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How to Build the Best Retirement Portfolio

One of the main goals of retirement planning is to construct a portfolio that will meet your income needs in retirement. Building this portfolio requires balancing the amount of risk you take in your portfolio with the need for long term growth. 

On the one hand, a retirement portfolio must generate enough long-term growth to overcome the effects of inflation, which erodes the purchasing power of your money over time. However, some people are hesitant to invest too heavily in stocks, which are historically more volatile than bonds or cash, at least in the short run.

As a result, a common strategy is to invest in a mix of assets designed to seek a certain return at a level of risk you deem acceptable. This is also referred to as risk-adjusted return. 

Here, we’ll go over what to consider when constructing the right mix for your retirement portfolio.

Read More: Retirement Readiness: How to Prepare for Life After Work

As you build your optimized retirement portfolio, you can use secure financial tools like Personal Capital to analyze your investments based on your risk tolerance, time horizon, and other relevant factors, such as sending kids through college or paying off your mortgage. Learn more about the free financial dashboard.

What is a Retirement Portfolio?

Broadly speaking, a retirement portfolio encompasses all of the financial assets you own that will be devoted to supporting your lifestyle after you retire. This includes retirement savings accounts like IRAs and 401k plans. Additionally, a comprehensive retirement plan factors in other assets and resources that are available to your income plan, such as taxable brokerage accounts, Social Security benefits, pensions, annuities and real estate holdings.

Read More: Retirement Definition and Helpful Tips

It’s time to get a plan. You can start by estimating your retirement portfolio.

Constructing a Retirement Portfolio

So how do you go about constructing the best retirement portfolio for you? Start by focusing on these areas:

  1. Estimate your desired retirement income: How much you want to spend each year in retirement will have a material impact on how your portfolio might be allocated. 

Start by looking at how much you spend today. Consider the expenses that could go away in retirement, such as those related to your work commute or a mortgage that will be paid off before you retire. Also consider expenses that may go up in retirement for things like hobbies and travel. 

Then, consider income sources outside of your retirement portfolio that will help meet your retirement expenses, such as pensions, Social Security benefits or part time work. This exercise should give you an idea of how much income your portfolio will need to generate.

  1. Determine your time horizon(s). Think of your time horizon in two ways. First, what is the timeframe until your desired retirement age? You should know how many years you have to save and grow your portfolio, as well as how much you should be saving in those working years.

Second, what is your life expectancy? Said another way, how many years do you anticipate living after you retire? Retirement can commonly last two to three decades (or longer!). Your portfolio needs to be invested in a manner that can reliably provide you income for your entire life.

If you are relatively young and have decades until you plan to retire, you can probably afford to assume more risk with your retirement investments. This is because you have more time to overcome market volatility and potentially recoup short-term investment losses. However, if you are older and nearing your planned retirement date, you might want to start shifting your retirement plan asset allocation to a more conservative mix or building up a larger cash reserve since you have less time to recover potential market losses.

  1. Assess your risk tolerance. Everyone has a different level of risk tolerance, so there’s no right or wrong answer to this question. One person might be comfortable with a high percentage of riskier investments like stocks in her retirement portfolio while another person might prefer to keep the stock allocation of his portfolio lower.

If high levels of stock market volatility make you uneasy and cause you to lose sleep at night, you may have a low risk tolerance and might find a portfolio more heavily weighted toward bonds and cash more tolerable. But if you focus on the long run and can ride out times of volatility without losing too much sleep, you might be comfortable with a retirement portfolio weighted more heavily toward stocks.

Getting the Mix Right

Based on your analysis of the factors described above, you can begin constructing your retirement portfolio with asset classes like stocks, bonds, alternatives and cash. For example, if you are in your 20s or 30s, have decades until you plan to retire and have a relatively high risk tolerance, you might choose an asset allocation that’s heavily weighted toward stocks.

If you’re older and on track to save, or have already saved, enough to meet your desired retirement income, you might choose an asset allocation that’s a little less risky. This allocation might have more invested in bonds or cash than in your younger years, as you may find yourself more concerned with preserving what you have accumulated, as opposed to growing it. 

However, it is important to not base your allocation decisions on age alone. There are many general rules of thumb you will hear today, such as choosing how much to invest in stocks or bonds based on your age. While these rules are easy to understand, they are oversimplified and may or may not be applicable to your personal situation. 

The good news is you don’t have to make this evaluation on your own. Working with a trusted financial advisor can provide confidence and peace of mind that your portfolio is appropriate for you.

Managing Your Asset Allocations

Over time, you may need to shift your asset allocation based on changes in your stage of life and future goals. Many financial experts recommend an annual retirement portfolio review to determine what kinds of adjustments may be needed to remain on track for a financially successful retirement.

On your own time, you can explore your retirement portfolio with the Personal Capital Retirement Planner. Millions of people use the interactive tool to see what they can do to improve their chances of retirement success. Using this tool, you can:

  • Run different scenarios in a side-by-side comparison
  • Review the impact of large expenses on your retirement
  • Add sources of income to your overall plan
  • See how your retirement plan would have fared in historic market downturns
  • Get a spending plan for retirement

You may also be qualified to speak with a Personal Capital fiduciary financial advisor, who can provide more detailed guidance when it comes to constructing the best retirement portfolio.

Ready to track your retirement portfolio?

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The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Dan Kellogg, CFP®, RICP® is a Senior Financial Advisor and Financial Planning Income Specialist at Personal Capital.
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