Experts recommend saving around 10X your annual salary to ensure an enjoyable, comfortable retirement.
Whether you're just starting to think through a retirement investment strategy, or you've already started and are looking to expand your portfolio, investing in retirement accounts should be a key part of your financial plans.
However, you'll quickly find (if you haven't already) that there are many options available to you, and finding the right one can feel overwhelming. Here is an overview of the best investments for retirees, the top retirement investment companies, and a guide for how much to invest.
What retirement account should I use?
The best investment for retirees is the one that fits their comfort level and meets their savings and financial goals. While there are many options, here's a breakdown of some of the most common.
401(k) or 403(b) account
If you choose to enroll in your employer-sponsored plan, you set a certain percentage of each of your paychecks to be paid directly into the investment account. Your employer may even match part or all of that contribution. For example, if you put 10% of your paycheck into the account, your employer may also put 5%, or match 10% as well.
There are two types of 401(k) plans: Traditional and Roth 401(k).
- Traditional 401(k): Employee contributions are pre-tax, meaning they reduce your taxable income, and your contributions can be reported as a tax deduction for that tax year. No taxes are due on earnings until you withdraw the money, when it will be taxed as ordinary income.
- Roth 401(k): Employee contributions are made after income tax is withheld from your paycheck, making them post-tax contributions. When you withdraw money from this account, you do not pay income tax on that withdrawal.
Note that there are contribution limits. In 2023, you can only contribute up to $22,500 per year. However, if you're aged 50 or older, you can make an additional $6,500 catch-up contribution.
You must be at least age 59 1/2 or meet other criteria outlined by the IRS to begin making withdrawals. Otherwise, you'd have to pay a 10% early-distribution penalty in addition to other taxes. Then, after age 72, those who are retired must withdraw at least a specified percentage from their plans.
A 403(b) plan works similarly, except these plans are offered by public schools and certain 501(c)(3) tax-exempt organizations.
IRA, or individual retirement account, is like a savings account but includes significant tax breaks, which is why many people choose to use an IRA for retirement investing. IRAs allow for someone to save either with tax-free growth, or on a tax-deferred basis.
There are three primary types of IRAs:
- Traditional IRA: Contributions you make to a traditional IRA may be deducted on your tax returns, and earnings can grow tax-deferred until you withdraw them once you retire. Due to the tax deferred growth, the money may be taxed at a lower rate once you retire since you may be in a lower tax bracket. You must start withdrawing the money by the time you're age 70 1/2.
- Roth IRA: Unlike a traditional IRA, these contributions are made after tax, which means you already paid taxes on the funds. Your money may grow tax-free, and also not be taxed when you withdraw it in retirement. Note that there are some income limits for contributing to a Roth IRA, so not everyone may be eligible. However, they are slightly more flexible if you need to make a withdraw early.
- Rollover IRA: If you have funds from a qualified retirement plan, you can "roll them over" into a rollover IRA, which is similar to a traditional IRA. You'd move your eligible assets from the employer-sponsored plan, like a 401(k), into this IRA.
You can contribute to both a 401(k) and an IRA to help you grow your funds faster. The IRA itself isn't the investment, but you gain access to a potentially wide range of investment options, especially compared to employer-sponsored plans. And, tax-deferred or tax-free growth make IRAs a great investment option.
You can work with a financial advisor to understand which option may be best for you, or there are tools out there such as this IRA Contribution Calculator to help.
Health Savings Account
If you're eligible, a health savings account (HSA) can be used to help save for retirement. This account allows you to set aside money on a pre-tax basis to help pay for qualified medical expenses such as deductibles, co-payments, co-insurance, and some other expenses, lowering your overall health care costs.
You can use those funds at any time, but you can only contribute to an HSA if you have a High Deductible Health Plan (HDHP). In 2023, the minimum deductible for an HDHP is $1,500 for an individual and $3,000 for a family. However, you can contribute up to $3,850 (in 2023) for self-only coverage and up to $7,750 for family coverage, and these funds roll over year to year.
