How to Build an Investment Portfolio for Retirement

Building an Investment Portfolio to Retire Happy Couple with Coins and Plants Featured Image

Everyone plans to stop working eventually. For most people, retirement has some sort of investment portfolio involved.

Sure, there are many moving parts, but most professionals will tell you it’s the best way to hit your goals. So how exactly should you start investing and preparing to hang up your hat?

Here we will explain how to build a retirement investment portfolio and all of the things to take into account as you advance in age.

What is a Retirement Investment Portfolio?

A retirement investment portfolio is a collection of assets designed to provide an income when you’re done working.

Retirement investing encompasses practically all types of assets, from stocks and bonds to real estate, commodities, and 401ks or IRAs. Your portfolio will change as the years advance because of a shift in time horizons and moving targets.

As an investor, you must set retirement goals, diversify your investments as much as possible, and apply discipline. All these things are vital to giving yourself a comfortable lifestyle when you are old enough to leave the work-a-day world and still young enough to enjoy life. 

Setting Retirement Goals

Everyone may have different goals for retirement because lifestyles and how to approach retirement years are different.

Do you want to travel, enjoy certain hobbies, spend time with old friends and loved ones, relocate to a different home, or possibly earn part-time in something you always wanted to do? These may be part of the plan, and the goals may change over the years.

Timing Matters

You need to consider when you want to retire. The difference in careers and lifestyles plays a role, as does the fact that life expectancy advances with time. The general rule is to have enough money to live for 30 years after you retire.

So, how much money is that? Experts have devised a formula that calls for 80% of your yearly income.

You can adjust that according to your expected income from Social Security, pensions, or part-time earnings. Then divide that number by 4%.

If you want to live on $80,000 a year during retirement, you want to have $2 million stashed away ($80,000 /0.04) when you leave your career.

You Need to Understand Risk Tolerance

All investing involves risk. You should be aware of how much of it you are willing to take on and how your retirement portfolio reflects that goal.

When you are young, you can afford to take a little more chance by investing more in growth stocks that may swing in the short term.

The closer you get to retirement, you will want to be more conservative. In later years, it’s common to put less money into stocks and more into fixed-income assets such as bonds and high-yield savings.

Choosing Appropriate Asset Classes for Retirement

A good retirement investing portfolio involves balancing asset classes. These are the different types of investments grouped together.

  • Savings accounts, money market funds, and treasury bills are in a class called cash and cash equivalents.
  • Bonds are in the fixed-income class
  • Stocks make up much of the equities class
  • Oil, gold, and agricultural goods come under the commodities classification.
  • There are also alternative asset classes for things like real estate, art, antiques, and other collectibles that maintain value.

Each asset class has a different role in an investment portfolio. Your age and distance from retirement determine how much weight you should have in each group.

For example, equities such as stocks are considered more aggressive in the short term, but they grow reliably over the long run. So, they are more suited for younger people and should make up most of an early investor’s portfolio.

More conservative assets such as bonds and cash should take up more of your portfolio the older and closer to retirement you get.

Diversification is Important

All investment portfolios should be diversified. That is combining distinct asset types to limit the risk of losing out when any one asset underperforms.

With an investment portfolio for retirement, the key is correctly balancing the weight of different assets.

Investment vehicles such as 401ks and IRAs cover diversification to a certain extent. But even these investment types need adjusting over time to fit changing goals.

Rebalancing Strategies

It is a good idea to check the asset allocation of your retirement investment portfolio regularly, usually once a year.

As the years pass, you will want to shift the weight of your portfolio away from more aggressive and volatile holdings like stocks into something stable like bonds, money market funds, or a high-yield savings account.

Early Retirement Portfolios

When you begin saving in your 20s, investing more heavily in stocks, mutual funds, and even real estate is best. Stocks should take up 70% to 80% of your portfolio, with the rest in other types of assets.

You can even look into real-estate investment trusts (REITs) as a good way to get into various types of real estate without putting a ton of money down.

Mid-Life Retirement Portfolios

By the time you reach age 40, you are well into your career. If you’re a millennial planning for retirement, you should consider corporate bonds and preferred stock offerings. About 60% of your holdings should be in stocks, 30% in bonds, and the rest in savings and other less aggressive instruments.

Late-Stage Retirement Portfolios

You should maintain stocks as a more significant portion of your portfolio even into your 60s. But shift more into bonds and savings as you age.

When you reach age 60 and are still at work, keep about 40% in stocks, 50% in bonds, and 10% in cash equivalents such as savings.

By age 70, most people are in the home stretch toward retiring, but if you are still investing into your 80s, you should be 20% in stocks, 50% in bonds, and 30% in savings.

Take Advantage of Tax-Advantaged Retirement Accounts

Taxes being a necessity and a certainty, having at least a few investments that ease the pain of taxes in your portfolio is a good idea. For most people, these come in the form of an individual retirement account (IRA) or a 401k.

  • An IRA is a tax-advantaged account in which you can choose investments.
  • A 401k is an employer-related contribution, sometimes matched to a certain percentage, overseen by a fund manager.

Both have their advantages tax-wise. But there are other investments, such as municipal bonds, state-sponsored college savings plans, and 403b accounts, that offer tax advantages.

The Importance of Regular Contributions and Staying the Course

It’s one thing to have a plan, another to execute it. Any retirement investment portfolio requires a regular diet of contributing to be effective.

You may start by contributing small amounts and see that you’ll be able to put away more as your income provides. The important thing is to put in money regularly, usually monthly, and contribute as much as you can afford.

Don’t Take Early Payouts

Don’t withdraw the money until you retire. You should have an emergency fund set aside to help you stay on course when unforeseen expenses arise.

The market will fluctuate, and you may want to shift money among assets within your retirement portfolio. But you shouldn’t let market swings deter you from regularly contributing.

Other Variables to Consider

Few things are certain in life, and one of the big reasons we save is to prepare for uncertainties. With a retirement investment portfolio, there are a few variables to take into account:

  • Social Security is its own retirement account. But it is government sponsored and reliant on the whims of politicians. Be aware of Social Security law changes and how they affect your savings future.
  • Taxes are another element of savings dependent on congressional and legislative action. Make sure you know how tax law changes will enhance or detract from your savings habits.
  • Having a child changes your budget drastically, but it is essential to maintain structure in your retirement portfolio. When you have a child, you should set up a separate long-term account. An IRA is a typical solution, but college education plans like state-sponsored 529s also exist.
  • Life expectancy and quality of life are unpredictable elements of your future. Since life expectancy grows with time, you should plan your retirement portfolio for living into your 80s. And you should be insured for debilitating illnesses, injuries, and long-term care.

The Wisest Investments You Can Make

Saving and properly investing money are essential aspects for any financially responsible person. An investment portfolio for retirement is the most vital tool for saving up for the future.

It requires a lot of asset adjustment and planning. But the most crucial element of retirement investing is discipline – the discipline to contribute consistently and stay on course with your goals.

At StockMarketEye, we know this. And we’ve designed the most effective tools to help you monitor and maintain your portfolio. Take a tour through StockMarketEye’s comprehensive investing tools, and you will see how easy it is to stay on top of your portfolio. A subscription may be the wisest investment you’ll ever make. 

Webster Lupton Avatar
Webster Lupton Webster Lupton is a former newspaper writer, editor, and author with experience in trading stocks and general investments. He likes sports, the outdoors, and bird-watching.