How to Set Up Your Retirement Portfolio?

Reaching the age of mid-50s brings changes to our lives and especially the way we look at our retirement savings and investment portfolios.

For most of us, when we hit the mid-50s it’s like a wake-up call to start getting our retirement plans in order. Avoid thinking about retirement is not an option anymore. By this time, we’re no more than 10 or 15 years from our retirement date, unless you did an awesome job and retired by 50.

As 50+ women, we are at this good point of life when we still have time to look at our finances and make necessary improvements. On another hand, we already have a realistic idea of how we want to spend our golden years and how much money we need for it.

If you’re planning on working until your full retirement age, you still have 10 years to save and invest until you need access to your retirement accounts. This age gives you enough time to accumulate more money in your retirement portfolio and make some changes.

There is no one-size-fits-all investing approach for everyone at any age. There are a lot of factors to consider before deciding. A lot depends on your age and risk tolerance. Let’s assume that you need to set up a new retirement portfolio or modify the one you have already created.

How to start? What do you need to know?

Start with asset allocation

The simple way to look at asset allocation is how your portfolio is divided between stocks, bonds, and cash.

There are three main asset classes:

• equities (stocks)
• fixed–income (bonds)
• cash

The question is why asset allocation is so important for investing?

Asset allocation is an investment strategy which brings a different level of risk and rewards over time. That’s why you need to have a certain percentage of each asset in your retirement portfolio.

The final goal of allocating the investments to different classes is to reduce the risk and increase a return on your money.

What you invest in is all about your personal goals and risk tolerance. When you’re in your 20s or 30s you might prefer all your retirement savings in stocks. Why? You have time to recover the setbacks of the markets. Moreover, you’re probably not in your prime earning years yet and your income will increase in the future, allowing to compensate for any monetary losses.

When you’re in your 50s and 60s the timeline horizon changes together with the risk tolerance. At this age, you have to start thinking about preserving capital rather than making big profits in the markets. You don’t have time to recover your investments from market downturns.

You need to set up your retirement portfolio based on your age and risk tolerance.

Retirement portfolio based on your age:

You need to decide how much money to invest in stocks and how much in bonds?

The most popular rule of asset allocation is to subtract your age from 100 and invest that portion in stocks.

If you use this formula the list below gives you various options on how to set up your portfolio based on the previous calculations:

• 50 years old: 50% stocks and 50% bonds
• 55 years old: 45% stocks and 55% bonds
• 60 years old: 40% stocks and 60% bonds

However, many financial advisers say that we should change the base number from 100 to 110 and even to 120. The new numbers are based on studies showing that we live longer with every year.

Knowing that stocks outperformed bonds over the long run, we need to have a greater allocation towards stocks. Why? Because stocks provide growth to our investments.

Based on new age recommendation subtract your age from 120 and you get a new recommended asset allocation:

• 50 years old: 70% stocks and 30% bonds
• 55 years old: 65% stocks and 35% bonds
• 60 years old: 60% stocks and 40% bonds

Retirement portfolio based on your risk tolerance:

There is a direct link between risk and return on your money or simply put a reward. The greater the risk, the higher the potential return. Less risk, less return.

Do you know what type of investor you are? Are you risk-loving, risk-averse, moderate or something between?

The list below shows how to divide your investments based on risk tolerance:

1. Aggressive: 100% stocks
2. Moderately Aggressive: 80% stocks and 20% bonds
3. Moderate Growth: 60% stocks and 40% bonds
4. Conservative: 45% stocks and 55 % bonds

The goal of The Aggressive, Moderately Aggressive or Moderate Growth portfolio is to get an as high return on your invested money as possible. That’s why it invested heavily in stocks. Only stocks bring growth or higher return on invested money. On the other hand, it gets your portfolio exposed to market volatility.

The goal of The Conservative portfolio is to preserve the invested capital rather than achieving higher returns. That’s why it invested in bonds. Bonds don’t grow high as an investment but gives us a certain level of capital preservation and reduce the exposure to market volatility and the risk of losing money.

The final goal of any allocation strategy is to maximize returns on your invested money and minimize a certain level of volatility and risk.

How to use the rules of asset allocation?

The good way to start is to be honest with yourself. As I mentioned before what you invest in is all about your personal goals and risk tolerance.

What is your time frame? Do you know how soon you need to have access to your retirement savings?

• If you have 10 to 15 years before start withdrawing money from retirement accounts, you might rely on stocks for higher return and growth of your portfolio. Even with the market downturns, you would have some time to recover your money. So Moderate Growth portfolio might the answer to your asset allocation.
• But if you’re 5 years away from retiring, you might consider a conservative approach or at least 50% stocks 50% bonds portfolio.

What is your risk tolerance?

Do you remain calm during the market ups and downs? Do you have sleepless nights when you heard the news about the recent market crash?

So, if safety and preserving the capital is your top priority, you might consider increasing your bond percentage. But don’t forget that we still need to have growth in our retirement portfolios to beat the inflation.

Stick with safe investments like money markets, CDs, and bonds if you want to avoid risk entirely. This asset allocation will let you avoid stocks completely, but leave you exposed to inflation.

You need to decide what works for you and what doesn’t. These strategies will be different for people who are already retired or those who are not.

If you’re already retired, these allocations may not be right for you. You will need to take regular withdrawals from your retirement savings. It changes your goal from maximizing returns to bringing steady income for life.

In the end, you should stick with the allocation model which works for you and your personal goals. Just remember, as you age and transition to a new phase of life your retirement portfolio needs to change as well.

If you want to know more about investments, asset allocation and portfolios head to Step-by-step guide to evaluating your investments and performance by Fidelity Investments.

My retirement portfolio asset allocation

I’m a risk-loving investor with moderately aggressive asset allocation strategy. I have 85% invested in stocks and 15% in bonds, cash, and others. I believe stocks will outperform bonds over the long run, but we’ll see continued market volatility from time to time.

Before starting this blog, I was happy with high exposure to stocks. Usually, I don’t have a sleepless night or start selling the stocks when the market goes down. My retirement portfolios consist of individual stocks, mutual funds, ETFs and some bond funds. Typically, I set up the trailing stops for all my individual stocks. This way it helps me to capture the gain when the market goes up and limit the loss when the market is down.

However, I started to feel that I need to simplify my portfolios and change the asset allocation from Moderately Aggressive to Moderate Growth. My goal is to start re-balancing our portfolios to meet 70% stocks and 30% bonds and cash allocation. This change will help to preserve the capital value of all portfolios and yet give me enough exposure to future market growth.

Putting it all together

Hopefully, this post will give you a basic idea how to set up your own retirement portfolio, create an asset allocation strategy and find methods to improve returns while reducing risks of losing money.

If you are ready to start, learning is a must. You want to take your time, do your research and make wise decisions. Set your goals, read the books and expand your mind with good information. All the knowledge you gain today will affect your financial well-being for years to come. You need to understand what you’re investing in. It doesn’t need to be complicated. It could be simple and easy steps to follow. Invest your time and energy to plan for the future and learn how to improve it.

How to set up your portfolio based on asset allocations article is not a recommendation and serves only as a guide. The opinions voiced in this material are for general information only. I am not providing any specific advice or recommendations to any of my readers.