Retirement Portfolio Strategies
The dream of every retiree is to retire on their own terms with financial stability. How to achieve that goal? It starts with building a solid retirement portfolio. That involves creating a balanced portfolio without extreme volatility. Start by finding the right investments to ensure your golden years are comfortable.
What to Include in Your Retirement Portfolio
No two retirement portfolios are identical. The right choices for your retirement portfolio depend on several factors. These include:
- Amount of money when beginning retirement
- Tax status
- Risk tolerance
- Spousal income and retirement date
For instance, some people may have a large enough portfolio that they can live off the income generated. That, along with social security or a pension, may prove sufficient to support the retirement lifestyle they seek. However, most retirees will have to access their principal at some point. If that’s the case, start by tapping interest and dividends from taxable accounts. You might want to do that rather than drawing down retirement account principal. The funds in your taxable accounts can continue growing. Although, you will no longer be reinvesting the proceeds.
Retirement Portfolio Strategies
If you’ve been investing for a long time, you’ve seen economic ups and downs. Keep in mind that you want to avoid the need to withdraw a large amount of money from your retirement portfolio when markets are down. Reduce that risk by keeping several years of living expenses in savings. This includes CDs or money market accounts. Remember it can take a few years for the market to recover from a significant downturn.
What income sources can you count on for the rest of your life? Which are less certain? For many Americans, social security is the sole example of the former. Perhaps you or your spouse are lucky enough to receive a pension. Knowing exactly how much retirement income you can depend upon without fail is the first step in managing retirement finances.
Your retirement portfolio strategy should focus on achieving a maximum return within a personally tolerable level of volatility. Sustainability is paramount in a retirement portfolio strategy. For best results, start saving early for retirement and use your age as an investment guide. For example, in your salad days, concentrate on a growth portfolio. Such a portfolio concentrates on stocks, mutual funds, and ETFs. At this stage, you have a long time to make up for any losses. At mid-career, shift towards a balanced portfolio. You’ll still have most of your funds in equities, but bonds can partially shield you from market volatility. As retirement approaches, an income portfolio, with a greater bond allocation, provides more sustainability.
Of course, cash, stocks, and bonds aren’t your only retirement portfolio options. There are a host of alternative investments that can make up a portion of your portfolio.
Examples of Alternative Investments
- Real estate: Rental property can provide cash flow in retirement, but it is not liquid. The exception is Real Estate Investment Trusts (REITs), which are publicly traded. Non-publicly traded REITs are less liquid.
- Annuities: These fixed-income investments sold by insurance companies can provide you with a guaranteed monthly income. Many of these instruments are complex. So it’s important to make sure you understand the fee structure and provisions before signing the contract.
Target Date Funds
For some investors, the easiest route in developing a retirement portfolio is focusing on target-date or asset allocation funds. For the most part, this relieves them of actively managing their retirement portfolio. Keep in mind that most such funds are designed specifically for retirement assets. That’s fine for your IRA or 401(k). However, it’s not fine for a portfolio geared for your retirement but without the advantages of a tax-sheltered account.
If going the asset allocation or target-date fund route, perform your due diligence. Pay attention to expenses and fees. These affect long-term performance.
Choose your target date carefully. Your target date must conform with your overall retirement plans. That may sound obvious, plan to retire in 20 years and pick the corresponding target date. However, life doesn’t always go according to plan. Think about what might happen if you had to retire earlier or decided to work a few more years.
Read the prospectus. The truth is that few investors actually do this. The material is lengthy and usually dull. Fail to read the prospectus, and you won’t find out how asset allocation changes over time.
Review your target-date fund’s performance regularly. It really isn’t a set-it-and-forget-it system. If there are changes in asset allocation by the fund manager, make sure those changes gibe with your retirement strategy plans. It’s also critical to compare your target-date fund’s asset allocation with your outside investments. You could discover your overall asset allocation needs rebalancing.
No investor should ever put all of their eggs in one basket, no matter how attractive the basket appears. Would the bulk of your investments perform the same way in event of market volatility? That means your retirement portfolio needs tweaking. It’s wise to consult a financial planner to ensure your retirement portfolio is properly diversified.
Retirement Portfolio Considerations
What are your realistic retirement dreams? Will you be able to fulfill them with social security or a pension? Crunch the numbers on planning for a 30-year retirement. When you know how much you can spend, you’ll know if your retirement portfolio should provide the desired retirement.
About Jane Meggitt
Jane Meggitt specializes in writing about personal finance. Besides investing and planning for retirement, she writes about insurance, real estate, credit cards, estate planning and more. Her work has appeared in dozens of publications, including Financial Advisor, Zack’s, SF Gate and Investor Junkie. A graduate of New York University, Jane lives on a small farm in New Jersey horse country.