Answers to questions about how to build an investment portfolio for retirement depend a lot on your time horizon. Time in the market is typically more important than market timing.
Focus on growth if you have decades to retire. As you approach or enter retirement, shift your focus to portfolio yield or income-bearing assets.
Your Investment Portfolio for Retirement
Consider your total investment portfolio as a large basket of assets. These assets include both taxable assets and retirement plan accounts. Over time, your portfolio grows to generate the income needed to live in comfort during retirement.
If you are saving and investing for the future, make certain the portfolio includes the following must-haves:
- Invest for growth, especially in your twenties, thirties, and forties.
- As you approach retirement, shift more of your assets to income-producing elements, e.g. dividend stocks, fixed income, Certificates of Deposit (CD), and so on.
- Regardless of age, regularly rebalance and diversify the investment portfolio as risk appetite, goals, and time to retirement change.
Elements of Your Investment Portfolio
Your investment portfolio includes the holdings and assets held in a variety of accounts, such as:
- Cash and/or cash equivalents, e.g. savings accounts, Certificates of Deposit (CDs), and money market funds
- 401(k) employer-sponsored tax-deferred retirement plans
- Robo-advisor accounts
- Individual Retirement Accounts (IRAs, including traditional, SIMPLE, Roth, and SEP types)
- Self-Directed Individual Retirement Accounts: read this guide to know what it is and this one to understand why it is such an important account to have a truly diversified retirement portfolio.
Any of these investment accounts may contain various assets, e.g. equities (stocks), mutual funds, fixed income (bonds), options, exchange-traded funds (ETFs), commodities, and futures.
It’s even possible to own real estate or real estate investment trusts (REITs) in a portfolio. In combination, these assets comprise an investment portfolio.
The ideal one is designed to meet your current and future financial needs. To invest for retirement, including the following assets to achieve these goals.
Invest in the Future: Growth Stocks
A retirement plan is supposed to grow over decades until you’re ready to enjoy retirement. Growth assets, e.g. real estate and stocks, usually create the core of a successful retirement portfolio. Of course, not all of them are considered growth stocks.
It’s possible to acquire blue chip stocks, or company shares considered to be mature and reliable choices for investors.
Choose growing companies if you’re years away from retirement. Typically, fast-growing companies also exceed the current inflation rate. The inflation rate measures the rate at which wholesale and retail prices increase over time.
Getting growth stocks helps you to maintain or improve your purchasing power regardless of the inflation rate over time.
Kiplinger.com reports that stocks have outpaced all other asset classes’ returns over time. For example, from the years 1926 – 2018, stocks delivered approximately 10 percent growth each year.
In contrast, bonds posted approximately half that (about five percent). Cash or cash equivalents typically returned less, averaging about 3.5 percent each year throughout the period.
Even a retirement portfolio that’s designed to conserve capital and generate income often includes a small number of stock holdings to hedge your capital against inflation.
How to Diversify Your Portfolio for Retirement ?
Portfolio diversification is one of the ways to protect your retirement assets. The assets in which you’re diversified might change over time until you reach retirement age.
In your twenties, you may simply diversify the investment portfolio in different equity types, e.g. small-, large-, or mid-capitalization stocks, ETFs, or mutual funds. You may also include real estate in this mix.
However, as you approach retirement, it may be prudent to shift your holdings to more conservative assets. You might add preferred stocks, corporate bonds, or other assets to generate predictable income with lesser risk than a common stock portfolio.
So-called alternative assets, e.g. gold, silver, palladium and platinum, oil and gas partnerships and leases, derivatives and structured products, and other types of non-market correlative assets, may also lessen your portfolio’s volatility. Read our top 7 gold IRA company guide to which dealer to choose.
Collectibles, which can't be owned within a retirement plan such as gold-plated quarters or wine collections could rise in value, however, they shouldn't be on the top of your list.
If you don’t know where to start, we suggest you read our two guides about what we think are the best gold and silver investments coins:
- Click here to see our list of recommended gold investment coins
- Click here to see our list of recommended silver investment coins
Your retirement portfolio should never depend on the shares of any one company (either within a taxable portfolio or within your retirement account, 401(k), or other stock purchase account).
This is like putting all your eggs in one basket. If the stock value declines, this could unfortunately affect your retirement plan’s short and long-term performance.
Retirement Portfolio holdings and Your Risk Tolerance
Your ability to assume investment risk will probably change throughout life. As you near retirement, your risk tolerance may change. Your goals may change from long-term capital growth to a more conservative stance, e.g. preservation of capital and income.
To protect your capital, you may choose low-risk assets, e.g. Certificates of Deposit (CDs), short-term investment quality corporate debt instruments, U.S. Treasury securities, and insurance annuities.
These securities are better choices for your retirement portfolio once you prioritize principal safety and income.
