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How to Invest Wisely for Retirement

Strategies for smart retirement investing

There are hundreds of ways to invest for retirement. Sales pitches from stock brokers abound, as do articles and websites devoted to retirement investments, many written or sponsored by companies that sell investment products. All of this advice can be confusing and contradictory.

Fortunately, you can learn the basics of smart retirement investing by following several simple strategies. These strategies meet the three main goals of retirement investing:

  • to keep your savings safe so they will be there when you need them
  • to keep them growing so they will more than outpace inflation, and
  • to invest them in ways that minimize profit-draining taxes and fees.

Be content to amass your nest egg slowly, but surely. You want your money to grow while at the same time minimizing the risk of a big loss. Here are some basic strategies to do this.

Pay Off Debt First

Pay off high-cost debt and commit to living mostly debt-free (except for your mortgage) before investing in retirement. It makes no sense to buy stocks while you are paying 14% interest on credit card debt.

Don't Be Too Greedy

Time has shown that you can achieve solid, inflation-beating returns over the long term, but can easily lose big if you try to double or triple your money fast. Aim to save for a comfortable retirement, not start a second career as a speculator.

There Is No Substitute for Saving

No investment strategy will make up for inadequate savings. To add a dollar to your retirement stash, don't spend it.

Invest in Products You Understand

If you are unfamiliar with the risks and rewards of futures trading, currency hedges, buying on the margin, or taking a short position on a biotech stock, leave them alone. Stick to investments that you understand.

Make Investment Decisions Yourself

It's almost always a mistake to make an investment decision based solely on the advice of a friend or relative. And take investment advice from financial planners with a grain of salt too. Often, you can do a better job yourself. Here are some tips:

Steer Clear of Commissioned Salespeople. These folks have a built-in bias towards convincing you to buy and sell investments -- it puts money in their pockets every time you buy or sell something. Unfortunately, you'll pay taxes and fees or commissions to the adviser -- not the best way to save your money. Even worse, commissioned salespeople often get extra compensation if you purchase a particular product that their company is pushing.

Be Aware of Financial Advisers That Charge Management Fees. Many financial planners don't earn commission on each transaction, but instead charge you a management fee based on the size of your portfolio. Although seemingly less biased than the commissioned salesperson, you should still use caution when considering their advice. Conflicts of interest are bound to occur with people so embedded in the industry. More importantly, it is difficult to know if the adviser is competent.

Be Your Own Investment Adviser. Most people can devise a wise investment plan by following the advice in this guide and investing in a good mix of stock and bond mutual funds (especially low-cost, tax-minimizing index funds). And doing your own investing has several advantages over paying someone to manage your investments. Here are two big benefits to doing it yourself:

  • You can invest the money you would otherwise pay the adviser.
  • You'll stay away from consumer-unfriendly investments, such as life insurance, annuities, or individual stocks that many advisers push to get commissions.

If You Use a Financial Adviser, Choose Carefully. Some people have a good reason to pay someone to manage their investments, especially very wealthy people who can afford the fees and don't have the time or interest to stay on top of their large portfolio. If you decide to pay for a financial adviser, thoroughly research their references, credentials, and track record. Some good ways to do this include:

  • Check if the adviser is a member of a professional trade organization.
  • Check credentials. Is the adviser a Certified Financial Planner (CFP) or a Certified Public Accountant-Personal Finance Specialist (CPA-PFS)? Better yet, is the adviser a fee-only financial planner who doesn't take commissions? The National Association of Personal Finance Advisors ( can help you locate a fee-only adviser.
  • Ask the planner for Part I and Part II of the Federal Securities Disclosure Form ADV. It contains information about the planner's qualifications and discloses any past legal or financial problems. You can also get the ADV from the U.S. Securities and Exchange Commission ( to several of the adviser's long-term clients. If the adviser can't arrange this, look for someone else.

Know Your Comfort Level for Risk

All investments other than a bank account or other cash-equivalent investments will fluctuate in value, some more so than others. When devising an investment plan, honestly evaluate your comfort level with risk. If you will panic at sharp losses, don't buy more volatile investments, such as stocks and bonds. The reason is simple: if you lose your nerve when markets take a big drop and sell your investments, you'll do much worse than if you had invested more conservatively in the first place.

Take Advantage of Tax-Advantaged Investments

401(k) plans, 403(b) plans, Keoghs, IRAs, and SEP-IRAs allow you to defer income tax on money you put aside for retirement. In addition to investing money that would otherwise be subject to income tax, your nest egg grows tax-free until withdrawal (after age 59

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