One of the primary goals of planning for retirement is to build a portfolio that will help you meet your post-retirement income needs.
Unfortunately, building a retirement portfolio is never easy. It often requires balancing the risks you take in your portfolio with your long-term growth.
An effective retirement portfolio should generate enough growth to overcome the negative effects of inflation, which may affect the purchasing power of your money in the future. Because of this, it is advisable to invest in a combination of assets that will give you an acceptable return.
If you’re not sure what to include in your retirement portfolio, here’s a beginner’s retirement guide to help you get started.
Ways to build a retirement portfolio
To successfully start building a retirement portfolio, consider the following:
- Keep an eye on your time horizon
Look at time horizons in two ways. The first is to know how long it takes to reach your preferred retirement age. This allows you to determine how many years you need to grow and save for your portfolio and how much you need to save in your working years.
The other is your life expectancy. Typically, retirement lasts two to three decades. For this reason, your portfolio should be set up in such a way that you can earn income during your lifetime.
If you’re young and don’t plan on retiring anytime soon, you can afford to take a higher risk with your retirement investments. Because you have time to protect your wealth from inflation and recoup your short-term investment losses.
- Know your preferred retirement income
Determining how much you’re willing to spend each year in retirement can impact how you allocate your portfolio. First, check how much you spend on a daily basis. Consider your expenses that may go away in retirement. These may include costs related to the mortgage or commuting to work. Also, consider the expenses that may be incurred in retirement for various things like travel and hobbies.
You should also consider the other sources of income outside of your retirement portfolio that would help cover your expenses, such as: B. Part-time jobs, pensions or social security benefits. This gives you an indication of how much income your retirement portfolio should generate to meet your needs.
On the other hand, if you are older and planning to retire as soon as possible, you may want to switch your retirement savings to a conservative mix or build a larger cash reserve since you don’t have much time to assess a potential market recover losses.
- Assess your risk tolerance
A person’s risk tolerance can vary widely. While some people like to invest more in riskier assets like stocks, others don’t.
If the stock’s high market volatility is making you anxious and keeping you up every night, you have low risk tolerance and your portfolio may be leaning more towards cash and bonds. However, if you are comfortable with volatility, you have a high tolerance and can be content with a portfolio that is more stock-focused.
- Diversify your investments
The best approach to building a retirement portfolio is to hold a mix of investments that offer you the best possible returns at a level of risk you are willing to take. This process is called asset allocation.
In general, asset allocation involves risk diversification, which is crucial as each asset class performs differently in different economic conditions. Once you have spread your investment capital across multiple types of investments, you can effectively manage your retirement portfolio and deal with the ups and downs smoothly.
During your retirement, you may want to adjust your asset allocation. For example, you may shift your money to other investments as your lifestyle changes or as economic conditions change. For best results, consult with an asset allocation expert to learn how to invest for retirement and get the most out of your existing investments.
What Are the Benefits of Building a Retirement Portfolio?
Creating a retirement portfolio has several benefits. One of them is that you can create a more stable base for your future. The returns you can earn from your retirement portfolio can help you live a life with a better income and supplement your Social Security benefits.
If your retirement portfolio is well diversified, it can also protect you from market volatility by balancing different income brackets. If one asset type falls in value, your other assets can fill the gap. In this way, you can secure a stable income even after years of retirement.
The key to building a retirement portfolio is knowing your risk tolerance and determining the right mix for you based on your time horizon, needs, and age. Over time, as your future goals and life stage change, making necessary adjustments to your portfolio will help you stay on track and enjoy a financially successful retirement.