Creating A Varied Investment Portfolio For Your Dream Retirement
Estimated reading time: 9 minutes
What does your dream retirement look like? Are you traveling the world? Do you spend your days on a beach somewhere (my personal dream)?
No matter what retirement looks like to you, creating a varied investment portfolio will help you build up the savings to put your dream (no matter what that may be) within your reach.
Here are three methods to help you build a varied portfolio and set up for retirement success!
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Why It’s Critical to Diversify with a Varied Investment Portfolio
A dream without a plan is just a wish. So, whatever your dream retirement looks like, you’ll need to plan accordingly. According to AARP (and most other retirement advisory sources), you need at least $1 million to $1.5 million saved to live comfortably in retirement.
What does this mean? Well, in a nutshell, plan on saving 10-12 times your final salary in savings if you want to retire by age 67.
To boost your retirement, you need to ensure that your investment portfolio is diversified. This means you invest in several ways, rather than putting your money all in one basket. By creating a varied investment portfolio, you’ll rest easy knowing that you’ve appropriately allocated your money amongst several asset classes, versus just one asset class.
In other words, don’t allocate all of your money into just one particular asset class, such as fixed low-interest bearing accounts. Don’t put all your cash in the stock market or tie up all your money in real estate investments. You should allocate your portfolio between several asset classes, which is based solely on your risk tolerance.
Now, if you aren’t sure where you fall on the risk tolerance spectrum, check out Is Your Risk Tolerance Holding You Back from Investing? Risk tolerance takes in several factors, including time until retirement, current financial status, debt, and more.
So how should you be diversifying based on your retirement timeline? The general rule-of-thumb is the younger you are, the more risk you can tolerate concerning the ups and downs of the market. The further away you are from retirement, the more time you have to recoup your losses as well as rebalance when appropriate.
Again, you must factor in your risk tolerance no matter what you’re investing in. If the volatility of your investment(s) is keeping you up at night, you’re in the wrong investment.
It’s important to note some investments have what’s called an inverse relationship, or, as known as: the seesaw effect. As one investment goes up, another investment will go down. So when interest rates are on the upswing, during that same timeframe, bond prices are often tanking.
Because of this inverse relationship, you want to build a diverse and varied investment portfolio. If some of your investments are underperforming (or not performing quite as well as you had hoped), there’s a higher chance your other investments will start exceeding your expectations to create the balance you need.
Investing with Your Employer-Sponsored Qualified Retirement Plan
The most common way people leave free money on the table is by not participating in their employer’s 401(k) plan, especially if the 401(k) plan offers a company match! Don’t be this person!
According to the Financial Industry Regulatory Authority (FINRA), taking full advantage of the match literally doubles your savings, even assuming no increase in the value of your investments.
Why is it so important that you don’t leave those company match funds on the table? Let’s do the math — say your company match is 4%. If you contribute 4% (pre-tax) from your paycheck into your 401(k) account, your company will match your contribution up to your 4% contribution! You’re doubling your investment, and this is what we call FREE MONEY!
Now, if you’re contributing 10% into your 401(k), your company will still only contribute up to their 4% match cap, but it’s a good deal, nevertheless. My suggestion is to find out if your employer offers a company match. That matched amount should be your MINIMUM target for contribution.
Remember, if you aren’t contributing up to the matched amount, you are essentially giving away free money (translation: more retirement dreams) year-after-year.
Employee 401(k) contributions for 2022 top off at $20,500 — a $1,000 increase from the $19,500 cap for 2021 and 2020. There’s no better time to start investing in your 401(k)! These new contribution limits also apply to 403(b), Thrift Savings, and most 457 plans (other employer-sponsored retirement options). If you have a 457 plan, check with the administrator of your retirement plan to see if this increase applies to you.
Since contributions to your employer-sponsored qualified retirement plan are pre-tax, the plan is considered “tax-deferred.” Meaning, your overall taxable income is reduced, which you will more than appreciate come tax-time. In addition to your tax-deferral now, you won’t need to pay taxes until you start taking distributions later.
Now, if you have a retirement plan through your employer but aren’t sure of the type, check out my post, 7 Retirement Plans Explained. This post should give you clarity on the various types of retirement plans available, in addition to the benefits that each plan offers.
A 401(k) or another employer-sponsored qualified retirement plan should be part of your healthy, varied investment portfolio. If you don’t have an employer-sponsored plan, though, don’t fret. There are several other investment options.
Planning for Retirement with a Roth IRA
Another option for retirement savings is through a Roth IRA. The Roth is an excellent addition to your varied investment portfolio.
There’s a (BIG) misconception that once we hit retirement, we’ll suddenly find ourselves in a lower tax bracket. I’m here to tell you, sometimes, this just isn’t the case. It all depends on your taxable income when you retire, and as you’re taking distributions.
One of the biggest arguments for creating a varied investment portfolio is to increase your ability to stagger your retirement funds. To minimize your taxable income once in retirement, it’s important to know which investment accounts to pull from first.
If you aren’t drawing your retirement income from your most tax-effective investments first, you may even increase your taxable income once retired. It’s essential to be wise as you create a varied investment portfolio.
Here’s where we need to touch on the Roth IRA. The Taxpayer Relief Act of 1997 introduced the Roth IRA, and it’s been nothing less than a massive hit since day one.
Roth IRA contributions aren’t tax-deductible as they are for the Traditional IRA, but the biggest win is that any distributions taken from the Roth IRA are not added into your gross income! Believe me, this tax-free distribution will really help when you hit your retirement years.
The contribution limits are the same with the Roth IRA as the Traditional IRA, but what individuals love is that anyone, regardless of age, can establish a Roth IRA, provided their income levels don’t exceed certain levels. It’s an excellent option for most people.
Even if you have an employer-sponsored retirement plan, it has nothing to do with eligibility for a Roth IRA, contributions can be made at any age, and don’t have to cease at age 70 ½. A Roth is a great addition to your varied investment portfolio for retirement.
Investing on Your Own to Vary Your Portfolio
Even though you may have both an employer-sponsored qualified retirement plan (401(k)) AND an IRA, you may want to consider building your varied investment portfolio with additional after-tax investments as well.
It’s especially important when your employer doesn’t have a retirement plan to offer — now is the time to start exploring retirement alternatives!
So, how do you know where to invest? If you’re more risk-averse, you may want to a High-Yield fund or Bond fund. If you prefer more of a stable investment, explore Balanced funds. If you’re all about the idea of higher growth potential, consider anything from Growth funds to International funds — just be prepared for the wild ride!
Reach Your Dream Retirement
Monitoring the progress of your retirement is a lot easier than you might think. If you still feel overwhelmed and don’t know where to start, check out my post, The Busy Woman’s Guide to Growing Your Money. This takes your big picture, long-term goals, and breaks them down into smaller micro-goals and manageable steps.
By reviewing your return on investment (ROI), you’ll know immediately if you’re on the right track in reaching your dream retirement.
Lastly, you may also find that your retirement goals and your risk tolerance change with time, and that’s ok! What makes sense for you now will most likely change down the road. What’s most important is that you are happy and comfortable with what your strategy is now.
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Once you get your budget rolling, check out my post on 6 Simple Steps to Get Financially Organized. This post also includes a helpful checklist available in my Resource Library (free to access).
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