6 ways to invest for retirement

Whether you’re just starting to think about retirement planning or you’re deep into the process, here’s something to keep in mind: According to the Social Security Administration (SSA), on average, Social Security benefits will replace about 40% of your annual pre-retirement earnings.¹ That means that unless you can take the equivalent of a 60% pay cut at retirement, Social Security alone will not meet your financial needs during retirement.

That’s why most people have to start saving and investing well in advance of their retirement date to ensure financial security and stability in their later years. But which of the many retirement investment options is best for you, your current financial situation, retirement savings goals, and tolerance for risk? Most importantly, which offer tax advantages that could help grow retirement funds faster? This article can help you to make better-informed decisions by telling you about six different types of retirement investments, including:

• Individual Retirement Accounts (IRAs)

• Employer-sponsored plans

• Guaranteed income annuities

• Cash value in life insurance

• Treasury and municipal bonds

• Income producing equities

How much will you have to save for retirement?

Before considering which investment options may be appropriate for you to help reach your retirement savings goal, you should have at least a ballpark estimate of that goal. In other words, how much you'll have to save to supplement your Social Security benefits, pension, and other guaranteed sources of retirement income.

Start by trying to estimate how much income you’ll need during retirement. There are many ways to arrive at a number, but one of the most popular is the 80% rule. This guideline suggests that most people will need approximately 80% of their final yearly gross pre-retirement income to ensure financial stability and security after they stop working.² Of course, the actual percentage may be higher or lower depending on your individual circumstances and lifestyle choices, such as where you want to live after retiring, your health and healthcare costs, and whether you plan to engage in potentially costly activities such as travel.

Next, subtract the total of all income sources – Social Security benefits, pensions, rental income from real estate, etc. – from the estimated income you'll need in retirement (e.g., 80% of your pre-retirement income). The answer will be a ballpark estimate of how much income you'll need to generate from your savings and investments.

Sidebar:

How much will you get from Social Security?

The Social Security Administration’s online benefits calculator can provide an estimate of how much you can expect to receive in Social Security benefits and show how the amount may change based on your age at retirement.

Here’s an example:

If you need $80,000 annually in retirement, and your total income from Social Security and other guaranteed sources is $40,000, you'll have to generate $40,000 a year from your savings and investments. So, your ballpark savings goal will be to save enough to generate at least $40,000 in after-tax income per year. There are different ways to estimate how big a nest egg you'll need to do that. Consider talking to a financial professional who can help you find the right number for your situation.

Which investment options are right for you?

Whatever savings goal you set, you'll need to choose one or more financial vehicles to help you get there. Here are some of the more popular retirement investment options available, along with their key features, advantages, and drawbacks.

1. Individual Retirement Accounts (IRAs)

An Individual Retirement Account - or IRA – is a tax-advantaged retirement savings account funded and managed by an individual without any employer involvement. They are typically used by self-employed people and those wishing to supplement their employer-sponsored plans. There are two main types of IRAs; the primary difference is when you pay income taxes.

Traditional IRAs 

Contributions to traditional IRAs are typically made with pre-tax dollars – which reduces taxable income for the year – and investment growth is tax-deferred. However, taxes are then paid when you withdraw funds in retirement. This type of retirement account is generally recommended for individuals who assume they will be in a lower tax bracket after retiring.

• Contributions are usually tax-deductible, which provides immediate tax savings.

• Investments grow tax-deferred with no taxes due until funds are withdrawn.

• You typically can choose from a wide range of investment options, including stocks, bonds, and CDs.

• Non-working spouses may be able to contribute to a Traditional IRA based on the working spouse’s income.

• Key Drawback: Withdrawals are taxed as ordinary income, and aside from a limited number of exceptions (such as for college tuition or a first-time home purchase), funds withdrawn before age 59½ incur an additional 10% tax penalty.

Roth IRAs

A Roth IRA is funded with after-tax dollars – so you don’t get a tax deduction when you contribute – but investment growth is still tax-deferred, and qualified withdrawals are income tax-free during retirement. This type of retirement account is generally recommended for individuals who think they will be in a higher tax bracket after retiring.

