A thoughtfully constructed portfolio is crucial for securing the income needed to support your retirement. While the idea of creating one on your own might seem daunting, it doesn’t have to be overwhelming. Establishing a solid foundation requires only a bit of knowledge and research. For those new to investing, consider starting with some of the best investment books for newcomers. With this in mind, follow these general steps to develop a robust retirement portfolio and manage it for the best possible results.

Define Your Financial Goals

To reach your financial destination, you need a clear understanding of where you want to go. Your financial goals serve as the milestones on your journey to retirement. Determining these goals involves understanding what you want to achieve with your money during retirement, how much time you have to prepare, and how long you expect to rely on your retirement savings. From this point, you can work backward to identify the steps necessary to achieve these objectives.

Additionally, you must balance your risk tolerance with your risk aversion. How comfortable are you with the ups and downs of investments in exchange for potentially higher returns? Generally, a higher risk tolerance can lead to achieving your goals more quickly, while a higher risk aversion might slow down the process. Once you have these details sorted out, you can choose the financial instruments that best align with your plan.

If you need assistance in answering complex questions about your longevity or retirement readiness, utilize free online retirement planning resources to help you get prepared.

Open Retirement Accounts

A retirement account is a tax-advantaged savings vehicle designed to help you grow your money steadily and relatively securely. There are various types of retirement accounts, with workplace retirement accounts and Individual Retirement Accounts (IRAs) being among the most well-known. Both types function similarly: you select investment options, fund your account, and the account’s value grows based on the performance of these investments. The main differences between them are:

• Sponsorship: IRAs are typically not employer-sponsored, whereas workplace retirement accounts are.
• Contribution Limits: In 2024, the contribution limit is $23,000 per year for a workplace retirement account and $7,000 per year for an IRA.

Although these accounts fall under a broader category, they each offer a variety of options with different stipulations and benefits. It’s essential to familiarize yourself with all available options to make an informed decision.

Diversify

In addition to a retirement account, you’ll need other assets to build a well-rounded portfolio. When selecting these assets, focus on diversification. Diversification is a strategy that involves spreading your investments across a wide range of asset types. Ideally, you want a mix that includes both liquid and illiquid assets. Beyond stable resources like cash and precious metals, consider adding assets such as real estate, stocks, bonds, and insurance products.

The philosophy behind diversification is that stable assets can offset potential losses from more volatile investments. For instance, if the stock market underperforms or the housing market declines, the gains from your more stable assets can help balance out these losses.

Choose the Right Assets

The assets you choose and the proportions of each asset type in your portfolio should align with your financial goals. For example, if you have just 10 years until your intended retirement date, you might consider increasing the proportion of higher-risk, higher-reward assets such as stocks to ensure you reach your minimum wealth threshold in time. However, this approach also exposes you to greater potential losses.

If you are concerned about running out of money in retirement, you might want to establish a safety net that guarantees income. Fixed annuities can serve this purpose. These are retirement vehicles sold by insurance companies that offer a set rate of return. You fund the annuity with a lump sum or a series of contributions, and the insurance company invests the money to grow the account tax-deferred. You can then choose to convert the account into regular payments during retirement.

Adjust

As retirement draws closer, your needs may gradually change, and your portfolio should adapt accordingly. At least once a year, review your financial goals, assess your portfolio, and evaluate how well it meets your objectives. If you identify areas needing adjustment—whether it’s a shift in portfolio mix, a different stock, or a new fixed annuity—make those changes. This proactive approach ensures that your actions remain aligned with your needs and objectives.

For fine-tuning your retirement portfolio, consulting with a financial professional is highly advisable. They can provide tailored strategies to achieve the appropriate diversification mix and maximize your returns.