Some investors may have concerns about outliving their money. That’s why considering your portfolio’s drawdown risk is important. It may make good financial sense to continue to include growth assets as a part of your investment strategy after retirement.
You might not want to exclusively get government-backed and guaranteed assets until your eighties and nineties for that reason.
Active or Passive Management of Your Portfolio for Retirement
Investors have an array of money management choices today. One investment management decision involves your choice of active or passive management:
Some financial advisors suggest low-commission passively managed index funds to their clients.
Other advisors suggest active management because these portfolio returns may be better than the broad market index funds. In addition, active management can reduce the portfolio’s volatility. However, active management may involve higher costs. It’s important to note that higher commissions and costs can subtract from your performance returns over time.
Robo-advisors work with preset algorithms and usually cost less than active human portfolio managers. A robo-advisor platform dually allocates your portfolio assets and manages them.
Because robo-advisors can’t deviate from their algorithm programming, they can’t make decisions about changing market conditions. They’re simply less sophisticated than their human portfolio managers.
If you require retirement planning, estate planning, administration of trust funds, or tax management advice, choose an experienced human counterpart.
Save to Build an Investment Portfolio for Retirement
You may need to save to build an investment portfolio for retirement. Not everyone has the capital to create one. Many must identify and describe savings goals before implementing the financial planning process.
Almost everyone should have a retirement and emergency savings plan. In order to feel financially secure, know your family or loved ones will be taken care of, or reach the place where you can enjoy life, dig more deeply into your vision.
What are the financial accomplishments you need? Do you want to own a home or live debt-free? What lifestyle do you want to enjoy in retirement?
The answers to these questions form your savings goals. Although achieving these goals might seem far off or even abstract, it’s essential to provide as many details as possible to achieve future results.
Retirement Savings Goals Matter
Understanding where you’re going—your financial destination—can help you create the best roadmap to get there. If your retirement goals are financially ambitious, it’s important to plan the specific steps needed to reach the goal.
Select your investment “mix”
Some financial goals, such as retirement that’s many years away, might be achieved with a current aggressive asset allocation. Although aggressive growth holdings may entail higher risks, it provides the best potential for higher future investment returns.
Think about your risk tolerance now
Consider your nearer-term goals as well. For example, you could select a safer investment allocation with most of your assets to lower overall portfolio risk. It’s a matter of knowing yourself. If you don’t have a long-term investment view, you may opt for slow and steady asset growth.
Select the right account types
You can save for retirement using tax-advantaged accounts, e.g. IRAs (traditional, SEP, SIMPLE, Roth, etc.) and employer-offered 401(k)s. Because you pay no current taxes on capital gains, your money grows faster.
Discuss the best account type for your goals and make the most of these benefits while avoiding potential tax penalties.
Determine your contribution amounts
Retirement planning is a useful way to fine-tune how much you should contribute now to reach your retirement and investment goals. Consult a financial professional to create your retirement plan now.
Adjust your retirement plan as needed
It’s important to measure your retirement plan progress on a regular basis. Avoid making costly short-term decisions. For instance, if you get high-quality assets and both markets and values decline, discuss your next steps with care.
Recognizing your investment portfolio goals for retirement should provide you with a sense of accomplishment. When you take the time to establish clear short and intermediate-term goals, there’s less doubt about achieving your long-term retirement goals.
Do you have questions about what you need to identify to achieve your retirement goals? After all, no one has a crystal ball about the distant future. Here are some things you want to identify for the future:
- What are your overall retirement goals? Are you dreaming big?
- When do you plan to retire? This is your answer to “What’s your time horizon?” Knowing when you plan to retire can help to inform your risk tolerance. If you have many years until retirement, you may be able to assume more risk.
- How much do you need to retire? The answer to this important question can help you evaluate savings rates and ultimately help you reach your retirement goals.
Commit Your Retirement Goals to Writing
It’s common to feel that retirement is only a distant dream. In addition to making a financial plan with your wealth advisor, write them down. Refer to this tangible reminder to recall what you’re working for and why.
Define your financial aspirations and revise them as necessary over time.
Don’t Get Stuck
Creating a long-term financial plan can be exciting. Use your financial plan to build momentum.
Remember, life happens. Don’t get stuck when life happens. Take a moment to revise your financial plan for retirement. For instance:
You worry that your retirement plans might change. Realize that’s okay. Consider your investment portfolio for retirement now and do your best. Know that whatever you decide today is the first draft.
You have no idea how much money you’re going to need to retire. Set financial goals anyway. Use calculators and other tools to refine your estimate. Take advantage of experienced financial professionals to establish these investment goals for retirement.
Your life is a “blank slate.” Perhaps you’ve just graduated or are in the early years of a career. You might not yet know how to select appropriate savings goals—other than the fact you know it’s essential to save for retirement. Consider wealth-building strategies now and fill in details about your time horizon later.
