How to Design Your Retirement Portfolio at Any Age

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What are the best investments for your retirement portfolio? That depends mainly on how much time you have until you want to retire – your time horizon. That’s the number one factor ruling your investment strategy.

When you have plenty of time until retirement, you can shoulder a ton of risk for the chance enormous rewards. As your time horizon shrinks, you’ll start shifting gradually from aggressive growth toward income preservation.

Before you start making investment choices, you’ll need to get comfortable with two important investment concepts: asset allocation and diversification. A lot of people (including many financial professionals!) think these are the same thing. They’re not.

Asset Allocation

Asset allocation is about different types of assets:

  • Stocks
  • Bonds
  • Cash
  • Real estate
  • Commodities (like oil and gold)

The allocation part refers to how much room each asset type takes up in your portfolio. For example, you could choose to hold 80% stocks, 10% real estate, 5% bonds, and 5% cash.

You’ll check in on your portfolio regularly (at least once a year) to make sure your actual asset allocation  still matches your strategy. As investment values change, they can throw your allocations out of whack. For example, after a stock market downturn, your asset allocation could look very different even though you didn’t actively change anything. Lower stock prices could, for example, turn your 80% intended allocation into 75% of your portfolio.

Diversification

Diversification involves choosing a variety of investments inside each asset class. So instead of owning one single stock in your stock portion, you’d spread that out over many different stocks. Ideally, you’d include different-sized companies, different industries, and even different countries. Diversity helps offset risk, because in virtually all circumstances, some types of stocks will tank while others skyrocket.

The easiest, cheapest way to diversify (own a whole bunch of different investments) is to focus on index mutual funds and exchange-traded funds. You can find funds for every kind of asset: stock funds, bond funds, real estate funds, etc. When you own even ONE share of a fund, you own pieces of hundreds of investments – instant diversification

Your strategy will include both asset allocation and diversification. That means you’ll own different types of assets and many different investments within each type. Here are some basic guidelines for what a solid retirement portfolio would contain based on your time horizon.

To learn more about designing a retirement portfolio to fit your unique situation, check out my book Retirement 101.

Time Horizon: 25 to 45 Years to Go

When you have tons of time on your side, you can go all in on aggressive investing. With a time horizon of more than 25 years, you can dedicate 90% to 100% of your retirement portfolio to stocks. The balance can be split between real estate and bonds.

Remember, your retirement portfolio can stand temporary dips in investment values because it has decades to recover… and bounce back even stronger.

So if you can’t stomach the ups and downs of market volatility, don’t watch.

Playing it safe now might reduce your risk of loss, but it will definitely increase the risk that your money won’t grow big or fast enough to provide you with a secure retirement. Avoid the temptation to look at your retirement accounts when the markets are tanking. Stick with regularly scheduled check-ins. If your plan is a good plan, it will survive the market rollercoasters and come out stronger on the other side.

This Is the Time to Stock Up on Stocks

Over the long term, stocks have produced higher returns than any other asset class. Yes, there have been catastrophic drops along the way, but the market has always gained back its losses and soared to new heights.

Having a diversified stock portfolio can help reduce the impact of market declines. That’s because even during the worst downturns, some companies and industries will hold steady… and some will do amazingly well.

Investing in index funds and ETFs, especially ones with super low expense ratios, is the easiest way to stay diversified. With plenty of time to spare, consider including these stock fund categories in your retirement portfolio:

  • Aggressive growth
  • Emerging markets
  • Small-cap and mid-cap stocks
  • Specialty funds

Before you invest in any fund, do some research! Good resources include:

Your brokerage firm – the company that holds your IRA or 401(k) account – probably offers investment screening tools and other resources you can use to research your fund options before you buy any shares.

Use Real Estate and Bonds as Anchors

Keeping a toehold in some other types of assets can help soften the blow of stock market downturns. There are hundreds of bond funds and dozens of funds that hold REITs – real estate investment trusts (sort of like stocks for real estate holdings).

Since the point of this part of your portfolio is stability, steer clear of junk bonds, niche funds, and high-risk real estate holdings.

You can learn more about REITs and how real estate can expand your portfolio in my book Real Estate Investing 101

Tax Tip: Don't bother with municipal bonds in your retirement accounts. They’re tax-exempt anyway, so you won’t really get any of the extra retirement tax benefits here.

Time Horizon: 10 to 25 Years to Go

Even if you got a late start, you still have some time to build up a substantial nest egg with maxed-out savings and smart investing.

As you’re moving closer to your retirement age, you may want to take a slightly more conservative approach with your portfolio. At this point, your asset allocation could start downshifting toward 65% to 90% stocks with the balance split between real estate and bonds.

