Investing for retirement: main guidelines

Investing for an uncertain future

Investing for retirement in 2019 will be difficult. The market correction of October 2018 signals that the financial and economic future is in peril. Analysts predict that the time has come for a market downturn. The downturn may or may not happen this year or in the next one. No-one is 100% certain about that.

Even if the downturn won’t happen, the financial damage is already done. It’s logical to presume that many future retirees have lost significant amount of savings they have invested. Because of the panic in the markets, investments, including those intended for retirement, have lost value. Investing for retirement should be as stable as possible. No-one wants to gamble on their future financial state.

In the light of the possible downturn, panic in the markets, and people losing their savings over them; how should a future retiree invest their savings for an uncertain future?

Retirement investing & savings strategies

Retirement investing strategies

Saving only through an employer or a government-mandated programme is not enough. Research shows that even low-income retirees fare better if they are allowed to invest privately, rather than only using government-mandated pension schemes.

Regrettably, there are cases when mandatory savings programmes for retirement do not protect the retirees from poverty in their golden years. Hence, it’s very important to choose the right investing strategy. The financial status of every future retiree depends on it.


Investing for retirement (bonds, pension fund, etf, index fund, stocks) and their comparison.
Comparison of retirement investment types. Copyright: Money Bear Club.
*For bonds: the average of Europe’s and USA’s 10 year yields as of October 2018.
*For ETFs: top 20 ETFs, 3 year returns.
*For index funds: 5 year average from these funds.

Low risk investments will bring low returns, and vice versa. Therefore, it’s important to balance risk with reward when investing for the sunset of life.

Government bonds is the most conservative investment type in this list. It has the lowest risk and limited yearly returns. The yearly returns of a bond depend on the country that issues it. Countries with fewer financial troubles issue bonds with lower return rates. Countries with more financial troubles and lower credit ratings issue bonds with higher return rates.

The biggest problem with bonds is their low returns. The average yearly return of bonds (2.82%) is a very low return that barely beats the returns from savings accounts. A 17.66% yearly return, as shown in the table above, can be tempting. Yet, it comes from a country which has been in the news because of its political turmoil (Turkey). Investing in this bond would be risky.

Using bonds as the main retirement investing strategy would be rational if the income of the investor provides enough savings on its own. If not, riskier strategies with higher returns should be the better choice.

If bonds must be included in the retirement investing portfolio, they shouldn’t take up more than 5% to 10% of the total portfolio value.

Private pension funds are arguably the most popular investing option for retirement. They are a very well-known and a common option of supplementing retirement savings along government-mandated programmes.

Although private pension funds beat the inflation in USA and UK, the same may not be true for other countries. There are private pension funds, which do not manage to gain positive returns. Choosing the right pension fund is very important, as the wrong choice could mean getting negative gains. And negative gains for retirement investing should never happen.

The biggest disadvantage of private pension funds is the management fees. Even if the management’s salaries are based on the returns gained for future retirees, management fees do make a dent in the investments of future retirees.

A 0.5% management fee is very common. According to Nutmeg, 0.5% management fee will wipe out 11% of the total investment for retirement. Giving away over 10% of an investment for the biggest financial life change doesn’t seem very rational.

From one side, the management fee is used to fund research and the salaries of analysts. The salaries of the analysts are also often based on the performance of the pension fund. This means that the analysts have an incentive for the fund to perform better. Moreover, picking out investments for a pension fund requires being able to spot investments that will gain value even 20 to 30 years in the future. Being able to do that is hard and rare. Hence, the analysts are receiving large salaries and the investors are paying big management fees.

From the other side, pension funds don’t offer customized investment plans. Pension funds have different plans based on risk levels. There usually are  3 to 5 plans offered by a pension fund. That means that the management fee that wipes out more than 10% of the total investment is not paid for personalised investment strategies.

Also, there is no guarantee that the private pension fund will outperform the market during your lifetime. Imagine losing 11% of the total investment just for fees and losing even more because of bad decisions of the analysts and managers. And not just for any investment, but for an investment in retirement!

ETFs (Exchange traded funds) can be as safe or as risky as the investor wants it to be. Many ETFs have a relatively low risk, since they are based on the total performance of top companies or conservative sectors. Others, like the Bitcoin ETF (Bitcoin Investment Trust, GBTC) have a 52-week range of $6.50 to $38.71.

ETFs earn a medium risk rating as an investment for retirement because they can deal with very volatile sectors. Biotech and retail ETFs might not be good choices as investment vehicles for retirement. Simply because, there is a high chance for that type of ETF to lose value quickly and irreversibly.

If a combination of low and medium risk ETFs are chosen as the main way to invest for retirement, the investor will see many potential upsides to it. ETFs are naturally diversified investments, since they are composed of many different companies. And diversity is always great for an investment strategy that seeks stable growth.

ETFs are also great because of how many investment ideas are represented in them. From country and region ETFs, to social change exchange traded funds, every investor will find one that fits their ideas.

Index funds are great for investors who don’t want to pay high management fees. Index funds as an investment for retirement are popular in USA. Index funds just seek to replicate the performance of a certain index. That means they don’t require many analysts or research fees to operate. Less research equals lower management fees for the investors.

Index funds are great for investors who are seeking a medium to low risk investment that brings not too low yearly returns. Also, there are governments that offer incentives for those who invest for retirement using index funds.

