There’s no single “right” way to save for retirement. Some people build their own individual retirement accounts using IRAs and Roth IRAs. Others rely on retirement plans provided through a workplace that may include 403(b)s, 401(k)s, and IRAs.
No matter how you build savings, it’s important to understand investment options available. “Your plan for retirement should be designed to meet your needs and wants in the long term,” Heather Winston, assistant director of financial advice and planning at Principal®, says. “But more than that, your plan for retirement is uniquely yours.”
Your plan for retirement is uniquely yours.”
Heather Winston, assistant director of financial advice and planning
Mapping it all out can be intimidating—but it doesn’t have to be. Here’s what you need to understand to build your plan for retirement.
Does my retirement plan need more than one account?
You need as many ways to save and plan for retirement as feasible to help you get to your goals. That’s why you’ve probably heard experts advocate for diversity in savings products, which in turn can provide diversity in retirement income.
Social Security is one piece. But it may not provide enough income after you’re done working to live the life you want. Adding a retirement income option, such as an annuity, can offer a guaranteed monthly income. An IRA, another saving alternative, can grow over time and help to round out your potential retirement income. (Get help figuring out the income you may need with this retirement calculator.)
How is the money in my retirement accounts invested?
Money that you save in both 401(k)s and IRAs is invested in a variety of investment options. Those investments typically represent different parts of the market, called asset classes. There are two main asset classes: fixed income and equities.
Fixed income
Equity funds
In general
Typically more stability over time
Typically more growth with more risk
What they are:
Purchasing a bond is like loaning a company (or the government) money and, in return, receiving a rate of return.
Growth engine of an investment portfolio made up of company stock shares
Made up of:
Bonds and other investments: income through regular interest payments
Short-term funds: includes CDs (typically FDIC insured unlike other investments), lower interest rates
Longer-term funds: higher interest rates but more risk, such as loan default
When you own stock, you own a little piece of a company, entitling you to a share of company profits and potentially dividends.
Important to know:
Less volatile than equity, but perhaps less growth; can lose value, including principal amount invested
More growth potential also equals more volatility and risk; can lose value, including principal amount invested
Tip: Learn more about interest rates—both earning and paying interest.
Why do we have different investment options for retirement?
Because not all investments move up (or down) in tandem, diversification matters. That may mean owning both fixed income and equity investments, domestic and international investments, big and small companies, and short- and long-term bonds. Over time, diversification may help your portfolio grow steadily without as many wild swings up or down. Put differently, diversification may smooth the ride.
Can I decide for myself what’s in my retirement plan?
Depends on the account. In a 401(k) for example, the choices of investments are typically determined by the plan sponsor—or, in other words, the employer or group that sets up the retirement account. In an IRA, you get to decide the company, which purchases an IRA and the specific fund to invest in. You typically have options to delegate the ongoing management of those assets to a separate investment manager in both of those accounts, too.
So yes, you can decide for yourself what direction to go. That said, you could find it overwhelming to pick various stocks or bonds and what percentage to allocate to each for your retirement account.
What if I don’t really want to spend a lot of time choosing investments?
That’s OK too. In fact, many employer-sponsored plans and IRAs allow you to pick a portfolio based on a target date or by how much risk you want to take. Then you can check your accounts periodically and adjust if needed. Funds like these are typically structured in one of two ways:
- A target date fund: This lets you pick a date—generally based on your age at normal retirement. The target date fund is set up to adjust the investment mix to generally become less risky as the fund get closer to the target date, which can be your retirement date.
- A target risk fund: The mix of investments in these funds, in contrast, is tied to a specific risk category. Some take more risk (and use more equities) and some take less risk (with more fixed income). If your risk tolerance changes, you can change your fund, too.
Whether you want to be more active or passive in your retirement plan strategy, you can work with a financial professional, robo-advisor, or other asset manager to put together a customized investment mix tailored to your financial goals. Some online managed account options help personalize your investment mix (PDF) based on age, goals, and risk tolerance.
Next steps
- Connect with your financial professional (or find one) to see if you should make any changes to your investment mix based on your goals or your current situation.
- Haven’t started saving for retirement yet? Talk to your employer about your retirement plan options. If you’re thinking about an IRA, here are three steps to start one.