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Best Investments for Retirement

Couple discussing what investments will help their retirement

What are your best investments for retirement? The answer is… it’s a trick question. In a perfect world, we could point you to a single asset that would maximize safety, growth and cash flow all in one nice, neat basket. Unfortunately, unless you’re lucky enough to have a generous pension fund, that asset class doesn’t exist. Virtually all investments offer some form of tradeoff. For investors in 2023, you have a wide range of options. Here are three strong choices for investing your retirement savings based on whether you want to maximize growth, security or cash flow. For the right balance to help you reach your retirement goals, consider working with a financial advisor.

For Growth: An S&P 500 Index Fund

A simple index fund is generally the best choice for long-term growth. An equity index fund is a portfolio of stocks built around one specific section of the market. You typically buy them in the form of ETFs or mutual funds. For example, you can buy an index fund pegged to the retail sector or to a specific commodity.

In each case, the fund would track the gains and losses of its indexed sector by purchasing a bundle of representative stocks that, ideally, rise and fall with the sector at large. This gives you the strong returns of investing in the stock market while smoothing out the volatility of buying individual assets. 

For long-term growth, your best choice is an S&P 500 index fund. This is a fund built to mirror the S&P 500 index overall, which tends to produce between 10% and 12% in annual returns. No other asset class reliably matches this level of growth. In fact, in a 2022 survey, the S&P Dow Jones Indices couldn’t find a single mutual fund that reliably beats or even matches the market overall. This is the investment for long-term growth, plain and simple. 

The downside to this asset class is volatility and risk. A well-indexed S&P 500 fund will provide just about the best average returns available to a public investor, but this is only true over the long term. Over the short term, your portfolio will be exposed to volatility and losses. This makes it a fine asset class for investors who have time, but a higher-risk choice for investors who need to access their money.

For Security: Target Date Funds

Couple looking at their retirement investments

Target date funds work similarly to mutual funds and ETFs. These are portfolios that hold a mix of assets ranging from stocks and bonds to funds, options and other publicly available investments. They generate their return and yield based on the performance of their underlying assets.

The idea behind a target date fund is that your portfolio will transition with your needs as you age. Essentially, you select a date for retirement when you set up the fund. When you’re younger, the fund invests in higher-risk/higher-growth assets like stocks and options. As you age, it shifts its holdings to more secure assets like bonds. The fund will start almost entirely focused on growth and will end, at its target date, focused almost entirely on security.

Target date funds try to give investors a best-of-both-worlds approach. By focusing early on growth and later on risk management, a successful fund lets you accumulate wealth and then keep it.

For sheer security, the best choice for most investors is a portfolio of bonds. In particular, Treasury bonds offer the lowest risk on the market. However as a long-term retirement investment, for most investors bonds are a weak option. In exchange for their security, they tend to offer little growth, so it’s unlikely a pure bond portfolio will meet your needs. Instead, to combine growth and security, a good target date fund is often the better option.

As with all things, though, there are downsides. Target date funds charge fees, which can sometimes be considerable relative to their overall returns. And unless they invest in an S&P 500 fund, it’s extremely likely that you will lose out on early growth. But for overall security, this might be a good option.

For Income: Income Annuities

For reliability of income, just about nothing beats an income annuity. They’re right up there next to pensions and Social Security.

An income annuity is a contract that you sign, typically with a life insurance company. In exchange for an up-front investment, they promise to make a series of structured payments to you at a later date. Typically this means you receive a monthly payment for a period of years. You can either make a single, lump-sum investment or you can invest steadily in an annuity over time. The further in advance you invest, the more money you will receive in payments. 

For retirement investors, the most popular option is what’s known as a “lifetime annuity.” With this contract, the company promises you monthly payments starting at retirement age and continuing for the rest of your life. Most people invest steadily in this contract over their working life as part of their retirement accounts. 

The amount of money you receive in payments depends on a number of factors, most importantly how far in advance you start investing and how much money you invest in the contract. A lifetime annuity is an excellent choice for income stability. You will receive a guaranteed amount of money every month for your entire retirement. This is the closest thing you can get to a privately funded pension. 

However, there are some risks here too. First, as with target date funds, annuities typically underperform relative to a well-indexed S&P 500 fund. An investor who steadily invests over several decades will typically receive more money from that index fund than from an annuity contract. Income annuities also face inflation risk, since with most contracts the payments are fixed, meaning that they will lose spending power over time. Finally, the contract is only as secure as the underlying company. If they go bankrupt or are otherwise unable to meet their obligations, it can put their entire retirement at risk. 

Bottom Line

Woman looking at her retirement investments

Selecting the best investments for your retirement is a very personal question. However, whether you are looking for growth, safety or stability, we have a few places where you can start. The right portfolio mix to help you achieve your financial goals is going to depend on a number of factors that only you and your personal financial advisor can really analyze.

Retirement Planning Tips

  • A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Financial planning doesn’t stop once you reach retirement age, it’s a lifelong process. To think about that, let’s dive into our guide on financial planning for and in retirement

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