How to Invest for Retirement (Simple Effective Approach)

How to Invest for Retirement (Simple Effective Approach)

Financial institutions, financial advisors, and banks want investing to sound like a complicated task. That way, you’ll need them to manage your retirement plan – for a healthy annual fee, of course.


Regular fees can reduce your ultimate retirement nest egg by 20% to 50%, which can be a huge dollar amount gone when you need it the most. Don’t just throw it away and end up missing your retirement goals.

retirement goals

In this article, you will learn a simple investing approach championed by one of the world’s greatest investors, Warren Buffett. It’s easy to implement, has extremely low fees, and has helped many people save for their retirements for 150 years.

Passive Investing For Retirement

Passive Investing For Retirement

One of the simplest and most effective forms of investing for a comfortable retirement is called passive investing. It is an investment strategy that involves very little time, research, or skill. It simplifies your investment decisions.

Stock market indices tend to rise over time. Major US stock market indices have an average return of slightly over 10% yearly returns for 100 years, and just under 10% for the last 150 years. An index is a collection of stocks that meet specific criteria.

Stocks that perform poorly are removed from the index, and stocks that perform well stay in the index, which is what allows it to rise over time. Passive investing means you buy one (or more) of these indices that has a long track record of generating returns. This can be done with one transaction, which will be explained in the next section.

With passive investing you can choose to input a chunk of capital, or you make regular payments to the investment, or you could do both. You simply buy and hold the investment. This is why minimal research or skill is required.

For example, each month I take a portion of my income and put it into the same stock indices. Whether the index moves up or down, I keep doing the same thing. Decide how much of your annual income you will contribute. Other than putting capital into the investment, there is very little to do – yet that capital experiences long-term growth and compounds each year based on the rate of return.

For example, if you make 10% your first year, and you make 10% the next year, in that second year you make 10% on your original capital plus your earnings from the first year. This keeps adding up year after year.

The following chart shows the power of compounding at 10% per year. If you invest $500 per month for 40 years, you end up with $2.7 million at the end of those 40 years, even though your total contributions are only $240 thousand.

workplace retirement plan

This can be done in addition to a workplace retirement plan; or, if your work doesn’t offer a plan, you can do this in place of it.

Further reading

Index ETFs to Invest for Retirement

Index ETFs to Invest for Retirement

Exchange traded funds (ETF) are investment vehicles that allow you to buy a stock index (a large basket of stocks) with one transaction. It allows you to replicate the returns of indices with a long history of profitable returns.

An ETF is run by a manager who makes sure the ETF, also called a fund, is tracking the index. Since the index is updated and the stocks within it change over time, the manager of the fund also makes adjustments to adjust the ETF so it aligns with the index.

In other words, the index and ETF manager do all the work for you. You just need to invest, and in exchange, you pay a tiny fee such as 0.03% per year.

By comparison, if you are paying 1% to a personal money manager or mutual fund, that will reduce your retirement nest egg by 30%! You want to invest in low-fee ETFs with a solid track record of producing returns over the long run.

An example of a solid ETF to buy is the iShares Core S&P 500 ETF (IVV). The S&P 500 has been around a long time and has averaged 10% yearly returns (and IVV tracks it). IVV has a very low fee of only 0.03%, which means you get to keep almost the entire profit.

Buying that one ETF is equivalent to buying the stocks of the 500 largest companies in the US. You own a wide variety of stocks, called diversification, with only one transaction.

Further reading

Picking an Asset Allocation for Retirement

Picking an Asset Allocation for Retirement

There are ETFs that track different assets, such as US stocks, Canadian stocks, UK stocks, oil & gas stocks, healthcare stocks, cryptocurrencies, bonds and much more.

Asset allocation is how much of your funds you dedicate to investing in stock ETFs versus how much you invest in cryptocurrency ETFs, real estate trusts (REITs), or bond ETFs.

real estate trusts

Cryptocurrencies are highly erratic, and may not be suitable for someone uncomfortable with volatility (large price movements). Bonds are a lower volatility investment than stocks. They have averaged 5% yearly returns over the long-run, while the S&P 500 (stocks) have returned 10%.

Through portfolio allocation, you can fine-tune what your average percentage yearly return is likely to be over the long run, and gauge how volatile those returns are. For example, with an all stock fund portfolio (you put all your money in stock index ETFs) you can expect to make close to 10% per year over the long run.