• Contributions to a Roth IRA are not tax deductible, so there are no immediate tax savings; instead, and unlike Traditional IRAs, qualified withdrawals^* during retirement are income tax-free.

• Investments grow tax-free, which allows your money to grow faster than in a non-IRA account, and unlike Traditional IRAs, you won’t have to pay taxes on your gains when you withdraw.

• Traditional IRAs require you to withdraw funds every year after age 72 or 73, but Roth IRAs don't - so the money can continue growing tax-free for as long as you want

• Allows penalty-free withdrawals of contributions at any age for any purpose.

• Key Drawback: Roth IRAs have income limits and eligibility restrictions. In 2023, individuals with a modified adjusted gross income (MAGI) above $153,000 are not eligible to contribute. Married couples filing jointly with a MAGI above $228,000 are not eligible to contribute.

Other types of IRAs include:

Spousal IRAs

These provide retirement savings opportunities for non-working spouses or spouses with limited income.

• Spousal IRAs allow married couples to contribute to an IRA in the name of the non-working spouse, even if they don't have earned income of their own

• The working spouse can contribute on behalf of their non-working partner

• Spousal IRAs can increase a couple’s combined retirement savings

  potential.

• Most spousal IRAs are either Traditional IRAs funded with pre-tax dollars or Roth IRAs funded with after-tax money

• Key Drawback: Withdrawals from Traditional Spousal IRAs are subject to income tax, and early withdrawals from either type of Spousal IRA may result in penalties

Rollover IRAs 

These allow individuals to transfer funds from an employer-sponsored retirement plan – such as a 401(K) - into an IRA without incurring taxes or penalties

• Allows individuals who change jobs or retire to consolidate their retirement savings from different employers into a single account.

• Offers a wide range of investment options, allowing individuals to diversify their portfolio according to their financial goals and risk tolerance.

• Allows individuals to continue tax-deferred growth on the transferred funds, ensuring that retirement savings can continue to grow without immediate tax consequences.

• Key Drawback: There may be less protection from creditors and/or higher fees than a 401(k).

SEP IRAs (Simplified Employee Pension Individual Retirement Accounts) 

These are designed for self-employed individuals and small business owners.

• Allow participants to make tax-deductible contributions for themselves or their employees.

• Have higher contribution limits than Traditional IRAs.

• Contributions grow tax-deferred, which allows money to grow faster than it would in a non-IRA account.

• Business owners can decide how much to contribute each year based on their current financial results.

• Key Drawback: In addition to ordinary income tax, withdrawals before the age of 59 ½ are also subject to a 10% tax penalty. (Withdrawals after age 59 ½

  are taxed as ordinary income.)

Simple IRAs (Savings Incentive Match Plan for Employees) 

These are designed for small businesses with under 100 employees.

• Allows employees to contribute a portion of their salary on a pre-tax basis, which provides immediate tax savings

• Requires employers to make either a matching contribution up to 3% of compensation or a non-elective contribution equal to 2 percent of the employee's compensation for the entire calendar year (even if an eligible employee doesn’t contribute) to employee accounts

• Key Drawback: In addition to ordinary income tax, withdrawals before the age of 59 ½ are also subject to a 10% tax penalty. (Withdrawals after age 59 ½ are taxed as ordinary income).

2. Employer-Sponsored Retirement Plans

If you're employed by a business, tax-exempt or non-profit entity, or the government – as opposed to being self-employed – an employer-sponsored retirement plan is one of the most valuable employee benefits, and most financial professionals would advise you to participate.

One advantage of employer-sponsored plans is that they often come with an employer match, where the company contributes a certain percentage of your salary to your retirement account. Additionally, employer-sponsored plans usually have higher contribution limits than IRAs. Employer-sponsored plans include:

401(k) plans 

These are offered by for-profit corporations and businesses.

