Layin’ It on the Line: How to build a safe and secure retirement portfolio – A step-by-step guide

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Lyle BossHello, baby boomers and seniors! If you are preparing for retirement or are already retired, one of the biggest concerns on your mind is probably how to keep your hard-earned savings safe and secure. With market fluctuations, inflation and growing health care costs, building a retirement portfolio that offers security and steady growth is more important than ever.
The good news is, it’s wholly possible to create a retirement portfolio that balances safety and growth. Let’s walk through, step by step, how to build a secure retirement portfolio that will keep you comfortable now and in the years to come.
Step 1: Understand your risk tolerance
Before you start choosing investments, you need to know your risk tolerance. You may have felt comfortable with more risk in your portfolio when you were working, but it’s time to shift the focus to protecting your wealth as you approach or enter your retirement years.
Risk tolerance: That means how much market volatility you’re willing to accept in exchange for potential growth. If market swings keep you up at night, you’ll want to take a more conservative approach, focusing on investments that offer more stability. If you can stomach some ups and downs, you may have room to include slightly higher-risk options for more growth potential.
Tip: Gauge your risk tolerance by asking yourself what you would do if the market fell 10%, 20% or even 30%. In that way, you will feel your comfort zone and build on your portfolio.
Step 2: Clearly define your retirement goals
The time has come to detail your retirement goals. The portfolio needs to be created to satisfy specific needs and desired lifestyle during one’s retired years. How much income does one need every month for their living, travel, hobbies and medical expenses?
Consider both your immediate and long-term goals. In the short term, you’ll want a stable income to cover basic living expenses. Over the long term, however, you’ll need a portfolio that outpaces inflation and continues to grow to sustain your lifestyle.
Tip: Put your retirement goals and timeline in writing. Are you planning to retire within the next five years or do you have more time? Do you want to leave a legacy for your heirs or fund specific dreams, such as travel or starting a business? Defining your goals helps determine how much you need to save and how your portfolio should be structured.
Step 3: Diversify your investments
One of the best ways to reduce risk is through diversification. That means spreading your investments across various asset classes — stocks, bonds, cash equivalents and alternative investments — to protect yourself from market swings.
A well-diversified portfolio minimizes the impact of a decline in any one asset class. For example, while stocks may be subject to volatility, bonds and other fixed-income investments have the potential to be much more stable. Real estate or other alternative investments can also provide returns that aren’t directly correlated to the stock market.
Tip: A typical retirement portfolio might include a mix of 60% stocks, 30% bonds, and 10% cash or other safe investments. However, your exact allocation should be based on your goals, risk tolerance and time horizon. Work with a financial advisor to customize your portfolio.
Step 4: Consider safe income-producing investments
As you approach retirement, one of the main objectives of your portfolio should be the generation of regular income with protection of principal. For this, safe income-generating investments are a must, especially if you depend on your savings for monthly income.
Bonds, particularly those of high quality and governmental, offer an almost perfect avenue for less-risky, regular income. Dividend-paying shares are also another class of stock that yields income but introduces somewhat more market risk. You can also think about fixed-income investment products devised to create periodic income. Hint: Think of including income stream investments such as bonds or stocks that pay dividends, enabling a cash flow that would not break into your savings.
Step 5: Build a cash reserve for flexibility
Having a cash reserve is one way to help protect your retirement portfolio from market volatility. You don’t want to have to sell investments at a loss when the market falls, to pay for an unexpected expense. A cash reserve gives you the flexibility to ride out market downturns without dipping into your long-term investments.
A general rule of thumb is to have at least three to six months’ expenses in liquid, accessible accounts such as high-yield savings or money market funds. This ensures you will have quick access to cash in the case of emergencies, medical expenses, or discretionary lifestyle choices like vacations or family gifts.
Tip: A cash reserve also offers peace of mind, knowing that you won’t have to sell investments at an inopportune time.
Step 6: Plan for taxes
Taxes are often one of the forgotten parts of retirement planning. Your tax rate can be different, depending on whether your withdrawals come from a traditional IRA, 401(k), Roth IRA or other account type. Withdrawing from a tax-deferred account, such as a traditional IRA, requires that taxes be paid on those funds. Withdrawals from a Roth IRA are tax-free.
Tip: Consider developing a plan that includes drawing from taxable, tax-deferred and tax-free accounts in a way that minimizes your overall tax burden. You may want to take distributions from your taxable accounts first and allow your tax-deferred accounts to grow longer. Work with a tax professional to ensure your retirement income plan is as tax-efficient as possible.
Step 7: Rebalance regularly
Your retirement portfolio is a living, breathing entity that needs regular checkups. As markets change, your asset allocation may shift, especially if stocks are performing well while bonds or cash equivalents aren’t. This can result in your portfolio becoming unbalanced and potentially taking on more risk than you’re comfortable with.
Tip: Rebalance your portfolio at least once a year or whenever there’s a significant shift in your life-such as a change in your goals, income or risk tolerance. In this way, your portfolio will remain in step with your needs and objectives.
Step 8: Protect your portfolio from inflation
Inflation can erode your purchasing power over time, especially if you’re relying on your retirement savings to cover a 30-year horizon. The good news is, there are ways to protect against inflation within your portfolio. Inflation-protected securities, such as Treasury Inflation-Protected Securities (TIPS), are designed to rise with inflation, ensuring your investment keeps pace with rising costs.
Tip: Invest in growth-oriented assets that generally outperform inflation over long periods, such as dividend-paying stocks or real estate. A well-diversified portfolio with some exposure to inflation-protected assets helps mitigate this risk.
Step 9: Create an income distribution strategy
Once you have built your retirement portfolio, the next step is to think about how you will distribute your funds. A good income distribution strategy will help you avoid outliving your savings. One popular rule of thumb is the 4% rule: You can safely withdraw 4% of your portfolio’s value each year.
However, this is something you may want to adjust depending on your situation. For instance, if you are in very good health and anticipate a long retirement, you may want to take out a smaller percentage. On the other hand, if you retire early or anticipate lower returns, you may want to consider a lower withdrawal rate.
Tip: Work with a financial advisor to decide on the distribution strategy that works best for your needs and is flexible when your circumstances change.
Step 10: Work with a financial advisor
Tailor your approach in the creation of a safe and secure retirement portfolio with the help of a financial advisor through complexities of retirement planning. They’ll take your goals, risk tolerance and time horizon into consideration while building a customized strategy to help protect your wealth and provide the income you need.
Tip: The services of a financial advisor extend to providing tax planning, retirement income strategies and investment decisions that keep your retirement plan on track.
Conclusion
Building a safe and secure retirement portfolio doesn’t have to be complicated. Following these steps — understanding your risk tolerance, diversifying your investments, protecting against inflation and working with a trusted advisor — you will be able to create a retirement plan that supports your goals, provides steady income and preserves your wealth for the future. It is all about starting early, reviewing regularly and adjusting your strategy as your needs evolve. With the right plan in place, you’ll be well on your way to enjoying a fulfilling and worry-free retirement.
Lyle Boss, The REAL BOSS Financial, endorsed by Glenn Beck as the premier retirement advisor for Utah and the Mountain West states. Boss Financial, 955 Chambers St., Suite 250, Ogden, UT 84403. Telephone: 801-475-9400.