How To Invest For Retirement: A 7-Step Guide
Whatever your age, it’s important to plan ahead and invest for retirement. Here’s a 7-step guide to help you retire in style.
Step 1: Understand where you are in the retirement spectrum.
You might still have many years ahead before you stop working. Or, you could be lucky enough to have already retired – spending your weekdays eating tapas at your villa in southern Spain.
Your position within this spectrum will determine how you invest for retirement.
Take 23-year-old Bob, who’s just starting out on the career ladder. Bob’s probably got at least 40 years to invest for retirement before he hangs up his boots. Forty years is a long time to:
- Compound his wealth.
- Recover from the occasional market crash.
- Add money to his retirement pot.
This puts Bob in a position to take more risk with his investments than 55-year-old Alice, who plans to retire at 60.
Step 2: Choose the right ingredients for your retirement portfolio.
When planning for retirement, it’s usually best to keep things simple. You want a long-term portfolio that keeps ticking along and compounds your wealth over time. You’re not looking for a legendary crypto trade to screenshot to your mates.
To invest for retirement, you want to spread your eggs among as many different baskets as possible. Think of it like building a football (soccer) team with just the right blend of attack and defence. You need to score goals, but you also don’t want too many goals to be scored against you.
Here are some players you might include in your team.
Asset class Role in the team
Global stocks Star striker. Racks up lots of points over time, but sometimes gets injured.
Global bonds Steady goalkeeper (most of the time, but isn’t always reliable).
Gold and silver Supports your goalkeeper to make your defence more reliable. Can score the odd goal, too.
Bitcoin A new talent. Unpredictable, but can create magic out of nowhere. A ruthless attacker today, but could become a strong defender with more game time.
Other commodities Comes off the bench when needed to implement new tactics.
Real estate investment trusts (REITS) The midfielder who doesn’t always get the credit, but does a great job supporting the team.
And now, let’s translate the above into actual finance speak…
Asset class Role of investment in your retirement portfolio
Global stocks Drives growth in your portfolio, but can be volatile.
Global bonds Provides stability and regular income. Less risky than stocks.
Gold and silver Hedges against inflation and currency movements.
Bitcoin Digital gold with potential for high returns, but also high volatility.
Other commodities Diversifies risks and can hedge against inflation.
Real estate investment trusts (REITS) Offers income through property investments without you having to buy actual properties.
Step 3: Decide how to split your portfolio based on your stage in the retirement cycle.
To invest for retirement, you should adjust your strategy based on where you are in the retirement game.
In the first half (~20 to 40 years old), you want to attack more. This way, you can put some points between you and the opposition. Then in the second half (~40 to 60 years old), you want to gradually step up your defence to ensure victory.
So moving away from sports analogies, at first you want to invest more in higher risk, higher returning assets like stocks and bitcoin. Then as you approach retirement, you want to gradually reduce your risk by putting more of your retirement pot in bonds and REITs. You might also want to transition to stocks that pay higher dividends so you can generate more income when you retire.
I asked ChatGPT to give me a “best practice” allocation range for each asset class based on traditional finance theory (with a modern bitcoin twist). It came back with the numbers in the below table. Of course, this is just a general guideline. But for the average person, it seems like a reasonable approach to me.
Step 4: Choose the right products to invest for retirement.
Once you’ve chosen your investment mix, the next step is to choose what products to use for each investment. This will depend on where you live, and what’s available in your home country. For example, if you’re in the UK, like me, you’ll have different investment options than someone living in the US. So, let’s compare these.
UK investors can get exposure to most investments through exchange-traded products (ETFs) or index funds. Here are some examples that UK citizens might use to invest for retirement.
ETFs for UK Investors:
|Asset Class||Popular ETF Options|
|Global Stocks||- iShares MSCI World UCITS ETF (SWDA)
- Vanguard FTSE All-World UCITS ETF (VWRL)
|Global Bonds||- iShares Global Government Bond UCITS ETF (IGLO)
- Vanguard Global Bond Index Fund (VGBA)
|Gold||- iShares Physical Gold ETC (SGLN)
- WisdomTree Physical Gold (PHGP)
|Silver||- iShares Physical Silver ETC (SSLN)
- WisdomTree Physical Silver (PHSP)
|Bitcoin||- CoinShares Physical Bitcoin ETP (BITC)
- WisdomTree Bitcoin ETP (BTCW)
- Bitcoin on a crypto exchange (e.g., Coinbase, Binance, Kraken)
|Other Commodities||- Invesco Bloomberg Commodity UCITS ETF (CMOP)
- iShares Diversified Commodity Swap UCITS ETF (ICOM)
|Real Estate (REITS)||- iShares UK Property UCITS ETF (IUKP)
- SPDR FTSE UK All Share UCITS ETF (UKRE)
Index Funds for UK Investors:
|Asset Class||Popular Index Fund Options|
|Global Stocks||- Vanguard FTSE Global All Cap Index Fund
- HSBC FTSE All-World Index Fund
|Global Bonds||- Vanguard Global Bond Index Fund
- L&G Global Inflation Linked Bond Index Fund
|Gold||See ETF options|
|Silver||See ETF options|
|Bitcoin||See ETF options|
|Other Commodities||See ETF options|
|Real Estate (REITS)||- L&G UK Property Fund
- M&G Property Portfolio
Side note: Right now you can’t buy bitcoin on traditional UK broker platforms like Hargreaves Lansdown because the UK Financial Conduct Authority (FCA) is still cautious. But I think that will change in the coming years. For now, you might consider buying bitcoin on a platform like Coinbase or Kraken.