Where your allocations end up depends on a combination of your:

  • overall net worth (can you please link to the post about net worth)
  • retirement investment performance so far
  • how much time you have left before you retire

With a shorter time horizon, you’ll start moving toward income, stability, and security rather than explosive growth. That doesn’t mean you should sell off all the stocks and stick with “safe” investments. After all, even if your retirement will begin in 10 years, it won’t end there… and your nest egg will have to support your whole future.

Stock Shifts

With at least ten years to go before you, your portfolio can handle a 100% growth focus for the stock portion. Your investments will have plenty of time to rebound from downturns with the continued opportunity to build value.

If you’re uncomfortable with risk, you could start moving some of your portfolio out of highly aggressive investments without giving up growth potential all together. Look for index funds or ETFs with these descriptions:

  • broad market funds
  • value funds
  • growth funds (without “aggressive” in the name)
  • dividend growth funds

Don’t move out of aggressive growth completely, though. With this much time left, keep a big helping of your stock pile invested in aggressive growth… as you can stomach.

Build In Balance with Bonds and Real Estate

As you increase the portion of your portfolio allocated to bonds and real estate, you’ll want broader diversity in those investments.

On the bond side, go for a mix of:

In addition to including different types of bonds, you’ll also want to include bonds with different maturities (how long until the bonds come due).

You’ll also want to diversify your real estate investments with different types of residential and commercial REITs. REITs normally specialize in one type of real estate, such as:

  • office buildings
  • warehouses
  • student housing
  • residential rental apartments
  • hospitals and medical centers

A single REIT can hold many different properties, but you’ll still want to look into a mix of REITs or some REIT funds for broad exposure to different types of real estate in different geographical areas. (You can research different REITs here.)

You can learn more about REITs and how real estate can expand your portfolio in my book Real Estate Investing 101

Time Horizon: 1 to 10 Years to Go

When retirement is right around the corner, you’ll want to make a sharp turn toward wealth preservation. That doesn’t mean ditching stocks all together. After all, you still have decades ahead of you, so your nest egg still needs some growth potential.

With less than 10 years to go, you’ll tone down your most aggressive investments to reduce the risk of big losses and add in safer, steadier choices. Your asset allocation model will be more focused on maintaining value and adding income, but have enough growth stocks to keep building up your nest egg. Aim for keeping 35% to 65% in stocks, and reduce the percentage gradually as you get closer to retirement.

Even if you’ve been sticking with DIY investing, this is a good time to talk to a fee-based fiduciary advisor. These pros will look at your whole financial situation (including your non-retirement assets, debt level, budget needs, etc.) and make recommendations specific to your retirement portfolio.

If you don’t already have a fiduciary financial advisor that you’re comfortable with, you can find a pool of professionals to choose from here. Get referrals from people you know who love their advisors. Or check in with your CPA to see if they know someone you might click with.

Make sure you are 100% comfortable with the advisor before you hire them. You want someone who will listen to you… who will take your goals and concerns into account… and who won’t just type some numbers into a spreadsheet and give you a one-size-fits-all plan.

If you feel like you need to supercharge your savings…

As soon as you turn 50, you can start making catch-up contributions to your retirement accounts.

Every year, the IRS limits on how much money you can stash in your IRA or 401(k). When you hit 50, you can put in more. For 2020, you can put an extra $1,000 into an IRA or an extra $6,500 into a 401(k). Even if you can’t swing the full catch-up, contribute as much as you can to help improve your future financial security. The contribution caps and catch-up amounts change every year, so check in with the IRS to see the latest info.

Steadier Stocks

Now that retirement is in sight, you want reduce the risk of losses without sacrificing sustained growth. To accomplish that, you’ll start moving out of super aggressive stock investments and into stock funds that prioritize stability and income. These funds tend to hold long-established companies with strong market positions that can weather economic downturns.

You won’t see explosive growth with these investments, but you will see slow, even increases in value. Plus, you’ll also start getting reliable dividends that can provide steady income once you cross the threshold into retirement.

Focus On Income

This close to retirement, you want to stock up on investments that produce income.

On the bond side, that can include choices like: 

  • mid- and short-term US bond market funds
  • TIPS (Treasury Inflation-Protected Securities)
  • high-yield corporate bond fund (look for the most highly rated of these that you can find, and keep this to a small percentage of your bond holdings)
  • REIT funds with growth potential

Building up income sources in your retirement portfolio will provide cash that doesn’t involve selling off assets – or at least will shrink your nest egg more slowly.

Want to learn more about preparing for retirement? Check out my book book Retirement 101.

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