If you invest 50% of your capital in bond ETFs and 50% in stock ETFs, you can expect to make 7.5% per year. The value of your portfolio will be more or less steady because bonds don’t fluctuate as much as stocks.

There is no perfect asset allocation for everyone. The general rule of thumb is that when you are younger, and you have a long time horizon until retirement, it pays to invest more heavily in stock ETFs or crypto ETFs, since these have high return potential.

As you get older, it’s better to allocate more capital to lower risk investments, such as bond ETFs, since you don’t want to experience a big drop in the stock market right before you need that capital. When bonds do drop, the drops are usually smaller than in stocks.

Once you are retirement age and need to live off your retirement savings, you may opt to move capital from stocks ETFs to bond ETFs to further protect what you have. Essentially, as you get older, you want less risk in the portfolio, and stocks have greater investment risk than bonds.

Further reading

Tips for Investing for Retirement

Tips for Investing for Retirement

Taking a passive investing approach to retirement using index ETFs is fairly straightforward, but here are some additional tips to help you out.

  • Commissions are fees. If you pay $10 per trade, you don’t want to be buying $100 worth of an ETF each month. You are losing 10% of your investment right from the start! Rather save up, and then buy an ETF when you have enough money that the commissions are well under 1% of your purchase.
  • If possible, invest on a schedule. It is easy to skip making an investment for a few months in favor of spending money now… But that won’t make you any wealthier. Have a plan for investing and stick with it. Ideally, have money automatically sent into your investment account each month.
  • Don’t over-complicate things. Invest in index ETFs regularly, and hang onto them until you need the capital or are nearing retirement and want to transfer that money into something lower risk. Avoid selling and then attempting to buy back in. Very few people are good at this; you will likely make lower returns by doing so.
  • Don’t check your portfolio daily. You don’t really need to check it at all. This is a long-term plan. Watching the ups and downs of your portfolio will just lead to anxiety. Let it play out; constant watching is not required.
Further reading
Invest for Retirement FAQs

Invest for Retirement FAQs

How can I start investing for retirement?

Go to your bank and open a self-directed trading account. The trading account can be inside an IRA or Roth IRA, or some other tax protected structure if you wish.

This could result in a tax deduction. Once the account is open, start making regular contributions to that account (such as monthly) and then buy index ETFs with the funds, such as the iShares Core S&P 500 ETF (IVV).

Can I invest for retirement with CFDs?

Do not make long-term investments with CFDs. The CFD broker almost always charges an overnight holding cost/fee, in addition to commissions and increased spreads (you pay more when you buy, and get less when you sell).

All these costs will significantly erode your potential gains, compared to investing directly in actual stocks or ETFs on a stock exchange.

What is the difference between trading and investing?

Investing is for the long-term with trades typically lasting multiple years. Trading is a more general term and typically refers to positions which are held for a shorter amount of time. Day trades may last seconds to hours, while swing trades may last days to months.

What is good to invest in for retirement?

Focus on investing in index ETFs. Index ETFs track a basket of stocks, which makes the ETF less volatile than most individual stocks. If you buy an individual stock, that company can go bankrupt. If you buy an ETF with 100 stocks in it, one company has minimal impact on the whole.

How much should I invest to retire at 50?

This will depend on how much money you want to have when you are 50, when considering your expenses in retirement.

The retirement calculator shows you how much money you can generate from your investments based on your contribution amount, rate of return, and time the funds are invested. The more you can contribute each month, the better the chance of being able to retire early.

What are alternative retirement investments other than stocks?

There are alternative investments that provide better long-term returns than stocks. Comics have returned 17% per year, Art 15%, Trading Cards, 12%, Lego 11%, Farm Land 11%, on average, as just a few examples. Some of these may be hobbies for you, but they could also end up funding your retirement.

Final Thoughts on Investing for Retirement

Start investing in index ETFs early. Choose ones that are low-fee; since the ETFs are all tracking the same thing, there is no reason to pay more than needed.

Make regular contributions instead of trying to “time” purchases. The idea is to keep this as simple as possible and benefit from the long-term rise of the stock market. Very few people, including many professionals, can time the stock market, so don’t bother. Hold the investments and contribute regularly, ideally monthly.

Decide on asset allocation depending on risk tolerance and proximity to retirement. This allocation may change over time, especially as you approach retirement. Continue your education by learning about automated trading or investing.

Further reading