It's important to know once you enroll in Medicare Part A and/or Part B, you can no longer contribute pre-tax dollars into the HSA since you'll have health insurance other than an HDHP. However, you may continue to withdraw money even after you enroll in Medicare to pay for eligible medical expenses.
If you're self-employed or the owner of a small business, there are a few retirement investment accounts that may work better for you than those listed above. These plans typically have higher contribution limits and offer more investment choices than employer-sponsored plans, while still being easy to set up.
- SEP IRA: This type of IRA is best for those who are self-employed or employers with one or more employees. Contributions are limited to 25% of your net self-employment income up to $66,000, and both contributions and investment income are tax-deferred. Earnings also grow tax-deferred, and withdrawals are taxed at ordinary rates.
- Solo 401(k)/Solo Roth 401(k): Best for self-employed people with no employees, contributions can be made up to $58,000, or $64,500 with catch-up contributions. Contributions and investment income in a Solo 401(k) are tax-deferred, while contributions to a Solo Roth 401(k) are taxable. Earnings grow tax-free, but withdrawals are taxed at ordinary rates for Solo 401(k)s. While these plans have higher contribution limits and allow small-business owners to make both employee and employer contributions for themselves, they are more complicated to get set up and you cannot make withdrawals prior to age 59 1/2.
- Simple IRA: If you're self-employed or own a business with up to 100 employees, you can contribute up to $13,500 (or $16,500 if you're older than 50) with a mandatory employer matching contribution of up to 3% of compensation, or a fixed contribution of 2%. Both contributions and investment income are tax-deferred, and earnings grow tax deferred. Withdrawals are taxed at ordinary rates, and you'll face penalties if withdrawing prior to age 59 1/2 or within the first two years of the plan.
If you fall into this category, it's best to work with a financial advisor to set up the plan and ensure you're meeting all requirements and following all rules to avoid penalties.
How much should I invest?
Experts recommend trying to save at least 15% of your pre-tax income annually for retirement, including any employer match. This will help get you to the recommended 60-80% of preretirement income you'll need to maintain your lifestyle in retirement.
Because not all your post-retirement income will need to come from savings (some will come from Social Security, for example), it's estimated that most people will need to generate only about 45% of their retirement income from savings.
- Taking advantage of employer matches on 401(k) or 403(b) contributions is a great way to get started. For example, if they match 5%, you should contribute at least 5%, though it would be better to invest 10% to get you closer to the recommended 15% total.
- You may also try increasing your saving just 1% each year, which can make a significant impact to your savings by the time you retire. This can be especially important if you aren't able to start investing 15% of your income right now. For example, you can start with 8% and increase by 1% each year until you hit 15%.
- If you're 50 or older, take advantage of catch-up contributions available for retirement savings plans. This allows you to contribute more than the normal limit for employer-sponsored plans and IRAs.
- Also consider your investing style. If you aren't as knowledgeable or don't have the time, you may want to work with an advisor or other professional to help you manage your investments. They can help you decide the risk you want to take with investments, such as stocks, and help ensure you have a diversified portfolio of stocks, bonds, and cash.
Note that if you want to have a more lavish or extravagant lifestyle when you retire – for example, if you want to spend most of your time traveling – you should aim to save more than 15% per year. Or, if you plan on spending less in retirement, you may be able to get away with saving only 10% or 12% of your income.
Top retirement investment companies
The best retirement investment company for you may depend on the type of investment account you're interested in having. For example, your 401(k) or 403(b) will be sponsored by your employer, and you won't get to choose that company.
For other investments, such as IRAs, you can choose the company to work with. Here are a few of the top companies to work with based on tools, education, customer service and responsiveness, and ease of use:
- Ally Invest
- Charles Schwab
- J.P. Morgan
- Merrill Edge
Depending on whether you want a more hands-on or hands-off experience or the type of investment you're looking to make, one of these companies may work best for you. With many you can even set up everything online without having to visit an in-person branch or call customer service.