Another side note: If you’ve read my book, Stop Saving Start Investing, you’ll know I also like some “actively managed funds”. Here, the fund manager tries to beat the market over time. Not all fund managers have this talent, but a select few do. Read my book for more on that.
US investors also have a range of choices between ETFs and index funds. Here are some examples.
ETFs for US Investors:
|Asset Class||Popular ETF Options|
|Global Stocks||- Vanguard Total World Stock ETF (VT)
- iShares MSCI ACWI ETF (ACWI)
|Global Bonds||- Vanguard Total World Bond ETF (BNDW)|
|Gold||- SPDR Gold Trust (GLD)
- iShares Gold Trust (IAU)
|Silver||- iShares Silver Trust (SLV)
- Aberdeen Standard Physical Silver Shares ETF (SIVR)
|Bitcoin||- Grayscale Bitcoin Trust (GBTC)
- Bitcoin on a crypto exchange (e.g., Coinbase, Kraken)
|Other Commodities||- Invesco DB Commodity Index Tracking Fund (DBC)
- iShares S&P GSCI Commodity-Indexed Trust (GSG)
|Real Estate (REITS)||- Vanguard Real Estate ETF (VNQ)
- iShares U.S. Real Estate ETF (IYR)
Index Funds for US Investors:
|Asset Class||Popular Index Fund Options|
|Global Stocks||- Vanguard Total World Stock Index Fund (VTWAX)
- iShares MSCI ACWI Index Fund (ACWI)
|Global Bonds||See ETF options above|
|Gold||See ETF options above|
|Silver||See ETF options above|
|Bitcoin||See ETF options above|
|Other Commodities||See ETF options above|
|Real Estate (REITS)||- Vanguard Real Estate Index Fund (VGSLX)
- Fidelity Real Estate Index Fund (FSRNX)
Step 5: Choose your pension provider.
When it comes to choosing pension providers, most people have 2 options.
The first option is to have a “work pension”. Here, the company you work for will give you options to invest with their pension provider. Your company might also contribute to your pension as part of your benefits package. For example, it might add 5% to your pension for every 5% of your salary you contribute. In the US, most companies offer this through 401Ks.
The second option is to manage your own pension. If you’re self-employed or want more control over your investments, you might consider managing your own pension. In the UK, you can do this through a Self-Invested Personal Pension (SIPP). I personally use Hargreaves Lansdown for my SIPP, but I hear Interactive Investor and AJ Bell Youinvest are good too.
If you’re self-employed and living in the US, your best bet to invest for retirement would be through an Individual Retirement Account (IRA). There are different types of IRAs, like the Traditional IRA and Roth IRA, each with its own tax implications and benefits. Popular choices for IRA providers include Vanguard, Fidelity, and Charles Schwab.
Step 6: Invest as much as you can.
Most financial advisors will say you need X amount of money to give you Y amount of income each year when you retire. Most of these retirement models are based on lots of assumptions. Where will you live? How much do you want to leave for your loved ones? What will the inflation rate be in 20 years time?
Sure, it’s great to have assumptions to get a general idea of how much cash you’ll need to retire safely. But if you just want one simple assumption to go on, here it is: invest as much as you can, as often as you can. It’s better to be safe than sorry.
Step 7: Rebalance your retirement portfolio once in a while.
Let’s say you have 5% of your retirement portfolio in bitcoin right now. But over the next year, bitcoin rips higher and starts to outpace the other investments in your portfolio. One year later, bitcoin takes up 10% of your portfolio as a result. What do you do?
One option is to rebalance your portfolio. In this case, you would sell half your bitcoin to get its percentage back down to 5%. That 5% could then be reinvested into your other investments that did worse. This way, you’re always “rebalancing” your portfolio back to your target percentages (the ones you set in step 3 above). You can learn more about portfolio rebalancing here.
In many pension plans, including SIPPs, IRAs and 401Ks, you can rebalance without having to pay tax on your profits. You only pay tax when you take money out of your pension. You know, when you need to pay for tapas…
- Retirement timeline: Whether you’re fresh in the game like Bob or nearing the finish line like Alice, always know your retirement timeline.
- Diversify: Your portfolio isn’t a one-man show. Mix it up with global stocks, bonds, gold, and yes, even bitcoin.
- Adjust with age: As you age, tweak your investment strategy to match your retirement horizon.
- Know your tools: Familiarize yourself with the investment products available in your home country.
- Provider matters: Ensure you’re with the right pension provider for your needs.
- Invest a lot: Retirement maths can be complicated. But one formula is simple: invest as much as you can, as often as you can.
- Rebalance: If one asset starts stealing the show, it might be time to rebalance. Rebalancing in SIPPs, IRAs, and 401Ks is usually tax-free – until you decide to take money out of them to pay for retirement.
About the author: Jonathan Hobbs holds the Chartered Financial Analyst ® designation. Jon once managed the investments for a boutique crypto hedge fund, and is the author of three investment books. Before that, Jon came from the traditional finance world, working at firms like Morgan Stanley, HSBC, and M&G Investments.