A man looks at his retirement portfolio while sitting on his patio with his dog.
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Your financial goals and risk tolerance primarily determine how you structure your portfolio. But you also need to consider taxes and fees, your potential lifespan, the need for long-term care, and the desire to leave a legacy.
Many people approaching retirement adopt a bucket structure designed to fund their short-, medium- and long-term goals with a mix of cash, stocks and bonds. You can also choose from traditional asset allocation, core-and-satellite, and other approaches.
A financial advisor can help you identify the right portfolio building strategy for your situation. Contact a fiduciary advisor today.
Suppose you are 65 years old, have a portfolio of €1.1 million and are about to retire. To figure out how to structure your portfolio, you first need to consider three key issues:
Objectives: Think about your short- and long-term goals. What kind of retirement lifestyle do you envision? How much income do you need from your portfolio, along with other sources of income, to pay for it? Do you want to leave a financial legacy?
Risk: Ask yourself how comfortable you are with fluctuations in the return on your investments. Can you resist the urge to sell when the market slumps? Do you want to increase withdrawals during a boom?
Costs: Thinking about ways to reduce taxes and fees can help your investments perform optimally. For example, you can minimize both taxes and fees with core investments consisting of low-cost, passively managed index funds.
If you need help assessing your financial goals and risk tolerance or finding ways to reduce taxes and fees, consider working with a financial advisor.
A person outlines his portfolio structure on a notepad.
You can choose from a number of different standard portfolio structures. Some, such as core and satellite, dynamic asset allocation and life cycle may be well suited for savers who are early in their careers and still have decades to go before retirement.
For people nearing retirement, a bucket strategy combined with traditional asset allocation is a popular choice. This approach typically divides your portfolio into three segments. Each bucket contains assets that are invested accordingly for short-, medium- and long-term goals after retirement.
Short term bucket: This category is designed to work with other steady income streams, such as Social Security and pensions, to cover your expenses for the first two years of retirement. It is usually invested in insured savings accounts or other safe, liquid options. This approach helps you manage your invoices without being affected by market fluctuations.
Medium-term bucket: This bucket contains investments that you plan to liquidate and convert into cash within three to ten years. The assets in this bucket can include longer-term bonds, preferred stocks, growth and income funds, and other fixed-income investments. The income from this pool of investments can be used to replenish the short-term bucket as it is used up.
Long term bucket: This part of your portfolio is invested for the long term. Here you invest in shares and other riskier assets. Your long-term bucket contains money that you won’t need until at least ten years after you retire.
If you need help setting up a bucket-oriented portfolio or implementing another retirement income strategy, consider working with a financial advisor.
A woman looks at her retirement portfolio on her laptop.
How you allocate your assets among different types of assets requires assessing your risk tolerance, predicting inflation and taxes, and adopting strategies for managing fees. It also involves considering your life expectancy and concerns about potential long-term and other health care costs.
Many retirees use low-cost index funds to divide assets between stocks and bonds. Index funds address risk by increasing diversification while maintaining the ability to match performance with the market. These passively managed investments also typically cost less in taxes and fees than actively managed approaches.
Asset allocation often changes over time. For example, in your early years of retirement, you might have an allocation that consists of 5% cash, 35% bonds, and 60% stocks. After ten years, you can move to a more conservative approach with 10% cash, 40% bonds and 50% stocks. In your later years, a conservative allocation of 30% cash, 20% bonds, and 50% stocks may be appropriate.
Diversified portfolios typically contain a core of at least 50% stocks, in part because stocks alone offer the potential to generate long-term returns that beat inflation. Bonds are also included because they can help buffer the effects of market fluctuations, so that a portfolio falls less in bad markets than in good markets.
The long-term bucket offers the potential to significantly increase the size of your savings pot thanks to the investment returns. It can serve as a source of a financial legacy for your heirs or provide you with additional resources in case you need expensive long-term care. Keep in mind that a financial advisor can help you with estate planning or long-term care planning.
The way you structure your portfolio primarily reflects your financial goals and risk tolerance, while also taking into account taxes, fees, life expectancy, and other potential needs. People nearing retirement often prefer a bucket structure in combination with traditional asset allocation.
When you start structuring your pension portfolio, you can call on the expertise of a financial advisor. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
SmartAsset’s asset allocation calculator can help you choose a mix of stocks, bonds and cash that suits your risk tolerance.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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