Continuing our series on retirement planning, we’ve already covered why retirement planning should begin with a vision – not just a number. Once you’ve clarified your goals and lifestyle in retirement, it becomes much easier to estimate how much money you’ll need. From there, we explored the different types of retirement accounts available to you and how to prioritize where you save.
Now comes the natural next question: What should you actually invest in?
This is where many people get stuck. They’ve opened their 401(k), Roth IRA, or brokerage account—but they’re not sure what to do next. Before we go further, let’s clear up a common misconception: retirement accounts are not investments. They’re just containers. You still have to decide what to put inside those accounts. That’s where this post comes in.
Investing Basics: What Are You Actually Buying?
When it comes to building wealth, simple really is better. The more complex your investment strategy, the more likely you are to run into problems like high fees, poor timing decisions, or holding onto underperforming investments. Complexity often works against you, not for you.
There are three basic building blocks in most investment portfolios:
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Stocks
Stocks represent ownership in a company. When you buy a share of stock, you’re buying a small piece of that business. If the company grows and profits increase, the value of your stock typically rises. Many companies also pay dividends, which are a share of their profits distributed to investors.
The downside? Stocks can go down—sometimes sharply. Market crashes like the Dot-com bust, 2008, and the COVID-19 downturn show just how quickly prices can fall. Individual companies can even go out of business entirely. This is why it is important to own a diverse array of stocks and not have too much invested in any one company. -
Bonds
Bonds are essentially loans. When you buy a bond, you’re lending money to a company or a government in exchange for regular interest payments and a return of your principal after a set period.
While bonds are less volatile than stocks, they are not risk-free. If the borrower is financially unstable, they may miss payments or even default. You can reduce this risk by avoiding “junk” or high-yield bonds and instead focusing on high-quality, investment-grade bonds issued by governments or stable companies and by diversifying your exposure so that you are not lending too much money to any one company.
Where stocks are the growth engine, bonds are the shock absorbers in the portfolio, providing stability. -
Cash
Cash doesn’t really grow in value, but it plays an important role in both working years and retirement. In your working years, keeping cash in an emergency fund is essential. In retirement, holding some cash helps you avoid selling investments at the wrong time—like during a market downturn—when you need to cover a large expense.
That said, cash comes with its own risk: inflation. Over time, inflation eats away at the purchasing power of your money. So while some cash is useful, too much can actually set you back financially by reducing your overall returns. Cash gives you flexibility, but it has an opportunity cost—you miss out on earnings when you have too much allocated to cash.
Mutual Funds and ETFs: How Most People Should Invest
Most investors are better off skipping individual stocks and bonds entirely. It takes a lot of time, research, and effort—and even then, the odds of outperforming the market are low.
That’s why I recommend using mutual funds or exchange-traded funds (ETFs) to build your portfolio. These funds allow you to diversify your exposure and spread the risk over a large number of companies at a low cost.
Mutual funds pool money from many investors. A fund manager then uses that money to buy a mix of stocks, bonds, or both. For example, a mutual fund that tracks the S&P 500 owns a small piece of the 500 largest U.S. companies. This gives you instant diversification and professional management at a relatively low cost.
ETFs are similar but trade like stocks throughout the day. Most ETFs are passively managed and track an index. They’re known for low fees and tax efficiency. While mutual funds are only traded once per day after market close, ETFs can be bought or sold at any time during market hours. Both can work well for retirement investing, and in many cases, they are nearly identical in terms of what they hold.
For example, pairing the Vanguard Total World Stock Index Fund (VTWAX) with the Vanguard Total Bond Market Index Fund (VBTLX) gives you exposure to thousands of companies and bonds across the globe. These funds offer broad diversification, automatic rebalancing (if held in a target-date fund), and incredibly low expense ratios—typically under 0.10% annually.
Active vs. Passive Investing
There are two main approaches to investing: active and passive.
- Active investing means trying to beat the market. This might involve picking individual stocks, timing when to buy and sell, or investing in a mutual fund with a manager aiming to outperform a benchmark like the S&P 500.
- Passive investing is the opposite. Instead of trying to beat the market, passive investors aim to match the market by owning index funds that track major benchmarks.