• Contributions are usually deducted from the paycheck before taxes for immediate tax savings. However, if contributions are made to a designated Roth account, they will be made with after-tax dollars (Consult a financial professional to determine whether a dedicated Roth account may be appropriate for you.)

• Many employers provide a "match," contributing a percentage of the employee's salary to the 401(k) equal to what the employee puts in.

• 401(k) plans often have higher contribution limits than IRAs for faster accumulation of funds.

• Depending on your plan, contributions can be invested in stocks, bonds, mutual funds, and more.

• Earnings – including interest, dividends, and capital gains - grow tax-deferred until retirement.

• Most 401(k) plans use automatic payroll deductions, making it easy for employees to save.

• The government imposes penalties for early withdrawals before age 59 1/2, except for certain types of hardship.

• Key Drawback: 401(k)s may offer limited investment options and/or high management fees

403(b) plans 

Offered by tax-exempt organizations, such as public schools, hospitals, religious organizations, and certain non-profit entities

• Employee contributions are made via salary reduction agreements, which allow them to defer a portion of their salary into the plan.

• Contributions are usually deducted from the paycheck before taxes for immediate tax savings. However, if contributions are made to a

  designated Roth account

  , they will be made with after tax dollars (Consult a financial professional to determine if a designated Roth account may be appropriate for you.)

• Some, but not all, 403(b) plans allow employers to make contributions.

• 403(b) plans typically offer investment options such as annuity contracts and mutual funds, but the availability of specific investment choices may vary based on the plan provider.

• The government imposes penalties for early withdrawals before age 59 1/2, except for certain types of hardship.

• Key Drawback: 403(b)s may offer limited investment options with outsized focus on annuities

457(b) plans 

Offered by state and local government employers, as well as certain non-profit organizations

• Contributions are usually deducted from the paycheck before taxes for immediate tax savings. However, if contributions are made to a

  designated Roth account

  , they will be made with after-tax dollars (Consult a financial professional to determine if a designated Roth account may be appropriate for you.)Plans offer a range of investment options, such as mutual funds, stocks, bonds, and annuities.

• Earnings – including interest, dividends, and capital gains - grow tax-deferred until retirement.

• Plans allow employees to contribute additional catch-up contributions starting at age 50, allowing for increased savings potential.

• Penalties for early withdrawal before age 59 ^1/2 are waived if the employee separates from service after age 55.

• Key Drawback: 457(b)s may offer limited investment options.

Traditional pension plans 

Also known as a "defined benefit plan," these employer-funded plans guarantee a specific monthly income during retirement. They have become much less common in recent years as many companies have transitioned to employee-funded "defined contribution plan" alternatives such as 401(k) plans.

• Offers a predictable and stable income stream during retirement, with the amount received based on factors such as years of service and salary history

• The employee doesn’t make decisions about how to invest funds – the employer is responsible for funding and managing the plan and bearing investment risks

• Plans often offer survivor benefits, where a portion of the pension continues to be paid to a spouse or beneficiary after a retiree’s death

• Key Drawback: Benefit paid out is based on years of service with usually a minimum required and funds are not self-directed.

Non-qualified deferred compensation plans

A non-qualified deferred compensation plan (NQDC) is a type of employer-sponsored retirement plan open to executives and other highly paid employees.

• Participants may enjoy significant tax benefits by deferring a greater percentage of their compensation than is allowed by the IRS in qualified retirement plans such as 401(k)s and defined benefit plans such as pensions.

• Participants may be able to save additional money for retirement beyond the limits of other retirement accounts such as 401(k)s and IRAs.

• Employers may contribute to NQDC plans or even match employee contributions

• NQDC plans may offer flexibility on post-retirement distributions, which can help reduce taxes.

• Key Drawback: Reduced protection from creditors and risk of forfeiture if the participant leaves the company.

Thrift savings plans 

These are offered to federal employees and members of the uniformed services, including the military. They operate similarly to the 401 (k) plans used by for-profit businesses.