There’s no need to allow perfection to stifle your financial progress. Realize that whatever your current dreams look like now, you can change or revise them.
Clearly, it’s important to diversify your investment portfolio for retirement. The word diversification may sound like you need an advanced degree to really understand it.
The good news is that portfolio diversification is a simple concept. Add variety to your investment portfolio for retirement. Doing so gives you a variety of options to withstand and thrive in many market conditions.
By spreading your capital into a variety of investment vehicles, you reduce risk and provide many opportunities for your money to grow.
Diversification is one of the key principles of investing. By diversifying the funds in your portfolio, your capital is positioned to build long-term wealth.
Why Diversification is Important to Your Investment Portfolio ?
There are several reasons:
- Diversification reduces your portfolio risk. Although investing will always involve some level of risk, it’s possible to spread the risk over different portfolio positions. If one investment loses money, others may appreciate in value.
- Imagine the following scenario. You and your best friend make $100,000 a year. Your money is generated from several clients but your best friend makes all her money with one person. If your best friend’s client goes out of business, what happens to her income?
- The same is true of your investment portfolio. If you put 100 percent of your retirement assets into a single idea, what will happen if the company goes bankrupt? (That’s one of the best reasons to avoid investing in a single company’s shares, too.)
Diversify by Asset Class
Financial advisors often recommend diversifying your investment portfolio by including different investment types called asset classes. The most common assets include:
- Mutual funds
- Index funds
- ETFs (exchange-traded funds)
- Real estate
Getting mutual funds is one of the best ways to diversify your holdings. Unlike individual bonds or stocks, mutual funds are professionally-managed portfolios.
Owning a variety of mutual funds can help you to diversify these holdings.
Index funds, ETFs, and real estate funds may also be part of your growth strategy.
How to Diversify Your Investment Portfolio for Retirement ?
Start by selecting the best retirement account.
If you’re an employee, perhaps the best place to start is your employer’s 401(k) or 403(b) account to evaluate your plan options. These workplace retirement accounts offer lots of advantages, including tax breaks.
Your employer may offer the option to automate your savings through payroll deductions. They may also offer matching funds. For instance, if you elect to save three percent, your employer matches your contribution with an additional three percent!
If your employer doesn’t offer a retirement savings plan or you work for yourself, you can fund a Roth IRA at your broker or investment dealer. Roth IRAs are funded with after-tax funds and your capital grows entirely tax-free. When you withdraw money from your Roth IRA in retirement, you don’t pay taxes on these funds.
Capitalization Sizes and International Funds
After you open a retirement account, you must select the assets in them. Depending on your risk tolerance, time horizon, and objectives, select:
Growth with income funds
These mutual funds typically include stocks of larger and established companies. These mutual funds are considered less risky than growth funds.
These mutual funds are comprised of the shares of growth companies. Typically, small to mid-capitalization companies’ shares are included. Growth funds are considered lower risk than aggressive growth funds.
Aggressive growth funds
These mutual funds are considered to have the highest risk—but also the highest potential rewards. Aggressive growth mutual funds contain the shares of small-capitalization companies and may include startup companies. Because these companies are often younger and less established, they’re likely to be more volatile than the broad stock market.
International mutual funds
International funds include shares of companies from outside of the U.S. market. Not all stock markets perform in unison so, if the U.S. market suffers a downturn, your international stocks might outperform in the interim.
Diversify your investment portfolio for retirement by spreading your money in these four fund types. If one mutual fund type doesn’t do well, other mutual fund types may deliver positive results.
Why You Should Rebalance It ?
The financial markets continuously change. Your investment portfolio for retirement will also change and respond to how your asset values rise and fall. Rebalancing your portfolio is a good idea. Meet with your financial advisor regularly to adjust your allocations.
Your goal is to keep your finances invested over the long term. Prepare the stay invested during a downturn. Put only what you can afford to leave in your retirement account.
The Bottom Line
Many investors want their ideal investment portfolio for retirement to allow them to live in reasonable comfort after employment ends.
Your investment portfolio should ideally reflect a balance of growth, income, and “safe money” assets that are appropriate for you. It’s essential to understand there’s no one-size-fits-all retirement portfolio.
Your ideal portfolio for retirement is based on your time horizon, risk preferences, and investment objectives.
Generally speaking, invest in growth assets until midlife. At that time, your objectives may shift towards generating more income and less capital risk.
Your risk tolerance differs from others, too. If you plan to work until later in life, you may have the ability to assume greater financial risks longer than those who retire earlier.
Your ideal portfolio to live a happy retirement is always dependent on you – and always reflects the amount of capital you have to invest, your risk tolerances, and your time horizon to reach your goals.