Investing in stocks to secure a stable financial state for the retirement years seems contrarian at the first glance. Investing in one of the most volatile investments just to secure a very stable future would be an unusual strategy. However, for some, it can pay off if they know when to exit this investment.

The stock market, even when accounting for downturns and recessions, will gain in value in a 30 to 40 year period (the period during which the average person invests for their retirement). When looking into the performance of the stock market since WW2, we’ll see that even big crises didn’t manage to reverse the growth trend.

Stock market performance since 1900. Based on S&P Composite Index.
Stock market performance since 1900. Source:

Even the global financial crisis of 2008 wasn’t strong enough to change the growth trend for more than a few years. If the stocks were picked correctly, the future retiree who started investing from 1970 to 2010, would have seen major gains. Vietnam War, Black Monday and the global financial crisis of 2008 wouldn’t have diminished the investment gains.

The problem is, most investors are only capable of investing in under 20 or 50 companies in total. Keeping track of, for example, 100 companies, their performance and future prospects would be very time-consuming. And the investor could choose 70 or 60 companies that won’t outperform or give the same returns as the market. Then, it’s unlikely that gains from few stocks will offset the losses from the majority of the portfolio.

Picking out individual stocks and hoping that their companies will be profitable year after year is naive. Believing that their growth prospects, market share, and other financials will always stay the same is also naive. And these naive hopes are the basis on which some investors place their retirement investments in stocks.

ETFs, if they are composed of many companies and are diverse, can be an answer in wanting to own all stocks, without actually owning them. The same is true for index funds. However, ETF prices don’t rise as quickly as stock prices. Also, ETF dividends aren’t as high as the dividends of the most popular dividend-paying stocks.

When BP was suffering from the Mexican Gulf oil spill, the retirees who had invested in the company had to cope with their retirement savings being wiped out. Although private pension fund investors incurred the largest losses, those who owned stocks also did not fare well. Who can guarantee that the same won’t happen to other investors who base their future on the unpredictable earnings of corporations?

Nonetheless, investing in older companies which aren’t subject to large stock price fluctuations could be a good addition to any retirement investment portfolio. If the share allocated to stocks does not exceed 30% of the whole portfolio, then the benefits of owning stocks will exceed the inherent risks that come with such choice.

Ranking best retirement investing strategies

For those who seek stability

  1. Bonds – the ultimate choice for risk-averse retirement investing. Fixed returns and extremely low volatility.
  2. Private pension funds – higher risk, but still very low volatility. Zero need to constantly track the investment portfolio.
  3. Index funds – low management fees and low risk.

For those who seek a balance

Here, the medium risk and medium to high return investments shine through.

  1. Index funds – medium risk, medium returns.
  2. ETF – low to medium risk, medium returns. Some ETFs, mostly those, which deal with emerging markets, are high risk investments.
  3. Stocks – high risk, with potential for high returns.

For those who love customization

Stocks and theme ETFs are the easiest way to directly customize your portfolio.

  1. Stocks – thousands of companies in many industries.
  2. ETFs – theme ETFs, change ETFs, country ETFs, region ETFs…
  3. Bonds – ability to choose bonds of (almost) all countries in the world.

For growth seekers

  1. ETF – on average, top 20 ETFs over a 3 year period managed to achieve a 37.82% gain.
  2. Stocks – growth stocks are one of the most popular choices for investors seeking growth, rather than stability in their investments. However, stock volatility is always a factor.
  3. Index funds – stable growth. Depend on the benchmark indices the funds are based on.

Retirement savings strategies

Main strategies for retirement savings advise allocating up to 20% of a pay check to savings. Of that, 5% to 10% should be allocated to retirement savings.

A 10% allocation for retirement savings can be too big for many to deal with. However, if it is combined with an investment, then 10% should be doable for most people. A portion of the investment can be used for an emergency fund or for supplementing primary income.

Retirement savings for retirement investing and emergency purposes.
Retirement savings. Copyright: Money Bear Club.

If these strategies aren’t suitable, those investing for retirement can try If you ever win the lottery… and Saving for your dreams savings strategies. They are easy to follow and do not require a lot of effort.

Budgeting also can help in saving for retirement. Do’s and dont’s of budget keeping offers a lot of tips and advice on how to efficiently track your expenses and income.

Alternatives for retirement investing

The main alternative for retirement investing is not investing anything at all. There are governments which guarantee big enough pensions for its citizens. Many don’t have to worry about investing for their pensions because of this factor.

By working in such country, and later retiring in a country with low-living expenses, many can escape the need to invest and save for retirement.

High incomes, such as those from a business or a high paying job can also be an alternative for retirement investing. However, most high-income jobs also come with big responsibilities and long working hours for the employee or the owner (business owner).

Although rare, some future retirees can use an inheritance or a lottery winnings as an alternative for retirement investing.

Nevertheless, all alternatives to retirement investing, are just that, alternatives. An employee can lose a high-paying job and social policies of a country can change. Hence, it’s imperative to save and invest for retirement. After all, it’s better to be safe than sorry.


*Disclaimer: this article is not intended to be taken as financial advice. Any risk an investor takes is only his or her own. Past performance does not indicate future gains.

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5 thoughts on “Investing for retirement: main guidelines

  1. Your given info about investing for retirement is very helpful for those people who want to
    invest for retirement. Hope this info will helpful. Thanks for sharing.


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