The best retirement planning advice is to start early and understand your options. When planning for retirement, identify your main goals and then determine how to save and invest to achieve them.

Here are some basic tips to help make investing for retirement a little easier.

Investment Options

In the United States, certain types of tax-advantaged accounts serve as retirement savings vehicles. Some are offered by employers, while others are available through brokerage firms or banks. Keep in mind that 401(k) plans , individual retirement accounts (IRAs), and brokerage accounts are not investments themselves, but portfolios containing the investments you choose.

Tax-Advantaged Accounts

Accounts can offer tax advantages in different ways. 401(k)s and IRAs are tax-deferred accounts, meaning you do not have to pay taxes on accumulated investment earnings each year. Income tax applies only to money you withdraw during retirement.

• Traditional IRAs and traditional 401(k) accounts are funded with pretax dollars, meaning you receive a tax deduction for deposits in the year you make them.
• Roth 401(k) accounts and Roth IRAs are funded with after-tax dollars; you cannot deduct the amount deposited at that time. However, you do not pay taxes on withdrawals from these accounts during retirement.

 

Taxable Accounts

Taxable accounts do not offer any kind of tax break. They are funded with after-tax dollars, so you receive no deduction when making a deposit. You also pay taxes on any investment income or capital gains in the year you receive them.

Most "regular" bank or brokerage accounts are taxable accounts. However, you can hold a tax-deferred account, such as an IRA, at a brokerage firm.

 

Retirement Accounts

• Defined Benefit Plans

These retirement plans, also known as pensions, are funded by employers. They guarantee a specific retirement benefit based on your salary history and length of employment.

• 401(k)s and Employer Plans

These are employer-sponsored defined contribution plans funded by employees. They provide automatic saving, tax incentives, and, in some cases, matching contributions.

• Traditional IRAs

You can deduct your traditional IRA contributions if you meet certain requirements. Retirement withdrawals are taxed at your individual income tax rate.

• Roth IRAs

Unlike most retirement accounts, Roth IRAs do not have required minimum distributions (RMDs).
For 2021 and 2022, you can contribute up to $6,000 per year, or $7,000 if you are 50 or older.

• SEP IRAs

These IRAs are established for employers and self-employed individuals. Employers make tax-deductible contributions on behalf of eligible employees.
An employer's annual contribution to an employee's SEP IRA cannot exceed 25% of the employee's compensation or $61,000 for 2022 ($58,000 for 2021), whichever is less.

• SIMPLE IRAs

These retirement plans can be used by most small businesses with 100 or fewer employees. Employees can contribute up to $13,500 for 2021 and $14,000 for 2022.

The catch-up contribution limit, if you are 50 or older, is $3,000. Employers can choose to make a 2% contribution for all employees or an optional matching contribution of up to 3%.

 

Types of Investments

• Annuities: These are insurance products that provide monthly, quarterly, annual, or lump-sum retirement income.
• Mutual Funds: Mutual funds are professionally managed pools of stocks, bonds, and other instruments divided into shares and sold to investors.
• Stocks: Stocks, or 'equities', as they are also called, are securities representing ownership in the corporation that issued them.
• Bonds: Bonds are securities through which you lend money to an issuer, such as a government or corporation, in exchange for interest payments and future repayment of the bond's face value.
• Exchange-Traded Funds (ETFs): ETFs are investment funds that trade like stocks on regulated exchanges. They track broad-based or sector indexes, commodities, and baskets of assets.
• Cash Investments: You can put cash into short-term, low-risk obligations that provide returns through interest payments. Examples include certificates of deposit (CDs) and money market deposit accounts.
• Dividend Reinvestment Plans (DRIPs): DRIPs allow you to reinvest cash dividends by purchasing additional or fractional shares on the dividend payment date. DRIPs are an effective way to build wealth through compound interest.

Start Early

Whatever types of accounts and investments you choose, start early. There are many reasons why beginning to save and invest early makes sense:

 

• You can harness the power of compounding: reinvesting your earnings creates a snowball effect with your returns.
• You make saving and investing a lifelong habit, improving your chances of a comfortable retirement.
• You have more time to recover from losses, so you can try higher-risk, higher-reward investments.
• Barring a major loss, you have more years to save, which means more money when you retire.
• You gain experience and develop knowledge across a wider variety of investment options.

Remember that compounding is more effective over longer periods.

Know Your Net Worth

Most people know how much they earn and spend, but instead of guessing where your money goes, you can keep your own personal financial records. This will let you calculate your net worth and ensure your retirement goals stay on track.

Include Net Worth in Your Retirement Goals

It has been said that you cannot reach a goal you have never set, and that holds true for retirement planning. Without specific goals, finding the motivation to save, invest, and devote the time and effort needed to make the best decisions is difficult. Specific, written goals can provide the motivation you need.

Regular net worth "checkups" are an effective way to track your progress as you work toward these goals.

Get Help When You Need It

A lack of investing expertise is not a convincing excuse for failing to save and invest for retirement.

There are many ways to obtain a basic, intermediate, or even advanced education in retirement planning to suit any budget. Even a little time invested goes a long way, whether through your own research or with the help of a qualified financial professional.

The Takeaway

You can improve your chances of enjoying a comfortable future by understanding your investment options, starting to plan early, managing your emotions, and finding help when you need it.

Of course, there are many issues to consider when planning for retirement. How much you need to save depends on numerous factors, including:

• When you want to retire: how many years you have to save and how many years you will spend retired
• Where you want to live: the cost of living varies greatly among cities, states, and countries
• What you want to do in retirement: traveling costs more than, for example, catching up on decades of reading
• Your lifestyle now and the lifestyle you envision later
• Your health care needs

Specific investing rules of thumb, such as "You need 20 times your gross annual income to retire" or "Save and invest 10% of your pretax income," can help you refine your retirement strategy. Still, it is also useful to keep the bigger picture in mind.