Saturday, 29 August 2015

Building a retirement portfolio

Retirement is something everyone should be considering no matter what age they are. But how do you begin to build a retirement portfolio? These 6 steps should help you get started.

1. Figure out what you need. This is particularly important when you reach the age of 50 – by this point you should have a good idea about what your retirement costs will be on a monthly basis and therefore how much money you will need to maintain your desired lifestyle. If you are unsure a good rule of thumb is a minimum requirement of 50% of your current income. If you are under 50 you should be aiming to save around 20% of your monthly income to provide for your retirement.

2. Save more, and extend your working life. The biggest lever you can use to bulletproof you retirement portfolio is to put more money into it, which you can do by saving more. And the simplest way to do that is to work longer. The reality is that most people will not have enough money saved in their retirement fund at 55 / 60 to be able to retire comfortably. By working to 65 you may be able to add a significant portion of savings to help with extra income production on retirement.

3. Diversify. If you want to lower the volatility of your portfolio, diversify within and among asset classes. That means owning funds instead of individual stocks, and owning multiple asset classes instead of just one: a portfolio of emerging markets stock and bond funds, plus domestic stock and bond funds. As always, keep your fees low.

Projected returns for a balanced portfolio of 60 percent stocks and 40 percent bonds over the next 10 years to range from –3 percent to 12 percent, with the most likely scenario between 4.5 percent and 8.5 percent a year on an annualized basis. Equities alone are forecast to have a return centered on the 6 percent to 9 percent range, but with a possible swing from year to year of a full 18 percent. Bonds expected returns are centered in the 1.5 percent to 4 percent range. The translation: You'll probably earn nearly as high returns with a balanced portfolio, but you'll face much less volatility.

4. Design your asset allocation with an eye to taxes. If you have significant holdings outside your retirement accounts, think through which asset classes belong in your retirement account. You'll save significantly on taxes if you keep the equities—which you may buy and sell more frequently as you rebalance—in your retirement portfolio. But don't make your portfolio decisions around your tax savings; maximizing your investment returns and keeping your principal safe is a higher priority. If you are an expat there are several ways to mitigate taxes on investments and future retirement income.

5. Keep a healthy portion of equities. Don't make the mistake of getting rid of all of your equities and shifting into money market funds because you think they are safer. We recommend that in retirement you have at least a 20 percent allocation to equities, often we recommend closer to 50% depending on an individual’s attitude to risk.

6. Relax and set yourself up for automatic rebalancing. You'll be retired for a long time, so in order for your money to keep working at the highest possible pace, you need to continue selling high and buying low, which is what rebalancing automatically does for you. This can be achieved by purchasing appropriate investment funds.

As always, seek advice of a professional where required.

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