:
Employer-sponsored plans. 401(k), 403(b), and similar plans are offered through employers and may have the added benefit of employer matching, in which your employer contributes a portion of the amount you contribute. These plans are often traditional, meaning that contributions are “pre-tax” (excluded from your taxable income). Your contributions then grow tax-deferred, and you pay income taxes on withdrawals during retirement. There are annual limits to the amounts you can contribute. For 2025, workers under 50 can contribute up to $23,000, while workers 50 and older can contribute up to $30,500.
Self-employed options. SEP IRAs and Solo 401(k)s work similarly to pre-tax employer-sponsored plans, but because you are your own employer, you can determine how much of an “employer match” to offer yourself (within annual contribution limits).
Individual Retirement Accounts (IRAs). IRAs can be used in place of, or in addition to, employer-sponsored or self-employment retirement plans. Contribution limits are lower ($7,000 in 2025 for those under 50 and $8,000 for those 50 and older), but you have a Roth option that provides a different set of tax benefits than a traditional retirement account. With a Roth, you use “after-tax” dollars to fund the account, but then your gains and withdrawals in retirement are tax-free.
Self-directed retirement accounts. Self-directed retirement accounts offer more flexibility and control than standard retirement accounts. Rather than limiting your investment options within the account to securities like stocks, bonds, and funds, you can use a self-directed retirement account for alternative investments, such as commodities, cryptocurrencies, and real estate.
Step 3. Diversify Your Investments
Within your retirement account(s), you will hold shares in different assets. Creating a diverse mix of assets is an important risk-management strategy. By diversifying your investment, you reduce the risk of substantial losses due to a collapse in any one company or sector.
For standard (non-self-directed) accounts, you’re typically limited to:
Stocks: Shares of ownership in a given company. Stocks offer long-term growth potential but come with market volatility.
Bonds: Loans to governments, municipalities, or corporations that pay back with interest. Bonds provide low-risk stability and income, helping to balance a portfolio.
Funds: Packages of stocks and/or bonds. Index funds are funds that passively follow a specific market index (like the S&P 500, for example). Mutual funds are actively managed funds with hand-selected stocks and higher fees than index funds. ETFs (exchange-traded funds) are funds that trade on the stock market throughout the day, just like individual stocks, for maximum liquidity.
REITs: Real estate investment trusts (REITs) are companies that invest specifically in income-generating real estate and pay a percentage of the profits out to investors in the form of dividends.
Self-directed accounts can expand into other investment types, such as:
Business private equity: Shares of privately held companies. Private equity may be more risky than publicly traded stocks, but it may also provide potential for greater returns.
Strategic asset allocation involves establishing a suitable mix of assets based on investment goals, risk tolerance, and timelines. As a general rule, younger investors can take on more risk with growth-focused assets because they have more time to recover from any losses before retirement. Those closer to retirement may prefer safer, income-focused investments.
It’s important to rebalance your portfolio regularly to make sure your portfolio retains your target asset mix. As growth-based assets appreciate faster than lower-risk assets, your portfolio will skew into a higher-risk profile. Selling shares of growth-based assets and reinvesting those funds into low-risk classes will bring your portfolio back into balance.
Step 5. Take Advantage of Tax Benefits
In addition to the inherent tax advantages of retirement accounts, there are additional ways to increase tax advantages through your investment strategy.
For example, investors aged 50 and over can use catch-up contributions, which allow them to exceed the standard savings limits on retirement accounts. Investing more in a traditional 401(k) or IRA can reduce your taxable income for the current tax year, allowing for additional tax savings now.
Furthermore, you can invest in asset classes that contain additional tax benefits. For example, real estate offers added tax advantages like mortgage interest deductions, depreciation deductions, and lower capital gains rates (compared to higher earned income rates).
Because taxes dramatically affect how much money you’re left to live on, both during your working years and during retirement, it’s worth meeting with a tax specialist during your retirement planning to discuss your goals and options.
Step 6. Automate and Stay Consistent
One of the best ways to stay on target for retirement is to automate contributions to your retirement plan.
If you enroll in an employer-sponsored plan, your contributions can be automatically deducted from your paycheck and transferred to your retirement account. This is ideal because the money never enters your possession, so there is no risk of spending it on anything other than retirement investing.
If you don’t have an employer-sponsored account, you can mimic the automation by arranging for automatic transfers from your checking account to your retirement account immediately after payday.
Automating contributions removes the hurdle of remembering to manually transfer funds each month. It also helps you avoid the temptation to try and time the market. Long-term consistency usually outperforms short-term speculation.
Step 7. Protect Against Inflation and Longevity Risk
It’s also critical to be aware of the risk of outliving your retirement funds. Building a portfolio that generates enough income to cover your living expenses allows you to finance your lifestyle indefinitely, without depleting your assets. Those assets can then be passed on to create generational wealth.
Another option for protecting against longevity risk is to consider annuities. Annuities can provide guaranteed income for life, reducing the risk of outliving your savings.
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