How to Build a New Retirement Portfolio

Building a portfolio takes planning and execution, like many other complex tasks.

Constructing a retirement portfolio is a lot like building a house. If you start with a strong foundation and a good plan, everything will come together the way you want. Time is the foundation -- the longer you have, the greater likelihood of success. A good plan must be easy to execute and flexible enough to be adjusted to life's changes.

Instructions

Get Started Early

1. 

   You don't have to be a genius - just serious about committing to a retirement plan.

   When Albert Einstein extolled the virtue of compound interest as the eighth wonder of the world, he was noting the importance of time as the great accumulator in investing.

   Take twin savers, Jack and Jill, starting out on a career path at the same time. Jill starts saving 10 percent of what she makes, or $5,000, from age 21 to 30, earning 6 percent per year. Then she stops saving. Jack waits until he is 30 before starting his retirement plan and saves $5,000 a year for 30 years, earning 6 percent per year.

   At age 60, Jill has $400,000, having invested $50,000. Jack, having invested $150,000, has $420,000. Jill had time on her side.

2. 

   Many employers offers retirement plans to start you on the way to saving.

   If you work for a company that has a retirement plan, take advantage of it as soon as you are eligible, especially if there is a matching contribution by your employer. The majority of plans provided by employers now are called defined contribution plans. These include 401k plans, Simplified Employee Pension Plans and Profit Sharing Plans. Most will allow you to save up to 25 percent of your income. If you are self employed, individual retirement accounts and Simplified Employee Pensions are low-cost retirement savings plans.

3. 

   Asset allocation funds automatically adjust the investment mix for you.

   Even if you know nothing about investing in the stock market, a portion of what you save needs to be allocated for growth, which for most investors means investing in stocks. Department of Labor rules for company sponsored retirement plans require having "a broad range of investment alternatives." This means the plan must include investment options in stocks, bonds and money market funds. Many plans now offer asset allocation funds with conservative, moderate and aggressive allocation models that balance the investments for you.

4. 

   Dollar-cost averaging lowers your long-term cost and increases your long-term profits.

   One way to smooth out the inevitable daily fluctuations in the market is to invest consistently and periodically over time, also known as dollar-cost averaging. This helps to remove some of the emotional stress of investing by continuing to buy shares when the price drops. This is critical to long term success -- buying more shares when the price is low and buying fewer shares as the price rises. Over time this has proven to be an effective strategy.

5. 

   The sooner you reach your goal, the sooner you can choose what direction to take from there.

   Every plan has to be flexible and reviewed from time to time to see how it is working. If you find yourself ahead of pace, don't slow down. Move up the target date. If you don't want to retire when you get there, you don't have to, but you'll at least be comforted by knowing you can. When you get raises, increase your savings proportionately. If you are maxing out your retirement plan options, congratulations. Now you can start saving for other purposes.

Tips & Warnings

• Stay the course. Once you choose a balance of investments, stick with it.

• Keep your eye on the long term. Short-term fluctuations provide investing opportunities.

• Always try to maximize your matching contribution if there is one from your employer. This is free money.

• Avoid the temptation of trying to time the market. This is a fool's game that will divert your attention from the long term.

• Don't listen to friends who are telling you they are making a fortune trading Forex futures and you can, too. If they aren't lying, they are exaggerating.

References

• DEPARTMENT OF LABOR: Default investment Alternatives Under Participan Directed Individual Account Plans"