• Contributions can be made on a pre-tax or after-tax basis: pre-tax provides immediate tax savings, while after-tax allows withdrawals in retirement to be made on a tax-free basis. (Consult a financial professional to determine which is best for you.)

• Plans offer a range of investment options, including various index funds.

• Earnings – including interest, dividends, and capital gains - grow tax-deferred until retirement.

• Some plans offer employer contributions.

• Key Drawback: Thrift savings plans may offer limited investment options.

Other ways to save for retirement

IRAs and employer-sponsored retirement plans are among today’s most popular retirement savings vehicles, but they are not the only options. Other popular choices include:

3. Guaranteed income annuities³

Annuities are financial products that convert a large sum of money into a steady income stream during retirement Individuals can contribute before they retire and gain a level of financial confidence that comes from knowing that a portion of their retirement savings will turn into a guaranteed income stream.

• Investments typically grow tax-deferred, which could help money to grow faster than in taxable accounts.

• If your annuity is purchased with after-tax dollars, the “annuity exclusion ratio” protects a portion of your income from the annuity from taxation (For additional details, please speak to your financial professional.)

• Choices include immediate annuities that begin paying out immediately after purchase or deferred annuities that allow the investment to grow over time before starting income payments.

• Annuities can be structured as fixed, where investment growth is based on a set rate of interest, or variable, where investment growth (and later income payments) fluctuates based on the performance of underlying market investments.

• Some annuities include features like inflation protection, which adjusts the payments to maintain purchasing power.

• Key Drawback: Lower yields than riskier investments and/or high fees and surrender charges.

4. Cash-value life insurance policies

While the primary purpose of life insurance is to protect your beneficiaries' financial well-being in the event of your death, whole life insurance and universal life insurance policies build cash value,⁴ which can also be an important part of your overall financial strategy. (Note: Term life insurance is not appropriate for retirement savings.)

• A portion of every premium payment goes into a cash account, which can grow over time and can be accessed while the policyholder is still living.

• The cash value component of the policy grows tax-deferred, so your money can grow faster.

• Policyholders can borrow against the accumulated cash value without triggering taxable events, providing a source of tax-advantaged income in retirement but doing so can reduce any future death benefit. However, the tax waiver does not apply to Modified Endowment Contracts.**

• Some policies may allow you to convert the cash value into an annuity, providing a steady stream of income during retirement.

• Key Drawback: Policies can be complex, and yields may be lower than other investment options.

5. Income-producing equities

Income-producing equities – stocks that pay dividends – have the potential to provide both a steady stream of income and capital appreciation, which makes them a popular investment, especially for those already in retirement.

• Retirees can have a steady stream of income (in the form of dividends) without having to sell their stocks.

• Some companies increase their dividends over time, which can help retirees maintain purchasing power despite inflation.

• In addition to income, there is also the potential for capital appreciation (if the stock price rises over time), which may be attractive to those saving for retirement.

• Key Drawbacks: Companies can reduce or eliminate dividends at will, and stock prices can fall at any time.

6. Government bonds

Government bonds – including Treasury bonds, Treasury Inflation-Protected Securities (TIPS) and municipal bonds (or munis) – are generally considered to be less risky than stocks. This makes them especially attractive to those already in retirement, who often prioritize capital preservation via lower-risk investments.

• Offer a fixed interest rate and return of principal at maturity, making them a relatively stable and conservative investment.

• Provide a predictable stream of interest income, which can be helpful in terms of budgeting and maintaining financial stability in retirement.

• Can be sold in the secondary market, offering liquidity if you need to access your funds before maturity.

• Some bonds, such as municipal bonds, offer tax advantages such as exemption from federal and state income taxes.

• Key Drawback: Lower yields than higher-risk investment options, and may not keep pace with inflation.

Guardian Can Help

Before making any retirement investment decisions – especially those involving annuities, life insurance, stocks, or bonds – consider speaking to a financial professional. If you don't currently have a financial professional, Guardian can help. A Guardian Financial Professional will listen to your needs, help define your goals, and work with you to better understand the retirement planning process and make the right decisions. Here's how to find someone near you: