How to Structure Your Retirement Portfolio
One of the biggest problems facing today's aging baby boomers is a double-edged sword--people are living longer, but that means a retirement fund must stretch that much further. Gone are the days when people could dump their equities at retirement. Retirees still need stocks, even if they pose a risk. Anticipated withdraw rates, equities/income ratios, and your age and life expectancy combine to dictate your retirement portfolio structure.
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Instructions
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Establish a "magic number." While experts disagree on the importance of such a figure--popularized in books and TV ad campaigns--determining a concrete retirement goal will at least provide a tangible starting point. The "number" is simply an estimate of how much money you'll need to maintain your standard of living upon retirement. According to the financial group ING's calculations, a 55-year-old single man making $100,000 a year, who wants to retire at 65 and plans to live to age 85, needs $1,257,193 at retirement to accomplish his goal.
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Hold sufficient cash reserves in money funds and CDs. This pays for near-term expenses. Consider using 25 percent of this fixed-income allocation to buy a ladder of high-quality bonds, CDs and a low-cost fixed annuity to pay out for a period of five to 10 years--when many retirees are active and have more expenses.
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Diversify holdings that aren't needed immediately. Stocks, bonds and real estate, especially over a long period--30 years is not an uncommon retirement nowadays--provide long-term inflation-fighting investments with money not needed over the next five to 10 years. This is a common-sense strategy to meet the main objective of your retirement portfolio--preserving funds to last throughout your lifetime while not impinging upon the money you need for current living expenses.
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Rebalance your portfolio. You need to constantly review the mixture and ratios of your holdings. Because stocks historically and over long periods outperform bonds, for example, ignoring a well-planned portfolio for years is irresponsible. According to U.S. News & World Report, if you began with a 60-30-10 mix of stocks, bonds and cash on December 31, 1984, and never rebalanced your account, 15 years later, your 60 percent stock-holding ratio would have skyrocketed to 86 percent. This also is essential as your needs change. You may develop medical problems or other cash needs that require an adjustment from equities funds to shorter-term cash instruments to provide more income.
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Get more involved in your own portfolio management to reduce fees, or consider instruments such as index funds--low-cost mutual funds--which seek to spread risk through the grouping of stocks and bonds. You'll have more time once retired to take an active interest in your portfolio, and you can make beneficial tweaks. Maybe you're not happy with the performance of the stock portion of your portfolio. Instead of reducing your stock ratio, you can change its mix.
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Keep track of your withdraw rate. If you annually exceed your estimated yearly withdraw rate--even by a small amount, and especially early in your retirement--you can severely damage your long-term prospects. You may even have to adjust your overall retirement goals if your initial withdraw estimates were unrealistic.
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Tips & Warnings
Beware set-in-stone advice about such things as a 60-30-10 ratio for stocks, bonds and cash. Diversity and rebalancing are keys.
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