Most Americans are not adequately prepared for retirement. Majority of adults know the key to a comfortable retirement is through saving, but don’t know how to do that effectively. The good news is that with investment planning, you can start successfully saving for retirement and a bright financial future.

Why Invest for Retirement?

Retirement investments provide financial security during your golden years when regular income stops. Your investments can ensure you have sufficient funds to maintain your standard of living without relying solely on Social Security benefits.

By investing early, you give your money time to grow through the power of compounding. This means that your investments earn interest or dividends on your initial investment and on any accrued money. Additionally, investing protects against inflation, which ensures the purchasing power of your money over time.

Types of Investments

You must first weigh your options carefully to help you find the retirement plan that suits your needs. Each of these accounts has distinctive features and benefits suited for different types of investors. So, understanding the characteristics associated with each is crucial to help you make informed decisions when planning for your retirement.

You can open these accounts with your employer or directly through an online or in-person investment firm. If you would like assistance with managing your retirement investments, you could hire a financial advisor or use the Teachers Insurance and Annuity Association of America (TIAA) retirement financial tools. Below are some of the most common retirement accounts that people use to start saving:

Defined-Benefit Plan

A defined benefit plan is a traditional pension plan that provides a specific, predetermined benefit amount to retirees based on their years of service and salary history. An employer is responsible for contributing to the plan and ensuring it is fully funded to meet future benefit obligations.

401(k)

A 401(k) is a defined contribution retirement account offered by employers, which allows employees to contribute a percentage of their pre-tax income towards their retirement savings. In 2023, you can contribute up to $22,500 if you're below 50. That amount increases to $30,000 for those 50 years or older.

The contributions grow tax-free until withdrawn, and employers may also offer matching contributions, increasing the account's value. Many employers also offer a wide range of investment options to choose from. However, it's worth noting that contributions to this type of account are limited, and there are penalties for early withdrawals.

Individual Retirement Account (IRA)

Individuals open these accounts to save for retirement, and there are a few different types of IRAs.

Traditional IRAs are retirement accounts that allow for tax-deferred investing. Contributions can be tax-deductible depending on the saver's income and tax-filing status. Withdrawals in retirement are taxed as ordinary income. For 2023, the contribution limit is $6,500, or $7,500 if you're 50 or older.

Roth IRAs are retirement accounts in which contributions are made with after-tax dollars. The account grows tax-free, and qualified withdrawals in retirement are tax-free. Roth IRAs have no required minimum distributions, and contributions can be withdrawn at any time without penalty. For 2023, the contribution limit is $6,500 or $7,500 if you're 50 or older.

SEP IRAs are employer-sponsored retirement plans in which the employer makes tax-deductible contributions to eligible employees. Contributions are limited to the lesser of 25% of the employee's compensation or $66,000 in 2023.

SIMPLE IRAs are retirement plans for small businesses with 100 or fewer employees. In 2023, employees can contribute up to $15,500, with an additional catch-up contribution of $3,500 for savers age 50 or older. Employers can choose to make a 2% contribution to all employees or an optional matching contribution of up to 3%.

Brokerage Accounts

Brokerage firms offer these accounts and allow you to invest in stocks, bonds, mutual funds, and other investments. They provide more flexibility and control than other retirement accounts. Plus, there are no contribution limits or withdrawal penalties. However, they offer no tax benefits and come with higher fees and more risk than other retirement accounts.

Conclusion

Choosing the proper investment account will help you make the most of your time and money for a successful retirement. To pick which account to add to your portfolio, you will need to consider your financial goals, needs, and risk tolerance. So, make sure that you're taking the time to assess each option that will allow you to retire comfortably.