Retirement Investing 101

If you’re intimidated at the idea of trying to create a retirement strategy for yourself, relax. The challenge of building a more secure financial future isn’t as hard as you may think, because you have the advantage of a workplace-sponsored retirement plan to help you. Your plan provides you with all the tools and resources you need to plan for your future. The important thing is to get started today, because the future will be here before you know it. Keep reading to see how easy it is to get started, if you just break it down into some basic steps.

Step 1: Consider Your Future
How much income do you think you will need to live on in retirement? Many financial professionals advise that individuals will need about 80% of their annual pre-retirement income each year in order to maintain their standard of living. Of course, you may need more or less.

Unfortunately, you can’t rely on Social Security to provide you with all the income you’ll need in retirement. Even if you’ll be eligible to receive benefits, the average retiree receives only about 40% of their pre-retirement earnings from Social Security.1 Your workplace-sponsored retirement plan can help you save the money you’ll need to close the gap. To help you determine how much retirement income you might need, visit Picturing Retirement: How Much Will You Need?

Step 2: Learn About the Benefits of Your Retirement Plan
Depending on the field you work in, your retirement plan may be a 401(k), 403(b) or 457 plan. But no matter what kind you have, your retirement plan offers the following benefits:

You May Save On Current Taxes

When you invest in a retirement plan, you automatically get two tax breaks:

  1. Your plan contributions are made on a before-tax basis,2 so they actually lower your current taxable income and therefore may reduce your current federal tax bill.
  2. Your account balance may grow on a tax-deferred basis—so you don’t have to pay federal income tax on the money you’ve accumulated, or any related  investment earnings, until you withdraw your money at retirement.3

To learn more about the tax advantages of retirement plans, refer to Give Yourself a Break: The Tax Advantages of Your Retirement Plan.

Saving Is Automatic

Your plan contributions are automatically deducted from your paycheck. What could be easier?

You Take Advantage of Two Investment Strategies

  • Compounding: Compounding is what happens if the money you save in your retirement account grows—and that increased amount remains in your account to be reinvested to potentially earn more. Over time, if your savings continue to grow, compounding can play a more important role as your total account balance increases. That’s because your account may be earning more on a larger amount of money. Obviously, the longer your money is invested, the more time it has to potentially compound. To learn more about compounding, visit Time is Money: The Magic of Compounding.
  • Dollar-cost averaging is the practice of putting the same amount of money in the same investment option consistently, regardless of the market performance (price) of that investment. Dollar-cost averaging can be beneficial because it allows you to automatically buy more shares when prices are lower and fewer shares when prices are higher. Over time, this tends to reduce the average cost of the funds you purchase. Learn more by reading What Is Dollar-Cost Averaging?4

You Have a Wide Array of Investments to Choose From

Choosing the investment mix for your retirement account is one of the most important steps you can take when it comes to retirement planning. Fortunately, your plan sponsor has chosen a diversified group of investment options for your plan’s investment lineup—so you can choose the investments you feel are right for you, based on your long-term financial goals and objectives.
To learn more about investing for retirement, be sure to visit Choosing Your Retirement Plan Investments and Managing Risk in Your Retirement Plan Account.

Step 3: Invest Now!
Regardless of when you expect to retire, saving and investing today could potentially give you more financial freedom later. Be sure to make retirement saving a high priority. If you haven’t joined your retirement plan, consider enrolling5 right away. Already participating? Then be sure to increase your contribution rate today to help provide your account with more fuel for your financial future.

1 Source: SocialSecurityOnline (, Understanding the Benefits, August 2011.

2 Some retirement plans allow after-tax (Roth) contributions as well as before-tax contributions. Check with your plan administrator for more information.

3 Applies only to those contributions (and investment earnings related to those contributions) made on a before-tax basis.

4 Dollar-Cost Averaging and other periodic investment plans do not assure a profit and do not protect against loss in declining markets. Such a plan involves continuous investment in securities regardless of fluctuating price levels of such securities and investors should consider their financial ability to continue their purchases through periods of low price levels.

5 Amounts withdrawn are subject to income taxes. Withdrawals before age 59½ may also be subject to a 10% federal income tax penalty and plan restrictions (457 plans not subject to 10% penalty).

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Ed. 09/2011