At Together Planning, we generally recommend a passive approach. Why? Because the data is clear. Over time, most active investors—and even professional fund managers—fail to beat the market after fees. Passive investing reduces your costs, simplifies your decisions, and helps you stay invested during market ups and downs. It’s not about chasing big wins, it’s about capturing steady, long-term growth.
Asset Allocation: How Much in Stocks vs. Bonds?
Once you understand what to invest in, the next step is deciding how much of each to own. This is called your asset allocation, and it’s one of the most important decisions you’ll make as an investor.
Your allocation refers to the percentage of your portfolio you hold in stocks, bonds, and cash. For example, a 60/40 portfolio has 60% in stocks and 40% in bonds. While no one allocation is right for everyone, your personal mix should reflect two things: your risk tolerance and your risk capacity.
- Risk tolerance is your emotional comfort with market ups and downs. Can you handle a 20% drop in your portfolio without panicking and selling everything? If not, your tolerance for risk may be lower than you think. This is something that tends to change over time. Many people become more conservative as they approach retirement and start relying on their savings for income.
- Risk capacity is your financial ability to take risk. If you’re younger and have decades before retirement, you may need to take more risk to grow your money. On the other hand, someone close to retirement who has a large pension or other sources of income may not need to take much risk at all.
For example, a 65-year-old retiree with a $5 million portfolio, pension, and Social Security income has a high level of flexibility. Their plan will likely work whether they take more risk or less. Compare that to a 30-year-old with a small 401(k) balance and no other savings. That person has a long time horizon and needs growth, so they can afford—and likely need—to be more aggressive.
Online risk tolerance questionnaires can help, but real-world experience is better. If you felt the urge to sell everything in March 2020 or during a past downturn, that’s a sign your portfolio may be too aggressive. A mix like 60% stocks and 40% bonds has long been a traditional retiree allocation, but the right number for you depends on your specific goals, age, and comfort level.
How to Pick the Right Funds
Once you’ve decided how much to hold in stocks and bonds, it’s time to choose which funds to use. Fortunately, this part is simple.
When evaluating investments for retirement, I suggest focusing on three key traits:
- Low cost – Expense ratios should ideally be below 0.20%. The lower, the better.
- Broad diversification – Choose funds that hold hundreds or even thousands of stocks or bonds.
- Simple structure – Avoid overly complex strategies or funds with too many moving parts.
Here are a few examples of fund types that meet those criteria:
- Target-date funds are one-fund solutions that automatically shift from stocks to bonds as you approach retirement. Stick with low-cost, index-based options from Vanguard, Fidelity, or iShares. Avoid higher-fee, actively managed versions.
- Balanced funds maintain a fixed mix of stocks and bonds, such as 60/40, regardless of your age. Vanguard LifeStrategy and iShares Asset Allocation funds are both low-cost and broadly diversified. Choose the mix that matches your comfort with stock market volatility.
Sample Portfolios
To give you a sense of how this looks in practice, here are two example allocations. These are for illustration only—not personal recommendations:
65-Year-Old Retiree:
- 36% Vanguard Total US Stock Index (VTI)
- 24% Vanguard Total International Stock Index (VXUS)
- 40% Vanguard Total Bond Market Index (BND)
25-Year-Old Investor:
- 54% VTI
- 36% VXUS
- 10% BND
Prefer something simpler? The Vanguard LifeStrategy Moderate Growth Fund (VSMGX) targets a 60/40 stock-bond split and handles rebalancing for you. It’s a great choice for those who want one fund that does it all.
Putting It All Together
We covered a lot today, so here’s a quick recap:
- Retirement accounts are just containers. What you invest in inside those accounts matters most.
- Stocks, bonds, and cash form the foundation of every portfolio.
- Mutual funds and ETFs are the easiest, most effective way to invest.
- Passive investing has consistently outperformed active strategies once fees are considered.
- Your asset allocation should reflect both your emotional risk tolerance and your financial risk capacity.
- When choosing funds, look for low fees, broad diversification, and simplicity.
If you follow these principles and stay consistent, you’re on track to build a portfolio that can support your retirement goals with confidence. The right investments, paired with the right accounts, can help you build wealth steadily and retire with peace of mind. You don’t have to get everything perfect from the start. The most important thing is to start investing and stay the course.
Together Planning is a registered investment advisor. The information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Together Planning has a reasonable belief that this marketing does not include any false or material misleading information statements or omissions of facts regarding services, investments, or client experiences. Together Planning has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.